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B/E Aerospace (NASDAQ:BEAV)

Q4 2012 Earnings Call

January 31, 2013 9:00 am ET

Executives

Greg Powell - Vice President of Investor Relations

Amin J. Khoury - Co-Founder, Executive Chairman and Chief Executive Officer

Werner Lieberherr - President and Chief Operating Officer

T. P. McCaffrey - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Robert Stallard - RBC Capital Markets, LLC, Research Division

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Operator

Good morning. My name is Jessica Morgan, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the B/E Aerospace Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, the conference is being recorded this day, January 31, 2013. Thank you.

I would now like to introduce B/E Aerospace's Vice President of Investor Relations, Greg Powell. Mr. Powell, you may begin your conference.

Greg Powell

Thank you, Jessica. Good morning, and thank you for joining us this morning. Today, we are here to discuss our financial results for the fourth quarter and full year ended December 31, 2012.

By now, you should have received a copy of the news release we issued earlier today. If you haven't received it, you'll find a copy on our website.

We will begin this morning with remarks from Amin Khoury, our Founder, Chairman and Chief Executive Officer, and then we will take your questions.

For today's call, we have prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page of the B/E Aerospace website at beaerospace.com. In addition, copies of the slides will be posted on our website for you to refer to after the call.

Joining us for the call this morning are Werner Lieberherr, President and Chief Operating Officer; and Tom McCaffrey, Senior Vice President and Chief Financial Officer.

As always, in our prepared remarks and our responses to your questions, we rely on the Safe Harbor exemptions under the various securities acts and our Safe Harbor statements in the company's filings with the SEC. We will address questions following our prepared remarks. [Operator Instructions]

Now I will turn the call over to Mr. Amin Khoury. Amin?

Amin J. Khoury

Thank you, Greg, and good morning, everyone. We are pleased this morning to be able to discuss our excellent 2012 financial results. Our full year 2012 results were the best in the company's history. We achieved records for sales, operating earnings, operating margin, bookings and backlog, and net earnings and earnings per share, adjusted to exclude debt prepayment costs, were also records. Our full year 2012 results include revenue growth of 23%, operating earnings growth of 26% and an operating margin of 17.5%, representing a 40-basis point increase. EPS adjusted to exclude debt prepayment costs increased 26%.

Throughout the year, each of the company's segments had solid market successes, as indicated by record bookings of approximately $3.2 billion, an increase of approximately 10% as compared with 2011. And full year 2012 total bookings, including awarded but unbooked programs, were in excess of $3.3 billion. Our revenue growth continues to be driven primarily by the robust new aircraft delivery cycle. Approximately 61% of full year 2012 revenues was driven by demand for products or new-buy aircraft, reflecting both robust new aircraft deliveries and weaker aftermarket demand.

Today, we increased our 2013 EPS guidance by $0.07 per share to $3.45 per diluted share, representing an increase of approximately 22% as compared to 2012 EPS and is based upon our high-quality backlog, the expectation of strong wide-body deliveries, a modest recovery in the aftermarket and significant continuing margin expansion. Our guidance does also reflect the recent changes in tax legislation.

Before discussing details of our fourth quarter and full year 2012 financial performance, I would like to spend a few minutes discussing the current market environment. In addition, I will ask Werner to briefly review some of the important operating and marketing highlights during the year for each of our businesses, and lastly, we will review our financial guidance for 2013.

Now let's briefly discuss the current commercial aerospace market environment. In spite of high full year average fuel prices and a slowing world economy, 2012 airline profits were better than expected. Historically, when GDP growth has fallen below 2%, the airline industry had generated losses. However, during 2012, the airlines cut costs and carefully managed capacity and accordingly have generated better-than-expected financial performance. In December, IATA made a second upward revision to its financial outlook for the global airline industry. For 2012, airlines are now expected to report a profit of approximately $6.7 billion, up from the IATA October forecast of $4.1 billion and up from the March forecast of $3 billion. Overall, performance has been positively impacted by strong passenger traffic growth of approximately 5.3%, near-record load factors of about 80% and continuing yield improvement that reflects both steadily increasing load factors and a 22.7% increase in the airfare CPI over the last 3 years.

For 2013, IATA expects global airline profits to improve to $8.4 billion or 25% higher than 2012 and extremely importantly, reversing a 3-year trend of declining profits. The 2013 IATA forecast is based on 2013 global passenger traffic of around 4.5% growth and capacity growth of about 4%.

