B/E Aerospace's CEO Presents at JPMorgan Aviation, Transportation and Defense Conference (Transcript)

| About: B/E Aerospace (BEAV)

BE Aerospace, Inc. (NASDAQ:BEAV)

JPMorgan Aviation, Transportation and Defense Conference

March 05, 2013 8:00 am ET

Executives

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

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

Analysts

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

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

All right, good morning. We're going to get started here with our aerospace defense track. I hope you all had a good evening. We are pleased to start out with B/E Aerospace. Amin Khoury is here, Chairman and CEO. Seated next to him, to his left, is Tom McCaffrey, SVP and CFO. And Greg Powell, VP of IR, is also in the audience here. So I'll turn it right over to Amin.

Amin J. Khoury

Thank you, Joe. And good morning, everyone. I will do a little bit of a company overview. And after that, both Tom and I will be happy to take your questions.

So B/E Aerospace is the largest global manufacturer of equipment for the passenger cabins of airplanes. We're also the largest global distributor of aerospace fasteners and consumables. The company has a strong balance sheet, excellent liquidity and no debt maturities until 2020. Our equity market capitalization is about $5.2 billion. The company is characterized by market share leadership in pretty much every product category in which we're involved. We have a large installed base which generates spares and retrofit programs. It's about a $9.5 billion base. And we have the largest industry sales force, R&D organization and customer service group in the industry.

Our customer base is the airlines, that's our largest single customer base, but it also includes the leasing companies and the commercial airliner and business jet OEMs. About 50% of our revenues last year were to foreign customers and 50% domestic, and 14% of our revenues last year were sales directly to Boeing or Airbus.

Over the last 7 or 8 years, the company has grown from around $850 million in revenues to a little over $3 billion last year. Revenue compound annual growth rate has been about 20% over that period of time, and our operating earnings growth rate has been about 28% compounded. Margins have expanded from 11% to 17.5%, so about a 600-basis-point expansion in operating margin over the period.

Last year, we reported record results, as we did in 2011. So revenues were up 23%, operating earnings were up 26% and earnings per share were up 26%. We also had record bookings last year and ended the year with a record backlog. So our backlog as of the end of the year was $3.75 billion, but that excludes $4.5 billion of programs that we've been awarded on a sole-source basis for which we don't yet have purchase orders. But as A350s begin to ship, all of those will have our galley systems. And as the 737s begin to ship starting in the third quarter of this year with their new lavatory configuration, which allows additional seats in each aircraft; our lav systems, including our lav structures, our lav toilets, our lav oxygen systems, our lav lighting systems, will be included in all the 737s. We've also developed some wastewater treatment systems. So the backlog is very strong and the company has some structural growth drivers, as well as the growth of new airplane deliveries, which are driving our growth rate. Our backlog is pretty well dispersed geographically. About 40% is in North America, 26% in Europe and 33% in emerging markets, Asia-Pac Rim, Middle East, et cetera. Our total backlog, both booked and programs awarded but unbooked, is about $8.25 billion and that is by far the largest backlog we've ever had.

These are some of the sole-source programs which we have been awarded. So to the left, let's see what we've got here, this is our lavatory, which because of the Spacewall configuration allows an extra row of seats. And as I mentioned earlier, it has our lav toilet, our lav oxygen system, our lav lighting system, it has a lot of our equipment in here. And of course, it carries that equipment. So the A350 galley systems, they're lighter, take up much less space, require less power and are basically the carrier for our food and beverage preparation and storage equipment where we're the largest global provider.

This is the PSU, and so it's a passenger service unit and the oxygen system for both the 787 and the A350. And in fact, the passenger oxygen system on pretty much every in-production aircraft in the world is a B/E Aerospace system. And then finally, our 737 lighting system is -- it pretty much goes into every 737 which is delivered today.

