BE Aerospace (BEAV) Werner Lieberherr on Q4 2015 Results - Earnings Call Transcript

| About: B/E Aerospace (BEAV)

BE Aerospace, Inc. (NASDAQ:BEAV)

Q4 2015 Earnings Call

February 02, 2016 9:00 am ET

Executives

Greg Powell - Vice President-Investor Relations

Amin J. Khoury - Co-Founder & Executive Chairman

Werner Lieberherr - President and Chief Executive Officer

Joseph T. Lower - Chief Financial Officer

Analysts

Seth M. Seifman - JPMorgan Securities LLC

Gautam Khanna - Cowen and Company, LLC

David E. Strauss - UBS Securities LLC

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Robert M. Spingarn - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Peter J. Arment - Sterne Agee CRT

Howard Alan Rubel - Jefferies LLC

Operator

Good morning. My name is Candice Scriven, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the B/E Aerospace Fourth Quarter 2015 Earnings Conference Call. All audience lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. As a reminder, ladies and gentlemen, the conference is being recorded this day, February 2, 2016. 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 - Vice President-Investor Relations

Thank you, Candice. Good morning and thank you for joining us this morning. Today, we are here to discuss our financial results for the fourth quarter and full year ended December 31, 2015. By now, you should have received a copy of the earnings release we issued earlier this morning. 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 and Executive Chairman of B/E Aerospace. Also, on the call this morning are Werner Lieberherr, President and Chief Executive Officer; and Joe Lower, Chief Financial Officer.

For today's call, we've prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page of the B/E Aerospace website at beaerospace.com. In addition, copies of the slides will be posted on our website for you to refer to after the call.

For comparability purposes, the 2015 results are presented excluding the previously announced third quarter charge related to the company's cost reduction program. The 2014 results are presented excluding discontinued operations and one-time expenses and present 2014 income tax expense based on the fourth quarter and full year 2015 effective tax rate for comparability purposes. These items are described in the reconciliation of non-GAAP financial measures at the end of the slide presentation and in our earnings release.

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

Following our prepared remarks, we will address questions. At that time, Candice will provide instructions. Please limit your questions to no more than two at a time so that we can get to everyone.

And now, I will turn the call over to Amin Khoury.

Amin J. Khoury - Co-Founder & Executive Chairman

Thank you, Greg, and good morning, everyone. As we get started this morning, I'd like to discuss a number of important 2015 highlights and put the year in perspective.

2015 was an important year in the company's history. It was our first year as the new B/E Aerospace, exclusively focused on the design, development, certification and manufacturing of aircraft cabin interior equipment.

This positions us uniquely as the leading manufacturer of aircraft cabin interior equipment. We sell our interior equipment directly to airlines and leasing companies, and this represents approximately 80% of our business. We refer to this 80% portion of our business as buyer furnished equipment, or BFE. The 20% balance of our business is seller furnished equipment, or SFE, which we sell to a very broad range of OEMs.

I'm pleased to report that our 2015 full year earnings per share of $3.03 exceeded our initial guidance of $3 per share and represent 21% increase over the prior year.

In addition, we reported a record operating margin of 18.4% and a 76% free cash flow conversion ratio. These results were achieved in spite of the significant business headwinds which we confronted over the course of the year. These included adverse foreign exchange impacts and the collapse in oil prices which negatively impacted our business with Russia and other emerging countries as well as our business jet and helicopter OEM customers.

As a result of these negative macro headwinds, the company's revenues fell short of our expectations. However, our earnings, operating margins, earnings per share, and free cash flow generation, all met or exceeded our guidance as a result of aggressive cost reductions and disciplined expense management throughout the year. Through it all, we were able to deliver strong financial results in 2015 and positioned the company for profitable growth in 2016, 2017 and beyond.

In addition, 2015 was another strong year for awards and bookings for both our commercial aircraft and business jet segments. These awards and bookings strengthen our backlog and lay the foundation for sustained revenue and operating earnings growth which are expected to continue to generate strong free cash flow. Werner will discuss our 2015 customer awards and bookings along with the number of operational initiatives in greater detail in a few minutes here.

During 2015, we implemented our capital allocation plan, which is predicated upon strong predictable cash flows and a priority to return capital to shareholders through dividends and share repurchases. Given our expectation of continued strong free cash flow generation, we are comfortable with our current level of debt and have set a long-term leverage ratio target of approximately 2.5 times net debt to EBITDA. We expect to achieve that objective primarily as a result of EBITDA growth rather than further debt repayment. In addition, we expect our free cash flow conversion ratio to move to approximately 100% in 2017 as several of our SFE programs ramp up and start to generate cash.

As a result of our expectation of continued strong free cash flow generation as well as the attractive value that our shares represent, we accelerated our share repurchase program by repurchasing $90 million of our shares in the fourth quarter, bringing our full year share repurchases to $150 million. In addition, we paid dividends of $79 million and we repaid $136 million of our outstanding term loan. In total, during 2015, we returned approximately $230 million of cash to our shareholders and $136 million to our debt holders.

We are now targeting approximately $150 million of additional share repurchases for 2016 and more than $200 million in 2017. Further, we expect to increase our dividend by approximately 10% in 2016 to approximately $0.84 per share. In total, over the 2015 to 2017 three-year period, we expect to repurchase more than $500 million of our shares and to pay dividends in excess of $260 million. Finally, earlier this morning, we increased our 2016 financial guidance, and we reaffirmed our 2017 outlook.

Now, let's discuss the current market environment. Continued positive industry trends support our 2016 and 2017 outlook. November year-to-date traffic is up 6.7%, and capacity has grown by 5.8%, resulting in continued healthy global load factors in excess of 80%. The global airline industry continues to demonstrate the disciplined growth capacity at a slower rate than demand, and the favorable resulting load factors have enabled the airlines to achieve record levels of sustained profitability.