In 2012, new aircraft deliveries were strong and should continue to be robust for the next several years as order books at the OEMs are at all-time highs, while airlines are operating as close to capacity as they ever have. In aggregate, net aircraft additions are a relatively small percentage of the overall fleet. We estimate the world fleet is in excess of 18,000 aircraft, including regional jets, and that the fleet grew by approximately 550 aircraft in 2012 or about 3%.

As we have reported over the course of 2012, we are experiencing weaker aftermarket demand. We believe this is due to several factors. First, the growing markets of the world are, for the most part, operating new, still-under-warranty aircraft, which do not yet require heavy aftermarket maintenance services. Second, new aircraft deliveries into the developed markets are primarily for replacement of aged equipment. And finally, airlines are carefully controlling capacity and more efficiently utilizing their aircraft. Nevertheless, the airlines have been dealing with thin margins and a negative 3-year trend of declining profits. As I mentioned earlier, the airlines' profits trend appears to have made a significant positive turn, which bodes well for a slowly improving aftermarket environment. We do continue to expect a significant improvement in aftermarket demand by 2014.

Now let's turn to Slide 2 and discuss our fourth quarter financial results. The bar chart on Slide 2 reflects our consolidated fourth quarter 2012 financial performance compared to the fourth quarter of 2011. Fourth quarter revenues increased 23% to $803 million. Operating earnings were $138 million, an increase of 27% on the 23% increase in revenues and represents an operating margin of 17.2%, which is up 50 basis points as compared to the same period last year. EPS was $0.73 per share, an increase of 30% as compared to the fourth quarter of last year.

Turn to Slide 3, and we will discuss our full year 2012 financial results. The company achieved record revenues of $3.085 billion in 2012, an increase of 23%. Operating earnings were also a record at $540 million, representing an increase of 26% on the 23% increase in revenues, and operating margin of 17.5% increased 40 basis points. EPS adjusted to exclude debt prepayment costs was $2.83 per share, an increase of 26%. EPS on a GAAP basis, to include debt prepayment costs, was $2.27 per share.

Let's review Slide 4, which summarizes our current bookings and backlog status. Bookings during the fourth quarter of 2012 were approximately $810 million and reflect a book-to-bill ratio of approximately 1:1. Approximately 50% of bookings in the current quarter were driven by a higher level of demand for products to outfit new-buy aircraft. As I mentioned earlier, throughout the year, each of our segments had solid market successes, as shown by record bookings of approximately $3.2 billion, an increase of nearly 10% as compared with 2011. And full year 2012 total bookings, including awarded but unbooked programs, were in excess of $3.3 billion. Backlog at the end of the quarter was approximately $3.75 billion, an increase of approximately 7% as compared to 2011, and total backlog, both booked and awarded but unbooked, was a record at approximately $8.25 billion.

Before we discuss performance at each of our segments, I'd like to ask Werner to briefly review some of the important operating and marketing highlights for each of our businesses.

Werner Lieberherr

Thank you, Amin, and good morning, everyone. During the fourth quarter, we were awarded a number of significant programs. I'd like to mention 4 major aircraft cabin interior awards. These 4 awards are initially valued in excess of $250 million and are indicative of the breadth of our innovative product offerings. The first of these was a lie-flat business class seating program to outfit the major international airlines' new-buy Boeing 787 fleet. In addition, B/E Aerospace will provide retrofit LED lighting for these same airlines' Boeing 737, 767 and 777 aircraft. The second was a full cabin interior retrofit program to outfit a major global airline's long-haul aircraft with lie-flat business class seating, Pinnacle main cabin seating and LED lighting. The third award includes a business class seating program, a Pinnacle main cabin seating program and a comprehensive food and beverage preparation and storage equipment program to outfit new-buy wide-body aircraft for a major Chinese airline. Finally, B/E Aerospace has won a Pinnacle main cabin seating program and a comprehensive food and beverage preparation and storage equipment program to outfit a Russian airline's new-buy 737 and A320 aircraft.

Early in the year, our seating business was, once again, awarded Boeing's Gold rating. In fact, our score increased, and we maintained our status as Boeing's best-performing seating supplier. Similarly, at Airbus, we are the preferred seating supplier. Embraer recognized our wastewater systems business with its Supplier of the Year award. Our global sourcing, lean continuous improvement and program management initiatives continue to return powerful results, as evidenced by the 40-basis point expansion in operating margin. During 2012, our low-cost country sourcing and our operational excellence efforts generated nearly $40 million of savings.

