BE Aerospace's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Apr.23.12 | About: B/E Aerospace (BEAV)

BE Aerospace (NASDAQ:BEAV)

Q1 2012 Earnings Call

April 23, 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

Howard A. Rubel - Jefferies & Company, Inc., Research Division

David E. Strauss - UBS Investment Bank, Research Division

Noah Poponak - Goldman Sachs Group Inc., Research Division

Robert Spingarn - Crédit Suisse AG, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

R. Rama Bondada - RBC Capital Markets, LLC, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Eric Hugel - Stephens Inc., Research Division

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

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

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

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Operator

Good morning. My name is Jessica Morgan, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the B/E Aerospace Second (sic) [First] Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder ladies and gentlemen, the conference is being recorded this day, April 23, 2012. Thank you. I would now like to introduce B/E Aerospace's Vice President of Investor Relations, Greg Powell. Mr. Powell, you may begin your conference.

Greg Powell

Thank you, Jessica. Good morning and thank you for joining us this morning. Today, we are here to discuss our financial results for the first quarter ended March 31, 2012. By now, you should have received a copy of the news release we issued earlier this morning. If you haven't received it, you'll find a copy on our website.

We will begin this morning with remarks from Amin Khoury, our founder, Chairman and Chief Executive Officer, and then we will take your questions. For today's call, we have prepared a few slides to help you follow our discussion. You can find our presentation on the Investor Relations page of the B/E Aerospace website at beaerospace.com. In addition, copies of the slides will be posted on our website after the call for you to refer to. Joining us on the call this morning are Werner Lieberherr, President and Chief Operating Officer; and Tom McCaffrey, Senior Vice President and Chief Financial Officer.

As always, in our prepared remarks and in responses to your questions, we rely on the Safe Harbor exemptions under the various Securities acts and our Safe Harbor statements in the company's filings with the Securities and Exchange Commission. We will address your calls -- I mean, we will address your questions following our prepared remarks. At that time, the operator will provide instructions. [Operator Instructions]

Now I will turn the call over to Mr. Khoury.

Amin J. Khoury

Thank you, Greg, and good morning, everyone. We are very pleased with our first quarter results, which were announced earlier this morning and which were above earlier expectations. Our results include record revenues up 25%; record operating earnings up 30%; operating margin expanded 70 basis points to 17.4% -- actually 17.9% adjusted; record earnings per share up 37%; and record bookings and backlog. Backlog, both booked and awarded but unbooked, was up 35%. The margin expansion was driven by our commercial aircraft and business jet segments, which more than offset the margin drag from the consumables management segment acquisitions.

During the quarter, we completed the acquisition of UFC Aerospace, an innovative provider of supply chain management and inventory logistic solutions to aerospace original equipment manufacturers. In addition during the quarter, we opportunistically took advantage of historically low-interest rates and issued $500 million or 5.25% senior unsecured notes due 2022.

Market share gains driven by our successful R&D innovations, together with accretive strategic acquisitions and successful operational efficiency initiatives, drove both the 37% earnings growth and the $8.1 billion record backlog. For 2012, we are guiding to a substantially improved earnings outlook of approximately $2.75 per diluted share, but now including approximately $0.13 per share interest expense drag on earnings from undeployed capital from the aforementioned senior unsecured notes offering.

Today I would like to spend a few minutes discussing the current market environment. In addition, we'll provide an update on the recent Hamburg, Germany aircraft interiors exposition which was our most successful expo ever. Then we will discuss our results for the quarter and lastly, we will review our current financial guidance for 2012.

