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BE Aerospace, Inc. (NASDAQ:BEAV)

February 25, 2013 8:30 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

Amit Mehrotra - Deutsche Bank AG, Research Division

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

Greg Powell

Okay. Gentlemen, if you'd like to sit down, we're going to get started here.

Okay. Welcome to our B/E Aerospace Investor Day. I'm glad that you all could make it. It looks like we've got a pretty good turnout. The weather is better obviously, in Miami than New York or Boston or Chicago. So I'm glad that everybody came down. I see a few sunburnt faces out there, so it's like some people had a good weekend as well.

So I'll just -- a quick introduction. I think, that really, we don't need any introduction. I think, most of you know who we are, but I will just run through it again. Amin Khoury is our Chairman, CEO and founder of B/E Aerospace; and to his left is Werner Lieberherr. He's our the President and COO. And to Werner's left is Tom McCaffrey, our Senior Vice President and CFO; and I'm Greg Powell, Vice President, Investor Relations.

One thing I should mention before we get started today is that we rely upon the -- as always, the Safe Harbor exemptions that are outlined and detailed in our SEC filings.

So just to give you a quick overview of our agenda today. I think, most of you might have picked it up, but we are on a very tight schedule. We do want to go visit our facility -- our consumables facility, and so we'll have a bus tour. Our bus will take us over there. But first we'll have a company overview, talk about 2012 and the year that we had and an overview of our outlook and so forth.

We'll break about 9:45 or 9:50. Please just make it a very quick break. Use the restrooms, and then please head straight downstairs to the lobby. We're on the fifth floor, obviously. So if you could just go straight down to the lobby and then go out into the front, we'll have a bus there. And we would like to leave at 10:00, so hopefully everybody is there. And like, if somebody's not, Joann [ph] will be out here trying to direct everybody to make sure that you get -- you do get down to the bus on time. But if there's any issues, please let her know and she can call down to the -- down there and let us know. But please, do try to be prompt down there.

We will -- it'll be about a 25-minute ride over there. We will tour our consumables facility. I think, some of you have been there in the past, but it's been a number of years. So you will see a lot of changes, and I think you'll be very impressed with what they're doing over there and the amount of work that they're doing. And then we'll have a bus to bring us back here, and we'll leave a very informal lunch that you're welcome to join us if you can. I know some people have flights and so forth, but without any further ado, I will turn it over to Amin Khoury.

Amin J. Khoury

Thank you, Greg, and good morning to everyone. We're blown away by the turn out, so thanks for coming down and participating in today's event.

I told Greg that there really ought to be 2 buses, one to the facility and one to the beach. We didn't work that out this year, but maybe next year. So one of the conversations that I was having with Werner this morning. He said, "You know, we've done this meeting here for the last couple of years in February, and the investors have, for most part, seen our CM facility. And while we do invest in it, improve it every year and so on and so forth, you think they might like to make to points in sale in North Carolina where we have our seating facility, and we're really proud of it and it's outstanding, and so on and so forth, and we won all these awards." And I said, "I don't know, Werner. We're about to turn out and win some sales in February."

So I -- as Greg has mentioned, I'm glad to see so many sun-tanned faces, and we welcome you.

So I'll talk a little bit about the company this morning. We'll spend just a couple of minutes talking about history. So since 2005, it's been a pretty steady improvement in operating earnings and margin, and it's been pretty much onward and upward. And we are proud of that performance.

We obviously, went through the financial crisis in 2008 and '09 time period, but the business held up reasonably well. And for the last 2 years, we've delivered records and revenues and earnings and earnings per share and bookings and the whole shooting match.

So a quick review of last year's results. So last year was a very good year. It was the second year in a row where we've had record revenues and record operating earnings and margins have improved and bookings and backlog and earnings per share and so on and so forth. So we're very pleased and happy about the performance that we were able to turn in. And our expectation is that the performances over the next several years look to be kind of a repeat of the last couple of years in terms of the continued growth in earnings and improvement in margins.

So last year sales were up 23% and operating earnings were up 26%, as were earnings per share. And our margin expanded by about 40 basis points to about 17.5%, and it was, all in all, a pretty good year.

We had a very good bookings here last year. Our backlog improved to $3.75 billion. That's our booked backlog and our SFE backlog, or unbooked backlog, improved to 4.2 -- $4.5 billion. So our total backlog was about $8.25 billion. It is well dispersed geographically, North America, Europe and then the emerging markets, Pac [ph] and Asia, Middle East, and we had record bookings again last year. Our total bookings, including SFE bookings, were $3.3 billion. So it was a strong year and our booked backlog was up around 7%.

SFE programs. We've got about $4.5 billion now in unbooked backlog. And our revenues, which last year were about $150 million from our SFE programs, up from about $100 million the prior year. We still feel pretty confident that, that number is likely to be in the $400 million range by 2015. So this is an important growing part of our business.

And just a quick review on what these programs are. The module lavatory program for the 737, our galley system program for the Airbus A350, our PSU and Pulse Oxygen systems for both the 787 and the A350, Sky Interior lighting for the Boeing 737, number of waste water treatment programs. So the SFE part of our business is becoming an important business.

All of this business was developed internally. It's basically the fruits of successful R&D effort. So we have invested heavily in research and development. Over the past half-dozen years, we've developed a lot of new products, and all of those products are basically market share gains because these are products that we have never produced or markets that we have not participated in, in the past.

The seating business had a terrific year last year. In fact, there were a couple of questions on the call about seating business. I think, Howard had a question, and I think Joe Nadol had comment. We had a record booking year in our seatings business last year. We ended the year with a record backlog for our seatings business. The quality of the backlog is outstanding and the strength of our bookings in all 3 categories, in both -- in coach, in business class and Super First Class were really, really outstanding.

Our win ratio was extremely high and geographically, our bookings were diverse, as indicated in the books that you have in front of you, Air Canada, Air China, Air France, KLM, Delta, Etihad, Japan, basically all over the globe.

