B/E Aerospace's (BRO) CEO Amin Khoury on Q2 2014 Results - Earnings Call Transcript

| About: B/E Aerospace (BEAV)

B/E Aerospace, Inc. (NASDAQ:BEAV)

Q2 2014 Earnings Conference Call

July 23, 2014, 08:00 AM ET

Executives

Greg Powell - Vice President, Investor Relations

Amin Khoury - Chairman and Chief Executive Officer

Tom McCaffrey - Senior Vice President and Chief Financial Officer

Werner Lieberherr - Co-Chief Executive Officer

Analysts

Noah Poponak - Goldman Sachs

John Godyn - Morgan Stanley

Robert Spingarn - Credit Suisse

Robert Stallard - Royal Bank of Canada

Howard Rubel - Jefferies

Joe Nadol - JPMorgan

Operator

Good morning. My name is Candice Gribbin, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the B/E Aerospace Second Quarter 2014 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, the conference is being recorded this day, July 23, 2014. 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, Candice. Good morning and thank you for joining us this morning. Today, we are here to discuss our financial results for the second quarter ended June 30, 2014. By now, you should have received a copy of the news release we issued earlier today. If you haven't received it, you'll find a copy on our website. We will begin this morning with remarks from Amin Khoury, our Founder, Chairman and Chief Executive Officer, and then we will take your questions.

For today's call, we have prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page of the B/E Aerospace website at beaerospace.com. In addition, copies of the slides will be posted on our website for you to refer to after the call. Also joining us on the call this morning are Werner Lieberherr, our Co-Chief Executive Officer; and Tom McCaffrey, Senior Vice President and Chief Financial Officer.

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

We will address questions following our prepared remarks. At that time, Candice will provide instructions. We know that there may be a number of questions today. We also understand that it is a very day with other companies reporting. So we will be very mindful of your time. So please help us with that and please limit your questions to no more than two at a time.

Now, I will turn the call over to Amin Khoury.

Amin Khoury

Thank you, Greg, and good morning, everyone. This morning we will discuss our second quarter financial performance, our current market environment, progress on our strategic review including the progress on our initiative to create two independent publicly-traded companies. And finally, we will discuss our outlook.

I am pleased to report that our second quarter 2014 results, exclusive of acquisition expenses, were the best quarterly results in the company's history. Our results included record quarterly revenues, operating earnings, net earnings and earnings per share. I'm also pleased to report that the underlying market for our products and services is robust. May year-to-date global traffic has increased a very strong 6.2%. And over the same period, capacity is up 5.8%, resulting in near record global load factors and yields. In fact, the May US airfare CPI reached the new record and average seat miles or flight hours, the major driver of aftermarket demand, grew by 6%.

Strong traffic growth, record load factors and record yields are continuing to drive record profitability for the global airline industry, which is in its unprecedented fifth successive year of profitability. 2014 airline profits are expected to be up 70% versus 2013, and IATA is projecting the current acceleration in air travel growth will be sustained in the months ahead.

So the aerospace cycle is being driven by continued growth in passenger travel, attendant increases in capacity and the aforementioned unprecedented period of profitability for the airlines. The combination of strong airline profitability, high oil prices and low interest rates have created ideal aircraft ordering conditions. And Boeing and Airbus continue to increase their production rates, supported by record backlogs, which now total in excess of 10,500 aircraft.

These extraordinarily strong industry conditions along with our own multiple company-specific growth drivers are allowing B/E Aerospace to grow revenues and earnings at a superior rate. In addition to the robust industry conditions, our record backlog which is resulting in steady market share gains, our leverage to wide-body aircraft deliveries which are expected to grow at an approximate 12% compound annual growth rate over the next four years, and our $5 billion of awarded but unbooked sole-source programs are the additional specific drivers of growth for B/E Aerospace.

During the quarter, we announced that the Board of Directors and the management team were engaged in a process to explore and evaluate the company's strategic alternative. If you'll bear with us for a very few moments, we'd like to review B/E Aerospace's history. Let's turn to Slide 2. Over the past eight years, revenues have grown at a 19% compound annual growth rate. Our operating earnings have grown at a 27% compound annual growth rate. And our operating margin has expanded 700 basis points over the same time period. This performance has enabled us to create substantial value for our shareholders.

Let's turn to Slide 3. Over the last 10 years, we have far outperformed the S&P 500, achieving a total shareholder return of more than 1500% through the end of 2013. We've also dramatically outperformed the S&P 500 and our aerospace peers during the last one, three and five-year time periods as well.