As Amin mentioned earlier, 2012 was an outstanding year from a marketing perspective. Our seating business recorded record bookings in 2012. The quality of our seating product portfolio is stronger than ever and is reflected in our coach, business class and first class market shares. Seating awards for the year were diverse both geographically and by product type. Some of 2012's highlights included awards from Air Canada, Air China, Air France-KLM, Delta, Etihad, Japan Airlines, JetBlue, Korean Airlines, Lufthansa, Qatar and SilkAir, a subsidiary

of Singapore Airlines.

We continue to maintain a strong leadership position for our food and beverage preparation and storage equipment product with record awards and a record win rate. We had an outstanding reception for our new Essence line of food and beverage preparation and storage equipment at the Hamburg Interiors Expo. This new product line won the prestigious Crystal Cabin Award, 2 international design excellence awards and the Airbus Most Innovative Product Award. We made significant progress expanding our lighting systems across a number of new platforms. As you might remember, more than a year ago, we introduced our all-LED lighting systems for the Boeing 737 Sky Interior. Market acceptance of this product has developed ahead of steam. Accordingly, we have begun to book orders to convert a number of airlines on a retrofit basis with our LED lighting systems across a number of aircraft platforms, including the 737, 757, 767 and 777.

Our consumable management segment also had a very successful year. The management team successfully managed a great deal of complexity and change, achieved outstanding customer satisfaction and on-time performance metrics and made solid progress integrating LaSalle, Satair and UFC. We were also successful in the marketplace where CMS retained 100% of the more than 160 contracts up for renewal in 2012, as well as capturing additional market share.

During 2012, CMS was presented with notable awards and recognition. CMS was named Honeywell's 2012 Supplier of the Year. In addition, CMS was named Platinum Supplier at Aviation Partners Boeing, Supplier of the Year at US Airways, received [indiscernible] Achievement of Excellence Award, named Preferred Supplier at GE Hamburg and received the Performance Excellence Award from Boeing Defense and Space. Clearly, from an operation perspective, our consumable segment is operating on all cylinders and achieving outstanding performance metrics while, at the same time, integrating several acquired businesses. We are expecting significant margin expansion at our consumable management segment as the acquired businesses are integrated and as the cost of the integrations dissipates.

I will now turn the call back over to Amin.

Amin J. Khoury

Thank you, Werner. And now I'll briefly review the fourth quarter operating performance for each of our business segments.

Let's turn to Slide 5 and review the fourth quarter results for our commercial aircraft segment. Commercial aircraft segment leadership team turned in another strong performance during the quarter. Revenues of $398.6 million increased 13.9%. Operating earnings of $68.6 million increased 17.9%. Operating margin of 17.2% expanded 60 basis points due to operating leverage at the higher revenue level and ongoing operational efficiency initiatives.

Let's turn to Slide 6 and review fourth quarter results for our consumables management segment. The leadership team for the consumables management segment also delivered a strong quarter, a quarter during which the CMS team was and continues to be deeply engaged in acquisition integration activities, which are expected to continue throughout 2013. Revenues of $302 million increased about 29%. Operating earnings were $54.8 million, an increase of just under 29%, and operating margin of 18.2% was flat despite the drag from lower-margin acquisitions. Operating margin adjusted to exclude the AIT cost was 19.5%.

Let's turn to Slide 7 and review the fourth quarter results for our business jet segment. The business jet segment leadership team delivered an excellent quarter, as shown by the substantial and continuing improvement in our business jet segment, which, of course, is being driven by the Super First Class portion of that business. Revenues of $102.8 million increased 45.8%. Operating earnings of $14.7 million increased 77%. Operating margin of 14.3% expanded 250 basis points, reflecting the 45.8% increase in revenues, an improved mix of revenues and ongoing operational improvements.

Let's briefly review our financial position on Slide 8. Free cash flow of $110 million in the just-completed fourth quarter represents a free cash flow conversion ratio of 146% of net earnings. For the full year ended December 31, 2012, free cash flow of $230 million represents a free cash flow conversion ratio of 98% of net earnings and a free cash flow conversion ratio of 79% of net earnings adjusted to exclude debt prepayment costs. As of December 31, 2012, cash was $514 million. Net debt, which represents total long debt of $1.96 billion less cash, was $1.45 billion. And the company's net debt-to-net capital ratio was 39.9%. The company has no debt maturities until 2020 and no borrowings outstanding on its $950 million revolving credit facility.