We also had very strong market successes in our food and beverage preparation and storage equipment business. Our win ratio on RFPs in that business was just under 90% last year. I mean, absolutely astounding. And we won any number of awards. We were -- including the Crystal Cabin Award, which is given out each year at the show in Hamburg in April; 2 International Design Excellence Awards, Airbus' most innovative product award, but the most important thing about the new Essence product line is not the awards that we've won, but the share of market that we've gained and the percentage of orders that we were able to book on RFPs for food and beverage preparation and storage equipment during the prior year.

Lighting systems. Obviously, we are -- our lighting system is in the Sky Interior for all of the Boeing 737s that are shipped with the Sky Interior, and that number is now about 90% of 737 deliveries. I think, more and more airlines are willing to pay the up charge to take the 737 with the Sky Interior. And where as Boeing thought originally, it might be 50% -- 50-50 with or without, it became 80% and now, it's 90%. It looks like it's probably going to become 100% over some period of time.

And for the first time, we booked retrofit orders, not only for 737, but also for the 757, 767 and 777 aircraft. So the retrofit business -- the LED lighting retrofit business is starting to become a healthy business for us as more and more airlines appreciate the ability to change the ambiance and mood in the aircraft with the lighting system and opt for retrofit programs for their aircraft.

We had a lot of operating successes during 2012, particularly on our operations excellence and low-cost country sourcing programs. All of that is evidenced by about a 40-basis-point expansion in operating margin, which we achieved during the year. And in fact, those programs helped us save about $40 million. That is our operating earnings benefited to the tune of about $40 million as a result of these operations excellence in low-cost country sourcing programs.

Our Consumables business had a really outstanding year from the point of view of on-time delivery and quality. The team did a wonderful job at managing complexity and change while achieving extraordinary customer sales [ph] satisfaction numbers.

So we made solid progress in integrating LaSalle and Satair and UFC. We're very successful in the marketplace. We're proud of this. We retained 100% of the more than 160 contracts which came up for review in 2012, as well as capturing a number of customers which we hadn't had prior to that year. So a really strong year for the guys.

On Awards. In terms of awards and recognition, again, it's all about how these awards translate into success in the marketplace. But one of the reasons that we were able to retain -- excuse me -- so one of the reasons we were able to retain 160 plus of our contracts, every single one, is that we were Honeywell supplier of the year, Aviation Partners Boeing platinum supplier, US Airways supplier of the year. They all have different titles and trophies, which they get it -- gave it -- give out, but Adcor's achievement of excellence, Boeing Defense in Space performance excellence, GE humble [ph] preferred supplier. So one after the other, we win these awards and it's -- the reason that we win the awards is all about on-time performance and quality and service, and those are all the same reasons why we are doing so well in the marketplace.

Company has a solid financial position. So we ended the year with about $500 million in cash, $514 million in cash. Long-term debt net of cash was $1.4 billion. Stockholder's equity was $2.2 billion and our net debt to net capital ratio was around 40% [ph].

So what's going on in the industry? The airline travel last year was pretty strong. It was a good year. Traffic was up around 5.5%. Capacity was up a little over 4% and global loads were at an all-time high.

As a result, the airlines made some money. They turned around a negative profits trend, which they were experiencing over a 3-year period. IATA forecasted $3 billion in profits for the global airlines in March. In October, they raised that forecast to $4.1 billion. And in December, they raised to $6.7 billion. And so it looks like it has turned. And usually when GDP falls below 2%, you end up having all the airlines losing money.

That didn't happen this year. I mean, really, what's going on is there's much better management, more discipline. The airlines were able to push through 4 price increases in December. And if you look at what's happened to ticket prices -- the CPI for ticket prices, they're up almost 23% over the past 3 years. So they are doing a decent job of managing capacity in a period where there is some reasonable level of growth. 5% growth was pretty good for the past year. And as a result, Boeing and Airbus have record backlogs, they're almost 9,000 aircrafts. The deliveries, as a percentage of backlog, is at a relatively low number. So it all looks reasonably healthy at the current time in terms of important stats in the industry.

Wide-body aircraft deliveries over the next several years are expected to be -- to grow at a CAGR of around 10%. So last year was a big year for shipment of wide-body airplanes. And hopefully, Boeing will sort out its issues with 787, and it looks like that will be the case.

Our expectation for -- is for approximately 1,100 wide-body airplanes to be delivered over the next 3 years. So I would say that the combination of strong backlog, the fact that the net additions to the aircraft fleet is relatively low, it was about 3% last year, so we added about 500 airplanes to the fleet because of the number of retirements. So out of 18,000 airplanes, we had a net increase of about 500 airplanes. So it's a little over 3%. All of that, I think, bodes reasonably well for B/E Aerospace. So our backlog in total is about $8.25 billion. It's an outstanding backlog in terms of quality and size.

We expect wide-body aircraft deliveries to be very healthy over the next several years. Our SFE revenues are growing very rapidly as we bring these products onstream, so should have pretty rapid growth in revenues there. We have a large installed base, which is driving spares and refurbishment. And we do expect some modest recovery in the aftermarket during 2013 and then stronger recovery in 2014.

So we have 3 reportable segments. Just a quick review. Our consumable segment generates 38% of revenues and 40% of our operating earnings. Our commercial aircraft segment generates 50% of revenues and 50% of operating earnings and our Business Jet segment generates 10% -- sorry, 12% of sales and 10% of operating earnings. Our operating margin was 17.5% last year and margins expanded about 40 basis points.

Total sales last year, a little over $3 billion; operating earnings, $540 million. So sales, up 23%, operating earnings, up 26%. This is a good summary slide which sort of gives a summary of each of the businesses and the size of the whole company.

So our Commercial Aircraft segment, which generates about 50% of both revenues and earnings, is the largest global manufacturer of aircraft cabin interior products for the commercial airlines, and our customers include the airlines, the leasing companies and the major OEs.

The installed base in that business is a little over $8 billion, and that's what drives our retrofit and refurbishment and spares business. We have leading global market shares for each and every important category in this business and we have the largest R&D, sales, customer service and organizations in the industry. So really strong market share leading business where the market share is some [indiscernible].

