Goodrich Corp. Q4 2008 Earnings Call Transcript

Goodrich Corp. (GR)

Q4 2008 Earnings Call

February 4, 2009 10:00 am ET

Executives

Paul Gifford – Vice President of Investor Relations

Marshall Larsen – Chairman, President and Chief Executive Officer

Scott Kuechle – Chief Financial Officer

Analysts

Troy Lahr – Stifel Nicolaus & Company

Carter Copeland – Barclays Capital

Joseph Campbell – Barclays Capital

Robert Spingarn – Credit Suisse

Peter Arment – Broadpoint Capital Markets

Joe Nadol – JP Morgan

Ronald Epstein – BAM-ML

Gary Liebowitz – Wachovia

David Strauss – UBS

Robert Stallard – Macquarie

Howard Rubel – Jefferies

J.B. Groh – D.A. Davidson

Patrick McCarthy – Friedman, Billings, Ramsey & Co.

Richard Safran – Goldman Sachs

Heidi Wood – Morgan Stanley

Presentation

Operator

(Operator Instructions). Good day everyone and welcome to the Goodrich Fourth Quarter Full Year 2008 Results Conference Call. Today's call is being recorded. The press has been invited to participate in today's conference in a listen only mode. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Paul Gifford. Mr. Gifford, please go ahead sir.

Paul Gifford

Thank you, [Rufus], and thank you for joining us today as we discuss our fourth quarter 2008 results. Joining us in the room today are Marshall Larsen, our Chairman President and CEO, and Scott Kuechle, our CFO.

We will start with some brief prepared remarks, followed by Q&A. The presentation is available on our Web site www.goodrich.com, which together with our press release provides the basis for most of our remarks.

Before we start, let me remind you that today's remarks include forward-looking statements that involve risks and uncertainties and actual results could differ materially from those projected in the forward-looking statements.

The risks and uncertainties are detailed from time to time, in our reports filed with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q. They are also detailed in today's earnings press release. I urge you to read them carefully.

This conference call is being webcast and replays will be available at our Internet site beginning this afternoon.

Now I'll turn the call over to Marshall, who will provide you with an overview of the fourth quarter 2008 results and our adjusted full year 2009 outlook.

Marshall Larsen

Thanks Paul. I assume you've all had the opportunity to review today's earnings release and the related presentation. Today, I'll describe the key factors that led to our strong performance during the fourth quarter 2008, and our adjusted outlook for 2009.

As you have probably noted, we updated many of the commercial aerospace environmental charts that we first shared with you last October. Our overall market assumptions, particularly those assumptions related to our commercial after market business are laid out on pages four through nine of the presentation we posted on our Web site.

Although I don't intend to go through them in detail today, I want to note that market conditions for 2009 have clearly deteriorated since we gave our initial outlook in October of 2008.

The outlook for global GDP has softened, the IMF now expects North America and Europe to have negative GDP growth in 2009, and their forecast for worldwide GDP growth is now at 0.5% for 2009.

We now expect available seat miles, ASMs, to contract for about 4% in 2009, compared to our prior expectations of plus 2% to minus 2%. We still expect the first quarter 2009 to show the largest decrease in capacity, with a slow recovery in subsequent quarters. However, it now appears that all four quarters in 2009 will show some negative ASM growth.

In October, we expected that there would be about 943 retirements in 2009. We've increased that number to about 1,366, but these retirements are still dominated by older, narrow body retirements, such as MD-80's and 737 classics.

Similar to October, we continue to expect that ASMs for the newer, more fuel efficient aircrafts, such as the A320, the 737NG, the 777, and the A330, will continue to grow in 2009, as new aircraft are added to the fleet and cycles for those aircraft remain high.

As we have said frequently in the past, we enjoy the benefit of having excellent positions on the newer, more fuel efficient airplanes currently in service. A significant majority of our aftermarket sales are from these newer airplanes, while a relatively small amount of our after market sales are from the models most likely to be retired.

The A320 remains a very important platform for Goodrich. There are well over 2,000 A320s that are over five years old; a lot more than were subject to major repair and overhaul during the last down cycle. This is a key difference for Goodrich when looking at prior cycle versus the environment we are now entering.

Now I'll make a few comments about our fourth quarter 2008. Our fourth quarter was another strong quarter. Our sales growth of 2% included significant sales reductions associated with the Boeing strike and an unfavorable foreign currency exchange rate impact on sales of $69 million. The results included 4% sales growth in our commercial after market channel, 7% growth in defense and space, and 15% growth in regional business and general aviation equipment sales.

The growth in these market channels was largely offset by a sales decrease of 11% in our large commercial original equipment market, where sales to Airbus grew by about 9%, but sales to Boeing dropped by about 40%, largely due to their machinist strike. Our segment operating income margins remained strong, increasing to 16.3% from 15.8% in the fourth quarter of 2007.

Our fourth quarter 2008 net income per diluted share was $1.35. When you normalize for the tax rate and remove the $0.12 per share gain related to the Rolls Royce JV, our adjusted EPS was about $1.09. For the fourth quarter 2008, we generated net cash provided by operating activities, minus capital expenditures of 137% of net income; very good performance in the current environment.

During the fourth quarter, we had several significant accomplishments. At the end of December in 2008, we completed the formation of a joint venture with Rolls Royce to develop and supply engine controls for Rolls Royce aero engines.

Each company owns 50% of the JV. Importantly, Goodrich will retain the after market products and services business associated with the joint venture's current and future products.

