BE Aerospace, Inc. Q3 2009 Earnings Call Transcript

BE Aerospace, Inc. (BEAV)

Q3 2009 Earnings Call Transcript

October 27, 2009 9:00 am ET

Executives

Greg Powell – VP, IR

Amin Khoury – Chairman and CEO

Mike Baughan – President and COO

Tom McCaffrey – SVP and CFO

Analysts

Robert Spingarn – Credit Suisse

Myles Walton – Oppenheimer

Howard Rubel – Jefferies

Eric Hugel – Stephens

Lucy Gao – Macquarie Capital

Presentation

Operator

Good morning. My name is Jessica Morgan, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the B/E Aerospace third quarter 2009 earnings conference call. All audience lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded, this day, October 27th, 2009. Thank you.

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

Greg Powell

Thank you, Jessica. Good morning to everyone, and thank you for joining us this morning. We are here to discuss our financial results for the third quarter ended September 30th, 2009. By now, you should have received a copy of the news release we issued earlier this morning. If you haven't received it, you'll find a copy on our Web site.

We will begin this morning with remarks from Amin Khoury, Founder, Chairman, and Chief Executive Officer of B/E Aerospace. And then we will take your questions. For today's call, we prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page of the B/E Aerospace Web site at beaerospace.com. In addition, copies of the slides will be posted on our Web site for you to refer to after the call.

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

As always, in our prepared remarks and our responses to your questions, we will rely on the Safe Harbor exemptions under the various Securities Acts, and our Safe Harbor statements in the company's filings with the SEC.

We will address questions following our prepared remarks. At that time, the operator will provide instructions. As in the past, please limit your questions to no more than two at a time. Now I will turn the call over to Amin Khoury, Amin.

Amin Khoury

Thank you, Greg, and good morning, everyone. This morning, I would like to discuss the current macroeconomic environment and the impact it's having on our customers and on our business. Then we will review our third quarter financial and operating results. And finally, we'll discuss our guidance for the remainder of 2009 and the outlook for 2010.

Let's first discuss the current market environment. The global economic crisis appears to be abating. Credit markets are beginning to function. The stock market has recovered strongly off its March, 2009 low, but remains down about 30% from its 2007 high. Economies are improving, and global air traffic declines appear to have finally ended. However, prospects for our recovery continue to be hampered by high global unemployment rates, depressed real estate prices, lack of readily available credit, and weak consumer and business spending.

Despite recent signs of recovery, our global airline customers continue to suffer from high fuel cost, weak demand for passenger travel, and significantly lower ticket prices, all of which have resulted in sharply lower yields. The airlines have lost $6 billion globally during the first half of this year, and are forecast to lose about $11 billion for the full year. Fortunately, the airlines have been able to access the capital markets to shore up their balance sheets. In the past six weeks or so, the US airlines, alone, have accessed the capital markets to raise about $4 billion.

Although global traffic declines have stabilized, US September passenger revenue was down 19% on about 2% fewer passengers, paying nearly 18% less per ticket than a year earlier. And while the IATA international data is not yet available, global traffic comps should be better than US comps, as clearly, both Asia and the Middle East are now growing at healthy rates.

Notwithstanding the unimpressive traffic results for 2009 to date, the most recent traffic results are starting to show slight sequential improvement over prior months, and a consensus is building among forecasters that 2010 traffic will show an increase over 2009. And clearly, improving global traffic is expected to increase demand for our consumables and spares.

While the airline industry has reduced global capacity by about 10%, the reduction in demand for consumables and spares has been in excess of 30%. We believe that many of aircraft idle during the past year were flown right up until scheduled heavy maintenance was required. As such, we believe there was a growing heavy maintenance backlog that will likely create additional demand for consumable products and spares once revenue passenger miles turn positive on a year-over-year basis and demand for lift begins to improve.

Throughout the downturn, we have been intensely managing our cost structure, which in turn has allowed us to maintain our margins in spite of the downdrafts in demand for our products. We've been able to protect our balance sheet, and have begun to generate respectable cash flows, while at the same time allowing the company to continue to invest in new products and technologies in order to expand our global market leadership positions.

Let's now discuss our third quarter results. As we reported earlier, the airline industry's lower yields are forcing airlines and MROs to continue their stringent cash conservation measures, including retrofit program push outs and aircraft refurbishment deferrals, which together with the significant decline in revenue passenger miles and a significant reduction in aircraft capacity, have caused the 27% decline in our revenues during the third quarter.