Now let's briefly discuss the commercial aerospace market environment. First, let's take a quick look at what happened in the full year 2011. The 2011 was a year of real uncertainty. The world's third largest economy, Japan, had a devastating earthquake and subsequent tsunami. The Middle East was in turmoil due to the Arab spring uprising. Europe experienced a sovereign debt crisis and recession. North America experienced slow economic growth, and oil prices spiked, averaging $111 per barrel for Brent crude during the year. Notwithstanding all of these factors, global passenger traffic grew a very healthy 6% and load factors were at record levels, yields were strong, and global airlines earned $8 billion in profits. As we have moved into 2012, global passenger traffic continues to grow and airline load factors continue near all-time highs. Passenger traffic showed strong gains in February, up approximately 8.6% versus the same period last year and up 7.2% year-to-date through the end of February. International traffic was up 9.3% in February and is up 7.3% year-to-date. And premium international traffic continues to be a positive story, up approximately 6.3% in February.

Demand for our products remain strong. Dollar traffic growth, smart capacity management by the airlines, near record high load factors, the onset of a strong new wide-body aircraft delivery cycle, increasing delivery rates for narrow-body aircraft and an airline industry which is in reasonably good financial condition has thus far offset the recent increases in fuel costs and the European recession. In addition, we expect to continue to benefit from our very high quality, geographically diversified customer base.

Now let's turn to Slide 2 and discuss our first 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 consolidated first quarter 2012 financial performance compared to the first quarter of 2011. First quarter record revenues increased 25% to $747 million. Pro forma revenue growth giving effect to all 2011 and 2012 acquisitions as if they had occurred on January 1, 2011 was approximately 17%. Record operating earnings of $130 million increased 30% and operating margin expanded 70 basis points to 17.4%. Operating earnings adjusted to exclude acquisition, integration and transition costs in the first quarter were $134 million, an increase of 34% and adjusted operating margin of 17.9% expanded 120 basis points.

Record net earnings and earnings per share were $69 million and $0.67 per share, respectively, both increased by 37% as compared with the first quarter of 2011. Earnings per share adjusted to exclude AIT costs were about $0.70 per share, an increase of about 43% versus the prior year period.

First quarter free cash flow of $24 million reflects a $67 million investment in inventories, that's exclusive of acquired inventories, to support the company's expected revenue growth. Full year 2012 free cash flow conversion ratio is expected to be approximately 80% to 85% of net earnings.

Let's review Slide 3, which summarizes our current bookings and backlog status. Bookings during the first quarter of 2012 of approximately $850 million were a record and reflect a book-to-bill ratio of 1.1:1. Included in first quarter bookings were 2 very significant retrofit orders valued at approximately $150 million. Both orders were market share gains in which we replaced the competitor's product on existing fleets. Record backlog at the end of the quarter was approximately $3.7 billion, an increase of approximately 16% as compared with the company's March 31, 2011 backlog and total backlog, both booked and awarded but unbooked, stands at a record $8.1 billion, an increase of 35% as compared with March 31, 2011. SFE backlog of approximately $4.4 billion represents an increase of approximately 57% as compared to March 31, 2011.

Before we discuss performance at each of our segments, I'd like to ask Werner to briefly comment on the recent Hamburg aircraft interiors exposition. During the last week of March, Werner and I, as well as a large group of our sales engineers, product specialists, product line managers and general managers attended the 2012 Aircraft Interiors Expo in Hamburg, Germany. This year's expo was the most successful ever for B/E Aerospace. The quality of our meetings with high-level airline executives was the best we have ever experienced. We continued to leverage our presence at the expo to differentiate B/E Aerospace as the innovator in aircraft cabin interior products.

Now I will turn it over to Werner to briefly discuss some of the highlights from the expo.

W. Lieberherr

Thank you, Amin. During the expo, we had substantive and highly positive strategic discussions with senior delegations from over 50 airlines, as well as Boeing and Airbus. We reviewed active programs valued in excess of $3 billion with these customers as compared to approximately $2.3 billion in 2011. Our focus this year was on our systems integration and innovation capabilities. The expo is a tremendous marketing platform, and our recent product introductions and other innovative development projects differentiate B/E Aerospace from the rest of our competitors. We believe this effort will continue to drive future revenue and backlog growth. The expo is rapidly moving from a tactical buying exhibition to a strategic innovation forum. These large senior executive delegations are using the expo to map out their medium-term and long-term strategic aircraft interior plans. Our strategic commitment to SFE systems innovation is highly valued not only by Airbus and Boeing but also the airlines, and positions us well for continued backlog growth. It was clear to all constituents that B/E Aerospace continues to be the innovative leader in the aircraft interiors space.