In mid-December 2008, we were selected by Airbus to supply wheels and carbon brakes for all variants of the A350 XWB family of aircraft. The selection significantly increases Goodrich content on the program.

In November 2008, we received a contract from the US Department of Defense, for the first operational satellite system in support of the Operational Response of Space, ORS. The satellite designated ORS Sat I, is to be manufactured and integrated by Goodrich's ISR systems team in Danbury, CT. ORS is focused on the ability to quickly and affordably implement space capabilities to benefit the war fighter.

In the fourth quarter, we officially opened a 350,000 square foot campus in Mexicali, Mexico, focusing primarily on metal treatment processing and fabrication. Additionally, our board of directors approved a plan to develop 165,000 square foot campus in Tianjin, China, to accommodate maintenance repair and overhaul, original equipment support, enterprise supply chain and shared service activities for the region.

For the full year 2008, our net income per diluted share increased to $5.39, a 43% increase over 2007 net income of $3.78. Our sales increased to $7.1 billion, which represented a 10% increase over 2007 sales of $6.4 billion. Almost all of this growth was organic.

For our major market channels, we experienced the following growth rates for the full year 2008, large commercial airplane, original equipment sales grew by 7%, including the 2008 impact of the Boeing machinists strike; regional, business and general aviation airplane original equipment sales grew by 23%; commercial aftermarket sales grew by 9%; and defense and space sales increased by 11%.

For the full year 2008, we generated net cash provided by operating activities, minus capital expenditures of 75% of net income, including the impact of inventory build-ups from the Boeing strike. Our capital expenditures for 2008 were $285 million. Also during 2008, we contributed $227 million to our worldwide pension plans, compared with contributions of $133 million during 2007. The 2008 contributions included a contribution in late December of $115 million. We made this simultaneously with the receipt of $115 million in cash from Rolls Royce, related to the completion of the JV.

In today's release, we also provided you with an update to our outlook for 2009. We believe this outlook realistically portrays our expectations for performance in the current market environment. We now expect modest sales growth in 2009.

In total, we expect to generate $7.1 to $7.2 billion in annual sales in 2009, representing a growth rate of about 1 to 2%. These 2009 sales expectations compared to 2008, include unfavorable sales impact of approximately $180 million across all market channels, or 2% of sales related to foreign currency exchange rate fluctuations and lower sales of approximately $150 million, another 2% of total sales related to the formation of the engine controls joint venture.

Our sales growth expectations for each of our major market channels are large commercial airplane original equipment sales are expected to increase by about 3% to 5%, including some continuing Boeing strike impact for the first half of 2009; regional business and general aviation airplane original equipment sales are expected to decrease by approximately 10%; large commercial regional business and general aviation airplane aftermarket sales are expected to be approximately flat, with large commercial aftermarket sales up slightly, while regional business and general aviation after market sales are expected to be somewhat lower compared to 2008.

This outlook assumes that world wide available seat miles, ASMs, decrease by approximately 4% in 2009 compared to 2008, and defense and space sales of both original equipment and aftermarket products and services are expected to increase by 5%.

Our outlook for 2009 from continuing operations and net income per diluted share is $4.50 to $4.90. While this is somewhat lower than our outlook of $5.05 to $5.25 that we provided you with in October, the decrease is primarily driven by a $0.27 per share increase in expected pension expense and a decrease in our aftermarket sales growth expectations.

For 2009 each 1% change in aftermarket sales would be expected to have about a $ 0.06 per share impact on our net income. Our 2009 outlook range includes among other factors, compared to 2008 higher pre-tax pension expense of $110 million or $0.55 per diluted share.

The higher pension expense incorporates the company's return on US plant assets of approximately negative 19% in 2008, includes a 2009 US discount rate of approximately 6.5% compared to a rate of 6.3% in 2008; a full year effective tax rate of 31 to 32% for 2009 and foreign exchange translation that is approximately $5 million favorable, when compared to 2008.

For 2009 we expect net cash provided by operating activities, minus capital expenditures to exceed 75% of net income. This outlook reflects a continuation of investments to support the new commercial airplane programs, current in early stages of production or still under development in capital expenditures for low cost country manufacturing and productivity initiatives.

We expect capital expenditures for 2009 to be in a range of $230 million to $270 million; a significant reduction to the outlook for capital expenditures we provided you last October. During 2009 we expect to contribute between $150 and $200 million to our worldwide pension plans.

Clearly we’re operating in a challenging global economic environment. We’ve performed very well in this environment and we expect to continue our strong performance, relative to market trends during 2009. Even though global airline capacity is expected to contract in 2009, we have excellent product positions in the newer more fuel efficient airplanes that are least likely to be removed from service.

We believe that this positioning will allow us to continue to report 2009 commercial aftermarket sales performance above market trends. We continue to expect commercial airplane original equipment sales growth for Goodrich in 2009 compared to 2008, as Boeing and Airbus are expected to deliver more new airplanes in ’09 than they delivered in ’08.

We’ve won significant product positions on new aircraft including the Boeing 787, the Airbus A350, the Bombardier C series and the Mitsubishi regional jet. These new programs are expected to generate significant new revenues for Goodrich for many years to come and will help us sustain our position as an industry leader in commercial aerospace.

Our positions on key defense platforms serve allied military forces worldwide. We’re very well positioned in the strategic growth areas of helicopters and intelligence, surveillance and reconnaissance. Within the next ten years we expect to see about 5,000 new military helicopters built and Goodrich has significant content on many of these platforms.