Let's turn to slide two, and review our financial results for the third quarter of 2009. The bar chart on slide two graphically illustrates our third quarter 2009 financial performance versus the third quarter of 2008.

Revenues of $460 million declined by $160 million or 27% as compared with pro forma revenues of $629 million in the third quarter of the prior year. Pro forma results include the acquired HCS distribution business as if the acquisition had occurred on January 1, 2008. 2009 third quarter operating earnings were $70 million. Operating earnings declined by 32.5% as compared with third quarter 2008 pro forma operating earnings of $103 million.

The US dollar strengthened substantially as compared with the British pound in the third quarter of 2008, positively impacting operating earnings by $7.3 million. That compares to a $1.7 million negative impact in the 2009 period. Excluding the foreign exchange impacts from both periods, adjusted operating earnings were $72 million, and adjusted operating margin expanded by about 30 basis points to 15.5% of sales during the 2009 period.

The 2009 third quarter tax rate of approximately 23%, was lower than the expected 31% tax rate for all of 2009, primarily due to a higher level of R&D tax credits generated by recently completed tax reduction initiatives.

GAAP net earnings for the third quarter were $36 million or $0.36 per diluted share. Excluding the foreign exchange impact in both periods, 2009 third quarter adjusted earnings per diluted share of $0.38 declined by 24% on the 26.9% decline in revenues as compared with pro forma earnings per share in the prior year period.

Slide three summarizes current backlog. As expected, bookings for the quarter at $400 million were soft, reflecting weak after market demand. The book-to-bill ratio for the quarter was about 0.9:1. And for the nine month period ended September, was also about 0.9:1.

However, based upon an uptick in demand for consumables in September and discussions with a number of our major customers relative to their planed spares purchases, combined with a marked pick up in RFQ activity for cabin interior products for both new build and retrofit aircraft, the company believes that the third quarter of 2009 represents the trough quarter for B/E Aerospace orders and backlog during this commercial aerospace downturn. We now expect the book-to-bill ratio to improve to about 1:1, beginning in the fourth quarter of 2009, and for the book-to-bill ratio to continue to be better than 1:1 for the full year 2010.

There are three reasons why we expect an expansion in both orders and backlog in 2010. First, due to the aforementioned expected improvement in demand for consumables and spares, which is consistent with the expected pick up in passenger traffic. And as we discussed earlier, we believe that there was a growing heavy maintenance backlog that will likely create additional demand for consumable products and spares once revenue passenger miles turns positive on a year-over-year basis and demand for lift begins to improve. In addition, we expect to benefit from the conversion of a portion of the SFE program awards, which we have already won, to purchase orders. And finally, we expect to win some healthy new orders arriving from the increase in current RFQ activity.

Now, I will briefly review the operating performance for each of our business segments. Let's turn to slide four and review the third quarter results for the consumables management segment.

Revenues were $181 million or 30% lower than third quarter 2008 pro forma revenues of $260 million. A decline in consumables management segment revenues in the current period was due to reduced activity at airline and MRO maintenance facilities, reduced aircraft capacity, and a decrease in revenue passenger miles flown as well as substantially reduced activity at business jet manufacturers, all as compared to the same period in the prior year.

Third quarter 2009 adjusted operating earnings were $37.4 million or 20.7 % of sales. That excludes acquisition, integration, and transition costs of $3.9 million during this year. And that compares with third quarter 2008 pro forma adjusted operating earnings of $47.5 million or 18.3% of pro forma sales, again, excluding AIT costs of $3.6 million. So the operating margin on an apples-to-apples basis actually expanded by 240 basis points for the consumables management segment.

The commercial aircraft segment revenues of $222.5 million decreased by 26% reflecting retrofit program push outs, reduced activity at airline and MRO maintenance facilities, reduced aircraft capacity, and a decrease in revenue passenger miles flown, again, compared to the some period in the prior year.

Third quarter 2009 operating earnings were $29.8 million or 13.4% of sales as compared with third quarter 2008 operating earnings, a $49.4 million or 16.4% of sales. Excluding the foreign exchange impact from both periods, adjusted earnings were $31 million and adjusted operating margin in the current period was 14%, an actual increase by 10 basis points as compared with the prior year period, reflecting the successful cost reduction activities and improved manufacturing efficiencies.