For the first time, we displayed a full-scale markup of our 737 modular lavatory system in a true cross-section of the Boeing 737 fuselage, displaying our lighting, seating and modular lav, which included our toilet, lav lighting and lav oxygen system. The modular lav generated a lot of interest from both the OEMs and airlines, and we were told by many that it was the highlight of the expo.

We also showcased our sole-soft [ph] A350 wide-body galley integrated with our Essence family of food and beverage preparation and storage products, as well as our recently introduced trash compactor. Here again, our A350 galley systems and our Essence product line drew a lot of interest from the OEMs and the airlines alike. The Essence products are considerably lighter than products currently on the market and include significantly improved power control and efficiency, improved reliability to peer performance and improved economics and aesthetics. I'm very pleased to report that our Essence line of food and beverage preparation and storage products, including coffee and espresso makers, steam ovens and chillers were awarded the prestigious and highly coveted Crystal Cabin Award at the expo. We are very proud of the team that developed this product line.

In addition, we displayed many of our recent product innovations including our next-generation lighting systems, Super First Class platforms, business and coach class seating platforms, oxygen systems, and consumables and logistics capabilities. I'd like to share with you a quote from the CEO of a major global airline. He stated, "B/E Aerospace is the innovation company." That sums up the reaction we received from essentially all of our major partners. So it was an outstanding showing by the B/E Aerospace, and we expect continued solid order growth arising from our successful efforts at the expo.

I will now turn the call back over to Amin.

Amin J. Khoury

Thank you, Werner. Now I will briefly review the first quarter operating performance for each of our business segments. Let's turn to Slide 4 and review the first quarter results for our commercial aircraft segment. Commercial aircraft segment leadership team turned in another outstanding performance during the quarter. Revenues of $375 million increased 21%. Operating earnings of $65 million increased 33%. Operating margin of 17.5% expanded 160 basis points due to an improved revenue mix and ongoing operational efficiency initiatives.

Let's turn to Slide 5 and review first quarter results for our consumables management segment. The leadership team for the consumables management segment also delivered a strong quarter. During the first quarter of 2012, we completed the acquisition of UFC Aerospace, therefore, we are presenting our CMS segment results on both a GAAP and a pro forma basis. Revenues of $287 million increased 24%, operating earnings of $52 million increased 16% and CMS pro forma revenues increased 9.5%. Pro forma operating earnings, adjusted to exclude AIT costs, were $58.7 million and pro forma adjusted operating margin was 19.4%.

Let's turn to Slide 6 and review the first quarter results for our business jet segment. The business jet segment leadership team also delivered a very good quarter, as shown by the substantial and continuing improvement in our business jet segment financial results. Revenues of $86 million increased 45%, operating earnings of $12.5 million more than doubled. Operating margin of 14.6% expanded by 410 basis points, reflecting the increase in revenues and improved mix of revenues and ongoing operational efficiency improvements.

Let's briefly review our financial position on Slide 7. First quarter 2012 free cash flow of $24 million represents a free cash flow conversion ratio of 36%. Free cash flow in the current period reflects a higher level of inventory investment to support expected revenue growth. Full year 2012 free cash flow conversion ratio is expected to be approximately 80% to 85% of net earnings. As of March 31, 2012, cash was $420 million; net debt, which represents total debt of $1.745 billion, less cash, was $1.325 billion; and the company's net-debt-to-net-capital ratio was 40%. As of March 31, 2011, the company had no borrowings outstanding on its $750 million revolving credit facility and has no debt maturities until July 2018.