We're the leading manufacturer of seating products, the leading manufacturer and marketer of interior systems, that's coffee makers and beverage makers, and ovens, steam convection, high-heat microwave, wine and beverage chillers, refrigerators, freezers, where food and beverage preparation and storage, I mean, we are basically the industry.

Interior structures are now starting to become an important part of the business because of our sole source exclusive programs on the A350 with galleys, and 737 with lightning and on some of the other programs which we've talked about. The modular lav for the 737 is coming next. In engineering services, we have wonderful reputation for working with the airlines to help them lay out LOPAs, which help them to be more profitable.

Commercial Aircraft segment grew at 19% last year on the revenue line. Operating earnings grew a little over 25%, 25.6%. The operating margin expanded to 17.5%. So all in all, it was a very strong year for our Commercial Aircraft segment, which ended the year with a record backlog, the biggest backlog that we've ever had.

What is driving the segment is wide-body delivery growth, increasing global air travel, our SFE revenues, which had begun growing significantly and the strong bookings, which we generate, which are driven primarily by product innovation and market share gains.

Our consumables segment generated 38% of revenues last year and 40% of our operating earnings, and there we're the largest global distributor of aerospace fasteners and consumables. Our customers include: Aerospace OEMs, airlines, MROs, FBOs. We have about 1 million consumable stock keeping units, robust IT systems and robotics. We book about 14,000 orders a day. We ship about 60% of those orders within 24 hours. So it is a really well-run business. You'll get to see that for yourselves later. And we're an authorized distribution for every fastener manufacturer.

The Key product families here are our hardware, obviously, adhesive clips -- adhesives, clips, fittings, knots, screws, rivets, washers, bearings, the Honeywell proprietary consumables, which support their APUs, environmental systems, fuel controls, hydraulics, jet engines' wheels and brakes and basically, we are the sole supplier of those parts both to Honeywell, but also to Honeywell's customers on a direct basis. We handle their third parties. Also included in this -- in these important categories are latches and plastic components and some struts, lighting, tooling, sales. I think, you know about most of that of stuff.

The value-added services. So we do a lot of kitting, and we're doing more and more kitting for our customers who would like us to keep their production lines running, not only by delivering hardware to their bins, by actually assembling the hardware into various kits and actually placing those on the floor.

We do obviously, full-service bin management. We do self-service bin management. We do 3PL and 4PL programs and we provide AOG support for airlines globally.

Our Consumables segment. Last year revenues grew 24% to $1.2 billion. Operating earnings grew 18.5%. Our operating margin was 18.5%. It was about 20% adjusted for AIT expenses, if you back out AIT expenses. But we've got another year of AIT expenses in 2013. But it was a strong year where we had a healthy earnings growth at a time when we did a lot of successful integrating, and at the same time, did a really outstanding job in terms of customer satisfaction, quality and on-time delivery.

Long-term growth here. I mean, what drives this segment is the global air travel growth of about 5% a year.

Increasing worldwide aircraft delivery rates are important, but revenue growth is also driven by our expanding key positions on critical customer platforms, where they want us and they are having us do not only the hardware, but also do kits. We're doing more and more for our customers, third-party logistics and fourth-party logistics, customer demand for same-day service. The number of orders that we're booking, while the small orders are enormous, but we still manage to ship about 60% of those on the same-day basis. And we'll spend about $20 million this year completing the integrations of Satair, UFC and Interturbine.

Our Business Jet segment generated 12% of 2012 revenues and 10% of 2012 EBIT, and there we're the largest global manufacturer of aircraft interior products for business jets. And we also do Super First Class suites, custom work in the front end of commercial airliners with very Despoked, high-priced systems. Our customers include the bizjet OEMs, the completion centers and, of course, the major global or major international airlines. And we have leading global market shares for all of the major product categories in which we're involved, including the Super First Class business.

Our products are lighting systems, oxygen systems, Super First Class cabins, seating product, food and beverage preparations and storage equipment. The business had really good year. Sales were up 43%. Earnings were up 80%. It's all internal growth. Margins expanded by 290 basis points. We still have a lot more to go in terms of margin expansion in this business. We ended the year here with the biggest backlog we've ever had in our bizjet segment. And just think -- I think that I did talk about this on a call a few weeks ago that the expectations for delivery against that backlog is very modest growth in revenues during the coming year because the backlog is mostly for shipments in 2014 and '15. So our expectation is for strong earnings growth from this business, driven by margin expansion. So we're looking for a really healthy double-digit improvement in earnings in spite of relatively low growth in revenues, and then an acceleration of growth in 2014 and '15. Actually both for commercial aircraft segment and bizjet segment, we're expecting an acceleration in 2014 and '15.

We've already talked about this. The outlook. So we expect continuous strong bookings in 2013 driven by the robust wide-body aircraft deliveries' outlook over the next few years and driven by a lot of our SFE programs, beginning to become part of our bookings as we get closer and closer to 737 lav deliveries in A350.

2013 revenues are expected to be about $3.35 billion, and they're expected to be stronger in the second half of the year as compared to the first half of the year. We expect 2013 EPS of approximately $3.45 per diluted share. That's up about 22% as compared to 2012. So we're expecting another record year this year, and that includes about $20 million of AIT expenses, the integration expenses in the consumables business. So it should be a very strong year in terms of earnings growth and margin expansion, notwithstanding the spending on integrating the acquired businesses. And our 2013 free cash flow conversion ratio is expected to be about 70% of net earnings.

We expect double-digit revenue growth in the 2013 to '15 period, so an acceleration of revenue growth in 2014 and '15.

Safe Harbor statement, Greg's already given us.

And with that, I think we can open it up to the questions and answers and Tom, Werner and I are all happy to take your questions.

Question-and-Answer Session

Unknown Analyst

So this is a question about this year's guidance. And you've talked about the wide-body deliveries and the importance of 787, et cetera. How do we think about your seats and other products on 787s that are not delivering? Are the seats actually going on those aircraft that are now waiting to deliver? Or do they go on at -- closer to the time of real delivery?