Let's turn to Slide 4, which indicates total shareholder return comparisons in a 10-year line graph, comparing our returns with the S&P 500 and our peers. This was accomplished through the simultaneous growth and development of all three of our segments, each of which is a global leader in its respective market. Two of our segments, commercial aircraft and business jet, are worldwide leading manufacturing businesses focused on the design development, manufacturing, certification and direct sale on a global basis of aircraft cabin interior products for commercial airliners and business jets.

These two businesses share numerous resources and functions such as research and development, low-cost country sourcing, the drive for operational excellence, aircraft certification capabilities and most importantly an internet relationship at the highest levels throughout our customer base.

On the other hand, our consumables management segment, while the global leader in the distribution of fasteners and consumables to the worldwide airline and aerospace industries, has a totally different DNA than our two manufacturing segments. This business does not design or develop our manufacturing products. Its global sales force is oriented towards the aerospace supply chain rather than a C-Suite and its competition, its information technology systems, its performance measurement metrics and its financial characteristics are quite different from those of our manufacturing segment.

While the manufacturing businesses and the service business have evolved together and performed remarkably well to deliver the extraordinary shareholder returns mentioned earlier, our management and our Board of Directors have concluded that separating these businesses into two global market-leading distinct public companies, manufacturing business and a services business. In order to address the distinct needs of each will result in a further optimization of shareholder value.

The separation of the two businesses is a natural evolution of our company. Both businesses as industry leaders have their critical mass and maturity to benefit from increased management focus and operational flexibility as well as from more tailored capital structures, cash flow allocation policies and compensation structures. We believe we are now at the point where the best growth potential for each business will be realized by creative two independent publicly-traded entities.

One of these entities is the global market leader in the aircraft cabin interior industry, and it is focused on design, develop and manufacturing, certification and direct sales on a global basis of aircraft cabin interior products for both commercial airliners and business jets. We will refer to this business as Manufacturing Co. On Slide 5, you will see that Manufacturing Co's revenues have grown at a 22% compound annual growth rate over the last three years, while operating earnings have grown at a 34% compound annual growth rate over the same time period and operating margin has expanded by 420 basis points.

So Manufacturing Co will consist of our commercial aircraft and business jet segments. It's the largest global manufacturer of a broad portfolio of aircraft cabin interior equipment for both commercial airliners and business jets. Our customers include the airlines, the leasing companies, commercial and biz jet OEM and aircraft completion centers. And we have the industry's largest global product support engineering and sales and R&D organizations. And there's some data for you on Slide 16, which is sort of a summary of how the business breaks down by OEM and aftermarket, business jet versus CAS, and revenues by geography.

Let's turn to Slide 6. Our other business, which is to become the new publicly-traded company by way a tax-free distribution of its shares to the B/E Aerospace shareholders, is also a global market leader. This business, which is focused on distribution, logistics and technical services serving the aerospace and energy services industries, we will refer to as Services Co. On Slide 6, you will see that Services Co's revenues have grown at an 18% compound annual growth rate over the last three years and operating earnings have grown at a 16% compound annual growth rate over the same period.

For the trailing 12 months ended June 30, 2014, Services Co had pro forma revenues of approximately $1.64 billion and pro forma operating earnings of approximately $312 million, representing 19% of revenues. The $312 million of operating earnings excludes the transaction expenses. So Services Co is the world's leading provider of aerospace fasteners, consumables and logistic services to the airline and aerospace industries.

It's a growing provider of technical and logistic services and associated rental equipment for remote oil and gas drilling sites. We have more than 1 million consumable stock keeping units in our consumables business. We have robust information technology systems and highly efficient operations. We are handling 16,000 orders a day. 60% are delivered the same day, and our on-time deliver rate is about 99%. So really outstanding execution in the business. And you can see on the right there that the energy services business on a pro forma basis accounts for about 22% of the total business of $1.64 billion.

So we believe the strategic rationale for the spin-off is very compelling. As standalone entities, the management teams and Boards of Directors of each business will determine the appropriate capital structure, free cash flow allocation policies, growth strategy, compensation system and performance measurement metrics. And through this tax-free distribution, each of the businesses will, post the spin, have the potential to enter into business combinations, including change of control transactions. This separation is the first definitive step resulting from our review of strategic alternatives and we continue to review and aggressively pursue our alternatives to further optimize shareholder value.