Let’s return to slide six, or let's turn to slide six, and review the third quarter results for the business jet segment. This jet segment revenues declined by 17%. They were $56 million in this period, compared to $68 million in the prior year. Operating earnings decrease by $3.5 million or 35.7%, reflecting severance costs, an unfavorable mix of products, and a negative impact of reduced operating leverage in the current year period.

In the 2008 and prior year periods, the business jet segment sold a healthy level, a very profitable equipment for VIP aircraft completions. During the 2009 period, this activity was essentially non-existent.

Please now turn to slide seven, which reflects our financial position as of September 30th. We have a solid capital position and our liquidity is strong. We generated free cash flow of $22 million during the quarter. Absent the $13 million decrease in accrued interest as a result of our semi-annual interest payment, our free cash flow conversion rate would have been approximately 100%.

During 2009, we computed our initiative to bring the HCS inventories in line with our distribution stocking model. This effort was the primary driver behind the $112 million increase in our inventories during the nine-month year-to-date period, essentially all of which occurred in the first half of this year.

With these inventory investments now behind us, we remain confident in our outlook for free cash flow for the fourth quarter of 2009 and for the coming year. We expect that free cash flow conversion rate in excess of 100% during the fourth quarter of 2009 and to end the year with about $200 million of cash on hand before a planned $100 million debt prepayment.

Now, I will spend a few minutes discussing our outlook and our guidance. As I previously mentioned, while the airline industry has struggled throughout 2009, we are starting to see the initial signs of improvement in global traffic. And it appears that global inventory de-stocking has run its course.

Bookings activity for our consumables and spares appears to have stabilized. And while the airline industry has reduced global capacity by about 10%, they’ve reduced their purchase of spares and consumables in excess of 30%. We believe that many of the aircraft idle during the past year were flown right up until scheduled heavy maintenance was required. As a result, we believe there’s a growing heavy maintenance backlog that will likely create additional demand for consumable products and spares once revenue passenger miles turns positive on a year-over-year basis and demand for lift begins to improve.

As I mentioned earlier, we expect an expansion in orders and backlog in 2010 due to the expected improvement in demand for consumables and spares, consistent with an uptick in demand for air travel; the conversion of a portion of the supplier furnished equipment program awards, which we have already won to purchase orders; and, expected new orders arising from the increase in current RFQ activity for our cabin interior products for both new build and retrofit aircraft. The expected expansions in orders and backlog in 2010 is expected to lead to substantial revenue and operating earnings growth in 2011.

Let’s turn to slide eight, where we will first review our guidance for the balance of 2009, and then discuss our 2010 guidance.

The 2009 fourth quarter book-to-bill ratio is expected to improve to approximately 1:1. 2009 fourth quarter revenues and operating earnings are expected to be approximately equal to that of the 2009 third quarter.

2009 fourth quarter earnings per diluted share are expected to be lower than 2009 third quarter EPS due to a higher fourth quarter tax rate and a debt prepayment charge of about $0.02 per diluted share related to our planned $100 million prepayment of long term debt in the fourth quarter. As a result, fourth quarter EPS, included the debt prepayment charge of $0.02 per share, is expected to be about $0.31 per share.

The company expects a free cash flow conversion rate in excess of 100% during the fourth quarter of 2009, and to end the year with about $200 million of cash on hand before our planned $100 million debt prepayment.

Let’s now talk about our 2010 financial guidance. The company expects an expansion in orders and backlog in 2010 due to expected improvement in demand for consumables and spares, the conversion or a portion of un-booked SFE awards to bookings, and an expected increase in orders for cabin interior products arising from the recent increase in RFQ activity.

2010 revenues are expected to be about $1.85 billion, reflecting a lower level of commercial aircraft and business jet deliveries in 2010; and, the weak 2009 bookings, which the company has experienced.

2010 net earnings per diluted share are expected to be about flat at approximately $1.40 per diluted share. That includes AIT costs of about $0.03 per share. The improvement in earnings – sorry, the improvement in margins will basically make up for the approximately 5% lower revenue level.

Beginning in the second quarter of 2010, the company expects favorable quarterly year-over-year earnings comparisons. The company expects to generate positive free cash flow in excess of $140 million for 2010, reflecting a free cash flow conversion rate in excess of 100% for the full year. And as stated earlier, the company expects a substantial increase in both revenues and earnings in 2011.