As a result, 2015 global airline profits are expected to be approximately $33 million, a new record and the sixth successive year of profitability. For 2016, the International Air Transport Association is forecasting global passenger traffic and capacity growth of approximately 7% and global airline profits of approximately $36 billion, up another 10% over the record profits in 2015. Strong traffic growth and record airline profitability are driving high levels of aircraft deliveries by both Airbus and Boeing.

Our commercial aircraft segment is strategically positioned to outperform in this environment as the company is leveraged to airline profitability, the airline aftermarket, and commercial aircraft OEM deliveries.

In contrast, the business jet market has been adversely impacted by the collapse in oil prices. Countries such as China, Russia and Brazil once net buyers of new aircraft – of new business jet aircraft had become net sellers. In fact, the collapse of oil prices has even negatively impacted the liquidity of oil-rich Middle Eastern countries that have also been key markets for business jet and VIP aircraft.

Finally, a number of new business jet models which are slated for entry into service in 2018 are impeding the purchase of existing aircraft models.

Nevertheless, we are prepared to navigate the currently weak business jet demand. We've designated – we've been designated preferred provider on a vast majority of new business jet aircraft types and our backlog of super first class products is strong. We expect our business jet segment to report negative revenue growth in 2016 as we've guided in the past. So, current business jet headwinds as well as a lower level of super first class products consistent with the timing of deliveries from our backlog.

We expect a recovery in the segment beginning in 2017, reflecting our strong backlog and our global leadership in both super first class products and business jet products.

I will now ask Werner to discuss our 2015 customer awards and bookings, as well as our operational initiatives.

Werner Lieberherr - President and Chief Executive Officer

Thank you, Amin. We continue to perform exceptionally well in the marketplace. During the year, we won total awards valued at approximately $3 billion which included both important buyer furnished equipment, BFE, and supplier furnished equipment, SFE, wins. Fourth quarter awards were particularly encouraging as we secured total awards valued at approximately $1.1 billion, which included both BFE and SFE wins.

During the quarter, we were selected by a major international airline to outfit its new-buy wide-body aircraft with proprietary and unprecedented high-end, super first class suites. In addition, our SFE wins included awards to supply passenger oxygen systems and toilets for the Boeing 777X, as well as an extension of the company's exclusive agreement to supply LED lighting systems for the 737 MAX. So the fourth quarter was an excellent quarter for bookings and awards.

The awards for the year were strong, and are very well distributed geographically. Of note, in 2015, we did extraordinarily well in the North American and Middle Eastern market. Each of these regions was a major focus for us, and our results reflect the success we had in these areas.

Specifically, in North America, we had very good success with Air Canada, American Airlines, Delta Air Lines, Jet Airways, Southwest Airlines, and United Airlines. During the past year, we were able to strengthen our relationships with these important carriers. Having achieved the highest win percentage in North America, it is particularly satisfying, given that these airlines are performing at their historical best financially and operationally, and are focusing more on upgrading their customers' experience. This bodes well for spare sales, interior upgrades and retrofits.

In addition, and as I mentioned earlier, we announced in October that we were selected by a major international airline to outfit its new-buy wide-body aircraft with proprietary and unprecedented high-end, super first class suites which are expected to set a totally new standard for the first class travel experience.

Our successful sales and marketing efforts, together with our investments in product development and innovation, continue to result in significant market share gains in 2015. In fact, in 2015, we won about 65% of super first class seating awards, almost 50% of business class seating awards, more than 50% of coach class seating awards, and more than 80% of food and beverage preparation and storage equipment awards.

I'm also very pleased to report that during 2015, we had significantly strengthened our partnership with Boeing by winning a number of strategic SFE program awards. Specifically, Boeing selected B/E Aerospace to supply oxygen systems and toilets for 777X. In addition, they extended our exclusive agreement to supply LED lighting systems for the 737 MAX. And finally, we achieved operability status on the 787 for our state-of-the-art, newly developed Essence line of food and beverage preparation and storage equipment.

Each of these programs was won on the basis of our differentiated product offerings, and both validates the success of our R&D spending and reinforces the strength of our relationship with Boeing. These awards and all those (15:50) goes to both our BFE and SFE backlogs. Our BFE product portfolio is the broadest in the industry, and we are the market leader in all product categories by share and customer quality, as we are strategically aligned with the top airlines across all regions.

In addition, our SFE backlog is based on proprietary technologies which are delivering on future high growth platforms such as the 737 MAX, 787, 777X and the A350. Our high-quality backlog substantially enhances revenue and earnings visibility over the next several years.

As Amin mentioned earlier, our operational initiatives help us to offset the negative revenue headwinds we experienced in 2015 as a result of the unfavorable dollar-euro exchange rate and the collapse in oil prices. Our global sourcing lean (16:52) continuous improvement and program management initiatives continued to drive margin improvement. In 2015, we delivered 50 basis points of margin expansion through disciplined expense management throughout the year.

In addition, we developed and begun implementation of a comprehensive cost reduction program that includes the consolidation of six facilities, the repositioning of product lines to lower cost manufacturing environment, and the elimination of more than 450 positions. Our cost reduction program is going as planned ,and is expected to be completed by the third quarter of this year.

Now let's turn to slide 2 and bring you our excellent awards, bookings, and backlog results for the fourth quarter and for the full year of 2015. During the fourth quarter, the company secured total awards valued at approximately $1.1 billion, which included the previously discussed BFE and SFE wins.

