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BE Aerospace (NASDAQ:BEAV)

Q4 2011 Earnings Call

February 01, 2012 9:00 am ET

Executives

Greg Powell - Vice President of Investor Relations

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

W. Lieberherr - President and Chief Operating Officer

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

Analysts

David E. Strauss - UBS Investment Bank, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Eric Hugel - Stephens Inc., Research Division

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

Gautam Khanna - Cowen and Company, LLC, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

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

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

Operator

Good morning. My name is Kevin Weibreit, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the B/E Aerospace Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, the conference is being recorded this day, February 1, 2012. Thank you. I'd 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, Kevin. Good morning, and thank you for joining us this morning. Today, we are here to discuss our financial results for the fourth quarter and year ended December 31, 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, our founder, Chairman and Chief Executive Officer, and then we will take your questions.

For today's call, we prepared a few slides to help you follow along with 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. Joining us this morning for the call are Werner Lieberherr, President and Chief Operating Officer; and Tom McCaffrey, Senior Vice President and Chief Financial Officer.

I may remind you, 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 statements in the company's filings with the Securities and Exchange Commission. We will address questions following our prepared remarks. [Operator Instructions] Now I will turn the call over to Amin Khoury.

Amin J. Khoury

Thank you, Greg, and good morning everyone. We had an extremely successful and productive 2011. I'm pleased to report that our 2011 results were the best in the company's history. It was a year in which we set new records for sales, earnings, cash flow, bookings and backlog. In addition, the company's operating margin expanded 120 basis points to 17.1%, or 17.3% on an adjusted basis. Throughout the year, our businesses had solid market successes in all 3 of our segments. We generated more than $2.9 billion of bookings, an increase of 30% as compared to 2010, and representing a book-to-bill ratio of almost 1.2:1.

Importantly, in what might well had been our most significant award ever, Boeing selected B/E Aerospace as its exclusive manufacturer of modular lavatory systems for the Boeing 737 NG family of airplanes, as well as the Boeing 737 MAX. The estimated value of the award is in excess of $800 million, exclusive of retrofit orders which are expected to be substantial. With this award, the value of SFE programs which the company has won, now totals approximately $4.4 billion, and our total backlog, both booked and awarded but unbooked is almost $8 billion.

Our SFE programs, including our oxygen PSU systems, our wastewater systems, the 737 lavs, the A350 galleys and a variety of thermal management chassis for control of primary and secondary power distribution in the Boeing 787 substantially increase our revenue potential on new build aircraft and provide us with excellent visibility with respect to future revenue growth.

In addition, we recently strengthened our Consumables Management segment by acquiring UFC Aerospace Corp., an innovative provider of complex supply chain management and inventory logistics solutions for $400 million. The acquisition of UFC substantially expands our capability to offer creative and differentiated supply chain solutions, value-added inventory logistics services such as 3PL and 4PL programs, and customized kitting solutions, as well as further expanding our broad consumables product offerings. This acquisition supports the company's commitment to provide the best and broadest portfolio of aerospace consumables products and services to our customers.

Given the solid outlook for our business, today we are confirming our recently raised 2012 EPS guidance of approximately $2.75 per diluted share, an increase of 23%. And on a comparable tax rate basis, the increase is approximately 27%.

Now let's briefly discuss the current commercial aerospace market environment. Despite the fiscal challenges experienced in the U.S. and Europe, the airline industry in 2011 had a pretty good year. Passenger traffic was up approximately 6%, capacity remained in check, load factors are near all-time highs, premium international traffic remains strong and was up about 6%. 2011 global airline industry profits are expected to have been approximately $7 billion.

Boeing and Airbus are further increasing their production rates on legacy platforms A320 and 330 and the B737 and 777, and each have new models entering into service, all supported by a record backlog of approximately 8,000 aircraft.

For 2012, IATA is forecasting both global passenger traffic and capacity to grow at an approximate 4% rate, and for global airlines to generate profits of approximately $3.5 billion.

Although the outlook for global GDP growth is slower than previously expected, demand for our products is strong, consistent with solid traffic growth, more capacity management, near record high load factors, the onset of a strong new wide-body aircraft delivery cycle, increased delivery rates for narrow-body aircraft and an airline industry which is in reasonably good financial condition. In addition to the foregoing, B/E Aerospace is benefiting from a very high-quality, geographically diversified customer base.