Industry conditions are quite favorable. So Airbus and Boeing have record backlogs, about 8,000 aircraft in their backlogs. Twin-aisle aircraft, in particular, should grow at a healthy rate over the next several years. They've got about a 10% compound annual growth rate, about 1,135 wide-body airplane deliveries. And those carry a lot of the equipment which we manufacture. So Super First Class seats, First Class seats, coach seats, food and beverage preparation and storage equipment, oxygen systems, lighting systems, a lot of our equipment is carried in these wide-body aircraft. So that's very favorable for us.

The chart there on the lower right hand is very interesting. As a percentage of total backlog, deliveries by the majors is at a relatively low level. And last year, the additions, the net additions to aircraft, was around 550 aircraft to a fleet of about 18,000, so only about a 3% growth rate in active airplanes. And with a 5% growth rate in revenue passenger miles, airlines have been able to really jam the airplanes full of folks. They've been able to raise prices significantly, and they've been able to make some money in a tough environment in terms of oil prices and the economy.

Talk a little bit about our 3 segments. So the largest segment, our commercial aircraft segment, generated about 50% of our revenues and about 50% of our operating earnings last year. And that business is the largest global manufacturer of aircraft cabin interior products for commercial airliners. Customers include the airlines, of course; the leasing companies; and the major original equipment manufacturers. The installed base in that business is about $8 billion. And we have leading global market shares for essentially all major product categories.

Let me just go back here. Okay. So what do we do in that business? We manufacture seating systems, First Class seats, business class, lie-flat seats and beds; main cabin and regional seating; premium economy and special seating. We make -- we manufacture all the food and beverage preparation and storage equipment, so coffee and beverage makers and water boilers; beverage containers; a full range of ovens, so steam ovens, convection ovens, high heat ovens, microwave ovens. We manufacture self-contained wine and beverage chillers and refrigerators and freezers and galley chilling systems. And we also manufacture passenger and crew oxygen systems and cabin lighting. So those are the -- that's the range of products in the interior.

Then we provide these structures. This is a brand-new business for us. It's sort of a -- it's a growth driver which will help us over the next several years in addition to the cycle itself. So we will be producing modular lavatory systems. The first ones will ship in August of this year. Those will be brand-new 737s for Delta Air Lines. Same with galley systems, so we'll be the sole supplier of galley systems for the Airbus A350 airplanes. And with a little luck, the entry into service for that aircraft will be the second half of 2014, and Airbus continues to stand by that projection. And then we provide a pretty broad range of engineering services and program management and certification services for our airline customers.

So the commercial aircraft segment generated half of our revenues and earnings last year. It grew about 19%. It grew to 1 -- a little under $1.6 billion in revenues. And operating earnings grew at 26% because the operating margin expanded by about 90 basis points. It was a solid year and we generated a 17.5% operating margin. And our expectation is for solid additional margin expansion in the coming -- in the current year, the 2013 year.

Our consumables business is -- we'll -- there, we are the largest distributor of aerospace fasteners and bearings and seals and electrical parts and a broad range of parts to thousands of customers, aerospace customers, around the world. And about 60% of what we ship in that business, we ship the same day we get the order. So we'll get typically 14,000 orders in a day and ship 60% of those orders the same day we get the order, and we're known for that service. What facilitates that is some very sophisticated IT assets and robotics in the warehouse, which enable us to ship the products on a same-day basis.

These are some of the products which we have in our range of SKUs. We have about a million different stock keeping units in that group, but they're basically adhesives and clips and fittings and nuts and screws, bearings, ceramic roller, ceramic roller thrust, ball, all kinds of bearings. We are the sole supplier for Honeywell of their proprietary consumable products, which supports their APUs, their environmental systems and their fuel controls and hydraulic controls, et cetera. So we're the -- we actually handle on a third-party basis their -- all of their customers. So we ship both to Honeywell for their manufacturing and directly to their customers who are basically our customers. There are a broad range of other component parts there which you can see up on the screen. And there are books over there on the right, if you'd like to get into it a little deeper.