Bookings during the fourth quarter of 2015 are approximately $690 million, which excludes the new SFE awards, and the book-to-bill ratio was approximately 1.05 to 1. Full year 2015 was record bookings year, with approximately $3 billion of orders booked, an increase of 10% over the prior-year period, and representing a book-to-bill ratio of approximately 1.1 to 1.

Backlog as of December 31, 2015 was approximately $3.2 billion, while awarded but unbooked backlog was approximately $5.6 billion. It represents an increase of approximately $600 million as compared with the third quarter. This brings total backlog, both booked and awarded but unbooked, to a record of approximately $8.8 billion.

Importantly, the backlog is of high quality and includes major programs for the most innovative and important airlines in the world. I will now turn the call back over to Amin.

Amin J. Khoury - Co-Founder & Executive Chairman

Werner, thank you. Now, let's review our fourth quarter and full year financial results. Please turn to slide 3, and we will review our fourth quarter consolidated results. The bar chart on slide 3 reflects our consolidated fourth quarter 2015 financial performance compared to the fourth quarter of 2014.

Fourth quarter 2015 revenues of $659 million increased 3% as compared with the prior year period. Revenues increased 4% on a constant currency basis. Operating earnings of $124 million increased 12% and record operating margin of 18.8% expanded 150 basis points. Net earnings per share of $0.81 per share increased 33%.

Now, let's review our full year 2015 consolidated financial results. Please turn to slide 4. Bar chart on slide 4 reflects our consolidated 2015 full year financial performance compared to the prior year. For the year ended December 31, 2015, revenues of $2.73 billion increased 5%. That increase was 6% on a constant currency basis. Operating earnings of $501 million increased 8% and record operating margin of 18.4% expanded 50 basis points as a result of favorable mix and disciplined expense management throughout the year. Net earnings per diluted share of $3.03 per share exceeded our initial guidance and increased 21% as compared to the prior year. During the year, we generated $240 million of free cash flow, reflecting a free cash flow conversion ratio of 76%.

Now, let's turn to slide 5 and review Q4 2015 results for our commercial aircraft segment. Fourth quarter 2015 commercial aircraft segment revenues of $525 million increased 9%. That increase was 10% on a constant currency basis. Revenues increased due primarily to higher volumes, a buyer furnished equipment sold directly to our airline and leasing customers.

Operating earnings of $103 million increased 16% and record operating margin of 19.5% increased 110 basis points as compared to the same period of the prior year. So, notwithstanding serious currency headwinds and collateral damage in the collapse in oil prices, our commercial aircraft segment turned in outstanding financial results.

Now, let's turn to slide 6 and review full year 2015 results for our commercial aircraft segment. Our commercial aircraft segment management team turned in very strong operational results in 2015 in spite of the aforementioned significant macro headwinds of currency and collateral damage in the collapse in oil prices. They took the cost reduction and expense management actions which were necessary and have set the business up for stronger revenue and earnings growth in 2016 and particularly in 2017 and beyond.

2015 commercial aircraft segment revenues of $2.1 billion increased 2%. On a constant currency basis, revenues increased 3%. Operating earnings of $397 million increased 6%, as compared with the prior-year period, and operating margin of 18.9% expanded 70 basis points as a result of a favorable mix of products and aggressive expense management.

Spares revenues increased a strong 10% as a result of increased global traffic, high load factors, and most importantly, our growing installed base.

Now, let's turn to slide 7 and review the results of our business jet segment for the fourth quarter. Unfortunately, the excellent fourth quarter performance of our commercial aircraft segment was partially offset by the lackluster revenue performance of our business jet segment. Fourth quarter 2015 business jet segment revenues of $134 million decreased by 15%. Revenues declined primarily as a result of lower sales, a super first class seating products, reflecting the timing of the rollout of products from our backlog, basically slipping to the right. The segment did turn in strong profitability performance as our operating earnings were $22 million, and operating margin of 16.1% increased 200 basis points as a result of a favorable mix of products and lower operating expenses as compared with the prior year period.

Now, let's turn to slide 8 to review the results of our business jet segment for the full year 2015. Full year business jet segment performance was solid as 2015 business jet segment revenues of $631 million increased 16.9%. Operating earnings increased 15% to $105 million, and operating margin was 16.6%. Business jet management team, as I mentioned earlier, faced significant macro headwinds in 2015. These included weakened markets for our business jet and helicopter products caused by the collapse in oil prices. In the fourth quarter, revenues also declined for our super first class seating products, reflecting the time of the rollout of new products from our backlog.

The team has worked very proactively and taken the actions that we believe will allow them to be well prepared to navigate the challenges of the business jet market, and lower super first class revenues this year. While we expect our business jet segment to report negative revenue growth in 2016, as we have guided before, we do expect a recovery in 2017, reflecting our strong backlog and our global leadership in both super first class products and business jet products.

Let's now review our outlook for 2016 and 2017. Today, we reaffirmed and further clarified our 2016 financial guidance in the context of reported results for 2015, and we increased our 2016 earnings per share guidance. Let's turn to slide 9 where we will review in detail our 2016 financial guidance.

For 2016, revenues are expected to be approximately 3% higher than 2015. Operating margin is expected to be in excess of 18%. Interest expense is expected to be approximately $92 million. 2016 net earnings per share are expected to increase by approximately 6% to approximately $3.20 per diluted share and 2016 free cash flow conversion ratio is expected to be approximately 75% of net earnings.

Now, let's review our 2017 outlook. Our bookings over the past three years have been extraordinarily strong. And as we have previously discussed, a major portion of revenues from these awards is expected to be realized primarily in 2017, 2018 and beyond. The quality of our backlog underlies our confidence in our 2017 expectation of revenue growth of approximately 7.5%. And based upon continued discipline cost management and execution of our capital allocation plan, we expect 2017 earnings per share growth in the low to mid-teens as compared with 2016.