And with that, I’ll turn it back to Greg to begin the Q&A portion of the call.

Greg Powell

This concludes our prepared remarks this morning. We’ll be glad to take your questions now. Please limit your questions to no more than two at a time.

Jessica, will you now provide everyone with instructions on how to ask questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question today comes from Robert Spingarn with Credit Suisse.

Robert Spingarn – Credit Suisse

Good morning.

Greg Powell

Good morning.

Robert Spingarn – Credit Suisse

A couple of questions, one for Tom, one for Amin. Amin, maybe I’d start with you. It’s a broader-based question on a new bill from Boeing and Airbus. There’s this contrarian theory out there that maybe, given the higher fuel prices that you cited and the fact that both air framers are going to keep deliveries largely flattish, that maybe some of these aircrafts that have been grounded before heavy maintenance don't make it back into the fleet. Could you comment on that? And also talk a little bit more about what’s embedded from a new build rate perspective in your guidance.

Amin Khoury

Sure. Well as you know, capacity has in fact started to creep back in. In the month of September, capacity did creep back in, and it appears to be doing the same thing in October. We haven’t changed our new build outlook. We continue to think that the delivery of narrow bodies will come down in 2010 as compared to the outlook for narrow-body deliveries that pretty much everyone has, including the air framers themselves.

So embedded in our guidance is a lower level of narrow-body deliveries as compared to essentially all of the forecasters. And the principal reason is basically retrofit activity in 2010, which has been deferred from 2009. So we feel fairly confident about it. And this recent pickup in the consumables and spares activity, which gives us some cause for hope here.

And then your second question was for Tom?

Robert Spingarn – Credit Suisse

Yes, I was going to ask Tom if he could walk through – Tom, can you walk through what drives your cash flow forecast for next year, maybe talk about the different working capital accounts?

Tom McCaffrey

Yes. Our expectation is for – just walking through some of the major components. I think we’ve given you the earnings guidance. CapEx for next year should be right around $50 million, which is up from prior years. And that’s really as a result of investments to support the $2.3 billion of the – of awarded, but un-booked SFE programs that we’ll begin to deliver in 2011. So we’ll begin to invest in PP&E into next year. So you should expect CapEx of above $50 million, and for DNA [ph] to be roughly the same amount, but between $50 million and $55 million. And in terms of working capital. You should expect to see some modest improvements in our inventories as well.

Robert Spingarn – Credit Suisse

So, we're going to draw down inventories. Would payables and receivables not be the big driver there?

Tom McCaffrey

That's correct. It will be a modest improvement in inventories next year.

Robert Spingarn – Credit Suisse

Okay. And then just a clarification, Amin, on the new build rates, if you're assuming 2010 production is down on the narrow body. Would that be back-end weighted given that they haven't announced anything yet?

Amin Khoury

It would be. But it is really not – as I mentioned earlier, we have taken into account in our 2010 planning the level of activity that we expect from the air framers. And if there is a reduction, which we expect there will be, it would certainly be in the latter part of the year.

Robert Spingarn – Credit Suisse

Okay. Thank you.

Operator

We'll move now to Oppenheimer and Myles Walton.

Myles Walton – Oppenheimer

Thanks. Good morning. A couple of questions, first, one on tax rate on 2010. What's the (inaudible) on tax rate that you're building to the guidance, and also where the cash tax is expected to be?

Tom McCaffrey

You should assume the tax rate to be about 34% next year. And there will be a modest benefit from deferred taxes. But they'll be–

Myles Walton – Oppenheimer

Okay.

Amin Khoury

It will be almost – will be almost a full cash tax spare at that rate.

Myles Walton – Oppenheimer

Okay. Got it. And then, Amin, for you on a go forward basis, if you were starting to generate cash like it appears you are, does M&A become more attractive given the competitive landscape? Likely, weakened competitors out there, maybe opportunities to make some plays, or is debt pay down the bigger priority at the moment?

Amin Khoury

Debt pay down, debt prepayments are the priority at the present time, but our plan at least for the first half of next year is not to do any further debt pay down, but rather to accumulate cash. And then make to a decision in the third quarter of the year how to apply that cash.

And in fact, we are seeing a lot of opportunities now. As you point out, a lot of our competitors are in – are having great difficulties, looks like M&A multiples are coming down. And there may be some opportunities to do some small things next year. Nothing on the immediate horizon. We’re not involved intensely in any big discussions, or negotiations, or anything like that.