Additionally, even with pressure on defense budgets, we believe the demand will increase for intelligence, surveillance, and recognizance capabilities. Over all, our broad range of defense products meet both strategic and tactful requirements around the world.

We’re mindful of the need to control head count and discretionary costs and we are prepared to act swiftly should economic conditions worsen. We’ll maintain our sharp focus on continuous improvement, which has allowed us to reduce waste, increase productivity, and increase our margins.

With our strong balance sheet, excellent cash flow and motivated work force, we believe we can continue our track record of strong financial performance during 2009 and beyond. And now we’ll be glad to take your questions.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen our question and answer session will be conducted electronically.

(Operator Instructions) And for our first question we’ll go to Peter Arment – Broadpoint Capital Markets.

Peter Arment – Broadpoint Capital Markets

Yes, good morning Marshall, Scott, Paul. Congratulations on the corner, very nice results. Can – Marshall, can you maybe just talk about cash deployment for ’09? I guess what you’re thinking about form both on acquisitions, or you’ve done a few selective ones. Could you give us a little more color on that front?

Marshall Larsen

Sure, obviously, you saw that we cut back on our capital spending. Basically we don’t want to add more capacity until we’re sure we need it. So we accepted and selected low cost country expansions where we’re actually decreasing our costs and raising our margins.

We’re being cautious about that deployment. You saw we’re going to have to make $150 million plus pension contribution during 2009; we want to keep the pension as close as possible to a significantly funded status.

But we’re also watching the returns there, so we’re not going to jump right in and drop $150 million in the first quarter. We want to see what happens to returns during the year. We will actively continue to look at both on acquisitions, and you saw we’ve done three of them last year and they fit very nicely into the portfolio and we’ll continue to look at those.

The good news is that we don’t have to go out and borrow money to do those kinds of acquisitions; we’ve got substantial cash on the balance sheet. We only have about a couple hundred million due in long-term debt, I think in May that we can pay off from the balance sheet and we’re generating good cash.

So we’re cautious in terms of making sure we remain fairly liquid in these difficult times until credit frees up better, but even saying that we have the capacity to do some of those acquisitions if we find the right ones.

Peter Arment – Broadpoint Capital Markets

Okay and then just quickly R&D is expected to come down and I didn’t maybe see it in the charts, maybe I missed it, did you give any – can you give us a little color on that then maybe Scott?

Scott Kuechle

Sure 2007, 2008 R&D which we expense through the P&L was in the $280 to $285 million range, and I think for ’09 we’d expect that to come down probably in the neighborhood of $260 maybe a little higher than that.

Operator

(Operator Instructions). Your next question we go to Robert Spingarn – Credit Suisse.

Robert Spingarn – Credit Suisse

A couple of questions, or one question and a follow-up. But the first question Marshall, maybe you can help me a little bit on the commercial OE. I'm looking at your guidance for 3 to 5% growth and thinking about – and this is at the airliner level – seeing that Boeing rising about 25% or more according to their plan and Airbus flat. So can you reconcile that to your lower growth number, or is it conservativism or is it flow related either to lead times or to the strike?

Marshall Larsen

Well it’s related to the strike and the lead times, because Boeing had us continue delivering especially in landing gear right up into six, eight weeks into the fourth quarter, which means that they have more inventory than they need right now. So, we have a slow first quarter coming up, and that impacted that growth rate quite a bit.

Scott Kuechle

Yes Rob just to build on that if you were to normalize for the strike impact, we'd be up probably 2% at Boeing, and then the other impact is because we formed this joint venture with Rolls-Royce, we no longer have some OE sales that go primarily to Airbus, but actually both to Airbus and Boeing relative to the engine controls business.

So, while we are expecting to report about flat sales on Airbus, if you normalize for that we would have been up probably 4%. So, on a normalized basis we're up 3 to 4%, excluding the effects of the strike in this joint venture.

Robert Spingarn – Credit Suisse

Scott, just to clarify, was the 150 million contemplated in the $7.7 to $7.8 billion you guided to in Q3?

Scott Kuechle

Yes, you mean on the Rolls-Royce joint venture impact?

Robert Spingarn – Credit Suisse

Yes.

Scott Kuechle

Yes, we had anticipated that and had the reflected.

Robert Spingarn – Credit Suisse

So, where I'm going is you were plus 20% now plus 3 to 5%. That really is a wash in those two numbers.

Scott Kuechle

Yes, I'm just trying to give you the year-over-year impact to try to guide it back to a fundamental build rate.

Robert Spingarn – Credit Suisse

Got it, and also is there any element to this at the back end of 2009 that is affected by lead time into 2010 and perhaps a slowing at the back end of the year, commercial '08.

Marshall Larsen

Well we know that Boeing said that they'll come out later in the year and give us an outlook for 2010. Right now we don't know what 2010 is going to be. We're not within lead times. So, when that happens hopefully if they do make a change, if it should go down in particular or if it goes up, that they'll give us plenty of notice so that we can prepare because we'll be shipping at least in the fourth quarter for things that are going to happen in the first quarter.

Robert Spingarn – Credit Suisse

Right, that's helpful, and then just last on your slide number five, and I always like this chart, your ASM chart. I think the biggest delta is from Q4 '08 to Q1 '09, the minus 1% approximately in the fourth quarter, to what looks like about minus 5, minus 6% this current quarter. We're five weeks or so into the quarter, can you just characterize what you're seeing in response to this delta? Do you see this yet or does this happen to you next quarter or the following quarter?