So our revenues in that business grew about 24% last year. Operating earnings grew at about 18.5%. This is a business where we've done several small acquisitions, and the acquired businesses have lower margins than our legacy business. And as we integrate those businesses, we're spending, well, $4 million or $5 million a quarter to get the integrations done. We expect those integrations to be essentially complete by the end of this year and to bring the margins in the acquired businesses up to the margins in our legacy business then to stop spending the $20 million or so a year that we're spending on integration, all of which should result in improved margins this year. The margin wasn't bad last year, it was 18.5%. And if you back out the AIT cost, the integration costs, it was about 20%. This year, we expect the margins to improve even though we will spend another $20 million on integrating the acquisitions.

Our business jet segment is the third and final segment, and that generated 12% of our revenues and 10% of our 2012 operating earnings. In that business, we're the largest global manufacturer of aircraft cabin interior products for business jets. We also manufacture bespoke Super First Class suites for the very front-end compartment of wide-body aircraft such as the 777 and the A380, the 747-8, for those airlines that want to offer cabins or special service. So for example, in the Emirates front end, there'll be small compartments which are, I would say, analogous or similar to train compartments. And you'll have a compartment which will -- which has privacy doors which are electrically actuated, dining for 2, a full bed, a little refrigerator, a TV screen, a place to hang your coat, et cetera, et cetera. It's basically like a small compartment. And there are a number of airlines in the world that offer these bespoke custom front ends. And our business jet segment does that because we do a lot of bespoke custom work in that segment. So we'll do "head of state" aircraft, we'll do aircraft for kings and princes and so on and so forth, and we'll do these bespoke front-ends for the commercial airliners.

These are some of the products which we manufacture in that business. So executive aircraft seating, digital LED lighting, reading lights, mood lighting, oxygen systems and then, of course, the Super First Class cabins. There is one of the cabins here. So this is -- that is an Emirates suite. So you can see there's a full bed, there's a little controller, a TV screen, accent lighting, there's a little refrigerator which you can't see in there, and this folds up to permit dining for 2 people. And those are very expensive. Those sell for $250,000 each.

So our business jet segment grew at about 43% last year, and earnings grew by about 80%. And the margin expanded by 250 -- 290 basis points. And our expectation for this year -- this business ended the year with a record backlog. Backlog rolls out, to some extent, in 2013 but then really accelerates in 2014. So for this year, we're expecting for this business relatively low revenue growth but very substantial earnings growth, with significant additional margin expansion.

The company has a solid financial position. So we ended the year with a little over $0.5 billion in cash. Long-term debt, net of cash, is $1.4 billion. Stockholders' equity, $2.2 billion. And our net debt-to-net capital ratio was -- just under 40%. And as I mentioned earlier, we have no debt maturities until 2020. We've got an unused or undrawn $950 million revolver, so the company has lots of liquidity.

Our financial guidance for 2013. So we expect continued strong bookings driven by both the robust wide-body aircraft delivery outlook; bookings from prior SFE program awards, so those programs that haven't yet hit our bookings where we're the sole supplier; and a modest recovery in aftermarket demand, which was pretty soft for the prior year. And we expect to end this year with a book-to-bill ratio in excess of 1:1, so we expect to grow our backlog this year.

2013 revenues are expected to be approximately $3.35 billion and are expected to be stronger in the second half of the year than the first, and that's a function of programmed deliveries. We expect 2013 earnings per share of approximately $3.45 per diluted share, and that's about 22% better than earnings per share in the 2012 time period. And that, the 2013 earnings forecast of $3.45, does include the $20 million of expenses to integrate the acquired businesses in the consumables business.

And our 2013 free cash flow conversion ratio is expected to be about 70% of net earnings, again weighted more heavily towards the second half of the year. And then we expect a double-digit growth rate in revenues over the 2013-to-'15 time period, more so in '14 and '15.