Manufacturing Co will focus on executing against its record backlog, continuing to drive innovation and growth through research and development and expects to evolve primarily through organic growth. Mergers and acquisitions or acquisition activity is expected to be less of a factor in the growth and development of Manufacturing Co. And as a result, it is expected that this strong cash flow generating business will be in a position to begin to return cash to shareholders after the separation. In fact, we expect Manufacturing Co will initiate a dividend in 2015 with a payout ratio in line with peers.

Services Co will be structured and capitalized to continue to execute on in-strategy of developing both through organic and inorganic growth and would expect in the near term to redeploy its free cash flow back into the business through product line expansions, through capital expenditures and through M&A. We believe both companies will benefit substantially from greater operational strategic and financial flexibility. Independent structures will enhance focus and more closely align incentives for management with shareholder interests.

Lastly, we expect both companies to be led by highly experienced and talented management teams and Boards of Directors. We expect to file our Form 10 registration statement with the Securities and Exchange Commission in September of 2014, and we expect to be able to effect the distribution of the shares of Services Co to B/E Aerospace shareholders before the end of the first quarter of 2015.

As you know, each year during the third quarter of the year, we undertake our three-year planning process. This process is normally completed by October, at which time the company annually hosts the meeting with the investment community. This year will be somewhat different. In October 2014, while we do plan to meet with investors and provide guidance, this year we expect to provide specific preliminary guidance for 2015 for B/E Aerospace as a whole. And in addition, we plan to provide directional guidance for each of the two businesses to be separated in the first quarter of 2015.

We do expect to deliver strong revenue growth for each of these businesses as they become independent public companies in 2015, and we plan to provide more specific guidance relative there to during our October meeting. In addition, we expect to provide an update on Boards of Director, our management teams and commentary with respect to capital structures and capital allocation policies. We look forward to further updating you as we progress on the separation of the two businesses.

Now let's review our second quarter results. Let's turn to Slide 7. Except as otherwise noted, the second quarter of 2014 results and the commentary on this call would exclude acquisition and strategic review related cost, which aggregated $12.8 million during the quarter. The bar chart on Slide 7 reflects our consolidated second quarter 2014 financial performance compared to the second quarter of 2013. Second quarter 2014 revenues of $1.09 billion increased 28% as compared with the same period of the prior year. Operating earnings were $198 million, an increase of 25%.

And operating margin was 18.2% or 50 basis points lower than the second quarter of the prior year, reflecting higher R&D spending, which is expected to decline significantly in the second half of 2014, and foreign exchange impacts caused by a weaker dollar, which were $3.5 million or about 70 basis points headwind at CAS in the quarter. We expect both of the aforementioned negative impacts to be eliminated in the second half of the year. Second quarter pre-tax profit was up 30% and second quarter earnings per share was $1.13 per share, representing an increasing of 27%.

Let's review Slide 8, which summarizes our current bookings and backlog status. Bookings during the second quarter of 2014 were approximately $1.06 billion, an increase of approximately 20% as compared with the prior-year period. Bookings for the first six months of 2014 increased 29% as compared to the prior-year period. During the first six months of 2014, aircraft cabin interior products awards increased approximately 175% as compared with the prior-year period and were a record for any six-month period. Backlog as of June 30th was approximately $3.9 billion, while awarded but unbooked backlog was approximately $5 billion, bringing total backlog both booked and awarded and unbooked to approximately $8.9 billion.

Now I will briefly review the second quarter operating performance for each of our business segments. Before we turn to Slide 9 to review the second quarter results for our commercial aircraft segment, I would like to comment on the change in our commercial aircraft segment aftermarket OE mix. As a reminder, over the past year, we've been generating approximately 40% of revenues from the aftermarket for this segment. And for this quarter, aftermarket accounted for about 45% of revenues.

It is important to note that our install base of manufactured cabin equipment is growing significantly and is expected to continue to grow strongly over the next several years. This is the direct result of robust sales of super first class and business class seats in addition to SFE equipment such as A350 galleys and 737 lavs, which will substantially expand as we deliver from both our booked and unbooked, but awarded backlog. This is expected to drive margin expansion due to increased spares revenues as a result of the growing install base.