Marshall Larsen

Well I think the first quarter is going to be a tough quarter on the aftermarket because you'll see the full effect of some of these capacity reductions that the airlines have already announced. We didn't get the full effect in the fourth quarter. So, that's why I believe we'll kind of build during the course of the year, and as we said our commercial side is actually up, in terms of '09. It's the regional and business and GA that bring the total aftermarket down to flat.

Robert Spingarn – Credit Suisse

Okay but just focusing on the commercial and this trend on the right side of this chart, if I understand correctly, this is airline ASMs.

Scott Kuechle

That's right.

Marshall Larsen

That's right.

Robert Spingarn – Credit Suisse

How would Goodrich aftermarket associated with these ASMs trend? When would you trough on growth?

Marshall Larsen

I think the trough is probably going to be in the first quarter.

Robert Spingarn – Credit Suisse

So, it's really coincident.

Marshall Larsen

Yes I mean if ASMs are down 6, 7% in that first quarter we're going to see that effect, but we won't see the effect to the extent that other companies might, because of the positioning on those newer aircraft.

Robert Spingarn – Credit Suisse

Got it, I was pretty much asking if there's any lag in the maintenance.

Marshall Larsen

Yes there certainly could be a little bit of that, especially on flyer agreements, but I think the general trend is right.

Robert Spingarn – Credit Suisse

Got it, so we're near the bottom now, thank you very much, that's helpful.

Operator

For our next question we go to Heidi Wood – Morgan Stanley.

Heidi Wood – Morgan Stanley

Good morning guys, again nice quarter. Scott, can you walk us through with this revised 2009 guidance, the $450 to the $490. You gave us color in terms of the large OE, in terms of 3 to 5% up and RJs and [Biz] just down 10%, etc., but I was wondering if you could do it in terms of the EPS impact just so we could visualize how that spills into the puts and takes over, across the divisions.

Scott Kuechle

Yes I can give you a little bit of color there, maybe start at the top. If you look at kind of where we're leaving 2008, we're reporting $5.33 on the EPS line, but included in that is some income that we got from the formation of the Rolls-Royce joint venture and a lower tax rate.

So, if you pull those out our normalized '08 starting point would be $5.10, from that you subtract $0.55 year-over-year for pension, which would get us basically to the low end of the guidance range that we put out there for '09, about $4.55.

So, we're guiding higher than that number because we're net-net going to get some operational improvements, cost improvements in our businesses, and we'll get some growth in some of the other market channels. In terms of margin performance, 2008 we had about 17.2% segment margins, and we're guiding toward 16 to 16 1/2 % margins for 2009.

And we would be up year-over-year on margin performance, in other words better than 17.2%. We're at net for pension, so the pension impact is a full point and a half on margins. So, we don't see a lot of change segment by segment in terms of margin performance, sales growth, relative to what we're seeing at the total company level. It's relatively consistent business by business, so pension is the single biggest impact.

Heidi Wood – Morgan Stanley

That's very helpful. Thanks very much and a quick follow up. Can you give us some color on puts and takes on '09 cash flow? I mean inventory build rose quite a bit, but obviously some of that's I would imagine Boeing strike related, but what happens to inventory in 2009? And give us color when you wrap up on CapEx on 787.

Scott Kuechle

Yes on '09 some of the components there would be certainly on working capital. We think we'll have a better year in '09 than we did in '08 on core working capital. We still see what we call non-product inventory, which is our preproduction excess over average building in 2009, probably in the area of $150 million to $200 million negative in '09 versus about $120 in 2008, and that's simply a function of we're starting to get into production relative to the 787.

So, we've got more excess over average. They're still working on the R&D side on the A350, and we've got gear turbo fan development work as well. So, that drives that up a little bit, but generally it's the working capital should be more favorable in '09 than '08 because we don't have as much growth built into the forecast, and CapEx and the $250 million range is down considerably from 2008 levels, and that just reflects again the environment that we're describing for '09 where we're not seeing production rates going up on the core products on the OE side.

Heidi Wood – Morgan Stanley

But the '09 CapEx includes some ongoing stuff for 787. Do you wrap up that work this year?

Scott Kuechle

There's not a lot of incremental CapEx associated with positioning for 787 ramp up. There is some in this year and there will be some next year in 2010 as we start to ramp up fully there, but it's not material to the overall.

Operator

We go next to Joseph Campbell – Barclays Capital.

Joseph Campbell – Barclays Capital

It's actually Carter and Joe. I wanted to return really quickly to Rob's question about the OE adjustment, it looks like the revision there was on the order of $300 million in revenues, which would be about 40% of your Boeing OE sales for an annual period.

So, it seems like a pretty large revision. So, I was trying to make sure, are you saying there's no sort of cushion built in here for later in the year if we decided to take the Boeing production rates down?

Scott Kuechle

Yes, Carter, what we've said is on the OE side there's a couple of factors there that resulted in our revision in sales expectations for '09 from where we were in October. First is foreign exchange, now there's clearly an impact there. We said about 2% overall or $180 million that spreads across all the different segments, so there's some of that impact on the OE side.

The second is when we gave our guidance we were still looking at rising production rates out of Airbus on A320. So, that's a change that Airbus has announced previously, between the last time we spoke and this time, and then apart from that you've got some expectation that the 787 and A380 have continued to slide to the right, and we did have some OE sales built into the back end of the year. So, it's really those three factors that are driving most of that change.