Now let's turn to Slide 2 and discuss our fourth 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 fourth quarter financial performance as compared to the fourth quarter of the prior year. Fourth quarter revenues increased 21% to $655 million. Operating earnings of $109 million increased 33%, and operating margin expanded 160 basis points to 16.7%. Adjusted operating earnings were $114 million excluding acquisition, integration and transition costs, an increase of about 26% compared to 2010, similarly adjusted. Adjusted operating margin of 17.5% expanded 70 basis points. Net earnings and earnings per diluted share were $57 million and $0.56 per share, respectively, increases of 84% and 81%, respectively. Adjusted net earnings and adjusted earnings per diluted share, which exclude AIT cost in both periods and exclude debt prepayment costs in 2010, were $61 million and $0.60 per share, respectively, increases of 42% and 43%, respectively. Fourth quarter free cash flow generation of $62 million represents a free cash flow conversion ratio of 109% of net earnings.

Now let's turn to Slide 3 and discuss our full-year 2011 financial results. Revenues increased 26% to $2.5 billion. Operating earnings of $428 million increased 35%, and operating margin expanded 120 basis points to 17.1%. Adjusted operating earnings were $433 million, an increase of 33%, and adjusted operating margin of 17.3% expanded 90 basis points. Net earnings and earnings per diluted share were $228 million and $2.24 per share, respectively, increases of 59% and 58%, respectively.

Adjusted net earnings and adjusted earnings per diluted share were $232 million and $2.27 per share, respectively, increases of 47% and 45%, respectively. 2011 cash flow generation of $241 million represents a free cash flow conversion ratio of 106% of net earnings for the full year.

Let's review Slide 4 which summarizes our current bookings and backlog status. As I mentioned earlier, our businesses had solid market successes in all 3 of our segments during 2011. We generated more than $2.9 billion of bookings in 2011. That's up more than 30% as compared to the prior year and represents a book-to-bill ratio of almost 2 -- 1.2:1. Importantly, we continue to build our SFE book of business as we strategically focus on opportunities to substantially increase our revenue content per aircraft through a creative, sole-sourced product offerings.

Notably, in 2011, we were awarded one of the most significant new business programs in our history when Boeing selected our company as its exclusive manufacturer of modular lavatory systems for Boeing 737 airplanes. The award is initially valued, as I mentioned earlier, in excess of $800 million and it is important to note that the $800 million number is exclusive of retrofit orders which are expected to be substantial in the future.

This innovative SFE system will become standard equipment on the Boeing 737 NG family of airplanes, as well as the 737 MAX. Our proprietary lavatory systems create the opportunity to add up to 6 incremental passenger seats on each new 737 airplane and integrate a number of B/E Aerospace innovative products, including our technologically-advanced Aircraft Ecosystems vacuum toilet, our long-life LED lighting and our tamperproof state-of-the-art lavatory oxygen system. We expect to begin delivering our modular lav systems for Delta Airlines' new-buy 737s in the third quarter of 2013, and for deliveries to ramp up thereafter in an orderly fashion.

We will substantially accelerate investments in our modular lavatory program and on the related wastewater systems program in order to be in a position to produce significant quantities of lavatory systems by the end of this year. With this award, the value of SFE awards which the company has won, totals approximately $4.4 billion. Our SFE programs, including our oxygen TSU systems, our wastewater systems, 737 lavs, the A350 galleys and the 787 thermal management chassis substantially increase our revenue potential on new-build aircraft and provide us with excellent visibility with respect to future revenue growth. Over time, we will continue to look for additional opportunities to expand our footprint on various aircraft platforms.

In addition, we are also stepping up our capital spending to support certain other SFE programs. As a result of increased capital spending for plant, machinery, equipment and tooling, as well as inventory build to support these programs, we recently adjusted our free cash flow conversion ratio guidance for 2012 to approximately 80% to 85% of net earnings.

Bookings during the fourth quarter of 2011, exclusive of SFE program awards were approximately $665 million. Total bookings, including both booked and awarded but unbooked drove total backlog to a record $7.9 billion, an increase in excess of 35% as compared with December 31, 2010. Total 2011 bookings of $2.9 billion were a record, an increase in excess of 30% as compared to 2010 bookings. Booked backlog at the end of the quarter was approximately $3.5 billion, an increase of approximately 15%, as compared with the company's December 31, 2010 backlog. And our SFE backlog increased to approximately $4.4 billion, an increase in excess of 60% as compared to the end of last year.

Before we discuss performance at each of our segments, I'd like to ask Werner to briefly review some of the important marketing and operating highlights for each of our businesses.

W. Lieberherr

Thank you, Amin. I will discuss some of our additional marketing activities and operational achievements in 2011. Our seating business was once again awarded and retained Boeing score rating. In fact, our Kilkeel seating facility received Boeing's Seating Supplier Excellence Award. In addition, we were named by Airbus as their preferred seating supplier. Our global supply chain initiative achieved a 27% year-over-year improvement from low-cost country sourcing. Our low cost country sourcing generates savings of roughly 30% for each part that we source from a low-cost country facility.