Let's now briefly look at our outlook. Based on our record backlog, both booked and ordered but unbooked of approximately $8.1 billion, our expectation for continued growth in global passenger traffic and attendant increases in capacity and our expectation of significantly higher levels of wide-body aircraft deliveries, we are guiding to a substantially improved 2012 earnings outlook of approximately $2.75 per diluted share, which now includes the $0.13 per share interest expense drag as a result of our recent opportunistic senior notes offering. This represents earnings per share growth of approximately 23% and actually 38% growth on a comparable interest expense and comparable tax rate basis.

Now let's turn to Slide 8 and review our 2012 financial performance. The company expects continued strong orders in 2012 driven by the robust wide-body aircraft delivery outlook and solid aftermarket demand. 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's full year 2012 guidance is approximately $2.75 per diluted share, representing an increase of approximately 23% and as mentioned a moment ago, 38% on a comparable interest expense and comparable tax rate basis. 2012 free cash flow conversion ratio is expected to be approximately 80% to 85% of net earnings, and free cash flow is expected to be weaker in the first half of 2012 and significantly stronger in the second half of the year.

And with that, I'll turn the call back over to Greg so we can get started on the Q&A.

Greg Powell

We will now open the floor to your questions. [Operator Instructions] Jessica, will you now provide us with instructions to ask the questions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Howard Rubel with Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

I want to -- Amin, your revenue guidance didn't change, so it appears as if all of -- this is going to come from operating results. Yet when a look at the business jet numbers, they're frankly stunning to say the least. So could you first address what you -- what was in the business jet numbers that caused such a sharp year-over-year gain there? And then also talk about where you might expect some of these operating improvements to continue.

Amin J. Khoury

Let me take the -- I'll take the 2 questions separately. First, we continue to expect to achieve our $2.75 number. We just have a lot more confidence in the number, but it will come from both acquisitions and over performance operationally. With respect to the business jet segment, it is -- it has to do with the quality of the backlog. And both the commercial aircraft segment and the business jet segment are doing a really good job of organic research and development and winning orders and winning programs and growing market share. In the case of commercial aircraft segment, which is basically doing the same thing, they're making structural improvements in the backlog. In other words, they're countercyclical. So as the business cycle changes and the airline industry cycle occurs, nevertheless, we'll be shipping products for A350s and 737s, which we have never shipped in the past, which will help to mitigate any downturns. And specifically with the business jet segment, it is the biggest backlog that the segment has ever had. It's a high-quality backlog, and we continue to drive, through our continuous improvement initiatives and our supply chain initiatives, better and better operating efficiencies and improving margins. So it's really the top line and the bottom line, Howard. It is a really good job in research and development, resulting in excellent orders and market share growth and a lot of work on the operating side to expand margins at the same time that we're growing the business.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Just a follow-up, if you were to talk about products, is it a combination of mix there? For example, a lot more the Sky Interiors making a difference and maybe you've picked up some share and/or improvement in Super First Class. Does that explain some of this sustainability as well?

Amin J. Khoury

Yes, it's all about Super First Class. I mean, the airlines basically feel as though we are the Super First Class company, and they are battling each other from a marketing perspective with more and more amenities, with more and more comfortable Super First Class suites. We've now booked a couple of orders of $300,000 a suite. So I mean, the biggest -- the airlines continue to battle each other for share on high-priced routes with maintaining their ticket prices high by using aircraft interior amenities, which is what is driving our backlog quality and our revenue growth and margin expansion in the business jet segment. Business jet manufacturing per se is still very weak. It was down in 2011 versus 2010. First quarter cycles are slightly up, but there's -- we really have not turned the corner yet on business jet manufacturing per se. And with a little luck, that will begin to add to the performance of our business jet segment in 2013 and 2014. But we feel very confident about the outlook for that business not only for this year, but for next year because of the quality of the backlog.

Operator

And we'll move on to David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Amin, could you give us some color on what the order environment looked like for consumables and also on the commercial aircraft spare side?