Marshall Larsen

And the strike.

Scott Kuechle

And the strike, yes, good point, Marshall. The strike impacted us to the tune of $60, $70 million in the fourth quarter of '08, and it's a similar number in '09, because as Marshall said, we continue to ship about half way into the fourth quarter and now we've got the continuation of getting inventory to normal levels at Boeing in the first quarter.

Joseph Campbell – Barclays Capital

All right, that's very helpful. One other one, I mean I know you don't give quarterly guidance, but it sounds like with Boeing OE being slower in the first quarter and aftermarket having its most challenging quarter in the first quarter, that Q1 will be sort of abnormally weak given normal quarterly EPS progression we expect out of you. Is there any color you can help us with there to see how the EPS will track over the course of the year?

Scott Kuechle

Well, you're right; we don't give quarterly guidance, but just the way that the capacity reductions are falling into place and we talked about that chart five in our presentation, that's when we expect to have the greatest impact on the overall ASMs.

So, we'll have the greatest pressure on our aftermarket in that first quarter we believe. Could we be exact in that? I'm not so sure, but I don't think there's a lot of lag in it, and then the OE side isn't as much of an impact on EPS because of the low margins.

So we've tried to build in a realistic outlook for the year, based on starting off with a tougher environment in the first quarter or two, than we will see in the second two quarters.

Joseph Campbell – Barclays Capital

Great, thanks a lot guys, nice quarter.

Operator

We go next to David Strauss – UBS

David Strauss – UBS

Scott, I know it's early on here, but thinking out to 2010 and what your pension might look like, can you give us an idea if you assume no change in your discount rate and you would happen to hit your assumed rate of return in 09, what '010 might look like?

Scott Kuechle

I'm not sure I can do that off the top of my head; certainly expense would come down a little bit. On the cash flow side, you know we're still thinking $150 to $200 million of pension contributions pre-taxed is probably an area where we'll be at for a couple of years, unless we have a big rebound in the market place.

I can tell you directionally we typically have 1% change in the discount rate is pretty leveraging, but a 1% return, I think is somewhere in the $5 to $6 million value to us, so you could probably project that forward if you're trying to get sensitivity relative to what the expense might look like if you get above average returns.

David Strauss – UBS

Right, I was just thinking since you don't smooth and you're taking all of the pain in '09, if you would just hit what your targets are, what expense in '010 might come down to.

Scott Kuechle

I mean if all the economists out there are right and we start seeing a rebound in the second half of the year of the market, which I don't know if that's right or not, then I think what you've said is probably correct, you'll get better returns going into the second half which should help.

Marshall Larsen

Yes, David I think if you hit those assumptions, I understand your question now, you're probably like $15 million pretax benefit in 2010 versus 2009 if you just hit your assumptions and the discount rate stays flat.

David Strauss – UBS

Right, okay.

Marshall Larsen

That's what you were asking right?

David Strauss – UBS

Yes, exactly, and then Scott, just could you give us an update on currency, where you stand on hedging now and then in the out years?

Scott Kuechle

Yes in '09 we're almost 100% hedged, so that's pretty well locked in and as we said earlier that'll be about a $5 million benefit versus 2008 on the currency side.

In 2010, we're about 81% hedged, and we would expect that to give us about a $15, $16 million further benefit in 2010 versus '09. We're about 60% hedged in 2011, and then I think about 40% the following year and 30% out in 2013.

And if you take the whole string together and say, what would our earnings look like after we get everything marked to the current exchange environment, there's about a $75 million improvement over that time period in our annual earnings pre-tax.

David Strauss – UBS

Ok, great and I'll slide one last one in here, other income that line, what do you expect that line to look like moving forward?

Scott Kuechle

It's about probably $14 million a quarter, is a pretty good estimate. You know it changes quarter to quarter so there's some volatility in that line but on average that's about right.

Operator

For our next question we go to Troy Lahr –Stifel Nicolaus & Company

Troy Lahr –Stifel Nicolaus & Company

You guys talked about capacity coming out in the first quarter, but do you also see airlines carrying excess inventory right now? I think one other supplier talked about that and he thinks some of these airlines need to burn through that. Are you seeing that as well?

Marshall Larsen

No, we haven't seen much of that. First of all where we have flight hour agreements, they don't need to carry inventory because it's our responsibility to get the product right at the right time, but we didn't see them doing that, and in our instance if they had too much inventory on some of those aircraft that they were parking, it didn't make any difference for us, because they were older aircraft.

So we haven't seen that to any great extent.

Troy Lahr –Stifel Nicolaus & Company

Okay, fair enough, and then can you talk a little bit about your guidance for 2009 for defense and space? I think you guys were up 11% in 2008 but kind of pulling back a little bit to probably more normalized level of 5%. Any programs winding down, or are you just being conservative with the 5%, can you kind of just walk us through that a little bit?

Marshall Larsen

Well, we don't know exactly where this administration is going to end up, but last year we increased by about 10% to $1.8 billion of expense in space, and there's lots of discussions going on in Washington right now, but we know the Air Force is going to have to invest in a tanker. I mean, unfortunately it got delayed, but whether it's an Airbus tanker or it's a Boeing tanker, we're going to have product on it. That's good.

We already talked a little bit about the helicopter market and the increased build rates. We're going to have to replace a lot of military helicopters in the next 10 years. I mean we had great positioning, like almost $1 million a ship set on CH-53s and others.