Let's now briefly review our outlook. Our full year 2013 EPS guidance of approximately $3.45 per diluted share represents an increase of approximately 22% as compared to our 2012 adjusted EPS of $2.83 per share. Our 2013 EPS guidance is based upon our high-quality backlog, the expectation of strong wide-body deliveries, modest recovery in the aftermarket and significant continuing margin expansion.

We expect 2013 revenues to be approximately $3.35 billion, with revenue growth expected to be stronger in the second half of the year due to the timing of scheduled program deliveries. Although both the commercial aircraft and business jet segments booked record orders in 2012 and have achieved record year-end backlogs, the timing of program deliveries is such that commercial aircraft revenues are expected to be stronger in the second half of the year, while the bizjet revenues are expected to show modest single-digit growth in 2013 followed by double-digit growth in 2014. Revenue growth rates for both segments are expected to accelerate in 2014 due to the timing of program deliveries from both our booked backlog and our awarded but unbooked backlog. In addition, we expect strong, continuing double-digit operating earnings growth in both 2013 and 2014 due to significant additional margin expansion driven by backlog quality and operational efficiency initiatives.

Looking forward, our total backlog, both booked and awarded but unbooked, of approximately $8.25 billion, our expectation for a 14% compound annual growth rate in wide-body aircraft deliveries over the next 3 years, our expectation of rapidly growing revenues from our supplier furnished equipment program deliveries, the expectation for continued growth in global passenger travel and attendant increases in capacity all provide a foundation for expected solid revenue growth in 2013 and an acceleration in our revenue growth rate beginning in 2014.

Now let's turn to Slide 9 and review our 2013 financial guidance. The company expects continued strong bookings in 2013, driven by the robust wide-body aircraft delivery outlook, bookings from prior SFE awarded programs and a modest recovery in aftermarket demand and expects to end the year with a book-to-bill ratio in excess of 1:1. 2013 revenues are expected to be approximately $3.35 billion and, based on scheduled program deliveries, are expected to be stronger in the second half of the year. The company expects 2013 EPS of approximately $3.45 per diluted share. The EPS guidance of $3.45 per diluted share represents an increase of approximately 22% as compared with 2012 EPS of $2.83 per diluted share. The company's 2013 earnings per diluted share guidance is inclusive of approximately $20 million of expected 2013 AIT cost. The 2013 free cash flow conversion ratio is expected to be approximately 70% of net earnings, weighted more heavily towards the second half of 2013.

And with that, I'll now turn the call back over to Greg.

Greg Powell

Okay. Jessica, we're now ready for the Q&A session. Can you queue everyone up? And please remember, 2 questions per person. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

And I know that -- just 2 things. One is could you talk a little bit about the competitive dynamics in the seating market? It seems that you've done well, but in a couple of cases, some customers have -- you've lost a couple of opportunities.

Amin J. Khoury

Sure. I mean, our win rate on bidding programs this year was very, very high, and it actually was the best year ever for seating orders. And our CAS segment had a record year and has a record backlog. So, I mean, it was really a great year. In terms of dynamics of the industry, I mean, we can't win them all. We're doing...

[Technical Difficulty]

T. P. McCaffrey

Howard, did you have another question?

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Yes, I did. And you're the target, so thanks for volunteering.

T. P. McCaffrey

It's always good to be the target.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

So great fourth quarter cash flow numbers, Tom. Can you talk a little bit about some of the challenges in doing a little better than 70% free cash flow for the upcoming year? And how did you -- I'll leave it at that.

T. P. McCaffrey

Well, yes, it was a strong cash flow quarter. As you know, we do business on a global basis, and so it's difficult to forecast with a high degree of certainty a lot of the international sales and when we'll receive them. It just turned out that we had a very strong collection period during the fourth quarter, which helped bring cash flow up above the levels which, I think, we had originally expected. So I feel good about that. Going into the -- 2013, the first half of the year for B/E is typically a little weaker in the first half, and that's a function of the timing of payments of incentive comp and interest accruals and a lot of other things. It is really just timing-driven, along with the timing of CapEx for the programs we have underway. CapEx this year will be $135 million, and so there's a lot of that going on in the first half of the year. And when you couple that with paying accrued liabilities in the first half, it's going to -- and stronger revenues on the second half. The impact will just result in stronger cash flow in the second half of the year.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

But you don't need to grow inventories a lot from here?

