BE Aerospace's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: B/E Aerospace (BEAV)

BE Aerospace (NASDAQ:BEAV)

Q3 2011 Earnings Call

October 26, 2011 9:00 am ET

Executives

Greg Powell - Vice President of Investor Relations

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

W. Lieberherr - President and Chief Operating Officer

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

Unknown Executive -

Analysts

Eric Hugel - Stephens Inc., Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Julie Yates - Crédit Suisse AG, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division

F. Carter Leake - BB&T Capital Markets, Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Amit Mehrotra - Deutsche Bank AG, Research Division

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 2011 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded this day, October 26, 2011. 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, and thank you for joining us this morning. Today, we're here to discuss our financial results for the third quarter, ended September 30, 2011. 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, 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 website at beaerospace.com. In addition, copies of the slides will be posted on the website for you to refer to after the call. Joining us on the call this morning are Werner Lieberherr, President and Chief Operating Officer; and Tom McCaffrey, Senior Vice President and Chief Financial Officer. As always, in our prepared remarks and in responses to your questions, we rely on the Safe Harbor exemptions under the various securities acts and our Safe Harbor statement in the company's filings with the SEC. We will address questions following our prepared remarks. At that time, Jessica will provide instructions. Please limit your questions to no more than 2 at a time. And now I'd like to turn the call over to Amin Khoury.

Amin J. Khoury

Thank you, Greg, and good morning, everyone. Demand for our products is increasing, consistent with the start of what is expected to be a very strong new aircraft delivery cycle. Our backlog, both booked and awarded but unbooked, reached another record during the third quarter and now stands at almost $7 billion, up 26% as compared to September 30 of last year. Booked orders for the 9-month year-to-date period are up 38%, versus the same 9-month period of last year. Our solid 9-month year-to-date results include revenues up 28%, operating earnings up 36%, earnings per share up 51%, a free cash flow conversion ratio of 105% and as mentioned a moment ago, orders of 38%.

Our 9-month operating margin of 17.3%, a 110 basis point improvement, as compared with 2010, was driven by substantial margin expansion in both our Commercial Aircraft and Business Jet segments, which more than offset the margin drag, from the recent acquisitions in the Consumables segment, which have not yet been integrated.

As a result of our solid year-to-date results, we are increasing our full year 2011 guidance to approximately $2.20 per diluted share. Now let's briefly discuss the current commercial aerospace market environment. Although the outlook for global GDP growth is slower than previously expected, demand for our products is strong consistent with solid traffic growth, market capacity expansion, near record high load factors, the onset of a new strong wide-body delivery aircraft, delivery cycle, and a solidly profitable global airline industry. In addition to the foregoing, B/E Aerospace is benefiting from a very high-quality geographically diversified customer base. Asia-Pac and Middle Eastern carriers now represent approximately 43% of the aggregate Boeing and Airbus backlog. Capacity growth and fleet expansion are necessary to provide lift for the very large and growing middle classes in the developing countries where people are just beginning to travel. Much like we experienced in the United States in the 1960s. In fact, it is expected that Asia alone will become the largest traffic region by 2015, ahead of both North America and Europe.

Importantly, the B/E Aerospace backlog has very similar characteristics as those of Boeing and Airbus. Approximately 40% of our total backlog is with customers in the emerging markets. So in spite of what we hear and read daily about the slowing global economy, global passenger traffic continues to grow and airline load factors and yields are near all-time highs. Global airline passenger traffic was up approximately 4.5% in September, and year-to-date through September was up approximately 6.1%. While the growth of premium international travelers slowed somewhat in August, it was up 2.3% as compared to August 2010 and premium travel is up a very strong 7.5% year-to-date through August.

Global load factors are at historically high levels. For August, the global load factor was 81.4%. Traffic and capacity growth rates have now converged and are forecast to grow at roughly the same rate of approximately 5% in 2012. Manageable fuel prices, solid yields and tight capacity have helped the airline industry's operating performance. As a result, IATA has increased it's profit expectations and now expects for global airline industry to turn in a solidly profitable year with global airlines generating approximately $7 billion of profit.

The 2010 to 2012 period represents the first time in more than a decade that the industry will have experienced 3 consecutive years of solid profitability. Now let's turn to Slide 2 and discuss our third quarter financial results.

I am pleased to report that all 3 of our operating segments performed well during the quarter. The bar chart on Slide 2 reflects our third quarter 2011 financial performance compared to the third quarter of 2010. Revenues increased 28% to $636 million. Operating earnings of $112 million increased 34%. Operating margin expanded 80 basis points to 17.6%. Pretax profit increased by 39%, and earnings per share of $0.64 increased 56%. Third quarter free cash flow generation of $69 million represents a free cash flow conversion ratio of 105% of net earnings.