And our Safe Harbor Statement is in the books. And obviously, we rely on Safe Harbor statements in our filings with the SEC.

And with that, both Tom and I will be happy to take questions.

Question-and-Answer Session

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

Okay, thank you. I'll be starting off with a couple, and if there are some in the audience, please raise your hand. But I have a couple of questions, just on some operating initiatives you have within the company. The first is that, you mentioned you're spending about $20 million this year to integrate these 3 acquisitions you've made in consumables. Can you give us a little more detail on what you're spending the money on, what the process is and at what point risk gets retired? Is this software, is this restructuring and letting people go? What -- where's the money going? And is there -- when do you declare victory on the process?

Amin J. Khoury

All right. It's yes, yes, and yes to your questions. Why don't we put our CFO to work here, Joe?

T. P. McCaffrey

Sure. Well, the costs, in large part, are -- well, are really broken up here into a couple of different categories. Part of it has to do with lease exit costs. So as we facilitate -- as we move the facilities from a combined 2 or 3 into 1, when we exit that, if there's a tail on that the accountants require you to go in and record that liability when you exit it. So that gets triggered typically when -- right as we're about to exit the -- one facility and move into another. So we have a lot of activity going on both in the U.S. as well as in Europe. Same thing applies to severance and related costs. That is, we finish up the facilities and we wind down what we have to do, there are some stay pay element associated with that. And so you'll see a head -- you won't see it, but what we're seeing is the headcount starts to drop a little bit at a time. And the reason why it takes a long time to get through that process is we, rather than just do a data transfer one file to another from one IT system, it's part-by-part, customer-by-customer so that, from a customer's perspective, when we're doing a bin management program, for example, that it's seamless, that they don't see what's going on in the back office and all they see is that they're getting -- they're placing their orders and that the stuff comes, it gets there on time, they don't have to worry about getting on the shop floor. And we make sure that all of the customization that goes into it in the outset is done consistent with what their original expectations are. So it's a very time-consuming process but when we get through that, they work through the rest of the integration activities, bringing up the new facility. And that's -- it's going to take -- 18 to 24 months is fair -- pretty much standard.

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

But you're fully expecting it to roll off after this year.

T. P. McCaffrey

Yes, the expectation, as Amin said, was we'll get through substantially all of it this year. There'll be a little bit which slides into the fourth -- into the first quarter of next year, but that should be it.

Amin J. Khoury

To -- just to elaborate, Joe. So in that business, we won a number of awards last year. Honeywell Supplier of the Year award, U.S. Air supplier of the year award, Boeing Defense Systems supplier of the year. So we pride ourselves on on-time delivery and quality, and our on-time delivery percentage is around 99%, better than -- much, much better than the rest of the industry. And by doing the integration one part at a time and one customer at a time and moving the IT information and the inventories slowly, we're able to maintain that service level for our customers. That's why it takes a long time.

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

Makes sense. The second question is, you're building on a new facility in the Philippines and putting a lot of capital into that. Could you speak a little more to the opportunity there, perhaps from a long-term cost standpoint, maybe put some context around it? And how big of an opportunity is low-cost sourcing for B/E?

Amin J. Khoury

Okay, well, we think about low-cost sourcing and the Philippines plant in 2 different buckets. So last year, through low-cost company sourcing and our operations excellence programs, and they're both -- they're sort of combined, so we have an operations excellence manufacturing team and we have a procurement team. And they have their individual people in each and every site in our company. And last year, we reduced costs by about $40 million through those 2 programs. So our low-cost country sourcing which has us acquiring parts in various developing countries of the world where we have teams stationed full time. For example, in China we have 4 people full time. And we do audits on our suppliers. Often, there are surprise audits to make sure that we have great readiness for those suppliers. So in the aggregate, the combination of our operations excellence, which has created a lot of space in our facilities as we reduced inventories and created more production space; and then low-cost country sourcing has saved us quite a lot of money each year. This past year, it was about $40 million. So we had a significant improvement in operating margin during the year; that $40 million was part of that improvement. Now the...

