AIR CONFERENCE CALLI listened to AIR’s conference call from this morning and have the following comments and information:4th Quarter 08:Revenue: up 28% YoYEarnings up 23.8% YoYThis was $0.01 over analyst expectations.For Fiscal Year 08:Revenue up 30%Earnings up 25.7%AIR works in the Aviation Industry both with commercial and defense customers. Their defense business currently represents 37% of sales, vs 15.9% in 2001, thus, they are more insulated from the volatility of the commercial market than in the past. Military sales represented 39% of sales in the 4th quarter, showing the increasing role this plays in AIR business.AIR operates in 4 basic areas:Aviation Supply ChainMaintenance, Repair, and OverhaulStructures and SystemsAircraft Leasing and SalesAVIATION SUPPLY CHAIN:This area of the business breaks down into 42% North America Commercial, 35% International, and 23% Defense.MAINTENANCE, REPAIR, AND OVERHAUL:81% of this business is Domestic Commercial Business. They have been impacted somewhat by the reduction in fleets of airlines. Specifically, United grounding their 737 fleet, which AIR provided heavy maintenance for at their Indianapolis MRO facility.This utilized 3 bays there. Two have been replaced with new customers, and negotiations are underway to fill the remaining vacant bay. There are possibilities of reduced business in both Miami and Oklahoma City facilities, but these are anticipated and efforts are underway to fill any vacancies as they occur. They have increasing business with Southwest, UPS and FedX among others. They say they fully expect continued growth in the MRO division in the first quarter of 09 (currently underway) and in total for fiscal 09, but will not put a number on that growth.Mesa Airways, one of their customers, has said it may have to seek bankruptcy protection. They provided 73M in business in 08. They are presently current with all obligations to AIR. AIR continues to service their aircraft.Much attention was given to an FAA advisory questioning AIR’s paint utilized for some landing gear truck beam rebuilding. They note that this resulted in little or no impact to their customers, no disruptions, and no penalties. Boeing stated that they consider AIR’s treatment equal to the original. (Author’s comments: in effect, they are saying this was a non-event).STRUCTURES AND SYSTEMS:This division represents 28% of total sales, and 86% of that is military.Part of this division is the cargo systems for the Airbus A400M Military Cargo plane, which is expected to begin delivery the end of fiscal 09, primarily to European customers. Revenue expected from this system is $300MExcluding revenue from the A400M, the current backlog in this division is over $300M, mostly deliverable in fiscal 09.AIRCRAFT LEASING AND SALES:Fleet currently at 37 aircraft, both wholly owned and joint ventures. All currently leased. 5 leases end in 09. They are negotiating sales of two, expect another to be re-leased. The other two do not come off lease until next spring.OTHER INFORMATION:They have increased inventory turns YoY, and have the highest margins for the company ever. They would not say that they can absolutely maintain current margins, but say that improving margins has been and will continue to be a major goal for the company, and they expect to see solid margins going forward.While not part of this quarter, they reported that they bought back convertible debt in June, effectively reducing shares accounted for by 4008. Future debt or share buybacks are under consideration depending on cash generation in 09.GENERAL COMMENTS:Management emphasized their long experience in this business, including several downturns in Commercial Airways in the past (bankruptcies in the 90’s, 9/11). They note that, in each case, they ended up in a stronger position as the business rebounded. They say that, while they see potential for growth still, they are emphasizing their “value proposition” to customers, finding under-served niches, increasing margin, cost control, gaining market share, maintaining a strong balance sheet, and cash generation.As to future purchases of aircraft for parts, aircraft for lease, or acquisitions of other businesses, they stated that they would continue to look at each situation “opportunistically”. This term was used several times in the call.Asked if Airlines, pressed for cash, would utilize more used/rebuilt parts such as AIR supplies, they said that had been the case in the past, and indeed, they have seen no slowdown in their parts business.At one point, it was noted that projections are for a reduction in the airline capacities of 11-15%. It was stated that flights currently seem to be going at 80-85% full (it was not clear if this was industry statistics, or allegorical), and noted that airlines will not reduce so far that there are customers not being served. My take on this is, yes, Airlines are streamlining their business, trying to be more efficient. Yes, rising prices will reduce total air travel some. But, people will fly, and airlines will serve them, and AIR expects to continue to provide parts and service to the industry.It was stated several times that they do not know what the impact of $130-140 oil would be on the airline industry. That is pretty honest.MY THOUGHTS:I find that, generally, conference calls are often about “selling” the company and “spinning” the situation. While no doubt there was a certain amount of this for AIR as well, my lasting impressions are that these guys (the individuals as well as the company) have been in this business a long time and know it well. The CEO clearly knows his business inside and out (many do not seem to, and, I guess, with a huge company, like GE, no one could). I did not sense any attempt to hide facts, or color a bad situation rosy. My take on AIR’s plans for the future: they definitely want to stay flexible: building cash and strong balance sheet, looking for “opportunistic” expansion possibilities, and emphasizing value for their customers. They avoided making specific projections or providing guidance for the future.I liked this company a month ago. As the price dropped, and I could find no justification for it other than unfound expectations that they will suffer from general market conditions, I liked them even more. Yesterday’s earnings release and today’s conference call have only reassured my confidence in the general strength and management of this company. I think it offers an exceptional value today. Today’s price action (closing lower) clearly indicates that Mr. Market is not ready to recognize the value I see clearly, so investing with expectations of quick profits would be an error. But, if you are looking for a great company being tossed in the trash along with an otherwise shaky industry, I think AIR fits the bill.Cheers, Doug
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