Let's turn to Slide 9. Second quarter commercial aircraft segment revenues increased 25.5%. Operating earnings of $99 million increased 24.5%. And operating margin was 18.3% or 20 basis points lower than the prior-year period. The lower CAS operating margin was primarily due to higher R&D spending and negative foreign exchange headwinds, as mentioned earlier. R&D spending was up significantly as compared with the prior year. Spending related to several developmental programs has now been substantially reduced. And as a result, we expect consolidated R&D spending, which was 6.5% of consolidated revenues in the second quarter, to come in around 5.7% of consolidated revenues for the second half of the year and for second half margins to expand year-over-year.

In addition, foreign exchange impacts caused by a weaker dollar for $3.5 million or about 70 basis points headwind in CAS. We do not expect a negative recurrence on FX during the second half of the year.

Let's turn to Slide 10 and review the second quarter results for our consumables management segment. The leadership team for the consumables management segment delivered a solid quarter. We are really encouraged that the consumables distribution business delivered high single-digit organic revenue growth for the quarter. And on a pro forma basis, as though all acquisitions had been completed on Jan 1, 2013, CMS revenue growth was a solid 12.0%.

CMS margins were weaker than the prior year, reflecting the revenue growth from several new long-term customer agreements that initially carry lower margins until customer inventories have been depleted. So as we begin taking over these accounts, we buy customers' existing inventories on hand at the time we sign the contract. We buy those at the customers' cost, which is one of the factors driving up inventories for CM for the first half of 2014. As these parts are needed, we sell the parts back to the customer and we add a small mark-up to cover our operational expenses. This was and will remain a drive on margins for about a year as we ramp up these programs and burn through customer-owned inventories on these new long-term agreements.

Let's turn to Slide 11 and review the second quarter results for our business jet segment. The business jet segment leadership team also delivered a solid quarter. In addition, during the quarter, we completed the previously announced acquisitions of EMTEQ, Fischer and a small manufacturing technology bolt-on transaction. Biz jet revenues increased by 14.4%. Operating earnings were $20.6 million, an increase of 16.4%. On a GAAP basis, operating earnings were $15.9 million. Operating margin was 16.9%, an increase of 30 basis points. So revenues of about $122 million and operating earnings of around $21 million.

Cash flow from operations in the second quarter of 2014 of $11.4 million reflects the 28% increase in revenues and a corresponding 17.3% increase in working capital as compared with the prior-year period, exclusive of cash and the impact of acquisitions. Capital expenditures to support long-term customer programs as well as recent acquisitions were $66.5 million. During the second quarter of 2014, the company paid approximately $795 million for the recently completed acquisitions. We expect substantially stronger free cash flow in the second half of 2014, and we now expect a full year 2014 free cash flow conversion ratio of approximately 60% of net earnings, reflecting a higher level of capital expenditures to support capital expenditure requirements of the acquired businesses. As mentioned earlier, there will be no acquisitions for the balance of 2014.

As of June 30, 2014, cash was $217 million. Net debt, which represents total long-term debt of $2.6 billion less cash, was $2.4 billion. And the company's net debt to net capital ratio was 45.7%. During the quarter, the company increased its revolving credit facility by $450 million to $1.4 billion, of which approximately $668 million was drawn.

Now let's briefly review our outlook. Our total backlog, both booked and ordered but unbooked of approximately $8.9 billion, our expectation for robust wide-body aircraft deliveries, our expectation of strong revenue growth from our SFE program deliveries and the expectation for continued growth in global passenger travel, all provided basis for our expectation of continued strong revenue growth.

Second half 2014 revenues are expected to grow in excess of 20% as compared with the second half of 2013. We expect CAS revenues will be stronger in the third quarter than in the fourth quarter as a result of scheduled deliveries of customer programs. In addition, we expect solid double-digit pro forma revenue growth for CMS for the balance of the year.

Please turn to Slide 13 and we will review our 2014 guidance. The company expects continued strong bookings in 2014. 2014 revenues are expected to be approximately $4.3 billion. The company raised guidance on March 31 and again on June 10 and now expects 2014 earnings per share of approximately $4.35 per diluted share exclusive of 2014 acquisition and strategic review related cost, representing an increase of approximately 23% as compared to 2013 earnings per diluted share, similarly adjusted to exclude 2013 acquisition expenses.

2014 free cash flow conversion ratio is expected to be approximately 60% of net earnings, reflecting a higher level of CapEx to support capital expenditure requirement of the acquired businesses.

With that, I will now turn the call back over to Greg.