As we complete the development phase of our supplier furnished programs and begin to ship higher volumes of SFE equipment in 2017, we expect our free cash flow conversion ratio to increase to approximately 100% in 2017. In addition, our backlog gives us excellent visibility into solid revenue growth beyond 2017 as well.

And with that, I'll turn the call back over to Greg for the Q&A portion of this morning's call.

Greg Powell - Vice President-Investor Relations

Thank you, Amin. I will now turn the call over to Candice for the Q&A section of today's call. She will provide us with instructions on how to ask a question. Candice?

Question-and-Answer Session

Operator

Thank you. And our first question comes from Seth Seifman with JPMorgan.

Seth M. Seifman - JPMorgan Securities LLC

Thanks very much and good morning.

Amin J. Khoury - Co-Founder & Executive Chairman

Good morning.

Werner Lieberherr - President and Chief Executive Officer

Good morning.

Seth M. Seifman - JPMorgan Securities LLC

I was wondering if you could talk – good morning. The SFE work that you've picked up in the quarter, I was wondering if you could talk a little bit more about that. It seems in the vein of stuff that you've done already, but it seems like you moved away maybe from SFE a little bit over the past two years or so, and awarded but unbooked backlog has been pretty flat. Maybe you could talk about the strategy in your approach to SFE versus BFE work and kind of how the announcements that you made today fit into that.

Amin J. Khoury - Co-Founder & Executive Chairman

Sure. I mean I think that our relationship with Boeing has evolved and continue to be a very good relationship. I think that the R&D activities which we had been undertaking on the SFE side have really paid off and enabled us to demonstrate some differentiated products and technology to Boeing which has motivated them to incorporate into the 777X. It's a new product which we developed which includes a Pulse oxygen system which is a lower weight, much more efficient system, as well as our toilet which is a much more reliable and easier-to-service product.

In addition, we've continued to upgrade our technology on the LED lighting side, and basically, it is a significant improvement in the development of the product technology which has enabled both we and Boeing to enter into basically a brand new long-term agreement covering the 737 MAX on an exclusive basis.

Werner Lieberherr - President and Chief Executive Officer

And just to add to that, our commitment is unwavered (31:39) to the SFE, as you can imagine. I mean, just when you look at the investments we are doing with Airbus on A350 ongoing, these are massive efforts. And the same goes for 737 lavatories. So, as Amin said, yes, we have a much larger share obviously, about 80/20, but these are very important wins and successful wins.

Seth M. Seifman - JPMorgan Securities LLC

Great. Thanks.

Amin J. Khoury - Co-Founder & Executive Chairman

I think, importantly – and it's a good question – importantly, these – several of our SFE programs are now moving to higher volumes in 2017. I think I mentioned in my prepared remarks that our free cash flow conversion ratio moves up to about 100% of net income, enabling us to continue to execute and improve our capital allocation program, which is a pretty shareholder-friendly program.

Seth M. Seifman - JPMorgan Securities LLC

Great. And then maybe as a quick follow-up, and I apologize if you mentioned this, but you guys have said repeatedly that your outlook for sales growth in 2016 and 2017 is based on what you have in backlog. And there's a lot of perturbations going on in terms of what the OEMs have said, Boeing is taking down the 777 rate in 2017 and the delivery pace of 737 is a little bit different than people expected, the pace of A320neo deliveries has been a little bit different, and A350, there have been some perturbations. If you thought about any risks in terms of your outlook for this year or next year, does any of that have any impact?

Amin J. Khoury - Co-Founder & Executive Chairman

When the OEMs take the rates down, it's because they don't have customers, future customers, for those aircraft, right? Our guidance and our backlog reflects orders, bookings and backlog with the customers which they do have. So, we build our revenue forecasting model on a grounds-up basis by customer and by product on – with particular on-dock dates.

So, when Boeing or Airbus talk about taking the rates down, they're concerned that they may not be able to get the orders which they need to keep the rates going at a higher level. Really doesn't have anything to do with the aircraft that they already sold to the airlines for the products which we manufacture, which are already in our backlog.

Werner Lieberherr - President and Chief Executive Officer

I just spent the last week, actually, in Asia and – to have exactly this type of discussions in China and Japan, Thailand and so on, and to go through program per program, what are these customers doing, and so that drives our top line.

Seth M. Seifman - JPMorgan Securities LLC

Great. Thanks very much.

Operator

Next, we have Gautam Khanna with Cowen and Company.

Gautam Khanna - Cowen and Company, LLC

Yeah. Thanks. Good morning.

Amin J. Khoury - Co-Founder & Executive Chairman

Good morning, Gautam.

Werner Lieberherr - President and Chief Executive Officer

Good morning.

Gautam Khanna - Cowen and Company, LLC

I was wondering if you could elaborate on the super first class timing blip out of the fourth quarter. Was it unexpected, or was it something that you have that you guys were aware of, but maybe we weren't? And then, when do those get recovered? Is it 2017 or...?

Amin J. Khoury - Co-Founder & Executive Chairman

It's really just a slight push to the right, and those were revenues we picked up in 2016, which is why we increased our revenue guidance to 3% growth rate rather than 1% to 2%. We had a really good year, and a really good fourth quarter. If you look at earnings and earnings per share and the operating margin and bookings and awards and cash flow and capital allocation plan, I mean, so many really good things happened during the year and in the fourth quarter. So, we feel really good about it, and I think that revenue shortfall for a program that moves to the right and gets delivered in 2016 is really – it's almost not worth talking about.