Amin J. Khoury

No. The -- Boeing specifically has told us to keep delivering and to meet our on-dock dates, and they are taking the equipment as we deliver it and they're installing it in the airplanes. So those airplanes, I mean, they have specific delivery for the customers for which they are intended. They're not white tails. I mean, they are actual 787s scheduled for deliveries. They feel confident that they're going to solve the lithium ion battery problem, which is exactly what it is. I mean, I don't know if you saw this morning's news about how they're doing it. It doesn't surprise us. I think, we talked about this earlier that we thought we understood the problem and where it was going to eventually end up. So our expectation is that Boeing is going to continue taking the equipment as they have told us, to continue shipping it and continue to install it in their 787s. And while they may not deliver some of those airplanes for a while, they will be delivered complete with the equipment. The airlines are putting a lot of pressure on that. I mean, they are feeling a lot of pain by not having these airplanes. And I think, you've been reading the same things that I have. So the 787 problem is going to be solved, and we don't expect any disruption in our delivery schedule.

Unknown Analyst

Even -- when you were talking about the bizjet segment there at the end, I think, you said something along the lines of there's still a lot improvement in the margin there. But the margin last year ended 150 basis points or so higher than the prior peak margin. And it's at a level where it's significantly higher than it's been on average over the past 5 years. Just wondering if you could maybe quantify or put a little more color on how much higher you think that margin can go.

Amin J. Khoury

Well, I don't want to give a specific margin objective, but there's nothing in our business which suggest that the margin in bizjet should be lower than the margin in commercial aircraft segment. So -- and if you asked Werner this question, he gets irritated about the old thing because he wants the margin in each businesses to be 20% margin. I mean, that's what we drive -- that's what we strive and drive for. And maybe, Werner, maybe you want to comment on that, but for the coming year, based on the quality of our backlog -- and our expectation is -- and as we roll product out of backlog and we look at those programs, we expect strong double-digit improvement in operating earnings and a big improvement in the operating margin this year again. I mean, we took 250 basis in 2012. We expect another big increase in 2013 and again in 2014. But in 2014, we expect an acceleration of revenue growth as well as a significant increase in margin. So the business should become an important contributor to the whole over the 3-year planning horizon here.

Unknown Analyst

That's very helpful.

Unknown Analyst

Amin, on the -- can you give us an update on the modular lavatory in terms of the -- how production is going, what the retrofit discussions are, what -- kind of just a general status update, what you're seeing from that stand point?

Amin J. Khoury

I can tell you this that both Airbus and Boeing have had multiple visits to our new factory. They are blown away by the state of art. I mean, it is really a state-of-the-art manufacturing facility. I've been really blown away, surprised. They are pleased with what they see. We're in the throes of static testing and all that right now. And we've got ourselves surrounded by Boeing engineers, et cetera, et cetera. But I would say that we're on time, on schedule. I think, Werner is very proud of the rate at which we've brought equipment in. You want to talk a little about the 737?

Werner Lieberherr

We actually just signed the contract just a little bit more than a year ago. And if you think what we did in the meantime, obviously, we've designed the product, we put purchase orders in place, but more importantly, what we also did is actually building a manufacturing plant, ordering equipment, put the equipment in there. I was actually in the Philippines, end of January, and it looks very, very impressive. I met with Boeing senior executives who were also there, and they're very good [ph] in price. So I think, we are really at the right place. Obviously, it's a very, very tight schedule. It's a 19-month schedule. So first delivery is coming up in August. So we need to stay very, very tuned in and make sure that, that -- these deliveries are happening, right? Maybe just to your second question, the -- in terms of the retrofit. We obviously pursue retrofits opportunities, too. And the one which we especially focus on, the way it looks like, probably end of Q1, beginning of Q2, that's probably when the decision point will be made for that airline.

Unknown Analyst

Amin, maybe just a follow-up on the operating margins. How should we think about CMS over the longer term? I mean, is that still a mid-20% margin business? [Indiscernible]

Amin J. Khoury

Well, I think the way we think about CMS is -- so for the past year, our margin in CMS, if you back out AIT expenses, was about 20%. We have to complete the integration of -- and we spent, I think, $17.5 million in AIT expenses. So that's -- so if you adjust for those expenses, it's about 20 million -- 20%. During the coming year, we hope to complete the integration of the 3 businesses. And when I say complete, there will be a little left over that needs to be done in Europe in the first quarter of '14, but essentially, it's all done in 2013. We guided to about $20 million of costs this year. We actually incurred about $17 million. In 2013, we're guiding to $20 million, and we expect to spend the $20 million. We expect to have nice a improvement in operating earnings this year in spite of the $20 million of spending. And in 2014, we expect to have another increase in operating margin, but also getting the benefit of not spending the $20 million, which in a $1 billion-or-so business is a very big deal in terms of the impact on operating margin. So in the near-term, our expectation is to get back into the 20s from the -- was it -- the actual reported number, Tom, was 18.5, or whatever it is. So a couple of hundred basis points of margin improvement is, I would say, is in the near-term, and then we'll see where we go from there.

Unknown Analyst

Okay. And then just one last one. Any thoughts on US Air-American merger? I mean, you've got the pinnacle seats with Star Alliance and then preferred status with US Air. I mean, too early to tell? Or how do you think your business is going...

Amin J. Khoury

I think, you -- I think, we're fortunate that you asked the question in that way. I mean, we have a good -- really strong relationship with US Air. We won Supplier of the Year with US Air. They value what we do for them. We have a much stronger partnership with US Air than we have ever had with American Airlines, so we view it as a plus. The combination of the 2 airlines is a plus. We'll see how that -- how it works out. We do a lot of work for American Airlines, particularly on food and beverage preparation and storage equipment, but they have not, for the most part, been our partner in the seating business. And they -- I think they -- we have viewed them in an opportunistic way, which is how they viewed us. Whereas with a lot of other customers around the world, we are really close partners and we do our planning together, we do our development together. So our hope is that we get to improve our relationship with the US Air American group and begin to develop more business out of that partnership.