T. P. McCaffrey

No, that's not our plan. You should expect for inventories to grow more or less at the revenue growth rate.

Operator

And we'll take a question now from Robert Spingarn with Credit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

I don't know if we got Amin back. In the meantime, Tom, I've got another one for you. On the $0.07 guidance increase on the earnings, how do we split that between operational improvement and tax?

T. P. McCaffrey

Well, I think the way you ought to think about it, Rob, is that we expect an overall effective tax rate in 2013 of a little over 29%, or it's about the same as 2012. So the 2012 rate, while it does not reflect the goodness from the R&D credit, as we mentioned in the release, 2013 will. But on the other hand, we've got some other tax items which we will expect some of that goodness that will come out of the R&D credit. We've got a lot of R&D initiatives -- not R&D, tax planning initiatives that are underway right now on a global basis, and it's really too soon to see how they may play out. So for now, I think you should expect the effective rate to be a little over 29% or about the same as 2012. In terms of timing, I think you know that because the law wasn't passed and signed into law until 2013, the 2012 credit didn't get reflected last year, and the -- it will get reflected in the first quarter. So our first quarter rate will be lower than the other quarters because all of the 2012 benefit will flow through in the first quarter. And then the tax rate for the other quarters will be higher than what we have in the first quarter, but overall, you should expect about a 29% rate, a little bit above it.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just to clarify that, and then I have a question for either Amin or Werner, whoever is there, what was the tax rate prior to today? In other words, the slightly over 29% was what from the old guidance?

T. P. McCaffrey

It was right about 30%, and the rate that we had for the year was 29.8%. So it was a little bit -- Rob, it was a little bit under 30% for the full year, and it will be a little over 29% for 2013.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. So it's something like 0.5% or so.

T. P. McCaffrey

Yes, something like that.

Robert Spingarn - Crédit Suisse AG, Research Division

Right, okay. So the other question, again, either Amin or Werner, we know you're highly correlated to the wide-body ramp, but we're now part of the way through that. And I wanted to ask you -- you've held bookings at around a 1.0 or a little bit better ratio very consistently. As this ramp starts to slow, and perhaps with a period of pause between now and when the A350 comes in, can you maintain a 1.0 or better book-to-bill for the next several years, or should we look for that to drop off at some point?

Werner Lieberherr

Absolutely. I'm sorry, Amin, go ahead.

Amin J. Khoury

If you look at our total bookings this year, it's about $3.3 billion if you include awarded programs. It was pretty strong, and we do expect our SFE programs to begin to enter bookings more strongly, and we do expect the 14% CAGR in wide-body deliveries to continue for the next 3 years. So what we're looking at here is strong wide-body deliveries continuing at a double-digit growth rate for 3 years, SFE programs entering bookings and deliveries, so helping both bookings and shipments, and some recovery in the aftermarket. So, yes, we expect our book-to-bill to remain above 1:1. I think we said so in my prepared remarks for 2013. We haven't given guidance on bookings for 2014, but we expect strong bookings for the next several years.

Robert Spingarn - Crédit Suisse AG, Research Division

That's what I was getting at through the wide-body ramp. And then just lastly, Amin, 787, what is B/E Aerospace's exposure if, for whatever reason, they should halt production?

Amin J. Khoury

There aren't many 787s that don't have B/E Aerospace equipment on them and a lot of B/E Aerospace equipment given our market shares with all the airlines. So for the time being, Boeing has told us that we should keep shipping at the same rate and meet all of our on-dot dates. And if that changes, we'll let you know, but we really don't know anything more than you know at this point.

Robert Spingarn - Crédit Suisse AG, Research Division

How much is in your '13 guidance?

Amin J. Khoury

I don't know the answer to that question, Rob.

Operator

We have a question now from David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Amin, on the business jet side, a couple of months back, you talked about you were a little bit more positive with regard to the outlook on business jet. Can you give us an update there? Obviously, the business jet segment was a lot stronger in the quarter. I assume that's Super First Class and not business jets, but any color around what's going on in business jet?