Greg Powell

Thank you, Amin. Candice, can you tell everybody how to prepare the questions and get in the queue. Please limit your questions to no more than two at a time. Candice?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs

On the consumables margin, it sounds like a lot of moving pieces in the quarter and you're still settling out some acquired revenue in there. I wondered if maybe you could talk about what the right margin for that segment is. A year, a year-and-a-half out when you've lapped the drag you just mentioned and all the recent acquisitions have settled in, how do we think about the right medium to long-term margin there?

Amin Khoury

I think we should expect some margin expansion in the business, but we will have a drag for the next several quarters as we integrate these brand new programs. So I did mention that the consumables business had single-digit organic growth. We booked the number of new programs. In those programs, we had the buyback from the customer, the customer inventories that hadn't yet depleted. We basically sell those back to the customer with a small fees to cover our operating expenses. So we have a little of any margin on those programs. That's not unusual. What is unusual is the number of new programs and the sizes of the programs.

So I think on the one hand, it bodes really well for growth of the business. On the other hand, there'll be a drag on margins for some period of time until we get through the startup period for these programs. And by the way, all of the inventories which we buy back from these customers are guaranteed by the customers. They buy back 100% of the inventory. And if they haven't bought them back by some time certain, we sell them back at those costs.

Noah Poponak - Goldman Sachs

So when we're beyond that into the second half of '15 or into '16, should we think about this being back over 20% where it was on an adjusted basis the last few years, or is it too hard to tell?

Amin Khoury

Rather than giving a specific numerical target, I think that you should expect after we work these in and complete our innovations here that margins should expand nicely in the business. Look for healthy margins in 2015/2016.

Noah Poponak - Goldman Sachs

And on the cash flow, is it possible to break out, Tom, in the D&A increase, how much of that was dealer-related intangible amortization step-up versus how much of that was just in the underlying business? And did you give a new full-year CapEx number?

Tom McCaffrey

In terms of CapEx, I'll answer that first, we do expect to sustain a higher level of CapEx than we had earlier planned to support the acquisitions. And CapEx ought to be in the neighborhood of about $225 million for the full year, which is the reason why we adjusted our free cash flow conversion ratio to about 60% of net earnings for 2014. I don't have the breakdown here with me. It may be great to get into after the call in terms of the increase in D&A associated with acquisitions. But I think Amin touched on it in the prepared remarks that cash from operations, while it was $11.4 million, it reflected the 28% increase in revenues and the 17% increase in working capital, exclusive of the acquisition impact.

June was our biggest revenue month in the company's history and that grew over $60 million increase in receivables. And all of the super first class program wins that we've had have, which have been in the neighborhood of 85% or 90% market share, is remarkably strong. There is a driver behind about the lion's share of the $65 million increase in inventories. So we expect very strong cash flows in the second half of the year. It just happened to line up this quarter.

Operator

We'll move now to John Godyn with Morgan Stanley.

John Godyn - Morgan Stanley

I was hoping to just hear a little bit about the guidance for 2014 and kind of bridging it. I mean the business momentum in the first half has been phenomenal. If I just assume that second quarter earnings is the right mark for the third and the fourth quarter and actually I think there's a case to be made that it goes higher, I'd be considerably above the guidance for 2014. So I'm just curious, is there a reason to believe that earnings momentum decelerates, or how do I bridge that?

Amin Khoury

We do understand your question and we have raised guidance in each of the first two quarters of this year, as we have overachieved versus expectations. In fact, in the second quarter, we delivered $1.13 compared with consensus estimate of $1.07. So it was a remarkably strong quarter. I would say let's see how we do in the third quarter. And if warranted, we will increase guidance at that time. We're just not ready to have another raise at this point in time. We have raised in both first and second quarters. And our guidance is our guidance, which is $4.35 and $4.3 billion in revenues. And we will assess the situation as we go through the third quarter and we'll see whether another guidance raise is warranted. Okay?

John Godyn - Morgan Stanley

And then, Amin, you had pointed out that the strategic review continues in that the announcement of the split was really just sort of the first step. Of course companies are always looking at strategic alternatives. But with respect to this process specifically, when do you expect the timeline to complete?

Amin Khoury

Our expectation is that the services business will be spun off from the corporation, from B/E Aerospace before the end of the first quarter of 2015. We are continuing to evaluate our alternatives. The process is well underway. We have, I think, announced a team of advisors. And we are doing our work and when we have something additional to say, we will do so. I couldn't comment more than that at this point in time.