Let's review Slide 3 which summarizes our current bookings and backlog status. Demand for our products as mentioned before, is increasing consistent with the start of what is expected to be a very strong new aircraft delivery cycle. Approximately 60% of our orders during the third quarter were driven by new-buy aircraft. Orders for the 9-month year-to-date period were up 38% as compared to the prior year 9-month period and our backlog both booked and awarded but unbooked, reached another record and now stands at almost $7 billion, an increase of approximately 26% as compared with September 30, 2010. Book backlog at the end of the quarter was approximately $3.45 billion, an increase of approximately 21% as compared with the company's September 30, 2010 backlog and the supplier furnished equipment backlog increased to approximately $3.5 billion.

Before we discuss performance in each of our segments, I'd like to ask Werner, to briefly review some of the operating highlights which are driving our ongoing margin expansion.

W. Lieberherr

Thank you, Amin. We continue to expand and to drive our corporate operational efficiencies and supply chain initiatives throughout the company. This year, we have significantly expanded our low-cost concrete activities. Our year-to-date coverage supply chain initiatives have been very successful, generating approximately $20 million of savings as compared with the first 9 months of 2010.

Because of our reputation for our very high quality workmanship to utilize the rigorous process to ensure that our LTC suppliers meet all of our quality standards. Each supplier must pass our first optical inspection process and must pass certifications for each and every part. In addition, once approved, our permanently site of local teams continually monitor quality and on-time delivery. We also conduct frequent unannounced supply audit. LCCs often generate savings of approximately 30% for each comps that we saw as NCC and during the third quarter, our total LCC spend has increased approximately 30% as compared to the third quarter of 2010.

As you know, both Boeing and Airbus are raising delivery rates in a strategic and neat succession. Working with both major OEMs on their entire single-aisle and twin-aisle platforms, we conduct continues rate readiness reviews on our production safety and throughout our supply chain. We are a gold-rated supplier at Boeing and last year, Airbus named us its supplier of the year. It is interesting to note that the seating industries year-to-date on-time delivery rates to Boeing is approximately 60% which includes the aerospace at 100%. I will now turn it back to over to Amin.

Amin J. Khoury

Thank you, Werner. Now I'll briefly review the third quarter operating performance for each of our business segments. Let's turn to Slide 4, and review the third quarter results for our Commercial Aircraft segment. The Commercial Aircraft segment leadership team again turned in an outstanding performance during the quarter. Revenues of $333 million increased 33%, operating earnings of $56.6 million increased 46.3%. Operating margin of 17% expanded 150 basis points as compared with the prior-year period, primarily due to an improved revenue mix and ongoing operational efficiency initiatives.

Let's turn to Slide 5 and review third quarter results for our Consumables Management segment. The leadership team for the Consumables Management segment also delivered a strong quarter. Revenues of $238.7 million increased 23.6%. Operating earnings of $47.6 million increased 17.5% and operating margin was 19.9%. Current period operating margin reflects the recent acquisitions of Satair and LaSalle, which have lower operating margins than the legacy CMS business. Organic operating margin excluding recent acquisitions for the third quarter of 2011 was approximately 21.2% up 20 basis points as compared with the prior-year period.

Organic revenue growth excluding recent acquisitions was approximately 9% and excluding both recent acquisitions and sales to military and business jet customers, growth was approximately 15%.

Let's turn to Slide 6 and review the third quarter results for our Business Jet segment. The Business Jet segment leadership team is beginning to hit it's stride, and delivered another substantial improvement in results for the third quarter. Revenues of $64.2 million increased 24.2%. Operating earnings of $7.9 million increased $3.7 million or 88%. Operating margin of 12.3% expanded 420 basis points, reflecting both the increase in revenues and an improved mix of revenues.

Let's now briefly review our financial position on Slide 7. Third quarter free cash flow of $69 million represents a free cash flow conversion ratio of 105%. For the first 9 months, free cash flow was $179 million and the free cash flow conversion ratio was 105%. As of September 30, 2011, cash was $265 million. Net debt which represents total debt of $1.245 billion, less cash was $981 million and the company's net debt through net capital ratio has now declined to 35%. As of September 30, 2011, the company had no borrowings outstanding on it's $750 million revolving credit facility and the company has no debt maturities until July 2018.

Now let's briefly review our outlook. As a result of our solid year-to-date 9-month results, we have increased full year 2011 guidance by approximately $0.10 per share to approximately $2.20 per diluted share. An increase of approximately 55% as compared to 2010 and approximately $0.30 per share or 16% higher than the 2011 guidance we provided 1 year ago. Looking out a little further at our expectations for 2012 and based on our record backlog both booked and awarded but unbooked of almost $7 billion, our expectation for continued growth in global passenger traffic of -- and attendant increases in capacity and our expectation of significantly higher levels of wide-body aircraft deliveries, we expect strong full-year 2012 earnings of approximately $2.65 per diluted share representing 2012 earnings per share growth of approximately 24% on a comparable tax rate basis. Looking further ahead, we are optimistic due to our record backlog, the expected robust wide-body delivery cycle and continued global growth in passenger traffic. Now let's go to Slide 8 and review our 2012 financial performance.