Amin J. Khoury

Yes, it's fairly all Super First Class, David. And I think one positive thing I can say about the bizjet, about bizjets per se is that it looks like the prices of used aircraft have firmed, and prices are beginning to move up. And inventories are sort of between 12% and 13%. So I mean, it looks like it may -- we may have a turn in orders here in 2013, but basically, what's driving our business is the Super First Class part of the business, which is -- which you implied during the question. And we did end the year for our bizjet segment with a record backlog, the best backlog they've had. But the bizjet segment, because of the timing of deliveries, particularly on the Super First Class side, we're going to have low sort of single-digit revenue growth but a very healthy expansion in margins that will turn into a really good year this year on the earnings line for bizjet, but not so much on the revenue growth rate. And then in 2014, we expect a double-digit increase, driven primarily by what's in the backlog now, the Super First Class part of the business, but I would expect that we would have -- we would begin to see some improvement in business jet deliveries per se at least by 2014.

David E. Strauss - UBS Investment Bank, Research Division

Okay. On the aftermarket side, how are spares orders at CAS, and what are you seeing also on the aftermarket side at consumables?

Amin J. Khoury

Yes, it's still a little soft. In our consumables business, it looks like daily orders are holding steady. It looks like there is no deterioration in the business in the fourth quarter versus the third quarter on a sequential basis. It looks like the legacy business, if you strip out all the acquisitions, is up slightly, something like 1% year-over-year. So it looks like the business has stabilized. Aftermarket demand is still soft, but we continue to expect sort of mid-single digit improvement in demand over the course of the year leading to a stronger year in 2014.

Operator

And Noah Poponak with Goldman Sachs has our next question.

Noah Poponak - Goldman Sachs Group Inc., Research Division

In the SFE business, there haven't been any brand-new SFE awards on the original equipment side since you announced the 737 lav. It looks like you're starting to take retrofit orders for skylight interior, but we haven't had the lav, the first lav retrofit order yet, at least announced. 100% understand this is a long-cycle business and a long process and a long-term growth driver, but I'm just wondering if either of those time frames have been surprising to you internally or not and what we should look for in 2013.

Amin J. Khoury

Well, we continue to hope and expect that we will book the 737 retrofit order in the near future. We do have discussions going on with a few folks. The interest is very high. These programs are very complicated. For the airlines, they're complicated. They have to do with their C checks and D checks and the locus of the balance of their fleets and all sorts of things that go into this. So discussions are slow. They're very methodical. We'll have a dozen people involved on our side. The airlines, the same. But I think it will play out pretty much as we have indicated and that we'll be able to announce a first retrofit program in the near future on the 737 lav.

Noah Poponak - Goldman Sachs Group Inc., Research Division

And any similar thoughts or comments on brand-new SFE products that you may or may not be working on?

Amin J. Khoury

Well, we actually have -- we don't announce every single booked order. We have booked additional SFE orders on the wastewater treatment side, for example. We've done some stuff on the oxygen side. We just don't announce every single SFE program. I think -- I want to remember -- I think that SFE backlog increased by some amount. Maybe, Greg, maybe you could...

Greg Powell

It was about $100 million this year, a little over $100 million.

Amin J. Khoury

And we shipped a lot of our SFE backlog during the past year, something like $150 million. So we are continuing to book SFE programs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. And then, Amin, it sounds like you're calling for a slightly back end-loaded year on revenue and cash. I don't know if maybe you wanted to a little bit more precisely quantify what to look for in the first half, whether it's on absolute revenue or inorganic growth rate. Just to get everyone on our side of the table on the same page.

Amin J. Khoury

I don't think we can do that. You're right. Based on the timing of program deliveries, our expectation is that second half will be better than the first half of the year. But I don't think we can do any more than that at this point in time. I think when we get through the first quarter, we'll have a much better feel for the second quarter and the balance of the year. I think we just need to work through the first quarter.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. And what was the consumables organic revenue growth rate in the fourth quarter?

Amin J. Khoury

The organic revenue growth rate in the fourth quarter was a little less than 1%.

Operator

And we have a question now from Robert Stallard with Royal Bank of Canada.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Amin, I was wondering if we could have some comments on how cabin retrofit and upgrade growth can be expected to pan out in 2013 and maybe into 2014, if you're prepared to give that.