Amin J. Khoury

Both -- the orders in both businesses were -- showed double-digit growth. And I know you must have noted the $150 million in retrofit orders in the quarter, so I mean the market is pretty healthy. I thought about how to talk about what happened in 2011 and all the negative stuff, yet how well the airlines did, how good yields were, how the load factors were large, traffic was up 6%, and that's continued in the first part of this year. And so we're still doing well, and we're still booking orders at a double-digit rate.

David E. Strauss - UBS Investment Bank, Research Division

The -- you had $4.3 million in AIT cost in the quarter. I think in the Investor Day that you commented that you would give us an idea of what you're projecting for full year AIT cost. And could you maybe comment there and also talk about how the integration of LaSalle and UFC are progressing?

Amin J. Khoury

There is really a lot of activity going on right now. It looks to us that like the cost for the year is going to be in the $15 million to $20 million rate, so we're actually stepping up spending here in the second, third and fourth quarters. We are in the process of closing facilities and rationalizing the workforce and trying to get to a single point of contact at so many of our customers, so there is a lot of activity. I would say it's close to frenetic. The planning is detailed planning. There are, I don't know, 100 people involved in the integration team at least. So we will continue to spend money here during 2012. Our expectation is that margins in our consumables business should continue to improve quarter-by-quarter now, except that the margin improvement is going to be offset with the higher AIT spending. But I think it bodes very well for margin expansion for this -- for the business in 2013 and '14.

Operator

And we'll take a question now from Noah Poponak with Goldman Sachs.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Amin, I just wanted to ask you if the decision to now include the dilution from the recent debt issuance, is that -- does that suggest that the M&A pipeline you're looking at is a little worse or a little longer dated, or is it just because the operations are that good?

Amin J. Khoury

It's a combination of reasonably healthy M&A pipeline and over performance and operations.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. Can you maybe address the first part there, specifically? I mean is the M&A pipeline better, worse or the same than how you saw it 3 months ago?

Amin J. Khoury

It's better. It's better. We're having active discussions with a lot of folks, and I think there's a reasonable probability that we will acquire something here during the second half of the year.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. So it doesn't sound like you feel any different about the likelihood that you put that debt issuance to use.

Amin J. Khoury

No, we feel -- we were very pleased that we issued the debt. We're happy with where we are. We are really pleased to be able to -- I know a lot of you were concerned at the time of the debt issuance that it might result in lower earnings per share, and we're pleased to be able to tell you this morning that we feel confident that we're going to deliver the numbers notwithstanding the drag from the interest expense from the undeployed capital, which we opportunistically raised.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. And then to move to a second topic. On the $150 million that you mentioned, the 2 retrofit orders, can you talk about what product category you took share in for this?

Amin J. Khoury

It's, yes it's seating. But we can't talk about who the customers are, but it's business class seating.

Operator

And we'll move now to Robert Spingarn with Crédit Suisse.

Robert Spingarn - Crédit Suisse AG, Research Division

Amin, maybe you can clarify just based on last couple of questions, just, I think, Howard specifically asked this, you talked about acquisitions potentially contributing in your guidance improvement, essentially your ability to hold guidance despite the dilution. Are you talking about existing acquisitions or future?

Amin J. Khoury

Future acquisitions.

Robert Spingarn - Crédit Suisse AG, Research Division

So you have built in some expectation of acquisitions into the $2.75?

Amin J. Khoury

We are confident that we're going to deliver the $2.75.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay, because some would see operational improvement holding the guidance at $2.75, absorbing the $0.13 and then whatever you buy is automatically accretive, but that's not what you're saying?

Amin J. Khoury

Well, who knows it will be automatically accretive, right, depends on how much we pay and what the earnings are of a company that we buy and so on and so forth. We're just telling you as we look at our opportunities both internally and externally that we now feel confident to tell you that we will be able to deliver the earnings notwithstanding the interest expense rate.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay, all right. So there's some credit for acquisitions in there. Other question is on the pro forma CMS margin, which I think you said is 19.4%. And that is down a little bit by our math from what you've said before in the previous 2 quarters. I think there were -- it was slightly above 20% both cases, and that's, of course, excluding AIT costs. So what is the trend that's driving that? Is there pricing pressure?