Gautam Khanna - Cowen and Company, LLC

Okay. Then, also you've heard Airbus discuss some of one of your major competitors' problems. And they kicked them off the A330neo, I believe, on certain products. And I was wondering, what product does that represent, and are you guys – when might we see a pickup in orders related to your competitors' woes at Airbus, or have we started to see that already, in short flow orders?

Amin J. Khoury - Co-Founder & Executive Chairman

During Werner's prepared remarks, he talked about our amazing success in North America over the past year, and also talked about our win rates on business class seating being at 50% and coach class seating being at 50%, which is really amazing, and our food and beverage preparation and storage equipment being at 80%. And the awards and orders and bookings that we've had over the past three years are really outstanding.

So, we built a large backlog, which gives us a lot of visibility into 2017 and beyond. And I would say that there has to be some impact on our orders and backlog from the troubles, which our major competitor has openly discussed over the past year or more.

So, I can't separate easily what we've won as a result of our innovation, as a result of our being the best company in the business in terms of on-time delivery and – from issues which our competitors have encountered. So, I think we should basically leave it at that. We are doing really well in the marketplace, and I think our opportunities in 2016 for awards and bookings may have been increased as a result of the well-publicized issues which our major competitor is encountering.

Gautam Khanna - Cowen and Company, LLC

Okay. Thank you very much.

Operator

We'll now move to David Strauss with UBS.

David E. Strauss - UBS Securities LLC

Thank you. Good morning.

Amin J. Khoury - Co-Founder & Executive Chairman

Good morning, David.

Werner Lieberherr - President and Chief Executive Officer

Good morning.

David E. Strauss - UBS Securities LLC

Amin, so the slip out on the super first class from the end of 2015 into 2016, is that what backs up the increase on the revenue forecast side from one to two up to three?

Amin J. Khoury - Co-Founder & Executive Chairman

Yeah. Primarily, yes.

David E. Strauss - UBS Securities LLC

Okay. Looking at the margin side, so you're continuing to forecast above 18% in 2016, looks like relatively similar to 2015. Can – it seems to imply a pretty low incremental margin. Can you talk about what's going on there, what you're assuming for R&D in those numbers?

Amin J. Khoury - Co-Founder & Executive Chairman

Yeah. We will go through the – but I'm going to ask Joe to do that. But it doesn't imply anything except operating margins in excess of 18%. Joe, do you want to talk about that?

Joseph T. Lower - Chief Financial Officer

Sure. And I've got to reemphasize. I mean, absolutely, extraordinary performance in 2015 and let's recognize that. But as we look at the business, we expect ER&D to be approximately 10% of sales as we've said in the past. And we expect SG&A to be approximately 12% of sales as we have in the past. So, pretty consistent with what, David, we've been talking about previously and consistent with our continued outlook for the business.

Amin J. Khoury - Co-Founder & Executive Chairman

Joe, can you just go through the rest in terms of CapEx...

Joseph T. Lower - Chief Financial Officer

Sure.

Amin J. Khoury - Co-Founder & Executive Chairman

...and so forth, so we'd get all of that out of the way?

Joseph T. Lower - Chief Financial Officer

Sure. Just going to go through it. CapEx, we anticipate, will be in the $90 million range or so. That has CapEx then actually slightly above depreciation as we continue to invest in the business. The combination of depreciation and amortization will be approximately $90 million as well going forward, which includes about $17 million of amortization. So again, investing at a greater rate in our depreciation. Free cash flow conversion then at approximately 75%, going to 100% in 2017 primarily as the SFE programs that both Amin and Werner discussed move from an investment phase into a recovery phase or just cash generation phase starting in 2017.

David E. Strauss - UBS Securities LLC

Great. Thanks, guys.

Joseph T. Lower - Chief Financial Officer

You bet. Thanks, David.

Amin J. Khoury - Co-Founder & Executive Chairman

Thanks, David.

Operator

Next, we have Deutsche Bank's Myles Walton.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Thanks. Good morning. I was wondering if I could...

Amin J. Khoury - Co-Founder & Executive Chairman

Good morning, Myles.

Joseph T. Lower - Chief Financial Officer

Good morning, Myles.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

...ask on the cash flow. Great performance in 2015. Looking at 2016, if I had it right, SFE capitalized development should be a pretty good tailwind to you. So, just curious, maybe, Joe, why cash conversion isn't better than 75% given what you did in 2015.

Joseph T. Lower - Chief Financial Officer

Yeah. So, the SFE investments will be slightly less, but we will continue to invest in the SFE programs in 2016 as we've discussed. As we look across, you see that the continued capital – working capital management, which we expect to be generally in line with this year. We have CapEx slightly higher next year than this year, again, continuing to invest in the business, and that results in kind of net-net-net, Myles, about a 75% free cash flow conversion ratio.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Okay.

Amin J. Khoury - Co-Founder & Executive Chairman

There's still pretty significant spending in 2016 on a variety of SFE programs, Myles.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Okay. The other clarification on the super first class revenue, was it customer-driven, that is airline-driven, was it OEM platform readiness, or was it B/E product readiness in terms of the source of the delay?

Amin J. Khoury - Co-Founder & Executive Chairman

Customer-driven. Customer-driven.

Joseph T. Lower - Chief Financial Officer

Yeah.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Airline customer or OEM customer?

Amin J. Khoury - Co-Founder & Executive Chairman

Customer-driven.

Myles Alexander Walton - Deutsche Bank Securities, Inc.

Okay. All right. Thanks.

Operator

Next, we have Robert Spingarn with Credit Suisse.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Good morning.

Joseph T. Lower - Chief Financial Officer

Good morning, Rob. Hi.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Just two quick things. I wanted to go back to the margins. And, Joe, you were talking about where do we factor in the completion of the restructuring, the cost improvement programs that you're currently working on? Shouldn't that give a little bit of a lift in 2016 once that's fully fleshed out?