Company expects total backlog growth in 2012 driven by the strong wide-body aircraft delivery cycle, additional SFE awards and strong aftermarket demand for retrofit refurbishment and spares. In addition, we are expecting continued growth in consumables demand driven primarily by the expected continuing growth in global passenger traffic and capacity. 2012 revenues are expected to be approximately $2.8 billion or approximately 12% higher than 2011 expected revenues of approximately $2.5 billion. The company expects full year 2012 earnings of approximately $2.65 per diluted share representing an increase of approximately 24% as compared with expected 2011 earnings per diluted share on a comparable tax rate basis. 2012 free cash flow conversion ratio is expected to be approximately 100% of net earnings. And with that, I'll now turn the call back over to Greg.

Greg Powell

Jessica, I'm going to ask you to give the instructions for the Q&A and we'll open that up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] All right, we'll move now to Myles Walton with Deutsche Bank.

Amit Mehrotra - Deutsche Bank AG, Research Division

Amit Mehrotra here for Myles Walton, can you just provide a little bit more color on the Consumables business, specifically some color on how the spares performed during the quarter in that business?

Amin J. Khoury

Yes. I mean, it was a strong quarter. Bookings were ahead of shipments. Shipments were up 9% compared to the same period last year and excluding acquisitions and the military and Business Jet segments, we're up 15%. So it was a solid quarter. The organic operating margin was up 20 basis points as compared with the prior-year period and we are in the process now of -- we're just actually beginning to incur integration expenses for the business. So it was a very good quarter.

Amit Mehrotra - Deutsche Bank AG, Research Division

Okay, and just with respect to that, when you look out to 2012, can you just give us some of the underlying assumptions behind the growth projection? Just a little bit more color in terms of what you're expecting from the divisions, from a growth standpoint?

Amin J. Khoury

Yes. We don't provide guidance by segment, but in all 3 segments, orders are substantially ahead of shipments. And so we have a lot of confidence in our 2012 guidance.

Amit Mehrotra - Deutsche Bank AG, Research Division

Okay. Just last couple more questions. Free cash flow, it looks like the free cash flow that you're going to be generating over the next few quarters, looks like you're going to have some good capacity to deploy on the M&A front. Do you see additional acquisitions next year and could you just give us a feeling of what the potential size of those could be?

Amin J. Khoury

Well, as we've indicated in the past, we are constantly on the lookout for transactions. Both on transactions which would strategically improve the operating businesses that we have. It's primarily what we're doing, or acquisitions very closely related to what we're now doing in the 3 segments which we operate. We are beginning to generate a substantial amount of cash and at the same time, the pipeline is looking fairly healthy. We are looking at a lot of different alternatives, but we are really intently focused on making sure that whatever we do creates shareholder value. And we're talking about accretion to earnings right out of the block. So we are looking at some things, wouldn't be at all surprised if we were to do 1 acquisition or 2 in 2012. And our expectation is that we'll be able to do those acquisitions out of excess cash on our balance sheet.

Operator

We'll move now to Troy Lahr with Stifel, Nicolaus.

Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division

I'm just wondering if you can talk, Amin, a little bit about the capacity? I mean, you guys have won a lot of content on the OEM side or significantly raising build rates. How are you guys from a capacity standpoint and do you guys need some capital outlays to handle and support Boeing and Airbus on the higher rates?

Amin J. Khoury

Yes. We are -- the backlog has reached a record level and it seems to be happening every quarter now. And we are beginning to step up R&D spending and step up our capital spending. So this year, we'll spend roughly $80 million. Next year, we could spend $90 million to $100 million and R&D as a percentage of revenues may not increase next year. R&D is increasing substantially and we are stepping up our spending right here in the fourth quarter. In terms of our capacity utilization, our manufacturing facility, we're between 65% and 70% on a one-shift basis.

Unknown Executive

A single-ship basis.

Amin J. Khoury

So we've got plenty of capacity and with the investments that we're making, we're expanding that capacity in advance of the demand on us to increase our outputs. As Werner mentioned a little while ago, we're the only company for example in the seating business which is 100% on-time to both the OEs and given that the average on-time delivery rate to Boeing year-to-date is 60% which includes us at 100%. You can see that there are issues, but they're -- but we do not have those issues, and we're doing a very good job.

Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just lastly then, I'm wondering if you could talk a little bit about Boeing? It seems like they made a decision to move away from one of their faster distributors and go directly to the OEMs, the faster manufacturers. Does that cause you any concern or you just don't have a lot of exposure there, you don't see any of your other customers making similar type decisions?

Amin J. Khoury

It isn't a significant issue for us, but it is a very significant issue. It's a Wesco specific issue, where we believe it affects a substantially material portion of their revenues. If both Boeing and their major Tier 1 subcontract manufacturers are considered, we view it as an opportunity for B/E Aerospace. So there'll be some pluses and minuses for us, but I think on average, with respect to this issue, it'll be a plus for us. I don't doubt that at all. Our business, do understand the difference here, started as an aftermarket business. In over many years, we were aligned with numerous airlines, MROs and other distributors and then we very successfully built a franchise as an aftermarket business. We then entered the JIT business by targeting the business jet OEMs and non-Boeing related manufacturers and we're also as successful in developing that side of the business. Honeywell, it had a similar history. Develop their business in very much the same way and then we combined the 2 businesses. In contrast, Wesco developed it's business primarily as a supplier to Boeing and Boeing subcontract manufacturers as well as the JIT military market. But today, the military market represents about 50% of Wesco's revenues, but Boeing and Boeing subcontract manufacturers, notwithstanding recent reports of the contrary, represent a very large portion of the 47% balance of Wesco's business. So whereas Wesco has risk to Boeing's proposed plan, we, on the other hand, have an opportunity to grow our business with Boeing, and it's suppliers, as a result of Boeing's initiative.

Operator

And will move now to our next question from Robert Spingarn with Credit Suisse.

Julie Yates - Crédit Suisse AG, Research Division

This is Julie for Rob. Amin, question on the backlog. So total sales were up about 28.5% but backlog was up just 21%. Is there somewhere where book-to-bill was below 1 as is in the military or elsewhere in some of the acquisitions?

Amin J. Khoury

I don't know where book-to-bill might be less than 1. It could be military. It could very well be military. And it could be one of the acquisitions. I'm just not -- I'm not absolutely sure at this point, but I don't have the detail by individual site or business right now.

Julie Yates - Crédit Suisse AG, Research Division

Okay. And then just on the 2012 revenue guidance. The 12% implied growth. How much of this is organic?

Amin J. Khoury

100%.

Julie Yates - Crédit Suisse AG, Research Division

100%. Okay. And then also on organic consumables grew nicely again ex the biz jet [indiscernible] in military, a double-digit pace for the second quarter in a row. Do you anticipate this will continue in the fourth quarter and into early 2012?

Amin J. Khoury

Yes. The bookings have been much stronger than shipments and shipments are now pretty strong. And that's true in every segment. So given the backlog growth that we're experiencing and giving -- given the increases in traffic and capacity, we think that the Consumables Business is going to have a good year in 2012. So, in fact, we think all 3 businesses are going to have very good comparisons on a quarter-by-quarter basis and for the full year 2012. I think the financial comparisons layout [ph] of the blocks in 2012 will be very strong.

Operator

And we'll take our question again from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

First question. Amin, if I look at your $2.20 of revised guidance for '11, it just looks really hard to get to that number with only a quarter left in the year. If I plug in your revenue guidance and assume interest expense and tax rate in line with a normal rate, the operating margins on a consolidated basis look like they have to be down pretty significantly in the fourth quarter. Is there anything unusual or that I'm missing in that math?

Amin J. Khoury

I'm going to have Tom answer the question and there is. We're going to talk about it right now.

T. P. McCaffrey

Noah, the -- well, the third quarter was very strong. So -- and we had a real strong third quarter, and if you exclude the one-time tax benefits, our results exceeded consensus estimates by about $0.03 or about 5%. So strong third quarter, and we expect to incur from integration related costs and expenses and to begin to accelerate R&D spending in the fourth quarter which will negatively impact operating margins, but notwithstanding those 2 factors, we did raise our guidance for the full year by $0.10 a share, which is an amount which is greater than the amount by which we exceeded consensus estimates for the period. So we just ended and we set expectations for 2012, up 24% above 2011 guidance level on a comparable tax basis. So, yes, the margin will be impacted by the effects have beginning to incur some integration costs and accelerating the R&D spending that Amin has referenced, I think, in reference to an earlier question.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. So your margins are usually down seasonally in the fourth quarter sequentially, and it'll just be a little more than normal this time due to those costs?