Unknown Analyst

I just wanted to ask specifically, with the airline profitability looking like it's continuing to trend up and maybe beating expectations, how do you think about your engineering services business and the retrofit cycle? I mean, I view your engineering services business as a great way to get in early with airlines on a lot of these programs. But do you see, with more profitability of the airlines, maybe them looking to do more in-house? Or do you even see the continuation or perhaps acceleration of their outsourcing on the services side and ultimately, for the retrofit opportunities?

Amin J. Khoury

Well, the airlines went through -- have gone through a couple of near-death experiences, right? I mean, September 11, 2001 and then SARS. And I mean, they've gone through some really tough stuff. They've been through a bunch of bankruptcies. And the net result of all that is essentially all of the airline industry executives are gone, and there are different airline industry executives running the airlines. There are a lot of folks at the airlines who have been through that experience. They don't want to go through it again. And so there is a new discipline which they found, which has enabled them to be able to generate income, even with global growth in the 2% range. They had a 3-year profits trend there, which was declining profits at a time when the world got to a 2% growth rate, which you would have predicted for sure that the airlines are going to begin to lose money. 1 or 2 did, but on average, they not only didn't lose money, they turned it around. They stopped the negative trend, and there have been 3 successive improvements in the outlook for earnings for the airlines. So I think the combination of a new discipline, which they have, and their ability to make money in tougher times, I think, are very important. And a part of your question was not only about airline earnings, but -- what was the part of the question?

Unknown Analyst

Retrofit.

Amin J. Khoury

The outsourcing, I think they don't have the organizations internally any longer to do the in-sourcing. So the airlines used to have very large organizations of interior planners to plan the interiors of their airplanes. They have, for the most part, seeded that activity to ourselves and our major competitor. So we do a lot of that work. It's not to say they don't have any interior capability. That's not true, they do. But it's pretty efficient now, and they don't have the large organizations that they used to have. So and I think that the direction is continuing to outsource and rely on industry sources. Now our engineering services business, that's a lot of reconfigurations and a lot of certification program management and so forth. In the past, it has been a business which has really helped us to generate orders for our product businesses. It continues to be, although it is no longer a business which loses money. It actually makes money for us at the same time that it is -- it's growing, making money and generating orders for our other businesses.

Unknown Analyst

You mentioned in your remarks about the trend toward outsourcing in the supply chain for the 3PL and 4PL. In the transportation world, 3PL businesses are usually mid- to high-single digits businesses. So my question is kind of to understand how your business model can be different from there and how we think -- we should think about the impact of margins of this part of your business increasing going forward?

Amin J. Khoury

Well, we view 3PL and 4PL as services that we provide to our customers to tie our customers closer to us. But for the most part, our earnings come from what it is that we ship through the 3PL and 4PL programs, so the fasteners and lightings and the bearings and the seals and the proprietary products and so on and so forth. And then as well, the way the turnaround service, the AOG or 60% same-day delivery service, allows us to price our products in a way to generate the operating earnings that we talked about a little while ago. So our operating earnings last year, adjusted for AIT, were 20%. There are no 3PL and 4PL programs -- I mean, companies that have those kind of numbers. So the 3PL and the 4PL for us is a service to lock us more closely to our customers to enable us to sell more and more products. So the number of SKUs that we have now is -- it's 1 million SKUs, and that has gone up steadily over the past 5 or 6 years. And the more that we sell of the products which we distribute at margins which are healthy, driven by 3PL, 4PL, it allows us to grow the margin overall.

Unknown Analyst

I wonder if you could update us on the outlook for -- if you could update us your outlook for M&A. For a lot of last year, it seemed like there was a shift in focus maybe for the products in terms of what you're looking at, although on the last call it seemed like there might be some opportunities in distribution as well. And then also, just the extent in products that there are opportunities to make acquisitions that are kind of consistent with the margin profile that you want for the business, given how dominant you are in the categories where you already compete.

Amin J. Khoury

I would -- I think that we can say with some confidence today, which we weren't able to a month ago, that I think there's a reasonably high probability that we will do at least 1 or 2 acquisitions this year. So there are discussions going on. We're seeing some quality opportunities, both the product and service side, and we continue to be disciplined in terms of our approach here. But I think that -- I think our entire team feels that we'll be able to put our excess cash to work in M&A opportunities over the course of the balance of the year. So we ended the year with a little over $0.5 billion in cash. We should generate a couple of hundred million dollars or so in cash this year. So somewhere in the neighborhood of $700 million, $750 million is basically -- almost all of that is excess cash, which could be available for us to do bolt-on transactions. It is really important that the transactions we do, do not dilute our margin plan. I mentioned earlier about our driving desire to grow our margins, and you can see that in the performance over the last 7 or 8 years. And as we talk about the company, I mean, I think there isn't anything more important to us than driving margin either through operations excellence or the quality of the programs we book or low-cost country sourcing. But we don't want to foul that up by acquiring businesses which have substantially lower margins which dilute our margins unless we're sure that there's something about those businesses that we can do to grow the margins, okay? So we're being disciplined. We want not -- to not dilute our margins, not dilute our growth rate, not dilute -- we want them to be accretive to earnings per share. So if we do transactions, we want those to be value creating for our shareholders. Okay?

Unknown Analyst

Amin, my Q at this point, talk about where you are with UFC and Interturbine. I mean, you had a little under 0.5 million SKUs a year ago. Now you're at 1 million. What kind of synergies have you been able to get? What are you doing in the way of store fronts? If you'd talk about the integration effort on a basis of what it's done for customer synergies, that would be helpful.