Operator

We'll move now to Robert Spingarn with Credit Suisse.

Robert Spingarn - Credit Suisse

Amin, your second half revenue, the 27% that you mentioned, how should we think about that in terms of organic growth, just because you've had so many acquisitions in there, so many wooden pieces?

Amin Khoury

Organic growth in the quarter was 16.8%.

Robert Spingarn - Credit Suisse

You're talking about in the remainder of the year?

Amin Khoury

What we said was we expected revenue growth to be in excess of 20%, I think, for the second half of the year compared to the second half of last year. We don't have the information as to what amount of that growth is organic, what is expected to be organic and what is expected to be acquisition. I can tell you that in the second quarter, we reported 28% revenue growth, and that growth was 16.8% on a pro forma basis, so 17% organic and the balance was acquisition.

Robert Spingarn - Credit Suisse

Tom, on the cash flow and particularly with regard to the future, the concept of a dividend at the manufacturing business and then reinvesting in consumables, could you give us some sense in that time period what the different conversions are? Obviously one is higher than the other. And the presumption in the past has been that the strong cash flow in manufacturing was to some extent funding inventory build for consumables, given your stock-based model. So how do we think about that going forward? Should we expect cash conversion to be materially lower than one-time at consumables? You've given the 60% number here, but that's more near term. How do we think about it long term?

Tom McCaffrey

First of all, we do intend in October, when we get together to talk about the businesses, to try and provide a little bit better clarity with respect to expectations on each of the businesses post the split in terms of capital allocation and some directional guidance that we would look at. We will, Amin mentioned, be establishing a dividend. Our expectation is that we will do that in the legacy B/E Aerospace. And we'll talk about capital allocation policies at that time. In terms of cash flow conversion for 2015 for our business that hasn't been spun off yet, we're not ready to talk about that.

Amin Khoury

From a capital allocation perspective, as you know, we've not historically paid a dividend or done share repurchases. And as you pointed out, we've taken the strong cash flow generated from the manufacturing business and we built the consumables business. And we haven't been able to pay dividends also because our business has been growing so rapidly. So Manufacturing Co will and does generate strong free cash flow. And with a more limited M&A agenda to execute on, we would expect to initiate a regular dividend in 2015 with a payout ratio consistent with our peers. So we believe we're going to have cash to do M&A, cash to pay dividends, cash to pay down debt. And the capital structure and the type of debt will reflect that.

Services Co has more significant capital investment requirements and will drive growth both organically and inorganically. And as such, you should expect that investing in the business will remain the first priority. But the boards of each company will need to make those final decisions. We believe that Services Co has tremendous growth ahead both organically and through M&A. So in the second quarter, the consumables distribution business and the energy services business both delivered strong organic revenue growth. That's our expectation on a going forward basis as well.

And while we can't give you specifics now, I think we will try to do that in October. We will give you, as I mentioned earlier, directional information not only about each of the businesses that is Manufacturing and Services, we'll give you specific guidance with respect to the corporation as a whole.

Robert Spingarn - Credit Suisse

The purpose of the question, of course, is once you separate the businesses, CMS no longer has access to CAS cash. And obviously you're now going to be able to pay that dividend at CAS. And I was wanting to know how things would work at CMS.

Amin Khoury

CMS is a good cash generator. It doesn't generate the kind of cash that manufacturing does, but it's a very good cash generator. The CAS is going to be able to finance its growth, there's no question about that.

Operator

Jason Gursky with Citi has our next question.

Unidentified Analyst

It's actually (inaudible) for Jason. In the quarter, you did raise guidance by $0.05. You referenced energy business going better than expected. I was wondering if you can add some color on that, especially with regard to how energy margins could actually provide some upside in CMS.

Amin Khoury

As I mentioned earlier, the energy business on a pro forma basis now accounts for 22% of the CM segment, and the margins of the CM segment are excellent margins, which include the 20% plus 22% from energy. And as I mentioned in response to an earlier question, we expect margins in our consumables segment, which includes both the consumables business and the energy services business, to begin to expand solidly once we get through these startups on the large new contracts in the consumables business. So energy is going to carry its share of the load, no doubt about it. Its margins are comparable to those of consumables.

Unidentified Analyst

And then as a quick follow-up in terms of the activity that you saw with those long-term agreements, was that a strategic decision on your part to pursue more, or are you seeing more suppliers looking to outsource more of their inventory? Just wondering what's behind the size and number of the long-term agreements being higher, being unusual in your words.