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

Is it -- I'm sorry, is that incremental from 2011?

Amin J. Khoury

Yes, yes.

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

And how much more before we get to Philippines? How much more runway do you think you have in low-cost sourcing?

Amin J. Khoury

Joe, we think about it as continuous improvement initiatives. And every day when we come to work, the most important thing that we focus on is our operating margin and doing things more efficiently and continuously analyzing what we're doing and getting the people in the shop floor involved in doing better. So there's not some specific number, it's a continuous improvement. Every day, we try to do it better and improve our margins. And there was a slide that we looked at earlier where we've shown that our margins have improved by about 600 basis points over the last 6 or 7 years. Our expectation is, over the next few years, that margins will continue to expand, as they have for the last 6 or 7 years, driven partially by our low-cost country sourcing, our continuous improvement initiatives. And the plant in the Philippines is important. That was the first part of your question. So there we have a "several hundred thousand square foot" facility. We will be producing the 737 lavatories we have, so 1/3 of the plant is devoted to 737 lavs, the first ones to be delivered in August of this year. We'll also be producing -- 1/3 of the plant will be producing A350 galley systems, and we've begun that production. We'll ship, I think, 7 or 8 shipsets worth in 2013, it's sort of insignificant. But in 2014, Airbus expects to begin delivering those airplanes in the second half of the year. So in 2014, it'll ramp up. In 2015, it'll be a major supporter. And then 1/3 of the plant is for expansion. And there, we believe that we will be garnering significant retrofit orders for some of the programs where we're sole-sourced, and so it is basically for expansion. We've had Boeing and Airbus down there multiple times. They are blown away by the state-of-the-art nature of the facility that we have built and the time frame that we've built it.

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

This is really about new programs. It's hard to move existing production sometimes, but it's easier to put a new program in a new place. And is that the thinking that...

Amin J. Khoury

Yes, for the most part, that's how we should think about it. We do have some smaller things scheduled to move, but the Philippines plant is, by and large, what I just described.

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

Got it. A question here.

Unknown Analyst

It seems like the supply chain, especially in the lower tiers, have been consolidating. Maybe you can talk about your competitors and who you're competing with. And then, it also seem that most of the backlogs are within Airbus and Boeing, yet you have 50% of your sale -- of your backlog with other country or with other customers. What's the dynamic there? How does it work for you? And how did you -- how do you think about the backlog? And why do you have only 50%?

Amin J. Khoury

Yes, so this past year, only 14% of our business was to Boeing and Airbus directly. Our business, for the most part, is a BFE business, buyer furnished equipment. So when the airlines buy an airplane from Boeing or Airbus, the passenger cabin is basically -- well, it's almost an empty tube. The seating, the food and beverage preparation equipment, the engineering services, the cabinetry, all that is purchased directly by the airlines. Now when we first started our business, we were exclusively a buyer furnished equipment business. Our customers were the airlines exclusively. We sold very little to Boeing or Airbus or any of the other OEMs. But as our market shares have grown -- so our market share is at 50% to 90%, depending upon which product we're talking about in the BFE segment. As market shares have grown, in order to increase our content per aircraft and to give us room to grow and run in the future, we had our engineering and R&D focus -- people focus on seller furnished equipment, that is equipment which is already in the airplane and supplied by Boeing or Airbus before the airlines buy their equipment for it. Seller furnished equipment would be oxygen systems, the lighting systems in the 737, the 737 lavatories, the A350 galley systems. So all of that seller furnished equipment, which is part of the $4.5 billion worth of programs that we've won but which are not in backlog, will be shipped over the next 10 years or so. It'll roll out more slowly. Our buyer furnished equipment backlog rolls out over a couple of years, 2 years to 3 years, but our seller furnished equipment backlog rolls out over about a 10-year period. Our competitors, well, our competitors in the cabin interior would include Zodiac, which is a French public company; Recaro, which is a private German seat manufacturing company. Our competitor in the distribution business, our main competitor is Wesco which is a publicly-traded company. And our primary competitor in the business jet segment would be Goodrich-DeCrane.