Amin J. Khoury

Well, retrofit cabin upgrades, so at the current time, most of the -- or a lot of the major airlines of the world are in the midst of receiving large numbers of new wide-body aircraft, okay? 787s, they're getting ready for their first A350s. They're getting 777s, 747-8s. So they are really preoccupied, to a large extent, with the number of new aircraft that are entering their fleets, and they're also dealing with some significant issues associated with some of the new airplanes entering their fleets, as we all know. So a retrofit backlog for this year looks fairly healthy. I mean, it's not -- there are orders that were booked in prior periods that are rolling out during this period of time, but no substantial growth in retrofit deliveries during this year. Most of what -- most of our growth in CAS and in the bizjet segment are coming from new aircraft deliveries.

Robert Stallard - RBC Capital Markets, LLC, Research Division

So this is an area that could pick up maybe in '14 or maybe into 2015 as we get through the bulk of these big wide-body deliveries?

Amin J. Khoury

Yes, our expectation, actually, is that orders for retrofits -- we expect orders for retrofits to strengthen in 2014.

Robert Stallard - RBC Capital Markets, LLC, Research Division

Okay. And on the capital side, you mentioned you don't have any debt maturities out until 2020. So can we expect no further debt paydown? And in relation to that, do you see cash deployment this year being, again, focused on bolt-on acquisitions?

Amin J. Khoury

Yes. We ended the year with about $514 million in cash. We expect about a 70% free cash flow conversion ratio in the coming year, so we've got a significant amount of excess cash, which could be deployed for acquisitions. We are seeing some interesting acquisition opportunities, primarily for the manufacturing side of our business but also for distribution, but primarily on the manufacturing side. I do think that it's reasonably probable that we will do at least one acquisition during the course of the year, maybe more like 2.

Robert Stallard - RBC Capital Markets, LLC, Research Division

But no debt paydown, you expect?

Amin J. Khoury

Well, our debt, for the most part, is bonds. I mean, they're notes with significant prepayment penalties. So we do not expect to do further debt paydowns, prepayments and to take the charges associated therewith. We've looked at it, and the penalties are very significant at the current time. So we're just going to continue to service our debt. We have $1.3 billion outstanding, as you know. And Tom, what's our average interest cost on all of that debt over the course of the year? I think it's about $122 million in interest.

T. P. McCaffrey

Yes, the interest cost will be about $122 million.

Amin J. Khoury

What's the average interest cost, Tom?

T. P. McCaffrey

It's in the mid-5% range. Most of the debt was placed right at 5%. We have a little bit out at 6.5%.

Operator

We'll move now to JPMorgan, Joe Nadol.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Werner, I think you mentioned in your prepared remarks that you were gaining share in CMS, and I was just wondering how you're measuring that or thinking through that. Is that within your addressable markets, maybe just looking at the aftermarket part, or is that overall?

Werner Lieberherr

I mean, it is in the addressable market, but we carefully actually review our hit rate, and so as part of that, we could see that we were able to actually make some market share gains.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

So it's measured based on your hit rate on bids or...

Werner Lieberherr

I mean, when we looked actually for accounts we didn't have before, we were able to make market share gains.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. And then I guess the second question on CMS is on pricing and what you're seeing there because you're looking for margin improvement, as you mentioned. Looking further down the line, is there pricing pressure, or is the pricing okay? And is the margin improvement you're looking for really based on volume? What's the gross margin outlook, I guess, as you get that margin improvement?

Werner Lieberherr

Well, I think it's twofold. I mean, I think the pricing is okay. I think it's volume and then secondly, it's also cost reductions. And we look at parts cost reduction, and we look at organizational cost reductions.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

And you mentioned that everyone's very busy with the integration effort. What's the latest update there on how much further there is to go and how much cost opportunity there still might be?