Amin J. Khoury

Well, we are -- excuse me, I don't -- we actually can no longer distinguish between what's a UFC sale and what's a M&M sale and what's a -- I mean, that's -- it's really hard to distinguish. We can still distinguish an Interturbine sale. We can for the time being, although we have a lot of our forward stocking locations now on the West Coast than -- and in other parts of our business offering for sale Interturbine products, but they're still booked as Interturbine orders. We still have multiple order entry systems on the desks of the -- of our customers' procurement departments in ordering equipment not only our equipment, but UFC equipment. But the fulfillment of those orders is what -- is no longer distinguishable. It's really becoming -- the fulfillment comes from wherever it comes from, so we've begun integrating the inventories. In terms of when it is that we would expect to complete that, we would have -- we would expect to have all of UFC completed before the end of this year. We would expect to have all of Satair with the exception of one small area, which I don't want to be specific about, completed by the end of this year. And Interturbine, I think the most important thing in terms of integrating Interturbine is marketing integration and lowering costs, and those programs are underway as we speak.

Unknown Analyst

Could you talk a little bit about the marketing synergies and what you're able to sort of see where you can see pull-through where if someone's buy-in was at one point was a normal product, they realize there's a large array and you're able to become a more significant supplier and a customer? I mean, you should be able, in a couple of cases, sell the old supplier list to the new customer list rather. And 1 plus 1 should be more than...

Amin J. Khoury

I'll give you an example. When we announced the Interturbine transaction, we actually had airline customers call us. Not only airline customers -- actually, as I think about it, our OE customers as well, call us and say, "Listen, we want you to, now that you've acquired Interturbine, we want you to take on our chemical business as well." I mean, that's a very good, clear example. So we're in the process of doing that. Saying that you're going to do it and doing it are 2 different things. It's very complicated to take on the chemical sales for these companies through our organization in the U.S. There are Hazmat and all kinds of issues that need to be addressed, but we're addressing them. And we actually have a pilot program going on as we speak, where the customer is actually driving us to make us do it because they really want us to take this on. So there definitely is crossover. Our customers do want to reduce the number of suppliers they have. They do want us to do this in a simpler way for them. They don't really want to have procurement buying from 3 separate companies. They want to have procurement buying from one company with one single point of purchase system, and we're working to get there. And I think before the end of this year, I think we'll be there.

Unknown Analyst

Sort of 3 questions on 1 topic and that's SFE. How does it impact your OE versus aftermarket strategy as you think about bidding that out? How concerned should we be about SFE really being about the primes going after positioning themselves for aftermarket royalties? And then how would or how do you respond to that? Any pressure on the part of the primes for those aftermarket royalties?

Amin J. Khoury

Werner, do you want to do this? Or would you like me to do it? Or would you like to talk about this?

Werner Lieberherr

The question was SFE versus aftermarket, right? I mean, as you can see, there's an industry shift going versus SFE. So for us to have a solid position on SFE, I think that's important, right? Now what does that mean to aftermarket and the OEMs going aftermarket? Okay. It's a certain race [ph], but I think we manage it very effectively with the company like Airbus or like Boeing, also including royalties. We don't see an issue in there at this point in time. Did I answer your question?

Amin J. Khoury

I would say that we do not see Boeing or Airbus as competitors for retrofit programs or the SFE programs that we've signed up for. I mean, we don't see that as an issue at all. So we are currently in negotiations with a few airlines about doing lav retrofits in 737 airplanes. There's not even a thought in their minds about having Boeing do this. Boeing's not involved in it. They're not trying to compete. They're -- I mean, it just doesn't exist. I mean, it may at some point in the future, but at this point in time, there's absolutely nothing like that going on. In terms of Boeing's desire to participate in the aftermarket in some way or to get royalties from those suppliers that supply the line systems to Boeing, which then have an aftermarket business, they have had that desire for the 25 years that I've been in the business. They haven't actually been able to figure out how to do it. The airlines resist mightily. Their customers resist this, because they know that it's going to lead to higher costs to the airlines. So it hasn't been an issue. We don't expect it to be an issue. Certainly, not over the planning period. So we talk about 2013 and we talk about 2014 and '15 in more general terms. So we don't have an expectation of any issues with Boeing with respect to royalties over that planning period.

Unknown Analyst

First, maybe a follow-up to that one for Tom. A quick one. The excess over average balance that's growing, is that primarily tied to some of these SFE programs? And what's the kind of outlook over the next couple of years for that to peak out?

T. P. McCaffrey

It is tied to the SFE programs for the A350 and the 737 lavs, as well as all the business jet platforms which have been under development that we've won over the last 5 years that have yet begin to deliver. So you'll see that grow this year. There's continued costs and expenses associated with the engineering and certification and prototypes and the testing and so on and so forth. And then as we begin to ship, you'll see they'll begin to amortize down.

Unknown Analyst

In a sense, is that a '15 or '14 peak?

T. P. McCaffrey

We haven't gotten that specific, but I -- it will grow during both '13 and '14. In '14, I mean, we'll be shipping. We're going to be shipping the lavs. So I mean, there may be a little bit, but it's not going to be a tremendous amount.

Unknown Analyst

Okay, great. And Amin, the consumables business, I think if you bring it back to a pro forma 2007, 2008 pro forma sales at the peak, it's probably $1.6 billion or so of sales combined of everything you've acquired over the period. Is there a -- should we think about getting back there? Or is it a different business today than it was at that point in time?

Amin J. Khoury

I don't think about it that way. I don't think any of us do. I think what we think about is what the growth is likely to be each year based on the size of the fleet and the number of customers that we had and the amount of repair and overhaul and maintenance that goes on. So we think about it more as demand created by revenue passenger mile growth and the airplanes having to be serviced. A lot of them haven't been serviced because they're new. I mean, so many new airplanes. In the last 2 years, there are more than 1,000 brand new airplanes that have been delivered which don't require any maintenance yet. So the way we think about it really is the revenue passenger mile growth plus more service because of the larger number of airplanes which require service as a percentage of the total airplanes in the fleet.

Unknown Analyst

And what's the percentage right now of military at consumables?