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

Amin, you have made, in recent months, some indications that you're going to be looking at M&A this year, 1 or 2 deals. I think you got a little more specific last week, at your analyst meeting early last week. Can you give us any further indication -- it's okay if the answer is just no, but any further indication of which direction we should be thinking about, whether it's CAS and -- or CMS? And if it is CAS, is it something that is a new -- relatively new area for you? Or is it right in the wheelhouse?

Amin J. Khoury

I can't think of anything more fraught with danger than talking about what you intend to do. So our expectation is that we will do 1 or 2 transactions during 2013, and we have had discussions and are continuing to do so. With us, it's really about not diluting our margins, which we focus so hard on improving margins every year, and not diluting our growth rate and making sure that transactions are accretive to earnings per share and create shareholder value. So we're working hard on it, and I would say that our expectation as a team is that we will do 1 or 2 transactions this year.

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

Fair enough. A question back over here.

Unknown Analyst

Right here in the front.

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

Oh, sorry.

Unknown Analyst

Your distribution business has high margins, in my experience, for the distribution business. Can you explain why and if you foresee those continuing for the next 3 to 5 years?

Amin J. Khoury

Yes, well I -- our distribution business had -- remember, I mentioned that we ship 60% of orders the same day we get the order? A lot of that is AOG or it's aircraft that are being serviced where some parts are needed the next day and they're trying to get "a couple of hundred million dollar" piece of equipment out of the facility and they need $300 or $400 worth of parts to do it. And they know that if they call us, that we will have the parts which they need in stock; that we'll be able to find them that day, box them and ship them; and they're going to get them the next day. And the fact that the sale is so small, $300 or $400, not sold off a price list -- so our IT systems are pretty sophisticated when purchasing -- and we've got 135 folks taking those calls. When they call in, we bring up that customer. We know what they bought, what they have bought historically, what quantities, what price they paid, what's in our inventory, what's our replacement cost. And then the sales people are paid based on the margin they generate on that little tiny sale. And there's not a whole lot of sensitivity about the cost to the customer because it's a few hundred dollars in a program which -- it's incidental, so to speak. And so our margins are pretty high in the business, and that's the reason why.

Unknown Analyst

Can you see those [indiscernible] ?

Amin J. Khoury

We see our margins in that business expanding.

Unknown Analyst

And then a quick one for you. The lav seems like a pretty significant retrofit opportunity just given the revenue opportunity for airlines. Any sense as to when we might expect the first order?

Amin J. Khoury

Well, our hope is it's going to happen here either at the end of the quarter or the early part of the second quarter. But sometime during the first half of the year, we believe we'll book our first retrofit program for the lav.

Unknown Analyst

I noted, if I wrote this down right, that in the business jet section, your growth is 43% in the revenues, and operating earnings is much higher than that. What -- and yet going forward, you expect the revenue growth to be fairly low. So I'm just wondering what your expectation in that's -- in business jet growth is going to be in the next year or 2, 3.

Amin J. Khoury

Okay, so business jet manufacturing per se is down about 50% from the peak and the business jet portion of our business is at a very low level of operations. But we also produce Super First Class suites in our business jet segment. We have a record backlog of that kind of equipment, and it's a very high-quality backlog. And it is what has been -- actually, sales of Super First Class suites have been driving our business. So this past year, our revenues grew at 40%, operating earnings at 80%. It's all organic growth coming out of the backlog, but because of the timing of shipments from the backlog, we expect this year to be a little better than flat, flat to slightly up, but operating earnings to expand substantially because of the quality of the backlog. And then in 2014, '15, because we have been selected and spec-ed in for so many new business jet aircraft, as their orders start to improve and shipments begin in the 2014-'15 time period, we've got both going for us, Super First Class and business jets. So that's why we feel confident about an acceleration of the growth rate, the revenue growth rate, in '14 and '15, with margin expansion in those years but significant margin expansion this year, having to do with the quality of the backlog and what is expected to be shipped.