Amin J. Khoury

Yes. Here, we're really -- we have to go forward now. We are substantially stepping up R&D spending. We've already begun to do that. It will be reflected in our fourth quarter numbers and it will be reflected in our full year 2012 numbers. And, well, I'm going to ask Tom to talk about R&D as a percentage of revenues in 2012 and to talk about SG&A as a percentage of revenues. The numbers are going to look a little bit different and we're also stepping up our capital spending. The backlog is really -- I mean, we are impressed with how much we've booked in a number of programs that we have. And it should be reflected in very strong growth in the 2013, '14 period. And I just want Tom to talk about this a little bit, bring it all together for you. You asked a question about a lower margin in Q4, but it really begs the question about R&D spending and some of these other items in 2012.

T. P. McCaffrey

Sure. Well, for the third quarter R&D was about $39 million or 6.1% of sales and that compares with $28.5 million or 5.8% in the same period last year. That $10.5 million increase in spending is primarily due to new product development activities on our Commercial Aircraft segment, and they're directly associated with the record backlog of about $7 billion. So we will begin to step up our R&D spending in the fourth quarter, and as we begin to look into 2012, we expect R&D to be about 6% to 6.5% of sales. I think while we're still talking about expenses, I'll just run through the SG&A and cover that for you too at the same time. SG&A was $87 million or 13.7% of sales, compared with $72 million or 14.5% of sales in the same period last year. SG&A as a percentage of sales decreased as a result of the operating leverage in the business, and SG&A as a percentage of sales in 2012 is expected to be about 13.5% of sales. So the expected lower level of SG&A spending in 2012 as a percentage of sales, more or less offsets the expected increase in R&D spending.

Amin J. Khoury

Tom, can you comment on incremental margins in 2012? Given that the SG&A spending is lower as a percentage of sales as being offset by R&D that's higher as a percentage of revenues. What does incremental margin look like in 2012 because that's the next question that's begged.

T. P. McCaffrey

Sure. If you look at -- in our guidance for 2012, it's calling for revenues of $2.8 billion. EPS of $2.65 and if you assume a 32% tax rate and about $105 million of interest expense, our incremental margin is expected to be about 27% in 2012 and that's just reflective of a lot of the things that we talked about. The quality of our backlog, planned operating initiatives, significant cost reduction benefits from the low-cost countries, sourcing program that Werner talked about and then the operating leverage which is just inherent in the business. So it's a pretty strong incremental margin in 2012 despite the increase in R&D spending.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. That was very helpful color. If I can just ask one other thing, sort of high-level, bigger picture and if you touched on some of this to some degree, but it's a very much a macro world right now and you guys have a lot of company specific and secular drivers that we argue make you different. But we all do worry about that macro and -- Amin, it sounds like you're saying your conversations with your customers aren't really changing. The last quarter you said that RFP activity and retrofits was feverish. I just want to try to gauge the temperature of whether things are changing on the margin to the softer side or not or if things seem like they're just kind of humming along for you.

Amin J. Khoury

The answer is still the same. I mean, RFP activity is very strong, it has not subsided. And I think the combination of the growth in the developing countries which is basically what accounts for such a big piece of global growth. I mean, China, Pac Rim, Asia, Middle East, South America, they're all growing at a very good pace. And it is -- and that growth that is the middle classes in those countries driving travel is what is causing Boeing's and Airbus' backlog and our backlog to continue to grow. And, I mean, the airlines have done a very good job of managing capacity expansion and they've got yields -- much higher yields and capacity utilization above 81%. So they're making money, I mean, IATA is increasing it's forecast for profitability, their balance sheets are in pretty darn good shape because it had a couple of years in a row here, very strong profitability and the outlook for 2012 is pretty good. So we're just not seeing anything in the marketplace which would suggest a slowdown, at least not at this point in time.

Operator

And we'll move now to Gautam Khanna with Cowen & Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

I wanted to -- I mean, just pick up first on the comment you made on Wesco, to the extent this initiative at Boeing, in your opinion, affects them, doesn't it -- does it raise the risk just generally of pricing in your space when you go after your re-competes and your new business, do your worry that margins across the CMS space start to rain in or how do you kind of guard against that?

Amin J. Khoury

You're suggesting being that, because Wesco made...

Gautam Khanna - Cowen and Company, LLC, Research Division

Well, one of your competitors is weaker. Right.

Amin J. Khoury

Yes. Weaker competitor. A competitor loses a lot of revenue and becomes very aggressive elsewhere, it's quite possible. Up until now, they've been very disciplined and as have we. And there are very, very high switching costs for the customers. Very high. And we are doing, I think, a better and better job of embedding ourselves with our customers. I'm talking about our IT services for example, and our 3PL services and we're doing -- we're just doing a very, very good job. Our on-time delivery rates to our program customers are extremely high. 98%, 99%. And the switching costs are high. So up until now, our experience with that is we've lost one customer and I think you know about that. And it was a customer where the contract had ended and the customer was lost in our price basis. I don't think that anybody is happy about that. I mean, nobody on our side neither the supplier that won the business, nor the supplier that lost the business, is happy about what they got out of it. So my guess is that discipline will reign with the 2 really good companies, high quality companies that compete with one another. But we'll have to see.