2011 was an outstanding year from a marketing perspective. As Amin mentioned earlier, bookings of $2.9 billion were up 30% compared to last year and we were awarded an $800 million sole-source contract from Boeing for our advanced lavatory system which integrates our proprietary space soil technology, our ecosystems vacuum toilet, our LED lighting and our lavatory oxygen system. We received a number of new awards with Star Alliance Airlines across all product platforms. The awards were led by our Pinnacle Platform seats, which continued its industry-leading rollout. To date, we have received [indiscernible] Pinnacle Platform seats for approximately 1,300 aircraft, with a total value of approximately $650 million.

Importantly, Star Alliance has selected B/E Aerospace as its development partner for long-haul economy seats for its airline partners. It is important to note that the Star Alliance network has 28 member airlines, with more than 4,000 aircraft flying over 21,000 flights a day in 185 countries. We significantly strengthened our position with Delta Airlines and increased our industry-leading market shares with new awards for seating, engineering services and food and beverage preparation and storage equipment. Delta will also receive the first B/E Aerospace model of lavatory systems on their new-buy 737 aircraft beginning in the third quarter of 2013.

Our Business Jet segment continued to expand our Super First Class market leadership position with significant wins at Emirates, Japan Airlines, Etihad and Qatar. We were also successful in securing several important VIP spoke [ph] seating programs.

Our Consumables Management segment also had a successful year. Goodrich significantly expanded their contract with us and also named us Best Supplier of the Year. Goodrich is now one of our largest CMS customers. CMS was awarded preferred supplier status by Bell Helicopter, and won the Platinum Supplier Award from Aviation Partners. In addition, CMS had a number of key wins including integrated Supply Chain Solutions, an area that we're looking to continue to expand through our acquisition of UFC.

And finally, during the fourth quarter, CMS undertook the integration of both the Satair and LaSalle businesses.

I will now turn the call back over to Amin.

Amin J. Khoury

Thank you, Werner. Now I will briefly review the fourth quarter operating performance for each of our business segments. During the fourth quarters of both 2010 and 2011, we acquired 2 businesses. As a result of these transactions, we incurred significant acquisition-related costs, as well as integration and transition costs in both periods. And we will therefore, present our segment results on both a GAAP and an adjusted basis.

Let's turn to Slide 5 and review the fourth quarter results for our Commercial Aircraft segment. Commercial Aircraft segment leadership team again turned in an outstanding performance during the quarter. Revenues of $350 million increased 24.7%. Adjusted operating earnings of $59 million increased 32.9%. Adjusted operating margin of 16.9% expanded 110 basis points due to an improved revenue mix and ongoing operational efficiency initiatives.

Let's turn to Slide 6 and review fourth quarter results for our Consumables Management segment. The leadership team for the CMS segment also delivered a strong quarter. Revenues of $234 million increased 16.7%. Adjusted operating earnings of $47.1 million increased 11.9%. Adjusted operating margin was 20.1%, and reflects the acquisitions of Satair and LaSalle which have lower operating margins than the legacy CMS business. Adjusted organic operating margin for the fourth quarter of 2011 was 20.8%.

Let's turn to Slide 7 and review the fourth quarter results for our Business Jet segment. Business Jet segment leadership team is beginning to hit its stride and delivered another substantial improvement and results for the fourth quarter of this year. Revenues of $70.5 million increased 16.7%. Operating earnings increased 84.4%, and operating margin of 11.8% expanded by 430 basis points, reflecting both the increase in revenues and an improved mix of revenues.

Let's briefly review our financial position on Slide 8. Fourth quarter free cash flow of $62 million represents a free cash flow conversion ratio of 109% of net income. For the full year 2011, free cash flow was $241 million and the free cash flow conversion ratio was 106%. As of December 31, 2011, cash was $304 million, net debt which represents total debt of $1.245 billion, less cash, was $942 million, and the company's net debt to net capital ratio had declined to 33%. Pro forma net debt to net capital ratio as of December 31, 2011, taking into account the acquisition of UFC which was completed yesterday, is 42%. As of December 31, 2011, the company had no borrowings outstanding on its $750 million revolving credit facility and has no debt maturities until July 2018.

Now let's briefly review our outlook. Based on our record backlog, both booked and awarded but unbooked of approximately $7.9 billion, our expectations for continued growth in global passenger travel and attendant increases in capacity and our expectation of significantly higher levels of wide-body aircraft deliveries, we expect full year 2012 earnings of approximately $2.75 per diluted share, that's $2.75, representing earnings per share growth of approximately 23% and growth of approximately 27% on a comparable tax rate basis.

Based on our 2012 revenue and EPS guidance, revenues and EPS for the 3-year period ending December 31, 2012, will have grown at a compound annual growth rate of approximately 16% in revenues and 25% in earnings per share.