Joseph T. Lower - Chief Financial Officer

So a couple of comments, Rob. First, as we mentioned, much of that is not going to occur until the latter half of 2016 with the program really not being completed into the third quarter.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Okay.

Joseph T. Lower - Chief Financial Officer

Second – okay, as part of it, second, as we've talked about, you do have – with a lower revenue growth rate you do have underlying inflation that impacts cost structures.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Okay.

Joseph T. Lower - Chief Financial Officer

We've continued to invest in our IT, in our infrastructure. That continues to be an impact on cost. So as we continue to reduce cost, there are some mitigants that we factored into our guidance.

Werner Lieberherr - President and Chief Executive Officer

Right, which is already factored in. And, Robert, I mean, 2015 was extraordinary, it is 18.4%, no question about that.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Okay.

Werner Lieberherr - President and Chief Executive Officer

I think at the moment, we can say in excess of 18% in the first half.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

And are there any underlying currency assumptions that you've built in or if we were as diverged, we'd see some sensitivity?

Joseph T. Lower - Chief Financial Officer

Yeah. Our current forecast, Rob, is pretty consistent with the outlook you see today. So we have basically assumed kind of this environment for currency over the course of 2016.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Okay. Okay, great. And then, Amin, just on the biz jet side, you talked about the timing on the super first class related to new product rollout. So I wanted to ask you if you could get a little more specific on the programs you're talking about whether it's A350 or other programs. And then as the negative sales growth continues into 2016 in that segment, is it more super first class or traditional biz jet? How do we think about those separately and then which of those recovers first in 2017?

Amin J. Khoury - Co-Founder & Executive Chairman

It's both. It's both in 2016 and they both begin to recover in 2017. On the biz jet side, there are a number of new biz jet aircraft that will be entering into service for the first time in 2018 and we will begin delivering products for those programs beginning in the – probably the second half of 2017 and that gives us a little bit of a boost on the biz jet side.

And on the super first class side, it's just – basically, it's A350 but it's also 777 and it's A380s and it's basically all of the wide-body aircraft that – where our customers are buying super first class products and it's just the on-dock base and the timing of the rollout from our backlog. So we've got a terrific backlog of super first class products which unfortunately has a little swoon in (46:01) into 2016 period.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Got it. And then you said this earlier, Amin, on the BFE, but the cuts to 777 and to 47, is there any – I guess you were talking about the BFEs. Is there any SFE exposure on any of those?

Amin J. Khoury - Co-Founder & Executive Chairman

On the 777, I mean, we do have the oxygen systems on the 777. We have passenger oxygen on the A380, I mean we have all these products. But when you have 7% growth or 6% to 7% growth in traffic and you have the retirements that are going on, there are some airplanes that are going to fulfill that lift. And I mean, with respect to oxygen, we are on 100% of in-production aircraft for our oxygen systems.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Right.

Amin J. Khoury - Co-Founder & Executive Chairman

So, the way we think about it here is that although there isn't – although it's not predictable as to which aircraft are going to be handling the lift in the 2000 – I would say, 2017, 2018 and beyond, period of time, I think that we are so represent – so well-represented on every aircraft type that we would expect to do pretty well given what traffic is doing and what airline profitability is doing.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

So what you're saying, as long as the fleet's not contracting, it's not a big deal?

Amin J. Khoury - Co-Founder & Executive Chairman

Yeah. I think this year, we would expect aircraft deliveries to be more or less flat with the prior year, but we'll have – we'll do better than that. I think we feel confident about a 3% revenue growth rate in 2016 and in 2017. I mean a 7.5% growth rate in flight aircraft deliveries, that's pretty good performance, I would say.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Yeah. And I really was only talking about the rate cuts at Boeing, and if there was SFE exposure there really.

Amin J. Khoury - Co-Founder & Executive Chairman

I don't...

Werner Lieberherr - President and Chief Executive Officer

No, I think..

Amin J. Khoury - Co-Founder & Executive Chairman

I mean lighting is...

Werner Lieberherr - President and Chief Executive Officer

Yeah.

Amin J. Khoury - Co-Founder & Executive Chairman

Lighting is a positive. We're not going to be cutting 737s and...

Werner Lieberherr - President and Chief Executive Officer

Well, I think the current rates, they are actually reflecting our numbers, to be clear. So we think they're good numbers.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Okay.

Werner Lieberherr - President and Chief Executive Officer

Yeah.

Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker)

Thank you, guys.

Joseph T. Lower - Chief Financial Officer

Thanks, Rob.

Werner Lieberherr - President and Chief Executive Officer

Thanks, Rob.

Operator

Now, we'll hear from Kevin Ciabattoni with KeyBanc Capital Markets.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Hi. Good morning, guys.

Amin J. Khoury - Co-Founder & Executive Chairman

Good morning.

Werner Lieberherr - President and Chief Executive Officer

Good morning.

Joseph T. Lower - Chief Financial Officer

Good morning.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Just wanted to follow up a little bit on Rob's question on biz jet. On the biz jet OE side, I mean, it sounds like you've got some new platforms coming on late next year rather. Wondering if you could give us anymore specifics on kind of what's some of those platforms are. And then, how do you guys get comfortable that the, call it, the legacy side – the older biz jet OE isn't going to worsen. It seems like there's – the sentiment there is getting a little bit more negative now with just a couple of outliers. Just curious how you get comfortable there.