Amin Khoury

We did announce that we had signed a couple of very large agreements at the end of last year. And we had three agreements which had been significant market share gains for us. So on the one end, we've got all this high organic growth rate in consumables business. On the other hand, these new programs will take a while to work through the customer inventories.

Operator

We'll go now to Robert Stallard with Royal Bank of Canada.

Robert Stallard - Royal Bank of Canada

Amin, I was wondering if you could start on the cabin upgrade situation. How far do you think we are through the global airlines upgrading of their wide-body cabins in terms of orders coming in to you?

Amin Khoury

I think we are actually just in the beginning. I mean A350 is a brand new airplane which hasn't been delivered. 787 is just rolling out. 777X is causing all kinds of consternation and activity in terms of our being able to respond to request for quotations. The combination of Airbus having introduced the NEO and introducing A350 and the A380 and Boeing having introduced the 777X as well as the MAX on the narrow-body side and now rolling out 787s in quantity for the first time has really got everybody in our industry really, really busy, working like hell to try to respond to request for quotations, quotations on retrofit programs, so that they can form their fleets. We had a lot of brand new cabin interior equipment that's going into these aircraft. Tom mentioned the big build for example in inventories in the quarter at our super first class business, because we got a record backlog there. We're building the product. We're rolling it out. And a lot of it has to do with brand new airplanes. So on the A350 galleys, we are up to our necks getting galleys out. During my career in this business, which is almost 30 years now, there's never been a period like this.

Robert Stallard - Royal Bank of Canada

So we shouldn't be too worried then perhaps that OEM aircraft orders are peaked, because your orders for upgrades and retrofits are lagging there?

Amin Khoury

Only aircraft orders have peaked. I mean they have 10,500 airplane backlog. And the deliveries as a percentage of that backlog are very modest. They're conservative. And I think the combination there we have of high oil prices, low interest rates, record travel airline profitability, I mean it doesn't get much better. So I think we should expect a sustained period here of elevated deliveries. And the companies that are supplying equipment for these airplanes are going to have elevated revenues, I think, for a long period of time. I don't think that this is one of those situations where we have a cyclical peak and a drop. I think it's going to plateau and grow slowly at a very high level.

Robert Stallard - Royal Bank of Canada

Why do you think there won't be any FX pressure in the second half?

Tom McCaffrey

It's really a balance sheet conversion. So we're just assuming that rates remain more or less in the neighborhood where they're at. The dollar-pound exchange rate changed pretty significantly during the quarter, which caused the headwind.

Operator

Howard Rubel with Jefferies has our next question.

Howard Rubel - Jefferies

Amin, you've announced some changes to the Board and you've now made some progress with the proxy. Can you elaborate a little bit along the lines of what sort of proposals you've received?

Amin Khoury

Yeah, you're right. We did announce some changes to our Board. We continue to refresh its strength. But in fact, we've added three new Directors since 2012. Most recently, we appointed Dave Anderson to the Board, who has a strong financial background, a deep understanding of the aerospace industry. We announced that my brother had retired. So the Board has been refreshed and expanded, I think. And in terms of the proxy or whatever, I think we've announced that a record date to the Annual Meeting is August 1 that we expect the annual shareholders meeting to happen on September 10th. And at this point, we have no proposals from any shareholders for our annual meeting.

Howard Rubel - Jefferies

And then just as a follow-up, could you just talk for a moment about integrating the energy businesses into the operations and how has that been going? I mean obviously the numbers say well. But there is sort of two parts to that. One is, can you talk a little bit about. And then second is, what were the integration costs in the quarter separate from, call it, the larger spin deal costs?

Amin Khoury

I think we reported in early June that the acquisitions were going to generate $10 million or so of expenses. The total that we had for the quarter, I think, was $12.8 million. So the vast majority was acquisition related expenses. During the quarter, we had six acquisitions. And I will focus, in response to your question, not on EMTEQ or Fischer or the other technology company provided to the services side.

So the services side, CMS completed the earlier announced Vision Oil Tools transaction and two other service business bolt-on transactions for an aggregate purchase price of approximately $256 million in cash. And they're reported as part of the consumables management segment. And through our Vision Oil Tools transaction, we expanded our technical services capabilities into the Williston Basin, Bakken, Rocky Mountain regions. And we added our division general manager and controller, both of whom have sterling credentials and industry backgrounds. The other bolt-ons expanded and strengthened our geographic coverage in the Eagle Ford, the Permian and the Utica basins.