Looking further ahead, we are optimistic due to our record backlog, the expected robust wide-body delivery outlook, a robust aircraft replacement cycle, a new aircraft product cycle, emerging market demand and continued global growth in passenger travel.

Now let's go to Slide 9 and review our 2012 financial guidance. The company expects continued strong orders in 2012, driven by the robust wide-body aircraft delivery outlook and solid aftermarket demand for retrofit refurbishment and spares. In addition, the company expects 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 $2.95 billion, or approximately 18% higher than 2011 revenues. The company expects full year 2012 earnings of approximately $2.75 per diluted share, representing an increase of approximately 23%, and as mentioned a second ago, 27% on a comparable tax rate basis.

2012 free cash flow conversion ratio is expected to be approximately 80% to 85% of net earnings. Free cash flow is expected to be weaker in the first quarter of 2012 and significantly stronger in each of the second, third and fourth quarters.

And with that, I'll turn the call back over to Greg.

Greg Powell

Thank you, Amin. I will now ask Kevin to give us instructions for the Q&A. Kevin?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today comes from David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Amin, can you give a little bit of color on the retrofit side of the business, how that's progressing? And in terms of the retrofit programs that you have scheduled for, or you think will come through in 2012, what percentage of those retrofit programs have now been started, therefore, are not at risk of being canceled?

Amin J. Khoury

Well, as we've talked about this before, we've -- I don't know that we've ever had a major retrofit program cancel. Usually what happens is they get deferred into a later period. At this point, we don't have any deferrals. We don't have any customers that are -- that have deferred programs. So I don't know what percentage of them we've "already started," which was your specific questions. I don't know the answer to that question. But the second part of the question was, and therefore, are not at risk of being canceled and I don't think we've ever had a major retrofit program cancel.

David E. Strauss - UBS Investment Bank, Research Division

Okay. Maybe just a risk -- at risk of being split to the right then?

Amin J. Khoury

Yes, well, we just -- we haven't been notified by any of our customers that they plan to split their retrofit programs to the right. And we try to be on top of that and -- because it's an important component of our revenue growth. Our growth in 2012, as we talked about before, is expected to be driven much more by the new aircraft delivery cycle with both the robust wide-body deliveries. I mean, we're expecting wide-body deliveries over the next 3 years here to be up about 50% on average as compared to 2011. So it's very strong. And that has a disproportionately large impact on demand for our products, that is wide-bodies do. And at same time, they're also ramping up deliveries, that is both Boeing and Airbus, of narrow-bodies so -- which has a very good pull for our in-surge business, our food and beverage preparation and storage equipment. So at this point in time, we feel pretty confident about our revenue guidance for 2012, David.

David E. Strauss - UBS Investment Bank, Research Division

As a follow-up, the outlook for AIT costs from here, obviously, they picked up in the fourth quarter with LaSalle and Satair but with UFC coming in, just the outlook for AIT costs? And then a quick one for Tom, the guidance or some sort of forecast for interest expense for the year?

Amin J. Khoury

Okay. On the -- I'll have Tom talk about interest and taxes and so on and so forth. But the -- I'm sorry, what's the first part of your question, David?

David E. Strauss - UBS Investment Bank, Research Division

The outlooks for AIT costs. Do they come down now and then ramp back up later in the year with UFC?

Amin J. Khoury

We'll incur substantial AIT costs this year. There are very strong synergies, synergy opportunity in the UFC transaction, no doubt. We will accelerate our spending on integration and transition expenses, but our guidance of $2.75 includes those expenses. So we will -- we'll be reporting our numbers on a GAAP basis. We will be probably telling you what the level of AIT expenses is on a quarterly basis because they're likely to be significant. But those are subsumed in our $2.75 guidance for fully diluted earnings per share. And Tom, if you want to talk about the interest and taxes and so on and so forth?

T. P. McCaffrey

Sure. David, I think you should expect interest of about $110 million in 2012, and that reflects the financing for the UFC acquisition. We borrowed about $200 million on our $750 million revolving line of credit to pay for a portion of the purchase price, of the $400 million purchase price. So it will increase interest expense a little bit in 2012. But absent any further bolt-on acquisitions, we expect to repay the revolver out of free cash flow during the year. And in terms of tax rate, Amin mentioned it. You didn't ask, but I'll tell you anyway. You should expect a tax rate this year, of about 32% for all of 2012.

Operator

Next up, we take a question from Noah Poponak at Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Amin, it was interesting to see you in the press release refer to the Boeing lavatory win as potentially the most important win the company has ever had. I wondered if you could speak to, in the SFE world, what the next lavatory is. And presumably, you don't want to get that specific for competitive reasons, but maybe just -- maybe you would, but if not, just broadly, the degree to which there are or are not other parts of the aircraft that you can go over that -- I'm sorry, go after that nobody is looking for you to go after, nobody's talking about that are places you can go and win share and win new business?