Amin J. Khoury

No, we just have a lot of companies that we've acquired which have very low operating margins which we have to integrate, take all the extra cost out and get lower-cost purchasing done and so on and so forth. It just has to do with the volume of acquired revenues from the acquired businesses, which are a drag on margin.

Robert Spingarn - Crédit Suisse AG, Research Division

But are we talking about -- I want to make sure we're talking about 2 different things here. So you're taking the integration costs out, you're saying you still have lower margins fundamentally in the acquired businesses?

Amin J. Khoury

Yes. I'm saying that UFC, LaSalle and Satair are all much lower-margin businesses, and the aggregate percentage of revenues coming from those businesses is getting higher. And so the overall margin is lower, which is why we are working assiduously now to integrate the businesses and to get all of the businesses performing the same way our legacy business is performing.

Robert Spingarn - Crédit Suisse AG, Research Division

Okay. On that basis, when would you expect the underlying, the 19.4% margin, the pro forma margin to inflect upward?

Amin J. Khoury

I think the margin is going to be improving every quarter now, second, third and fourth quarters of this year and all of next year. But it will be -- it will, to some extent, be masked by increasing AIT costs. So we've guided to $15 million to $20 million of AIT costs this year. We had $4.3 million in the first quarter, so one will be offsetting the other. But as we get through the AIT costs, the margins, I think, are going to be -- really start to look stunning for this business.

Operator

And we'll take a question now from Cowen & Company's Gautam Khanna.

Gautam Khanna - Cowen and Company, LLC, Research Division

I was wondering if we could follow up on the M&A question. Can you characterize maybe the size of some of the things you're looking at? I mean, is there any anticipation you'd deploy all $500 million this year?

Amin J. Khoury

We really can't talk about the M&A pipeline. But you know our strategy is basically to use excess cash on the balance sheet or excess free cash flow or a combination of the 2 and not to incur significant additional indebtedness in order to do M&A transactions and rather to focus on bolt-on transactions which strengthen each of the segments that we already have. So we're not looking at anything transformational. We're not looking at some major change in the balance sheet. The kind of transactions that we've done -- let's talk about a transaction that we did a year ago. Werner's got his hands full. So if we talk about our TPM business for example, and how it's organized, we've now divided it into 2 businesses, an electronics power management business and a brazing business. And both businesses are making a transition from military work to commercial aerospace. For example our brazing business, which is divided graphically -- geographically into east and west, is now run out of our braze west location. Our Brave East business has migrated from about 20% commercial to 60% commercial this year. Our electronics business is also making a major portion in the commercial aerospace. So now, for example, we produce about 30 power control devices for the Boeing 787. There's 17 remote lowering amperage distribution units. There are 8 common start motor controlled units per ship set. There are 3 cargo refrigeration units. There's supplemental cooling units for the galley. So when we buy a business, we want to buy a business which is an important bolt on, which will help us strategically. Now the TPM business is now all over our company, helping our seating people with power issues, helping our inserts folks with power issues. In fact, the business now reports to the head of our inserts business, helping our galley structures people, et cetera, et cetera. So it is really all about trying to acquire things that strengthen us. Same thing in the consumables business. We made acquisitions in the consumables business which either improved our 3PL, 4PL capability or improve our cading capability or improved our product line breadth in the case of LaSalle, and that's the kind of things that we're looking at.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And just one follow-up, can you talk about the RFP pipeline on the retrofit side? If you'd quantify that $1.5 billion in the previous quarters, where does that stand today?

Amin J. Khoury

I don't know where it is. I mean, Werner mentioned earlier, we'll take a look at it. But that coming out of the expo, we were negotiating and discussing $3 billion worth of potential bookings as compared to $2.3 billion coming out of the expo last year. I don't really know how much is retrofit and how much is new. But I think I would say that new-buy is driving the activity. And to the extent that there is the retrofit activity, it has to do with the airlines buying -- doing new interiors on a new-buy aircraft and at the same time retrofitting their existing aircraft, so they have commonality throughout their fleets.