Amin J. Khoury

Percentage of military in the consumables business? In the whole company, is under 10%. I'm not sure what it is in the consumables business, probably -- mostly consumables, so it's probably 10%, I would say. Something like that. Is that right, Tom?

T. P. McCaffrey

Yes. I think that's [indiscernible].

Amin J. Khoury

So maybe it's 10% in the consumables and 10% in the rest of the business as well and 10% overall.

Amit Mehrotra - Deutsche Bank AG, Research Division

Amit back here. The SFE business, I think, in the past you had talked about that being $100 million in 2012. It came in about $50 million better. Was that on the LED lighting side retrofit? And maybe talk about why potentially it could be better than $400 million as we get out to 2015.

Amin J. Khoury

I think it could be more -- the products that are generating the $400 million in revenues in linefit programs could generate a lot more revenue, but primarily in retrofit rather than OE. It's possible that it could be larger, but I think we've got it right. I mean, as we think pretty carefully about what portion of our asset the backlog is going to flow through bookings and revenues during that -- during the planning period. What could drive the number higher is more aircraft deliveries. I mean, I think we've got the 737 deliveries right. I think we've got the A350 deliveries right. But if more A350s are delivered, which is, I think, unlikely because I think entry in the service is going to be the second half of '14. How many they can deliver in 2015 based on the history of both Boeing and Airbus, it's probably not going to be a large number of airplanes. So I think the higher probability of greater sales comes from the retrofit side for the same products that would be going on to linefit.

Amit Mehrotra - Deutsche Bank AG, Research Division

Do you know why in '12 it was $50 million better than you had been talking about?

Amin J. Khoury

Why in '12 was it $50 million better? Well, we said it was $100 million, which we thought was going to grow to $400 million. So it wasn't. I don't -- I think in 2011, it was $100 million. I don't think we forecasted what it would be in 2012, but we said that we thought it would be $400 million by 2015. In 2012, it was $150 million, and it looks like we're still on track to go from $100 million to $400 million over that time period.

Amit Mehrotra - Deutsche Bank AG, Research Division

Okay. And then on the aftermarket, you said a modest recovery this year, but improving in '14. What do you see or what are you looking at when you're calling for further improvement or acceleration in '14 relative to '13?

Amin J. Khoury

The number of new airplanes that have entered service in the 2010, '11, '12 time period. So there's so many new airplanes that are responsible for the growth in revenue passenger miles, particularly in the developing countries of the world where most of the growth is, whereas in the U.S., the deliveries have gone mainly to retire older aircraft. But all of those airplanes are not getting heavy maintenance. But over this time period, many, many more of those airplanes which are being flown into the ground, I mean, they are really -- they are flying those airplanes as much as they can, keeping older equipment on the ground. And those airplanes will require C and D checks and heavy maintenance, and they will create significant demand for parts. That's how we think about it. Howard? What was your score, Howard?

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

We're not going to talk about it. Greg beat me, though. He did get $6. So you should know.

Greg Powell

If you play a $2 Nassau [ph], you got to pay it when you lose.

Amin J. Khoury

In any event, our investor guide doesn't even understand customer golf. It's all about $6.

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

All right. Talk about your vision for an airplane interior. I mean, you've had lots and lots of share on [indiscernible], but there's still other things that you can do. What do you think about other systems and other opportunities for helping your customers either create a different ambiance? Look at the other things that carriers are doing to service their customers and try to develop additional products. There's a lot of R&D you're spending. Not all of it's new products, some of it's on innovation.

Amin J. Khoury

Well, I'm going to ask Werner to chime in as well. But I would say the way we think about it is we think about at which platforms are going to be the most important over the next 10 years and then which platforms we should try to be on and then which product in those platforms. And so as we think about the business now, 777x is hugely important for us. So and as we think about 777x, I mean, there are numerous opportunities for us to grow our business on that platform. A320neo, 737 MAX, 777x, I mean, these are platforms that we think about where we need to have a greater presence. And I'm going to ask Werner to comment on this as well. But if we just think back where we've come from, we started our business 25 years ago and we were fixated on BFE. And we said, "Okay. Well, we want to enter a business where the niche is growing and there are no dominant competitors and where we can be -- we could be the market share leader and possibly one day, become a dominant competitor and where the customers don't have too much power." Only in Airbus, they've got a lot of power. But if you have hundreds of airline customers, it's not the same. So you have more pricing power and where suppliers don't have a great deal of power. What we found in all of those things in the BF -- in the servicing of the airlines of the world, selling them BFE equipment for their passenger cabins. And we were able to become the #1 and have the highest margins because -- PIMS in the Harvard Business School, if you have twice the market share, you have 3x the operating earnings power and so on and so forth. We really took all that stuff to heart and we built this BFE business. Our market shares became so large that we couldn't continue to grow the business at the rate that we had grown unless we could find a way to have more content on the airplanes, different kinds of products. And we were already dominant in the BFE side, so they had to be SFE products. So we spent a lot of money on Research and Development, and we developed a bunch of BFE products: oxygen systems and lighting systems and lavatory systems and galley systems and wastewater systems. And so now we've got all this stuff that are the fruits of this developmental effort. And we specifically now target certain aircraft platforms for those products. And we tried to do this in a way where as we moved into developing and selling products for customers with more power, that we did it in a way to try to protect our margins. So our programs are all sole-sourced, they're all exclusive. We've brought a lot of innovation. We've had our airline customers dragged through our programs so that we had some advantage during the negotiations with both Boeing and Airbus on the 737 lav and on the A350 galleys. So as we think about it on a going-forward basis, it's -- a lot of the products that we've already developed for other platforms and some new products which are required on those platforms, which may have applicability in some of the platforms we're already on. So Werner, I don't know if you want to expand on that.