Amin J. Khoury - Co-Founder & Executive Chairman

We're not comfortable. It's in our guidance. It doesn't make us particularly comfortable and we have gotten notifications from a number of our biz jet customers that they are reducing their delivery rates in 2016. But that's in our guidance. It's why we are expecting a decrease in revenues in our biz jet segment in 2016. With respect to specifics which you asked for, so you've got the Bombardier 7000 and 8000 entering into service in 2018. You've had Dassault 5X push out into 2018.

Werner Lieberherr - President and Chief Executive Officer

No, no, 2020.

Amin J. Khoury - Co-Founder & Executive Chairman

And we've got – which other aircraft – we got Gulfstream delivering new aircraft and we got Cessna...

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Yeah.

Amin J. Khoury - Co-Founder & Executive Chairman

...bringing new aircraft to market. So, they are pretty much all of the biz jet manufacturers are bringing new biz jet aircraft to market in 2018.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Okay. That's helpful. And then just last quick one. I think that spares were up 10% for the year in 2015. Are you guys seeing any changes there over the last kind of quarter or two, and is that 10% something we can expect to play out in 2016 as well?

Amin J. Khoury - Co-Founder & Executive Chairman

Well, our spares business is growing primarily as a result of really heavy traffic growth. Very heavy load factors which takes a toll on the airplane interiors and a rapidly growing installed base because of the delivery growth rate that we've had over the last four years or five years. So, the rate at which we are delivering now is double the rate that we were delivering four years or five years ago. And our installed base has grown substantially. So, in the fourth quarter, I think we turned in revenue growth, spares revenue growth of around 12% and 10% for the full year, and bookings at a higher rate than sales. So, it's been an excellent performance. It has positively impacted our margins.

I think that – I don't know that we would want to – in fact, we won't give guidance as to growth rate for spares 2000 – in any period of time. We don't guide specifically by segment, let alone product line within a segment. So, our expectation is that the business will continue to be healthy in 2016.

Kevin Ciabattoni - KeyBanc Capital Markets, Inc.

Great. Thanks, Amin.

Amin J. Khoury - Co-Founder & Executive Chairman

Sure.

Operator

Next, we have Peter Arment with Sterne Agee CRT.

Peter J. Arment - Sterne Agee CRT

Hi, yes. Good morning, Amin, Joe, Werner.

Werner Lieberherr - President and Chief Executive Officer

Good morning.

Amin J. Khoury - Co-Founder & Executive Chairman

Good morning, Peter.

Peter J. Arment - Sterne Agee CRT

Hey. Most of these questions have been answered, so Werner, maybe – you just came back from Asia, maybe you can just ask a big picture question.

Werner Lieberherr - President and Chief Executive Officer

Yeah.

Peter J. Arment - Sterne Agee CRT

What are you seeing from kind of the customer discussions over there? I mean, Amin has talked about the very strong traffic growth, you're seeing it in your bookings numbers, but the headlines would all tell us that China and EM is weak, and what are you seeing on the airline customer base in Asia (52:40)?

Werner Lieberherr - President and Chief Executive Officer

Yeah. I would say, I mean I was just there, and actually started to investigate the chief statistician of China, so that type of thing obviously doesn't boost confidence. And so, I was a little bit worried, but actually, in talking to these major airlines, I'm actually much more positive. They there – clearly, they have the plans in place. They have the traffic growth, and they want to execute on it. So, I looked into these programs, actually, I actually really have to say, I did actually feel much better than before I took off, because I just thought, what kind of effect does it have on the airlines in particular, but I didn't see that.

Amin J. Khoury - Co-Founder & Executive Chairman

Peter, traffic growth in China was way above GDP growth. So I think traffic growth was somewhere in excess of 11% in China, as compared to GDP growth claimed at a 7% rate. Who knows what it was actually. But I think there's a disconnect there, because so many people in the developing world are moving into the middle-class and getting to the point where they're able to travel for the first time.

I don't think that China represents some sort of outlier. There are a number of regions in the world now where traffic growth is way above GDP growth. So, not so much in the developed countries, but much more so in the developing countries and the emerging markets.

Werner Lieberherr - President and Chief Executive Officer

Yeah. And just to give you number, about 7.3 billion people in this world, about 4.3 billion live in this bubble of emerging countries. It's massive. And when you see, I mean, the type of drive and determination (54:30) these people have, and they want to move out and conquer the world, it's clear to me that these type of airlines, there's a lot of opportunities, not just for legacy carriers, but obviously also for low-cost carriers in these areas.

Peter J. Arment - Sterne Agee CRT

Yeah. And just, Amin, if I could just follow up on that, thanks for the color. Just, you mentioned you're doing very well with the spares growth. I mean, 7% traffic growth is impressive for the whole industry, and it looks like it's going to be repeated again this year. I mean, at some point, does the spare volume increase just because of those high-load factors in the wear and tear, or is there kind of a leveling off there?

Amin J. Khoury - Co-Founder & Executive Chairman

No, I think it has increased. It has increased dramatically, and I think that's reflected in today's numbers. So we have 12% in the fourth quarter, 10% for the full year. It's become a big, big, very profitable business for us which is, in fact, impacting our margins in a very positive way. Our hope and expectation is that, as we roll out a lot of the backlog of particularly business class and super first class products over the next couple of years, that our installed base continues to grow, and then our spares business continues to grow along with the installed base.

Werner Lieberherr - President and Chief Executive Officer

And in talking to these airlines, cabin standard is for them really important. I mean, they heavily compete. While we think it's a great environment, but just like Europe or Middle East or Asia, I mean, these airlines are in heavy competition. And in talking to the senior executives, they do want to invest, because they want to have a really competitive, good-looking cabin standard which drives spares, obviously.

Amin J. Khoury - Co-Founder & Executive Chairman

Yeah. That's even beginning to happen in North...

Peter J. Arment - Sterne Agee CRT

Thank you very much.