Gautam Khanna - Cowen and Company, LLC, Research Division

Sure. And you've mentioned the RFP pipeline on the retrofit side still remains pretty large. How should we think about -- you mentioned book-to-bill in 2012, backlog will grow. So it will be positive, but do you expect that to be fairly lumpy or fairly consistent as we look over the next couple of quarters? Because, obviously, the first half was off the charts and Q3, had a bit of a slowdown. But I just want to get your sense. Do you think Q4 is going to be a big book-to-bill and then how should we think about coming through?

Amin J. Khoury

It's pretty lumpy and we certainly can't forecast. Bill -- bookings by quarter, third quarter was very strong. I mean, it wasn't strong by comparison to the first 2 quarters which are the biggest 2 quarters we've ever had. But it was a very strong quarter. I mean, a quarter over $600 million in bookings is a really strong quarter, and that doesn't even take into account the largest of e-bookings during the period. So I don't want to talk about specific bookings by quarter, but our expectation for 2012, the full year, is that we will have another year of bookings in excess of shipments and continued backlog growth.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And one last one. The CAS margins have really been a great story this year. And I just wanted to get a sense where -- is there anything you can tell us about maybe pricing that flows through sales from the backlog, on the retrofit side or what have you that CAS gives you confidence that, that margin can continue to march upward because we don't really have a precedent if we look back at the prior peak given where you guys are now in terms of margin rate, you're well above prior peak.

Amin J. Khoury

Well, I think a couple of things. First, the business has never been as well-run as it is now. We've never run it with the discipline that we have had. The quality of the backlog is very high. The embedded margins in the backlog are solid. And our spares business is a really strong profitable business and it's growing faster than the rest of the business because of the size of our installed base. So the business is just very different now than it's ever been in the past. It's a much higher-quality business with a high-quality backlog, much lower cost structure, a lot of LCC activity embedded in our business, years of lean and continuous improvement which are yielding excellent results. And so, the margins, it may be historically higher than the past, but our expectation is, is it's going to continue to expand.

Operator

And we'll hear now from J. B. Groh with DA Davidson.

J. B. Groh - D.A. Davidson & Co., Research Division

Amin, could you give us a feel on Consumables and your conversations with customers, sort of inventory levels? I know we went through a big de-stocking phase and just given some of the comments from the airlines about rationalizing capacity in Q4 into Q1. I was curious as to sort of your feel for inventory levels.

Amin J. Khoury

Inventory levels at the customers, well, the order activities hasn't changed much, meaning that average order sizes are still pretty small. The airlines are basically buying what they need for the most part. They haven't done restocking, except in rare limited cases. So I -- we don't expect a slowdown unless MRO activity slows down or capacity is significantly reduced. Where we are now, as I mentioned earlier, orders are well in excess of shipments. That is continuing, we expect orders to continue to be stronger than shipments at least for the foreseeable future. And our outlook for 2012 is for -- more of the same because basically we're going to add another 5% of capacity and another 5% of traffic. Basically, those 2 are pretty much in-step and with capacity utilization above 81%, yield should be pretty good and the airline should be able to operate normally.

J. B. Groh - D.A. Davidson & Co., Research Division

I guess I'm asking is if capacity gets cut, we probably wouldn't see a disproportionate, impact to the Consumables business because the inventory levels are pretty low, is that a safe bet?

Amin J. Khoury

I think it is. And if capacity is cut, it certainly can't be cut by much because capacity utilization is over 81%. The only way they could cut capacity is if traffic declines. You actually need a decline in traffic, not a slowdown in growth but an actual decline.

J. B. Groh - D.A. Davidson & Co., Research Division

And that's sort of a clarification question on both SFE awards. How do we define that in terms of the links of that backlog? Is that just -- is it 18 months, 24 months, or is that everything that's in the Boeing and Airbus backlogs and that you've -- that you think you're going to be on?

Amin J. Khoury

It's the stuff that we expect to ship over an approximate 10-year period of time where there is firm -- where there are firm aircraft in the backlog, and we're the exclusive supplier. And what we're going to try to do in 2012 sometime, is give you some annual guidance as to what the revenues from the SFE backlog are likely to be -- SFE revenues, what they're likely to be beginning in 2013, 2014.

J. B. Groh - D.A. Davidson & Co., Research Division

And so the length of your traditional backlog is 18, 24 months, something like that?

Amin J. Khoury

The length of our traditional backlog is about 24 months. It's stretching out just a little bit now because there are so many new airplanes being ordered. And we are, as I've -- we mentioned on the call, about 60% of our bookings in Q3 related to new airplanes, new aircraft activity. So the normal 24-month backlog is stretching out a little bit. We'll give you some more color on that as well when we do the February fourth quarter and final 2012 guidance. And we'll also give you some guidance as to what we think revenues from the SFE backlog are going to look like in 2013, '14.