Amin J. Khoury

Well, the first part of the question has to do with why did we refer to that win as perhaps the most important. Well, first of all, it does put us into the Boeing structure as a Tier 1 supplier to Boeing. Second of all, the lav technology, the IP, has applicability in other aircraft types. Thirdly, the potential for pretty significant retrofit programs is a very big deal. I mean you're not going to have airlines with different numbers of seats in the same aircraft type, right? So we think that there's a very substantial retrofit opportunity for the modular lavs. We believe that the modular lavs have applicability on other aircraft types. And so having gotten the imprimatur of quality and reliability from Boeing on the 737 lav, we think that this sort of opens up major new opportunities for the company. With respect to the second half of your question, which relates to other parts of the airplane, we alluded, for the first time today, to business related to the thermal management of power distribution, both primary and secondary power distribution, and that would include galley refrigeration control and it would include control in the -- I'm looking for a word, in the freight compartment, cargo compartment of the aircraft. We are -- we already have a number of line items involved there, I think 4 line items, about 20 different components on the airplane, and that looks like it's going to grow to 7 or 8 with more than 30 different line items being shipped for each 787. So -- and with respect to other opportunities, I guess, we just assume not to discuss those now because we're in the middle of trying to develop that business. And for competitive reasons, I think we'd just assume not alert potential competitors to what it is we're doing.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. Is it possible to quantify the potential size and annual revenue opportunity from the lavatory retrofits that you're talking about?

Amin J. Khoury

Well, we won't ship our first one until the third quarter of 2013. We'll have to build a lot of them in 2012 and we'll begin shipping them early in 2013. But Boeing won't deliver the first one until the third quarter of 2013 to Delta Airlines. We tried to be conservative about this but to give you some guidance, and so we said, "Well, over the next 3 years, we'll grow our SFE business from the current level of approximately $100 million to about $400 million a year within 3 years." So that gives you some idea based on the backlog that we now have, okay? And assuming no new SFE programs that deliver during that time program, that's about what the revenue level would be. So growing from $100 million to $400 million over the next 3 years. I think that's [indiscernible]

Noah Poponak - Goldman Sachs Group Inc., Research Division

That doesn't include -- that does not include the lavatory retrofit opportunity, correct?

Amin J. Khoury

Correct. That's correct.

Operator

Moving on now to Crédit Suisse and Robert Spingarn.

Robert Spingarn - Crédit Suisse AG, Research Division

Just as a follow-on before I get into couple of other questions, can you characterize the narrow-body content? You've talked about it being I guess, wide-body and narrow-body is a range of 6x to 9x in terms of your average content per aircraft. I think you said that in the past. How does that change now on a 737 with your new system?

Amin J. Khoury

Rob, I've got tell you that about the only thing we can do to really upset Boeing would be to tell you folks what the revenues per ship set would be. I can tell you that there are roughly 3 lavs per ship set but we can't tell you what the price of the lav is, including all other B/E Aerospace component parts. And we can't talk about either the revenues per ship set or the margin. But obviously, it changes the ratio.

Robert Spingarn - Crédit Suisse AG, Research Division

All right. I'll go back and parse through the numbers you gave Noah. But maybe you can answer -- here's another one we were wondering, where did the extra 6 seats come from? What are you physically doing?

Amin J. Khoury

Well, the way the lav is designed, it's a manufacture, we are able to plant -- we were able to shape the wall of the lav so that it takes up less floor space. It actually -- picture an angle. It's not actually on a 45 degree angle. But instead of being a straight wall, it's angled back so that you get an extra row of seats. And then when you go into the lav, you cannot see that there is less space in the lav. In fact, it looks more spacious than the current lav because of the way it's designed.

Robert Spingarn - Crédit Suisse AG, Research Division

You're painting a pretty picture. I'm imagining where somebody's feet are in the row behind the lav, but we won't go there.

Amin J. Khoury

No, the row behind the lav doesn't change. It's the row just before the lav where you get the extra row of seats.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. Maybe you'll have a demo of this in March?

Amin J. Khoury

So the seat back, right? And the passenger are basically inserted into the lav, okay? Without being in the lav. And when we do our meeting in early March, we're actually going to show you the lav.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then just a question on the Consumables Business, do you have the organic growth there?