And as mentioned during our prepared remarks, we don't anticipate any further acquisitions in 2014. So while there are startup expenses and integration expenses and so on and so forth, we can break them out. We can just absorb them. They're part of the operating margin in the CM business. And the energy business on a pro forma basis now accounts for 22% of the CM segment. So I don't know how much we spent on integration, but it's part of our cost and part of our margin, and we just didn't break it out.

Tom McCaffrey

One way to answer it in terms of activities that have been going on, we have established our group headquarters in Houston. As Amin mentioned that we've got the group's GM and VP of Finance along with safety and a lot of the other key functions in the group headquarter out there. They're individuals that have been in the industry basically for their entire career, some in the financial side, public accounting and so on. So a good well rounded experienced individuals that have been around this sector before, they're in the process of bringing the teams together, building their plans and getting brought on board with respect to our entire methodology and the whole lot of boarding process. I would say it's going remarkably well, because it's just a really good entrepreneurial team that is all working together.

Operator

We'll move now to JPMorgan's Joe Nadol.

Joe Nadol - JPMorgan

Amin, just on the backlog in the bookings, you are flat sequentially in Q2. You had probably some additions from the acquisitions. Year-to-date you're up a bit from 8.8% to 8.9%. But then you said in October when you give your guidance, you prelude it by saying you're going to look for strong revenue growth for those businesses next year. Could you help square that? Are you looking for strong bookings in the second half? Can you give maybe a bookings or a backlog target by yearend, anything along those lines?

Werner Lieberherr

As you know, first quarter was a blowout quarter of awards and bookings. We announced approximately $600 million seating awards from seven airlines and first quarter bookings of $1.1 billion, a record for any quarter. Second quarter bookings are also very strong at more than $1.06 billion and up 20% over the prior-year period. Bookings for the first six months of 2014 increased 29% as compared to the prior-year period. During the first six months of 2014, aircraft cabin interior products awards increased approximately 175% as compared with the prior-year period and a record for every six-month period.

So when you look at that, yes, we continue our strong win ratio. For the first six months of the year, we won actually more than 90% of first class seating programs, over 60% of business class seating programs and about 50% of economy class seating programs. We also won over 80% of the food and beverage preparation and storage equipment awards. So from a booking and awards perspective, second quarter 2014 was a success.

We continue to expect strong bookings in 2014, driven by our record backlog to robust wide-body aircraft delivery outlook, as you heard from Amin, bookings from prior SFE awarded programs and the continuing improvement in aftermarket demand.

Amin Khoury

Yeah, I guess if we deliver 28% revenue growth and the book-to-bill is 1-to-1, that's pretty darn good. I'm not sure what the issue is. We're not going to project a specific level of bookings for the future period, but we expect bookings to continue to be strong for all the reasons I mentioned in my prepared remarks.

Tom McCaffrey

Joe, the energy businesses really don't carry a backlog. So it's not like there was some addition as a result of those acquisitions.

Joe Nadol - JPMorgan

My other question is you can add to this, maybe you can't, Amin, but you continue to say that you continue to evaluate other alternatives. And my only question on that is would any of the alternatives disrupt your plan to split the company in two in Q1 of next year?

Amin Khoury

We have really spent a tremendous amount of time on this with some pretty bright people helping us at Citi and at Goldman and at JPMorgan and at Shearman & Sterling. We've had numerous board meetings. We've evaluated so many different alternatives. So I think that the probability that the services business gets spun off as a freestanding public company before the end of the first quarter is a very, very high probability. I think you should expect that that is going to happen. We nevertheless continue to review all of our alternatives. We continue to evaluate other prospects. Obviously if someone were to log in a bid for one of the two businesses, which would generate a return on an after-tax basis, which we think would be substantially higher than the expected trading price of the two companies in aggregate, we would evaluate it. Obviously we would evaluate it. And that's what we do and that's what we are doing. But our expectation is very high that whatever we do that the consumables segment will be a freestanding public company in 2015.

Operator

We are now at the 9 o'clock hour and this will conclude our question-and-answer session. Mr. Powell, I would turn the conference back to you for closing comments.

Greg Powell

Thank you for joining us this morning. I look forward to talking to you in October. Have a good day.

Amin Khoury

Thank you. Bye, bye.

Operator

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

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