Operator

And Michael Ciarmoli with KeyBanc Capital Markets has our next question.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Just to follow-up on the SFC business. It looked like that portion of the backlog grew probably at the fastest rate both year-over-year and sequentially. Any specific platforms or products that's tied to? Maybe can you just elaborate on that big jump in the SFE backlog?

Amin J. Khoury

Yes. They're very specific. The increase includes additional awards that haven't yet been announced by either our customers or ourselves. And so at this point in time, we're not yet permitted by our customers to discuss these. And in addition, there have been upgrades and increases on current programs. So, we're going to talk with you more about that in the first quarter of the year where we believe we'll be able to give you some specifics which we can't right now.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay. I'm assuming -- margin profile consistent with the corporate level and everything else you've been doing in the SFE on these new wins?

Amin J. Khoury

Yes.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay. And then just on the -- looking at inventory. Inventory growth continuing, how should we think about inventories going forward here? Will you continue to see that line item grow?

Amin J. Khoury

Tom is the one who's buying the inventory, I'm going to let him answer the question.

T. P. McCaffrey

That's one way of looking at it. You should expect working capital generally, which is going to include inventories to grow consistent with the earnings growth rate. So as the revenue growth rate is growing, the business will consume more inventory and generate more receivables and payables and so on. So we've been pretty good at managing that moving forward. If there is a surge in demand, on the Consumables side, we may find opportunities where we would want to invest ahead of that demand, and that would be a good thing not a bad thing because it would say that we were looking for higher levels of revenues to come. But right now, I think you ought to just expect working capital to grow with the revenue growth rate.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Will there be any near-term acceleration for the provisioning of some new aircraft entering into service?

Amin J. Khoury

No.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay, fair enough. And then just last one, not to beat a dead horse on the Consumables, but if my math is right, it looks like out of the bookings I guess, you had roughly 60% was for the OE, leaving the remainder for aftermarket retrofit, that would be down sequentially, but it doesn't sound like that should raise any yellow flags. I mean, I know you characterized spares in aftermarket last quarter as sort of blowout. It seems like you're still confident in strength in this market. I mean, do we -- should we be thinking about some deceleration of growth here, or can you continue to grow that Consumables and spares at these levels?

Amin J. Khoury

We didn't mention -- we did not mention those numbers in that data, in connection with the Consumables business. We talked about it for the overall corporation. And what we were saying is that each of the businesses has an order, a bookings rate which is higher than a shipment rate and each of the businesses is growing backlog, which gives us a lot of confidence about our 2012 numbers. But I don't think you can take -- you can talk about that in a specific way, relative to Consumables and certainly the 60% orders associated with the new aircraft, don't have anything to do with the Consumables business. It's included in the numbers, but mostly what's driving that is the Commercial Aircraft segment.

Operator

And will take the question now from Carter Leake with BB&T Capital Markets.

F. Carter Leake - BB&T Capital Markets, Research Division

Amin, you want to just guess my question?

Amin J. Khoury

Yes. Why wouldn't we want to answer your question?

F. Carter Leake - BB&T Capital Markets, Research Division

The Star Lines deal. Could you give some color on that? Is it an exclusive deal, how might programs be generated from that? Upgrade programs?

Amin J. Khoury

Well, the Star Lines includes 27 airlines and the airline groups are trying to become more closely affiliated and to try to bring up standards and quality across those fleets. The big drivers initially, are looked on to Air China and Austria, which is basically right next door to look on to [ph] . We think it's likely to develop into a lot of business. I think in the news release that we let out, I think we talked about the size of the initial orders from the first 3 carriers, which I just mentioned. I don't know if we did or didn't.

T. P. McCaffrey

No, we did not give the exact dollar amount.

Amin J. Khoury

Okay. So we didn't. So I can't give you the exact dollar amount. But we were -- we competed very hard to win that business. Werner himself spent a lot of time in Germany and in China, trying to win the business which we did. And we won the business on quality and performance at excellent pricing and margins. So we're -- we are very pleased with the win. And we think it will develop into a lot more business as more of the 24 other airlines who haven't yet ordered the product begin to do so.

F. Carter Leake - BB&T Capital Markets, Research Division

So if there was another airline beside the big 3 that wanted to do an upgrade, are they obligated or is it just a sort of a bulk pricing kind of deal?

Amin J. Khoury

No, they're not -- it's not a bulk pricing sort of a deal. And they're not obligated, but they are really bringing a lot of pressure to bear. The alliance is bringing a lot of pressure to bear to try to get all of its folks in line.