Amin J. Khoury

Yes. CMS organic growth rate in Q4 year-over-year was 12.5%, okay? I want to comment on that because someone mentioned that the sequential growth rate compared to the third quarter was down, and that is -- that's a seasonal trend for B/E. I mean, almost half of our business is aftermarket-related, right? And there 4 fewer shipping days due to the year-end customer shutdowns. So in 2010, our Q4 sales were down about 4% sequentially versus 2003. And in 2011, our sales are down about 2% compared to the third quarter of 2011. I think the proper -- the appropriate comparison for B/E in the fourth quarter is how did we do compared to the same quarter of the prior year? And that's up a strong 12.5% organically.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. And then as a final clarification on the free cash flow conversion adjustment that you announced before, the 80% to 85%, the inventory piece of this, is this driven specifically and only by the new SFE business? Are you starting to build your fastener inventories?

Amin J. Khoury

It's not only the SFE business. It is also inventories associated with the Consumables Business as we -- because we've acquired UFC and we've got some work to do here. But all of that is subsumed in our 80% to 85% free cash flow number.

Operator

We have a question now from Eric Hugel at Stephens Inc.

Eric Hugel - Stephens Inc., Research Division

Amin, you ended the year with about $3.5 billion of backlog from backlog. Looking through your guidance versus sort of last quarter, where you talked about expecting backlog growth in 2012, I don't see that comment in the guidance today. Would you expect to continue to see that $3.5 billion grow in terms of backlog as we go through '12?

Amin J. Khoury

I don't know if the $3.5 billion will grow. I think the $7.9 billion will grow. So I'm just not sure. I think our backlog will continue to grow. Our total backlog will grow in 2012. I think our backlog will actually grow in 2012 also, but it's a little soon to know. And orders were so strong last year, I mean, up more than 30%. Actual booked orders up more than 30% and total backlog up 35%. It's maybe tough to beat that but I think that we probably will.

Eric Hugel - Stephens Inc., Research Division

Okay. And with regards to the UFC acquisition, is that expected to be sort of accretive, sort of right off the bat? Or is there going to be a drag for a quarter or 2, and then have accelerating earnings as we move into the back of the year?

Amin J. Khoury

Well, we raised guidance 3 weeks ago at the time of the announcement of the UFC acquisition. So we expect it -- and we raised by $0.10, right? And the $0.10 was due to our expectation that UFC would deliver accretion in the first year of ownership of the business. We were able to close the transaction, actually, the day before yesterday at the end of the day. So we'll have it for 11 months of this year, and we expect it to contribute almost $0.10 a share, maybe not the full $0.10 but it will be accretive and we're comfortable with our $2.75 guidance.

Eric Hugel - Stephens Inc., Research Division

Okay. But you won't sort of comment as to whether it's sort of accretive out-of-the-box?

Amin J. Khoury

Yes, it's accretive out-of-the-box.

Eric Hugel - Stephens Inc., Research Division

Okay, great. And just real quick, Tom. The tax rate, 30.5% for the quarter looked a bit low. Was there any sort of one-time benefits in there?

T. P. McCaffrey

Yes, there was a small adjustment from some tax planning and that was able to flow through in the fourth quarter, but you should expect 32% for 2012. That is our expected rate.

Operator

We'll take a question now from Troy Lahr at Stifel, Nicolaus.

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

I'm wondering if you can talk a little bit about the negotiations that you're having with airlines on the lavatory systems. Do you think that they start retrofitting some of their aircraft before they take the new deliveries since they can add another 6 rows and that would be pretty incremental to the airlines?

Amin J. Khoury

No, we don't. I don't know when the first retrofit order will be booked. We're having discussions with lots of airlines, Troy. But it's premature to discuss any of that right now.

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

Okay. And then as this SFE work starts to ramp up over the next few years, should we expect that, that's going to have about the same margins as the segment margins? Or do you think that, that might have a bit of a drag?

Amin J. Khoury

Our expectation is that -- and we feel very comfortable with this forecast, is that our margins will continue to increase over the next few years. We had a terrific year this year with respect to margin improvement in both CAS, our Commercial Aircraft segment and our Business Jet segment. We expect significant additional margin improvement in both those businesses next year. We expect our Consumables Management segment to get these businesses integrated, I mean, they've now got UFC, Satair and LaSalle to get integrated, so we will incur significant integration costs, but we expect margins in that business to expand at a healthy rate also. So we feel very confident about our margin expansion over the next few years. And that is including the SFE program deliveries, which we expect, which is likely to be around $400 million, as we mentioned earlier, 3 years out.

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

Okay. And then just so I'm clear, is there any opportunities on the lavatory system with Airbus? Or do you think that this is just solely Boeing right now, and that's much further down the line if you can penetrate into Airbus with this product?

Amin J. Khoury

There are other lavatory opportunity in other aircraft types. We need to determine which aircraft types are the most probable for us to win, and which ones to go after and how to sequence it all. So the answer is yes, there are opportunities on Airbus aircraft, but there may be more opportunities on other aircraft types from whomever.