It probably will be a fighter gap at some point in time here, and the need for more F-18s or F-22s or maybe even the acceleration of the F-35. We don't know that yet, but we're positioned on those, and certainly they're going to have to continue to support airlift modernization, though we've got good content on C-17s and 130s and the C-5 re-engining and we know there's gong to be no decrease in the need for intelligent surveillance and reconnaissance products, and we're, that's right in our sweet spot.

And that's contributed a fair amount to our growth, and also on the helicopter side again, our HUM systems have been, we've been methodically inverting the Army's Blackhawk fleet, putting our HUM system on it, so we feel like we're positioned pretty well on it, but to be able to call greater than 5% at this point seems difficult.

Troy Lahr –Stifel Nicolaus & Company

Okay, that's good.

Scott Kuechle

Troy, I would add too, that remember the foreign exchange discussion that we had at the beginning that takes our growth rate and all these different segments down about 2% relative to 2008 levels, so that may be part of the gap that you're seeing there.

Troy Lahr –Stifel Nicolaus & Company

Ok, fair enough, thanks guys.

Operator

We go next to Joe Nadol – JP Morgan

Joe Nadol – JP Morgan

Question on the aftermarket, we're still seeing a, certainly a premium, a good rich premium over ASMs globally, but did decline in the quarter and that your outlook, which may or may not be conservative, but it calls for a little bit more of a dip. So you had a double-digit premium for much of 2008, it was like mid single-digits in mid Q4 and you're looking for 4% in 2009.

Could you talk about some of the dynamics behind that? I would have thought with a lot of the McDonald Douglas aircraft going away that maybe your premium would, well at least hang in there. Is there something else going on, to pricing?

Scott Kuechle

Yes, I think it's hard to track it quarter by quarter but I think Joe, if you look over the course of the year in '08, ASMs were up about 3% and our aftermarket grew by 9%, so there's a 6 point delta there. What we're talking about for '09 full year is ASMs down 4, we have that FX impact of 1 to 2%, so we're still holding – we're guiding to flat even with the FX impact.

So we're literally still staying in that 5 to 6% Delta between what we saw this year and what we're expecting, or what we saw last year in '08 versus what we're expecting in '09.

Joe Nadol – JP Morgan

Okay.

Scott Kuechle

But for quarter-to-quarter, it’s not an exact relationship.

Joe Nadol – JP Morgan

Okay. And, then, a follow up question, on cash flow, Scott maybe just on the pre-production and excess over average, you gave some numbers on that already. I think you said 120 last year to going to 150 to 200 this year, could you talk about maybe where we – that might be going.

I mean at least today given what the schedules are today for all these aircraft in '010 and '011 and how each of the major pieces move in terms of 787 and A350?

Scott Kuechle

Well that'd be, certainly directionally, what you’re going to see is 787 still having some excess over average as they ramp up production and we get riding down the learning curve on production costs there and A350 will continue to spend R&D in 2009, 2010 and then, start to ramp down on that one. And then, Gear Turbo Fan is just starting to ramp up relative to our R&D investment in that program. So I think it stays kind of in that same level in 2010 versus 2009, but I can’t give you any more precision than that.

Joe Nadol – JP Morgan

So 787, I’m sorry, 787 should be – I thought you said those pieces would be growing in 2010?

Scott Kuechle

The 787 will stay, I think, similar to 2009.

Joe Nadol – JP Morgan

Okay.

Scott Kuechle

But, it’s excess over average, as they continue to ramp up production.

Joe Nadol – JP Morgan

Right. Okay. All right, thank you.

Operator

We go next to Ron Epstein – Bank of America.

Ronald Epstein – BAM-ML

Yes, good morning, guys.

Marshall Larsen

Hi, Ron.

Ronald Epstein – BAM-ML

In your outlook, you mentioned down 4% global traffic growth.

Marshall Larsen

Right.

Ronald Epstein – BAM-ML

If indeed that does play out, wouldn’t you expect Boeing and Airbus to have to cut production rates? I mean, that’s a pretty huge drop in global traffic, right?

Marshall Larsen

Yeah, but it’s the quarterly trend though, that’s going to be better as the quarters go by, so it isn’t going to be as bad as that first quarter. I know it’s 4% for the year. I think the other thing is that Boeing – what'd Boeing say, they were 15% over sold for ’09.

I think Airbus still has some of that, so I don’t expect a short-term cut in either company. I can’t predict what they will do for ’010 yet. We’re going to have to hear from them, but, hopefully, at least the U.S. is coming out of this recession here in the second half if not parts of Europe probably won’t be yet.

So, it’s a question that I just can’t answer any better than that right now until I hear more from Boeing and Airbus, but, the further we go into the year, even if they were to decide, it’s harder to make those cuts, you start getting into the end of the second quarter, you’ve got production pretty well lined up, so we’ll see.

Ronald Epstein – BAM-ML

Okay. And, then, just, I guess, just one final one. On the C-Series Program, we really haven’t seen anybody order the airplane yet, I mean, just Lufthansa's expressed an intent to, they haven’t done it yet. Why do you think that is? I mean, why don’t you think they haven't gotten a substantial interest in the planes yet?

Marshall Larsen

Well, my guess is it’s just a cautious environment on the airlines part at this point in time. I think if we were – if we weren’t under this recession area environment, it might be different. So, I’m hoping there isn’t a delay in that plane because of it, but you never know.

Operator

For our next question, we go to Gary Liebowitz – Wachovia Securities.

Gary Liebowitz – Wachovia

Good morning, gentlemen.