Werner Lieberherr

Yes. To expand a little bit, as Amin said, obviously, we do look at other SFE opportunities. And I think what helps us a lot is really the customer intimacy. I personally spend tons of time with senior executives, CEOs of airlines to understand what they really want, what they really need, which gives us then the right basis for discussion also with the OEMs. So we can say, "Look, this would make a lot of sense from an SFE perspective." So I think we're doing that. Having said this, I think, for you, important to know is also, A350 galleys and 737 lavatories, that's paramount for us. These executions need to go very, very well, which will be the business card, obviously, for more SFE business. So we put a lot of emphasis on that. And then as Amin said before, a strong history of BFE equipment, it's still very, very important to us. If you think about, for example, premium class seat of a premium airline, whether it's British Airways or Cathay Pacific, they want to have a [indiscernible] product that will remain a BFE product because that makes -- that's how they differentiate. So that's how we look actually at our strategies, at our focus, and last but not least, you heard it from Amin a few times, we are very sensitive when it comes to margin. We are very selective. Definitely we could already have the next SFE program at this point in time, but then again, it needs to make sense from a margin perspective. Does it really fit our portfolio? Is it accretive to our portfolio? That's the way we look at these things.

Amin J. Khoury

Thanks, Werner. I think one of the things that Werner said, I think, is really important is that the folks who supply stuff directly to Boeing and Airbus for the most part supply those parts based on specifications generated by the OEs. And they build the print, right? I mean, they're actually shipping a product which Boeing or Airbus has declined. And what Werner said a moment ago is we spend a lot of time with airline CEOs and marketing departments trying to understand what they really want and need. And so we're not basically getting a print from Boeing, which says build this. We're going to Boeing and saying, "Look, this is what your airline customers really want." And this is what we've developed that we think that will help you to sell more airplanes to those customers, whether it's more seats or a better ambiance or whatever it is. And that is a different kind of negotiation than, here's a print. Bid on it with a lot of other manufacturers. And that's how we're developing our SFE business, and I think that is -- that's a really important differentiator.

Greg Powell

Two more questions, one here and then Hans [ph].

Unknown Analyst

To return to the question about margins in the bizjet segment. You said a moderate growth in revenues, but pretty dramatic margin increases. It implies very strong incremental margins. Can you talk about what the -- which implies, I guess, a mix either in products or in customers that’s changing. Can you talk about what that -- what's really driving that mix and allowing that seems like pretty impressive incremental margin?

Amin J. Khoury

Very high quality, Super First Class programs and a record backlog. That's a really specific answer to your question. And so we do expect really nice margin improvement in the bizjet business driven by the quality of the backlog.

Unknown Analyst

Any offset in the lower margin business coming down? Because if you just look at it in terms of increase in one product and the rest of the product portfolio staying basically higher margin than...

Amin J. Khoury

Well, there's nothing going on in the bizjet side. I mean, we're shipping at such a low level. Business jet manufacturing is down 50% from the peak. We have very large market shares pretty much in all of those platforms. We've been spec-ed in to an awful a lot of new airplanes, but not many are being shipped just yet. Now in the 2014, '15 time period, some more of those airplanes start to be shipped as well. The inherent margin in those products are good. And the margins in our Super First Class business are good. So our margin improved by 250 basis points this year. We're going to have another big improvement in margins next year based on the quality of the backlog and a little more utilization in our facilities, not much.

Unknown Analyst

Okay. How much of the $700 million dry powder do you think you can use for this year?

Amin J. Khoury

Well, I don't know. I mean, we can't tell you exactly how much we're going to spend.

Greg Powell

Okay. This will be our last question.

Unknown Analyst

[indiscernible] you got a lot of...

Amin J. Khoury

Wait. McCaffrey wants to keep some of that to run the business.

Unknown Analyst

Just a little bit, I hope. You have a lot of competitors across the full spectrum of your business segment. You don't really face up against one big one right across all of your [indiscernible]. But if you can -- if you look across your products in the segment, what are you seeing out of competitors that is most concerning, most threatening that drives a competitive response from you and your [indiscernible]?

Amin J. Khoury

That's a really good question. Well, Sean Cromie, who runs the commercial aircraft segment, when he wakes up during the -- in morning, he thinks about Zodiac. All right? And he says, “I got to beat Zodiac today. I got to beat Recaro today.” And those are my 2 guys. And we're going to kick butt and take -- I mean, that's kind of how he thinks about it. And our operations are going to be the most efficient in the world and our on-time delivery is going to better than theirs and Boeing and Airbus and the airlines are going to know today, just the way they did yesterday, that we are the best, we're the most innovative. The best people in the industry want to work for us, and I need to make sure that we protect that franchise. And we booked almost 90% of the food and beverage preparation and storage equipment orders, and we booked a huge share of every part of the seating business. And that's kind of how he thinks about it. And Lighting, Boeing's excited about what we're doing and we're getting lighting retrofit programs, and now we want to get onto other platforms. But when he thinks about competition, he thinks about Zodiac and Recaro for the most part. I would say that that's -- okay. And when the guys in the consumables business wake up, that's not what they think about, okay? They think about Wesco, who's our -- who's the #2 in the industry and then the smaller, smaller players who are nipping at our heels, but making absolutely sure that we are the very best in terms of on-time delivery and quality. And all those rewards that we talked about, all those quality awards, that's not just about getting a trophy. It is really about being perceived as the best in the industry. And that's what we think about every day. And the business jet guy, I guess they would think about Goodrich. I mean, Goodrich entered the business through the acquisition of DeCrane some years ago, and -- I mean, in answer to a question here a moment ago, I said that we've been spec-ed in to an awful lot of the new bizjet platforms. I think that we did what we did in the right way with the right timing, so it is really hard for a new entrant, even with the quality of the Goodrich name, and now it's UTC. For them to be able to do something about this, they need to wait for the next generation of aircraft because we've been so successful with Dassault and Embraer and Cessna, and pretty much everybody, Gulfstream. So I think that our -- that the segment heads and their teams think about different competitors, major competitors in each business and those are the ones.

I think with that, we should take our break here. Greg, do you want to...

Greg Powell

Yes. Just take a break. If anybody needs to use the restroom, it's straight down the hall out here. And then please rush down and get down so we can leave at 10:00 sharp because they're expecting us over there, and we don't want to leave anybody here. Thanks.

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