Operator

Next up is Gautam Khanna at Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

I wanted to explore 2 things. One, I saw TransDigm, I guess, they're buying this company Amsafe which makes seatbelts and that company's strategy tends to be raised price. Are they a supplier to you guys when you deliver a seat or does that impact in any way?

Amin J. Khoury

No, we are a minor customer of theirs, under a couple of million dollars a year. The seatbelts and seat restraints are most often bought directly by the airlines and the airlines supply the restraints through the seating manufacturers as customer-furnished equipment. So while we are one of the largest manufacturer of seats in the world, the seat -- restraints for the seats are generally provided to us by our airline customers.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay, good. And then the other thing I was wondering is, you mentioned the 3PL, 4PL capability at UFC. How incremental is that to what the CMS business does today? I mean, how does this kind of expand your reach in that domain?

Amin J. Khoury

They're really good at it, they focused on it, they had to in order to build their business because they don't have product line breadth or the inventory depth or the IT assets or robotics or other things that we have. So they have really focused on 3PL and 4PL programs and they've become experts at logistics. And by becoming experts at logistics, they're taking on more and more products at the customer base, so as the customers ask them to do it. It makes the customer inventory management and purchasing so much more convenient, and even warehousing. It's simpler and less costly and more efficient. And I think that they are better at it than the rest of us, including the 2 big guys. Not I think, they are. And that includes kitting. So we are enthusiastic about this transaction. We've been working on this for months. It is -- it was a very much sought-after company, and I think it bodes well for our future ability to compete in the marketplace.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And one last knit question. You mentioned the CMS organic growth. Last quarter, you gave it by end market. Do you know what it was Commercial and then Biz Jet and Military separately? Do you have that handy?

Amin J. Khoury

Yes, Tom, I do. We do have it somewhere. I think it was 14%. Tom, do you remember? Or do you have the number, the growth exclude -- organic growth rate excluding military and biz jet sales? 14.6%?

T. P. McCaffrey

Yes, I think it's 14.5%.

Operator

Now we go to Deutsche Bank's Myles Walton.

Myles A. Walton - Deutsche Bank AG, Research Division

Just to go on consumables again for a moment, Amin, the growth rate there looks like it's accelerating on an organic basis, and in the outlook you comment that your outlook for growth there is more tied to global traffic and capacity which is obviously, not growing at 12%. But back in the day, this was your fastest-growing business. Do you think the business on a go-forward basis is more going to be a small factor multiplier to global traffic and capacity growth? Or is there a swing back coming that will be very outsized growth in that segment as you restock?

Amin J. Khoury

I think over a long period of time, our business should be tied to traffic and capacity, as you point out. Within those -- but within cycles, there could be some volatility. So in the -- the new aircraft build cycle takes off and folks become nervous about their inventory levels. They may buy more than they actually need. But in the end, that results in them buying less than they need in the downturn, right? So yes, I think that what you point out is quite possible, that there might be an upswing here because of what's happening. I mean, you got 8,000 airplanes in backlog and both of the majors increasing their delivery rates. And so there is a possibility that the growth rate could accelerate. But I don't think -- but I think the right way to think about it from a long-term point of view is that market demand is driven by capacity growth and revenue passenger miles and our growth, vis-à-vis anybody else's growth is going to be also delivered by market share gains and by customers in Europe and Asia outsourcing more of the work which they currently do themselves, and for customers outsourcing to us and our competitors more of the products which they now buy. So UFC, for example, was involved in paint, in doing a lot of kitting and some other products which we did not -- basically, we're not involved in. So product line expansion will help to drive growth. 3PL, 4PL programs will drive growth in excess of -- I'm talking about growth in excess of passenger growth rates -- revenue passenger mile growth rates and capacity and more outsourcing by companies or airlines in Asia and -- I'm sorry, manufacturing companies in Asia and Europe. So -- and then there's market share growth. So there are a lot of ways to grow aside from just capacity and revenue passenger miles.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. I mean, another way I kind of look at it is if I pro forma all of your business in consumables back to 2008, I mean, I think it's $1.5 billion, $1.6 billion kind of business back at the peak. Given everything you hold in your pocket today, when do you think you get to that level?

Amin J. Khoury

I don't know the answer to that question. But our expectation is solid growth in revenues for our CMS business in 2012, and getting a lot of the integration work behind us and substantial margin expansion in the coming years. I don't know when we'll get back to that number. It may be that number happens because of an acceleration in purchasing because of the increase in build rates for aircraft.

Operator

Moving on now to J.B. Groh at D.A. Davidson.