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

And can we speak a bit about the channel to market? Historically, as you noted, you've been focused on BFE. And then PSFE is a really expanding part of your business. Your major competitor in interiors is being -- is very acquisitive right now and they're buying -- getting into IFE. For example, they're buying touch labor-type businesses. Could you provide insight into how you think about your channel to market and whether that's -- or why you're not doing that and whether that's a competitive threat to you?

Amin J. Khoury

Well, we -- I think you've followed us for a long time, and we try to be the best at everything we do and we try to be #1 in everything that we do. And I think there's a limit to how much breadth you can take on. For example, IFE, so you take on in-flight entertainment equipment, you're really talking about becoming a software company and competing on the bases of capital and technology against companies that have lots of capital and technology. You're talking about Collins and you're talking about the Japanese electronics manufacturers, Panasonic and so forth. It's just not what we -- that's not our strong suit. This company was built in the beginning by focusing on a market, a niche market, which we thought would be growing for a long time, where we could become #1 in that niche; and where we could manage the competitive environment because we could be the strongest competitor; and where the customers weren't that powerful so all the airlines rather than focusing on the 2 majors, Airbus and Boeing; and where the suppliers didn't have that much power. Basically, a classical Michael Porter analysis of the industry and the business, and that's how we've grown. Well, acquiring an IFE business would be way outside, conceptually. And in terms of providing touch labor, that's the same thing. I mean, having large touch labor facilities in Germany and France, it's just not something that we would do. And talk about an anathema to margins, I mean, that's it. So we have a good competitor which you refer to, I think they do a good job. We just strive to be somewhat more focused and particularly focused on growth and earnings and margins rather than just growth in product range and growth in revenues and growth in structures and so forth. We're just different.

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

A question in the back there.

Unknown Analyst

You benefited recently from the increase in production rates at the OEMs and then a recovery in the business jet. How do you think about growth longer term, say, after 2015? Is it increase in shipset as the older planes get retired? Is it actually taking share? Is it just RPK growth? Just how do you think about it?

Amin J. Khoury

Well, I think we have the benefit of having growth drivers that have to do with brand-new programs, which have come out of our research and development and engineering activity. So for the next 10 years or so, as we ship basically all the passenger oxygen systems for all the aircraft; and galleys for the A350s, which is a brand-new airplane; and lavs for the 737 and the 737 MAX; and as we do retrofit programs based on those new product developments and wastewater treatment systems, so all of these systems and products which are part of that $4.5 billion SFE backlog, which is not actually a booked backlog, are products which will help drive our revenues in addition to the growth in new airplanes which are basically being manufactured and shipped to handle the ever-increasing number of passengers. So there are structural growth -- there is structural growth in revenue passenger miles and passenger activity in many of the developing countries of the world which far exceeds what's going on in the developed parts of the world. So last year, the growth rate in revenue passenger miles, which is what drives everything. You have a 5.5% growth in revenue passenger miles and a 4% growth in aircraft deliveries, what you have is higher load factors -- so the load factors were around 80%. Yields improve, so the airlines have had successive improvements in their outlook for profitability over the past year from $3 billion to $4.5 billion to $6 billion, and this year, the outlook is for about $8.5 billion in revenues. That is being driven by revenue passenger miles. And revenue passenger miles drive airplane deliveries, so it's more people flying from all over the world as middle classes develop in India, in China, in Asia, and the Pac Rim countries, in Africa, and so on and so forth. That is where the growth really is. And we are truly a global country -- company.

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

Amin, I think we've hit the time limit here, but thanks, guys, for joining us. Appreciate it.

Amin J. Khoury

Thank you.

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