Marshall Larsen

Good morning.

Gary Liebowitz – Wachovia

If your view of the OE and production cycle plays out, when do you think free cash flow conversion gets to or exceeds 100%?

Marshall Larsen

Well, I don’t know where Boeing and Airbus are going to come out on 2010, but if 20 – let’s just assume that 2010’s the peak or if it’s flat and these are not our forecasts by any means. This is just notional to tell you that once we get to that peak and start coming down, that’s when we will start climbing to 100% and above.

But, I don’t know where that peak is yet and what’s happened; to us this year is we’re still sitting on a fair amount of inventory because of the Boeing strike and also because of the delay in the 787. So, we haven’t been as efficient about turning that inventory as we would in normal times.

But, once the OEs announce, at some point in time, that their book to bill has changed and they’re going to bring production down, which happens every cycle that I’ve seen in my career, then, we’ll start taking a lot of working capital out and there will be less capacity and expansion and we’ll start exceeding that 100%.

Gary Liebowitz – Wachovia

Thank you.

Marshall Larsen

You’re welcome.

Operator

We go next to Richard Safran with Goldman Sachs.

Richard Safran – Goldman Sachs

Good morning.

Marshall Larsen

Good morning, Richard.

Scott Kuechle

Good morning.

Richard Safran – Goldman Sachs

A question on business jets, a two-parter, can you tell us first, which manufacturers you’re most leveraged too and, also recently, we’ve seen some pretty dramatic reductions in the forecasts from Cessna and then on the low end of Gulfstream, and what I wanted to know was does your forecast for RJ’s Business Jets and general aviation OE include those recent production cuts?

Marshall Larsen

Yes, it does. Our forecast does include that and we’ve got a fair amount of business in Cessna, [Lombardi A] and Gulfstream. Gulfstream has been primarily landing gear being our largest component of that with engine controls. Now, that’s a JV with rolls, so that’s a sales reduction that Scott took you through, and then we do a fair amount of business with Cessna on all kinds of different products and the same thing with [Lombardi A]. So, we’ve tried to factor in those production cuts in our forecast.

Richard Safran – Goldman Sachs

Okay. And just to follow up then, so for example at Cessna, it looked like the production cut was about 35%. Could you just take us through how you get to the – reconcile that, for example, with the down 10% forecast that you have?

Marshall Larsen

Well, the down 10% includes everything, after market, regional business and general aviation. It isn’t just business jets.

Richard Safran – Goldman Sachs

And where would the – and so, is it more coming off regional jets offsetting or?

Scott Kuechle

Yes, yes, the regional jet piece is much larger than the business in general aviation component, both in the aftermarket, as well as on the OE side. So, what we’re seeing as much there is just some phasing of orders out of EMBRAER. We’ve got a lot of content on the 190 aircraft and even though their production has remained high, just the order patterns are a little different in ’09 versus ’08 on that airplane.

They’re taking down production a little bit on the 170. Those are the two biggest regional jet platforms that we have currently on the OE side, so we’re much more tied to that than we are to the Business GA Market.

Marshall Larsen

Another way of looking at this, Richard, is you look at the presentation we have on the Web and slide 23 and it shows that regional business in general aviation OE is 9% of total sales, so a 10% downward, that’s less than 1% of total sales for us.

Richard Safran – Goldman Sachs

Okay, thank you very much.

Marshall Larsen

You’re welcome.

Operator

We go next to J.B. Groh – D.A. Davidson.

J.B. Groh – D.A. Davidson

Good morning, guys.

Scott Kuechle

Good morning.

J.B. Groh – D.A. Davidson

I had a question on that 40% guidance range, does your flat AS – does your flat aftermarket represent kind of a bottom of that and, then we’re upside from there? How should we think about that 1% change in aftermarket translating to $0.06 in the EPS? Is the mid point flat aftermarket or is the bottom flat aftermarket?

Marshall Larsen

There’s a lot of things that go into a range, I mean.

J.B. Groh – D.A. Davidson

Right.

Marshall Larsen

We generally, try to build our cases towards the middle of the range, so.

J.B. Groh – D.A. Davidson

Okay. So, if you think about that approximately flat, all else held constant, that would be the mid point?

Marshall Larsen

I think you should think about that on all of the assumptions that we're making.

J.B. Groh – D.A. Davidson

Okay.

Scott Kuechle

Yes, it isn’t just aftermarket.

J.B. Groh – D.A. Davidson

Okay. Okay. And, then, is the pension impact pretty constant across the different segments? Is it a similar impact?

Scott Kuechle

It’s heavier in actuation and landing systems and in the cells and interiors, just because they’ve gotten more headcount generally, and more U.S. presence, in particular, in a couple of those businesses, so U.S. and U.K. presence. So, it’s a little heavier in those two businesses, but relative to sales and margins it’s about the same kind of an impact.

Operator

We go next to Robert Stallard – Macquarie.

Robert Stallard – Macquarie

First of all, you’ve given all of us a very helpful detail on 2009 and the industry outlook. Looking at your airline capacity assumptions, is there anything that’s changed in there versus three months ago with regard to the regional break-up?

Marshall Larsen

What was that, airline capacity? I didn’t quite catch that by region?

Robert Stallard – Macquarie

Yes, is there any change in regard to your regional assumptions there; Asia versus Europe versus U.S.

Scott Kuechle

I think Europe is probably the biggest change I think we've detected over the last three months. I think if you look at our expected ASMs by region, in ‘09 we’re looking at Europe being down somewhere around 9%. I don’t think we would have expected that three to six months ago.