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

Guys, I think Miles kind of asked my question. On this Consumables Business, I mean, can you sort of give us an indication of where you kind of think customer inventory levels are? I mean, obviously, with the 12% growth, I guess, 14.5% on just a pure commercial versus what we're going on with traffic and even production rates, it's a pretty good number. So maybe you could comment on what you think customer inventory levels are currently?

Amin J. Khoury

No, I don't think customers have at all panicked. And I know most of you folks follow the manufacturers of fasteners and think that they've experienced the same thing. And you also follow other distribution companies in the business. So I think so far, it's been -- everything's been very calm. People are not -- have not so far, seem to have been concerned about the increase in build rates, and there's no panic and there's no increase in inventories.

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

So it's not a -- you're not seeing a panic in a restock kind of a situation? Like you said, it's more share gain and product line equipment?

Amin J. Khoury

They're buying what they need.

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

Okay, great. And then on UFC, I think I can back into this but I mean, it looks like with the kitting and that sort of thing, the margin profile, that's probably, maybe a little bit better than what your core Consumables Business is?

Amin J. Khoury

No, it's a little worse. We can tell you, I mean, the UFC EBIT margin is, I think, roughly around 17%. Satair and LaSalle around 14%. And so we've got 3 businesses that we got to integrate which are drag-on margins. But even at the 17% margin number for UFC, it as accretive to earnings in 2012.

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

And when you talk about integrating those 3 businesses, what's the time span?

Amin J. Khoury

We will accelerate our efforts this year, particularly with respect to UFC, because there are so many duplicate facilities between us and them. And there are some opportunities on the cost side for materials. And so I think that we will accelerate that effort and we expect very substantial synergies, particularly from the UFC transaction.

Operator

And we'll take our last question today from Carter Leake at BB&T Capital Markets.

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

Amin, when you speak about the $800 million opportunity on the lavs, is it -- because you speak to the MAX, it safe to assume that the timeframe at least is closer to 10 years?

Amin J. Khoury

Sure. The answer is yes.

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

Okay, that's helpful. Could it be -- I mean 15 years, but it's at least 10 years?

Amin J. Khoury

Well, it's 10. Yes, it could be longer, but our thought about the timeframe is about 10 years. Our thought about the timeframe is 10 years from the 737 NG and 737 MAX alone, right? If there are other programs, either retrofit programs or lavs in other aircraft types, all of that would be incremental to the $800 million.

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

Okay. And then on the retrofit opportunity, from a certification perspective, I know you don't want to talk about retrofit opportunities now, but from a certification perspective, could you retrofit before Delta if you had the product? I just want to understand how that works.

Amin J. Khoury

There's no way to produce the product faster than that. I mean, we're building a new plant, we're buying the tooling, we're hiring and training people. We've got to get lavs out of the -- out of our production facilities in 2012 in order to meet the 2013 third quarter delivery schedule, right? We'll have a long stream of product on the ocean to -- in order to be rate-ready to deliver units to the 737 line as fast as Boeing is building 737s. So revenues from retrofits prior to 2013 for 737 lavs, highly unlikely. Order...

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

Well, I would even say, what about speed in '14 sounds on lavs because that's the switch by of the ramps for just meeting Boeing's needs, right?

Amin J. Khoury

Well, that's a different -- that's a different story. I think it becomes more likely that there's a possibility to have retrofit revenues in 2014 and '15. The first task is to be rate-ready for Boeing and to make sure that we are a gold supplier and our on-time delivery is perfect and that we maintain the opportunity to win this type business on other Boeing aircraft types in the future, right?

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

Okay, sure. Lots of negative news coming out of Europe, just those airlines. Can you speak to how you manage any receivable risk, if any, on CMS if it sort of worsens over there?

Amin J. Khoury

Tom, you can talk about -- what is your worry about? European bankruptcy? What is that you're -- what is your focus? So we understand your question.

Greg Powell

I think he dropped his line, Amin.

Amin J. Khoury

Okay. Tom, do you want to take a crack at that?

T. P. McCaffrey

Well, if the question is what's our exposure, historical exposure be it on a credit -- from a credit risk perspective, it's been de minimis. I think that when we had the flood of bankruptcies 12 years ago, over that time period, I think our aggregate credit losses were somewhere in the neighborhood of $4 million to $6 million. And even then, those were the amounts that we recorded and we usually are able to recoup some amount through the Bankruptcy Court process because they need us to support their ongoing operations.

Greg Powell

We're past our time now and I appreciate everyone listening in. And we look forward to talking to you next quarter. Thank you.

Amin J. Khoury

Thanks everyone.

W. Lieberherr

Thank you.

Operator

Ladies and gentlemen, again, this concludes today's B/E Aerospace Conference Call. Thank you again for participating today.

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