Amin J. Khoury

Well, we expect to spend about $20 million this year. We guided to about $20 million of expenditures in 2012 and spent a little less. We expect to spend all of the $20 million in 2013. We should be essentially complete by the end of the year. There's still a little bit of stuff to do in the first quarter of 2014 but essentially complete. But we expect to see our margin expanding in the business even as we're spending on AIT due to a reduction in excess facilities and reduction in excess personnel and reduction in excess IT cost. And so mostly, what we think about in terms of driving the margin expansion in that business is cost reduction. We do expect some improvement in volume over the course of the year. We talked about mid-single digits. In terms of pricing, as Werner had mentioned earlier, we renewed 100% of the 160 contracts that came up for renewal over the course of the year and added some additional customers as well. So it was a really good year for CMS in the marketplace. They won 7 or 8 Supplier of the Year awards, incredible on-time performance. I mean, they're really operating on all cylinders, as Werner mentioned earlier. The goodness of some volume growth would be wonderful for some additional operating earnings and margin growth, but we don't expect much in the way of growth this year. As we said earlier, maybe mid-single digit.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just one more, going over to CAS and honing in on the premium seat market. I think Howard asked earlier about market share, and were you losing some. You mentioned that this was your best year -- or last year was your best year ever. And I did see that your major competitor didn't grow as much as you did in the quarter. I think they were single-digit, and you were double organically. As you look forward, I mean, do you think that -- if you've been gaining a little bit of share there, do you think that might continue into the next couple of years, just given the profile of your customers, the profile of how the deliveries are ramping on 87? Do you expect to continue to grow that market faster than -- grow that business faster than the market?

Amin J. Khoury

We expect to book orders at a higher rate. Well, first, let's talk about how we measure share, okay? So share is measured in each year depending upon what has been delivered by us as compared to delivered by our competitors over the course of the year. And because we have been booking at a rate which is higher than our market share, our market shares will have to grow as the backlog is rolled out into deliveries. And we've been booking at a rate in excess of the market growth rate for 3 years now, and we've been gaining share on the booking side for about 3 years. And we had a great year this past year, so our expectation is that shares will grow in 2013, '14 and '15 as we roll out the backlog, and that will basically reflect the orders that we have taken and the size of the backlog that we currently have.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Understood, understood. And the 787 is a key driver there. Is that accurate?

Amin J. Khoury

787, 747-8, 777, A380, A350, all of these wide-body aircraft types have -- there's important backlog associated with pretty much all those aircraft types, but 787 for sure, just as all the other wide-bodies that I mentioned a second ago.

Operator

And we'll take our last question today from Myles Walton with Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

Amin, just a clarification on the CMS. The mid-single digit, was that kind of your market organic growth, or has that got a touch of benefit from Interturbine?

Amin J. Khoury

We expect our business, our CMS business, to grow at a mid-single digit rate during the course of the year compared to 2012. Everything looks [ph] -- Interturbine and all the businesses in 2012 and 2013.

Myles A. Walton - Deutsche Bank AG, Research Division

And then, I mean, it looks like, if I look at your revenue kind of buildup, that there's a healthy amount of conservatism, I guess the best way to put it. Business jet had a 40% CAGR this year, and I guess you're talking single...

Amin J. Khoury

Hold on one second. Hey, Tom, would you just take a look at that question and make sure I answered it accurately for Myles? I don't want to mislead anyone, and I just -- just thinking about the question, I'm not sure I answered it 100% accurately. What's your second question, Myles? While Tom is looking...

Myles A. Walton - Deutsche Bank AG, Research Division

It was more -- it looks like there's a lot of revenue opportunity upside to your number if business jet is growing 40% this year and you're kind of talking about a single-digit growth next year in consumables, given the backlog and the SFE kicking in. I'm just curious. It seems, again -- is there any pushback you could give to me to think about the revenue outlook as being on the conservative side?

Amin J. Khoury

As I mentioned earlier, both commercial aircraft segment and bizjet segment ended the year with the biggest backlogs they've ever had, with a record backlog. But the timing of deliveries from the backlog, particularly for the bizjet segment, has very modest growth in bizjet in 2013. It's just the timing of deliveries. So we expect low-single digit growth, revenue growth in the bizjet segment in 2013 and acceleration, a double-digit growth in 2014, and it has to do with the backlog and the timing of backlog and all these Super First Class programs that we won. Now we expect earnings, operating earnings to grow at a double-digit rate, but it's because of margin expansion and the quality of the backlog.

T. P. McCaffrey

And Myles, in response to -- just to clarify what -- I think what Amin was saying is that organic growth at CMS next year will be mid-single digit. And so to that, you would add half year of Interturbine.

Operator

And this concludes our question-and-answer session. Mr. Powell, I'll turn the conference back to you for closing comments.

Greg Powell

Okay, thank you for joining us today, and we look forward to speaking to you again after we report our first quarter results. Thank you.

Amin J. Khoury

Have a good day, everyone.

Operator

Ladies and gentlemen, this concludes today's B/E Aerospace conference call. Thank you for participating in the call.

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