The U.S. carriers have gotten ahead of the capacity reductions, largely in response to high oil prices so a lot of their capacity reductions have already been in place. I’m sure they’ll go a little further, but they at least got a jump start. So I think Europe is probably the biggest area of change, developed Asia is a little bit weaker as well.

Robert Stallard – Macquarie

So what are you now expecting for Asia in 2009 all in on capacity?

Scott Kuechle

On the developed Asia side, more like 4% down and emerging Asia, we’re still seeing growth there of probably 4% up.

Robert Stallard – Macquarie

Okay, and as a follow on, Marshall, you talked a lot about the uncertainty of our OEM production in 2009. If there were to be an aggregate 10% reduction in OEM production in 2010, would we see a similar number in your OE revenues in say Q4, and what do you expect the implications to be for say overhead absorption?

Marshall Larsen

Well, I mean if the OEs were to make that kind of announcement sometime in third quarter or something like that that they were going to bring it down, then we have to look at our lead times and landing gear has the largest lead times so it would affect them more than anyone else.

But also, it wouldn’t affect our income as much, because it is a low OE margin and most of the other businesses wouldn’t turn that fast. I mean they’d turn faster and so you’d end up not as much EPS impact. We’d probably see some sales impact though in that fourth quarter, if they were to do that. Now, we have no indication that they’re going to do that.

Robert Stallard – Macquarie

Yes, absolutely because...

Scott Kuechle

The more lead time they give us the better we can manage to that so if they tell you six to twelve months early that they’re going to change production rates up or down, you can react to that. If you get surprised is when it’s tough because then you’re trying to chase costs as opposed to plan for it.

Marshall Larsen

But I will say that we are being cautious about our long lead time purchases, because we don’t want to get caught flat-footed if – and this isn’t just a large OE, this is any part of our business.

Robert Stallard – Macquarie

Right, thanks so much.

Operator

For our next question we go to Howard Rubel – Jefferies.

Howard Rubel – Jefferies

Thank you very much. Marshall, I think you spent around $20 million this year in ERP integration costs. Could you address two points; one is at what point does that go away, and then second is could you maybe address some of the benefits you’ve gotten, how it’s translated in either better working capital or lower manufacturing costs?

Marshall Larsen

Well, it’s not going to go away for several years because we’re taking it through every business and what we’re doing is we’re bringing one or two businesses on a year. This year we brought landing gear on and the aftermarket portion of aero structures. Last year we brought wheels and brakes in and a couple of small businesses and on the wheel and brake side, I can give you a better flavor there of the benefits.

They are seeing a much greater transparency in all of their information and able to act on it I think quicker. The old system was very cumbersome, and Scott, you’ve got even more details on that. Why don’t you share a few?

Scott Kuechle

There’s a few areas of real benefit, and I think what Marshall’s alluding to is you have the ability now in one system, one desk to actually get visibility to all of your inventory everywhere around the world, whether it’s in the service centers or in the manufacturing facilities.

So you’re better able to respond to customer demands, you’re better able to manage your inventory, just have more visibility. So the linkage between procurement and forecasting and operations is so much better so you have the opportunity to reduce your work-in-process inventory, you have the opportunity to cut your raw material inventory, etc.

So it’s good working capital benefits and frankly better experience for the customer, because you can link planning and procurement and operations much more, much better, and we’re even seeing benefits on the financial closed side. We’re able to close the books faster, we’re able to give our production managers reports that are more real time so they can respond to issues.

So there’s a lot of operational improvements that come from that. It takes time to extract them from – you get the information first and then you start managing to the information. So there’s a lag between the expense and the benefit, but it’s real and our businesses that have been operating on SAP for awhile have seen significant benefits.

Aerostructures has been operating theirs the longest and you can see by their margin performance and their cost performance that they operate very, very well.

Howard Rubel – Jefferies

I would agree and I think it sort of helps you manage the uncertain market that you’re in would be I think the other take away.

Marshall Larsen

That’s right. I mean that’s one expenditure that we will not cut back on during this time period because we think it’s going to really set us up down the road.

Howard Rubel – Jefferies

You talked in the release a couple of times about pricing being a little bit better. That also would seem to help you in the market going forward. Have you been, I mean, so you’re able still to see a little bit better price on raw materials; is that a fair assessment?

Marshall Larsen

Yes, we’re getting a little bit better pricing on raw materials but we’ve got long-term contracts in many cases, like on some of the forgings and longer lead time items, but we are going through – our procurement people are going through every major contract, and even some of the smaller ones, looking to see whether or not we have any ability to reopen those negotiations and where we can, we do.

Howard Rubel – Jefferies

Finally, it looks as if you add back the pension contribution that you’re likely to make this year, you’d be very close to 100% free cash flow as equal to net income. Is that right, Scott?

Scott Kuechle

Yes, that’s true.

Operator

And with that ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Gifford, I’ll turn the conference back over to you for any closing remarks.

Paul Gifford

All right, thank you, [Rufus], and thank you all once again for joining us today. In case you hadn’t seen some of the notices that we’ve been sending out, we will be speaking at two additional conferences; one this week and one next week.

The comments by Marshall at both conferences will both be webcast, so I look forward to talking to you in the future and that’s about it for now. Thanks.

Operator

And ladies and gentlemen, this does conclude the Goodrich fourth quarter full year 2008 results conference call. We do appreciate your participation and you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of US dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!