But as you know, we do see a lot of things come across our desk. We do talk about them all the time. Haven’t done anything for quite a while, but there’s a possibility that perhaps in the second half of 2010, assuming things play out the way we believe they will, that we might be looking to do – to apply some of our cash to strengthen our businesses strategically.

Myles Walton – Oppenheimer

Okay. I’ll stick to the two questions. Thanks.

Operator

We’ll move now to Howard Rubel with Jefferies.

Howard Rubel – Jefferies

Thank you very much. Amin, could you address the consumables business, it terms of – what you’re seeing in terms of product demand and mix, and are you in fact, seeing any stock outs or anything like that yet?

Amin Khoury

Stock outs. No. I mean, I think what’s going on our in consumables business is demand from business jet manufacturers is way down. Way down, like 50%–

Howard Rubel – Jefferies

I’m surprised it's not 100.

Amin Khoury

– which is negatively impacting overall demand. We had the first up tic in orders. Bookings in the month of September were pretty nice. Much better than August and much better than the April through August or April through September period. And that gave us a little bit of cause for hope.

And the spares guys as well. They’ve been out talking to all of their – all of our customers and they’ve been pretty much singing the same song. Which is they haven’t bought enough product, they’ve got issues, their spending is plenty to go up and that’s – and that is reflecting itself in current activity. And with respect to – you've mentioned stock outs, with respect – I assume that what you mean is, are we stocking our customers big stock outs or are we stocked out – what do you mean by that, Howard?

Howard Rubel – Jefferies

What I meant is, that as you look at your – maybe your days of inventory relative to demand, are there any areas where you’re seeing unusual pick ups or in fact, there's places where the con – the opposite exists, and you have more than enough for quite some time as you look at your turns? Maybe that’s a better way to have asked it, sorry.

Amin Khoury

Yes. No, I think we have enough inventories. And as Tom mentioned, we don’t expect to have to add to our inventories at a rate that's faster them we're selling inventories next year in our consumables business. Which is one of the reasons that we have so much confidence in our – we have enough confidence in our cash flow forecast to actually forecast the specific number or in excess of a specific number.

So inventories are in good shape. We have the depth that we need. We’re buying what we need, as we need it. I think our customers are – are for the most part, very happy with our service. I think we have solved the service issues with the Honeywell customers that we brought on and it's fairly seamless.

In fact I had a meeting with one of our customers on a totally different subject recently, and the customer couldn’t stop talking about how wonderfully we had turned things around. They had been – they had been a customer of the acquired business, and they were really thrilled with our service.

So we don’t have any inventory issues that we’re dealing with. We’ve got enough inventories. We’re generating cash. We’re confident about fourth quarter cash generation. And we’re confident about 2010 cash generation.

Howard Rubel – Jefferies

And then just as a follow up, if we do the math on the AIT costs and a few other things, you can easily see over $15 million that – plus probably some severance charges this year. And so the set up question a little bit is, why aren’t you being a little more optimistic with the bottom line? Because as we just anniversary [ph] these costs alone, you get offset with the lower revenues. You get flat, and I know you wouldn't just tolerate flat as an acceptable outlook.

Amin Khoury

Is that a forecast?

Howard Rubel – Jefferies

No. No. It's a fast pitch for you to hit.

Amin Khoury

Our revenues are going to be down a little bit next year, compared with this year. Bookings in 2009 have been weak. We're not going to have our first one to one quarter until the fourth quarter of this year. And thank goodness. We're going to knock on the table here.

And new airplane deliveries are going to be down next year. Our revenues are going to be down a little bit. Thank goodness for the retrofit activity, which is in spite of new aircraft delivery being down. Our retrofit activity is keeping our revenues up and our cost reduction activities are allowing to expand margins as revenues go down, which has been quite an effort on our part.

And so, forecasting higher operating earnings on lower sales while we're still taking costs out, I think is pretty – a pretty good effort. If we do better, we'll do better. But we're not finished yet and we'll continue to have AIT costs during the first half of 2010, as we mentioned in our guidance. Our expectation is the second half of 201 won't have any AIT costs in it, and will have the higher margins of the year, and will point to a – will point to a much healthier 2011.

Howard Rubel – Jefferies

Thanks, Amin.