Amin J. Khoury - Co-Founder & Executive Chairman

That's even beginning to happen in North America. I think the airlines really want to see their cabin standards at a high level, and maintained. And I think that that bode – it bodes well for both refurbishment and retrofit, as well as spares.

Werner Lieberherr - President and Chief Executive Officer

Yeah.

Peter J. Arment - Sterne Agee CRT

Appreciate it. Thanks, Amin.

Amin J. Khoury - Co-Founder & Executive Chairman

Sure.

Operator

Thank you. We will take our final question from Howard Rubel with Jefferies.

Howard Alan Rubel - Jefferies LLC

Thank you very much. Just a couple of clean-up items.

Amin J. Khoury - Co-Founder & Executive Chairman

Well, (56:51) Howard Rubel.

Howard Alan Rubel - Jefferies LLC

I mean you got to have a close...

Amin J. Khoury - Co-Founder & Executive Chairman

Wait a minute, Howard. You know the rules (56:56)

Howard Alan Rubel - Jefferies LLC

Oh, my God. Amin, I was going to give you a softball. Now, I don't know, it might now be one high and tight.

Amin J. Khoury - Co-Founder & Executive Chairman

Sorry, Howard. Go ahead.

Howard Alan Rubel - Jefferies LLC

Well, thank you. I mean, just a couple. One or two that are easy, and one that's probably not. First, I'll do the hard one which is, on all the deferred production costs, sounds like you're adding some new programs to this whole process. So, could you, for a moment, talk about – it sounds like maybe lavs are improving and maybe galleys are improving. But, as you add the new toilets and some of the other new programs, that actually causes some of the deferred costs to increase, could you kind of disaggregate that for a moment and address progress?

Amin J. Khoury - Co-Founder & Executive Chairman

I'm going to ask Joe to handle that. Okay, Howard?

Joseph T. Lower - Chief Financial Officer

So Howard, clearly in 2015...

Howard Alan Rubel - Jefferies LLC

Thank you.

Joseph T. Lower - Chief Financial Officer

...in 2015, it's primarily the existing, obviously, SFE programs that we have. And that investment will continue in 2016. So when we talk about 2016, it's a combination of both the existing programs that we're continuing to make investments in. And then, as some of these new programs come on, probably to a much smaller degree, the nature of the programs, there is the potential for some deferred costs on those programs.

But in the primary drivers of the 2015, 2016, 2017 time period are the existing SFE programs that we've been talking about. And as we move into the larger deliveries in 2017, it's the first time we really start to see that becoming a source of cash after now a couple of years, several years of investments in those programs.

Howard Alan Rubel - Jefferies LLC

So also, it sounded like, in the process of getting the toilets and some of these agreements with Boeing on the 777X, you alluded to an improvement in the contract terms on the 737 MAX for the lavs. Is that correct?

Joseph T. Lower - Chief Financial Officer

We've mentioned an extension of the 737 MAX, which is the – it's a BSI. That's an extension of that program for our new lighting.

Amin J. Khoury - Co-Founder & Executive Chairman

And an improvement in the technology...

Joseph T. Lower - Chief Financial Officer

It's a whole new technology that's going to go into the Boeing Sky Interior.

Amin J. Khoury - Co-Founder & Executive Chairman

Right.

Howard Alan Rubel - Jefferies LLC

Okay. And then just on the two simple ones. One on tax rate, Joe. The credit's now extended for an indefinite period of time. What does that do for 2016 tax rate?

Joseph T. Lower - Chief Financial Officer

It should make it much easier for you in using a straight 22% across the year versus what we went through this year with the first three quarters, and the fourth quarter adjustments. So it should be straight line across the year now.

Howard Alan Rubel - Jefferies LLC

And then last just maybe to Amin, here's the softball for you. The U.S. carriers, and you kind of alluded to it, have more cash than they know what to do with. And one of the places that's always great is to put it into interiors. Where are you in terms of having some retrofit programs or some other products? I could think of about two carriers that could improve their business-class seats.

Amin J. Khoury - Co-Founder & Executive Chairman

Well, we can think of more than that.

Joseph T. Lower - Chief Financial Officer

Yeah, yeah. (60:08)

Amin J. Khoury - Co-Founder & Executive Chairman

I can think of a lot more than that.

Joseph T. Lower - Chief Financial Officer

Exactly.

Amin J. Khoury - Co-Founder & Executive Chairman

I think it's a positive that we have done so well with the North American carriers and, I think, very substantially improved our partnership relationship with the biggest airlines in North America. And that includes American and Delta and United and Air Canada and JetBlue, I mean, Southwest Airlines and all of them are now talking about improving the passenger experience. This is pretty new. I mean this had been pretty much an international, especially Asia, Middle East and to a somewhat lesser extent, European phenomenon.

It is becoming an American – a North American phenomenon as well, and they have done really well, the North American Airlines, in terms of profitability and cash flow. And I think the managements have done a good job and they are speaking a lot about upgrading and improving the passenger experience. So, I think the outlook for refurbishment and retrofit, as well as strong spares growth, is pretty good for us right now.

Werner Lieberherr - President and Chief Executive Officer

Definitely. And, Howard, just to relate a little bit more, in terms of the Americas that our win rate actually in 2015 was 77%. So you have a good chance to fly on B/E Aerospace seat very soon.

Howard Alan Rubel - Jefferies LLC

Sounds like a good thing. Thank you.

Amin J. Khoury - Co-Founder & Executive Chairman

Okay.

Greg Powell - Vice President-Investor Relations

Great. Those are our last question.

Amin J. Khoury - Co-Founder & Executive Chairman

Thanks, everyone. Have a good day.

Joseph T. Lower - Chief Financial Officer

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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