It's really about a quality upgrade, is really what this is all about.

F. Carter Leake - BB&T Capital Markets, Research Division

And then the seats. Are we talking about premium economy, economy, and/or both?

Amin J. Khoury

The alliance is primarily pinnacle for coach.

F. Carter Leake - BB&T Capital Markets, Research Division

It's pinnacle, okay. Cabin retrofit programs. If you could, just any color on the stickiness of 2012 programs. B/E will trade on fears that downturn in traffic, downturn in premium class travel leads to a cancellation of these programs. For 2012 at least, can you provide...

Amin J. Khoury

Cancellation of which programs?

F. Carter Leake - BB&T Capital Markets, Research Division

Well, if an airline had a cabin retrofit program in place for 2012, do they have the right to defer?

Amin J. Khoury

Yes. Absolutely. If airlines, if they have -- they have the right to defer and they have the right to cancel. I mean, it will cost them a lot of money to cancel, but they can do so. I don't know that we've ever seen a situation where in airline orders, a lot of new wide-body aircraft and then decides to retrofit their existing their wide-body aircraft to have a standardized fleet where the order has been canceled. But certainly, there are instances where -- when the airlines get into extremes when their bleeding cash and they're losing money, they look wherever they can to try to conserve cash. And -- but that is not a situation which anyone anticipates at this point with capacity utilization over at 81% and capacity and traffic growing at about the same rate and the driver for growth basically being the developing countries of the world, the middle classes which are growing. We just don't seem to be in that position and the airlines also have decent balance sheets and they're making a lot of money. So I think that you need to bring some rational thinking to the downside story which you are asking about. So yes, they can defer and it's quite possible that they might, but we feel pretty confident about our 2012 guidance.

Operator

And our final question today will come from Eric Hugel with Stevens Incorporated.

Eric Hugel - Stephens Inc., Research Division

Can you talk about -- maybe at the Consumables business, the opportunity for any sort of meaningful SKU count extension as we look forward?

Amin J. Khoury

There is an opportunity, but right now we are really beginning the process of integration. We began it in -- toward the end of the third quarter here. We'll be in to it pretty deeply in Q4 and all of 2012. So it's going to take a lot of operational time when we do these integrations. It consumes our IT department, it consumes the operating people, it consumes the procurement department. Quality gets really busy as well. So it's not likely that we'll have a lot of SKU increases in 2012, except perhaps by 1 minor acquisition or 2. So we're not looking at doing that right now, Eric, because of all the operational activity that we have to undertake.

Eric Hugel - Stephens Inc., Research Division

Sure. Can you comment -- maybe you've sort of referred to it, but at Commercial Aircraft products, sort of the spare parts and stuff like that, can you sort of talk about how that's sort of trending? That's pretty high margin stuff.

Amin J. Khoury

Yes. As I mentioned a little bit earlier that spares orders are much stronger than spares shipments. And a combination of the retrofit and refurbishment activity which is not exactly related to spares, but it's included in our aftermarket bucket. The aftermarket bucket is becoming more and more profitable and the orders that we're taking are very healthy orders. So the backlog quality looks really good, which is just another factor leading us to feel comfortable about our guidance for 2012 which calls for twice the increase in profit as we've got an increase in sales. So 12% increase in sales and 24% increase in profit is pretty good performance and you would have to have the aftermarket working well and the backlog quality being satisfactory and margins improving in our businesses for us to deliver those results.

Eric Hugel - Stephens Inc., Research Division

Sure. And I guess just lastly, can you talk about sort of in the Consumables business, sort of what you're seeing in terms of military and on the biz jet side, I guess last quarter, Wesco commented about sort of the Gulf Stream business. Are you feeling that impact in terms of your sales in that business or is that still ahead of us? Or is it even meaningful?

Amin J. Khoury

It's like a $15 million annual revenue contract which is $1 billion business.

Eric Hugel - Stephens Inc., Research Division

Is it 50 or 15?

Amin J. Khoury

15. 1-5.

Eric Hugel - Stephens Inc., Research Division

1-5. Okay. And military?

Amin J. Khoury

Military business is very quiet. It's not growing. It's flat as a pancake, or slightly down. Not much positive I can say about it at this point in time. I think that the -- our government is bound and determined to decrease military spending and the impact in a lot of businesses which I know you all -- you folks follow is substantial reductions in revenues. So we're holding our own, we're doing okay, but there's certainly no growth.

Operator

And there are no further questions and this concludes our question-and-answer session. Mr. Powell, I'll turn the conference back to you for closing comments.

Greg Powell

Sure. Thank you, everyone, for joining us and we look forward to touching base with you again shortly.

Amin J. Khoury

Have a good day, everyone.

Greg Powell

Thank you.

Operator

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

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