Amin Khoury

Okay.

Operator

(Operator instructions) We'll move now to Eric Hugel with Stephens.

Eric Hugel – Stephens

Hey. Good morning, guys.

Amin Khoury

Good morning.

Tom McCaffrey

Good morning.

Eric Hugel – Stephens

Hey, Amin, can you talk about on the consumable business, where are there – where do you see share gain opportunities, either in terms of geography or adding SKUs? Now that you've pretty much digested the inventory from Honeywell, would you be willing now to add new SKUs if the opportunity arose?

Amin Khoury

Yes. I think the opportunity is there. And its electrical components, bearings, and seals, I think are the most important ones. There are a few – there are a few additional – few is not the right word. There are some additional opportunities in the fastener side as well. I think we'll become more aggressive about that in the second and third quarters of next year.

Right now, we are intensely involved in completing the integration of the – of the HCS business. We're right in the midst now of integrating some customers – very large customers, customers that generate tens of millions of dollars of revenues for us. And moving them from the old DTEX computer system – HCS system, to ours. And it is a major activity.

So that is going on. It's been successful with every customer we've moved on, so far. But it is demanding all of the internal resources which we have, just to do a good job of managing that transition. We don't expect that to be finished, as we reported earlier, until the end of the first quarter of next year, first quarter of 2010. And then, for all activity relative there to be ended before June of next year.

So the answer is, yes. There are opportunities. But in the very near term, for the next few months, we are so occupied with completing the integration. Which, by the way, has been magnificent. It has gone very smoothly.

Obviously, we've had some issues and so forth. We've had some surprises, but nothing that we couldn't handle. And it really has gone very, very well. I think we're handling the operating issues that have arisen very well. And we expect to, as they say, complete this by around the end of the first quarter of this coming year.

Eric Hugel – Stephens

With regards to geography, would you guys benefit like when you expanded into Hamburg for Europe? Would you guys benefit with a larger facility – I think you don't have one in Asia. Is there opportunity there?

Amin Khoury

There is a lot of opportunity in Europe. We have just completed our Hamburg expansion. It's operating very well. It's a pretty good-sized business. We're expanding our European sales force. So while we are reducing head count, we are growing in certain areas.

We have set-up two facilities, one in the Middle East, and one in Asia now – two in Asia. We've just set-up our second one in Asia. So there are opportunities to grow geographically, not only in Europe, but certainly in China, Asia, and in the Middle East.

Eric Hugel – Stephens

And just a follow-up. I remember initially when you acquired HCS, there were a number of large logistic support types of contracts that were, I guess, dis-priced [ph] or the pricing on them wasn’t too good, and it was a matter of rolling those contracts over re-bidding them. Could you talk to us about how things are going there, when we could expect to see some progress on that front?

Amin Khoury

Yes. We should see some progress in 2010. We should see some margin improvement on some programs, which have died a natural death at the end of December – will have died a natural death by the end of December 2009, and those had been renegotiated at – on a proper basis. So 2010 margins are expected to improve in the consumable business versus 2009. I think we have one or two contracts left, which don’t expire until the end of 2010. But we’re pretty much through all of that.

Eric Hugel – Stephens

So you haven’t lost any customers?

Amin Khoury

We haven’t lost any customers? I don’t know that I can say we’ve never – we've never–

Eric Hugel – Stephens

Well, so basically, you haven’t lost any customers that you didn’t really want to lose.

Amin Khoury

Oh, that’s correct.

Eric Hugel – Stephens

Okay, great. Thanks a lot, guys.

Operator

We’ll move now in Macquarie Capital and Lucy Gao.

Lucy Gao – Macquarie Capital

Good morning. I was looking at a presentation that you did earlier this year. You mentioned that in the last cycle, after market consumables demand returned after two quarters post-9/11 and spares demand returned after ten quarters, I was wondering what are you seeing different in this cycle? It looks like spares are coming back sooner than last cycle?

Amin Khoury

Yes. If our customers are telling us the truth and we believe they are, and if we look at our booking trends, it appears that the spares business is going to be better in 2010 than it was in 2009. In thinking through the number of quarters and trying to determine whether it’s more or less the same as it was after September 11th, I think our first down quarter was the first quarter of 2008.

If you remember the price of oil spiked, I think, during the second quarter of 2008, airlines began to panic pretty quickly, especially those in the US. And as I remember, our first down quarter, I believe, was about the third quarter of 2008. So we will have had two down quarters in 2008, and four in 2009. I think that’s it. I think 2010 looks like it’s going to be a better year than 2009, better – based on the discussions, which we’re having with the customers and the trend in booking. So it looks like it’s going to have been a six or seven-quarter kind of problem as compared to ten after the events of September 11.

Lucy Gao – Macquarie Capital

And then maybe just following up on the recovery in spares and also RFQ activity, are you seeing any geographies that are better than others? I know you've mentioned that Asia and the Middle East are recovering sooner. But are you seeing anything in your customer base?

Amin Khoury

Why don't I ask Mike to jump in and talk about geography and RFQ generally.

Mike Baughan

Sure, Amin and Lucy, yes. We're encouraged by what we've seen in the last three of four months. I think we've seen a noticeable uptick in activity, in market activity for the cabin interiors products, both for new aircraft and for retrofit. I mean, it starts with in an increased dialogue and level of discussions with airlines, and certainly that's happened. But more recently, the last couple of months or so, we've seen an uptick in actual RF fees, both for new aircraft and for retrofit.

And these discussions are all geographies. I mean, the Middle East continues to be very strong. But I would say that this is an uptick that we've seen pretty much in all regions. The kind of things that we're looking at involve new higher density layouts, and cabins, and local changes. It can be anything from taking a galley out of an aero body to put more seats in, or to put a higher density lie-flat business class seat in the cabin, or weight reduction options, those sort of things.

I'd like to talk a little bit about retrofit because we're seeing a considerable change and improvement in the retrofit market. And I would – I guess, I'd start by just the thing that airlines pursue retrofit programs either to increase yield or reduce costs. There are very hard financial benefits to doing a retrofit program. And in doing those, an airline has to commonize [ph] and harmonize its fleet. It's very difficult for an airline to introduce new cabin interiors, on the 777 for instance, and not also do it on its 8330. They need to provide a common brand identity and service offerings to their customers. And a common interior also does not still reduce their operating costs and logistical complexity.

What we're seeing now is that a number of these major airlines are having to make new interiors decision to support new aircraft buys, 787s or 777s for instance. And they're using the occasion of those new aircraft buys to think about and strategize how they're going to migrate that new technology into the rest of their fleet.

Probably, the best example of that now would be what we're doing with AirFrance. AirFrance flies 777s and 8330s. They're also introducing now to their fleet new 8380s and new 777s. Because of the new 8380s and the new 777s, they had to make a decision about what do they want to do with business class. They made the decision to go with lie-flat business class. They have now expanded that out through the rest of their fleet, so their retrofit 777s and their retrofit 8330s. And we're in the process of embodying – such that aircraft now, most of those deliveries will be 2010 and 2011.

In addition, AirFrance has made a decision to put a new class of service in its entire fleet, premium economy. That didn't exist before. And AirFrance can't simply think about putting premium economy in its 8380s. It needs to have a solution that works also for the gusts of its fleet, the 8330s and the 777s. So AirFrance has selected us to put premium economy in their entire fleet, 80% or so of that order will be retrofit.

And those deliveries will happen, again, primarily in the 2010, 2011 period. So that's an example, I think, of the dynamics that we're talking about, in this case the premium economy. They're replacing 40 coach seats or so in the aircraft with 22 premium economy, and enhancing yield. They're optimizing the yield and density equation of their fleet. And there are other opportunities like that that we are in discussions now with a variety of customers, customers that are taking 78s or new 777s, and like AirFrance, are trying to think about how do we move our new technology throughout our entire fleet.

So the RFQs, in summary, there's new technology in the market that can substantially increase yields or reduce costs for the airlines. As they introduce that into the new fleet that has to migrate into the existing fleet and taken together, that's going to drive, we think, increased bookings in 2010 and revenue generation in '11 and '12 for that type of activity.

Lucy Gao – Macquarie Capital

That's great detail. Thanks very much.

Greg Powell

Jessica, I think, is that it for the questions?

Operator

There are no more questions.

Greg Powell

Okay. Great. Well, thank you for joining us on the call today. And as always, if you have a follow-up, feel free to give me a call.

Amin Khoury

Thanks, everybody. Have a nice day.

Operator

Ladies and gentlemen, this concludes today's B/E Aerospace third quarter 2009 earnings conference call. Thank you for participating.

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