Operator

And Rama Bondada with the Royal Bank of Canada has our next question.

R. Rama Bondada - RBC Capital Markets, LLC, Research Division

In regards to the $67 million in increased inventory purchase that you discussed earlier, could you give us some color around what this purchase was, which segment it was in and is this a one-time event, or is this a trend going forward?

Amin J. Khoury

It's primarily our manufacturing businesses where the inventory is being driven, and it has to do with hyper growth in the business jet segment and a gigantic backlog and a record backlog in the CAS segment and rapid growth and the SFE backlog. I mean, orders and the backlog and revenue growth are driving the increase in inventories, and it just has to do with the health of the business. And it's primarily being driven by our manufacturing businesses.

R. Rama Bondada - RBC Capital Markets, LLC, Research Division

Is there any particular part like fasteners or anything that in particular that's driving this?

Amin J. Khoury

No, we don't manufacture fasteners. When I say our manufacturing businesses, I mean our commercial aircraft segment and our business jet segment.

R. Rama Bondada - RBC Capital Markets, LLC, Research Division

And then looking -- switching gears quickly here, looking at the 787 and 747-8, can you give us some color and details on the incremental contribution from sales that you're expecting this year in your guidance? And then also what's the status of the certification, final approvals for the new premium class seats for these this new planes like the Lufthansa 747-8 business class that you guys are working on?

Amin J. Khoury

We don't actually do our plan that way; we do it by airline customer or leasing customer and we build it from the bottom up, which product is -- which interior product is which customer going to get on which on dock date. And it does relate to whether there is 787s or 747s or any other kind of aircraft. But we don't actually have the number, the revenues that we would expect to ship to various airlines associated with their receipt of new 787s or 747-8s.

R. Rama Bondada - RBC Capital Markets, LLC, Research Division

And then what about the certification process and final approvals for these new seats that you're putting on these planes?

Amin J. Khoury

Well, there are significant certification issues and the certification issues become more and more complex all the time, especially with angle-facing seats and side-facing seats in divans and so on and so forth. And it is a great advantage that we have that we are sort of the leader in that area. So we continue to be on time to every customer with all of our products notwithstanding the increasing complexity of certification, so we're in good shape.

Operator

And Deutsche Bank's Myles Walton has our next question.

Myles A. Walton - Deutsche Bank AG, Research Division

First a clarification. I was wondering maybe, Tom, the pro forma earnings for CMS that is in the slides, in the presentation at $54.4 million before you add in the AIT. How do you get to the pro forma? What's the adjustment?

T. P. McCaffrey

Well, it's to include UFC for the full quarter.

Myles A. Walton - Deutsche Bank AG, Research Division

For the full quarter, okay. So then if you were doing more of a pro forma excluding UFC, the 19.4% pro forma margins you were talking about are actually higher than that I would imagine, in the 20s?

T. P. McCaffrey

Yes, that's right.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay, great. I think that helps clarify sequentially what's going on. And then the real question, American Airlines and potential merger with U.S. Airways or another entity, but at least U.S. Airways seems to be the more aggressive one at this point. Amin, can you comment on what kind of opportunity that could present for you given the respective relationships with the 2 customers and how you've seen that play out in the past, whether that's United Continental or others?

Amin J. Khoury

Well, United Continental was a great thing. They were both our customers, especially for premium class products. And when they merged, they struggled for a while trying to figure out which livery they were going to agree upon as a common for both fleets. They weren't able to make that decision in the short term, and they both confirmed orders with us to continue delivering products under both liveries, which we are doing. That is ongoing as we speak. I think the end result of that will be that they will likely have a major retrofit program at sometime in the not-too-distant future when they decide what to agree on finally. They're just not able to do it so quickly. They can't get the integration done, so they're going to go ahead and spend a couple of hundred million dollars extra and still have 2 fleets for some period of time. With respect to -- and both of those airlines say that we have had strong partnerships for a very long period of time. Our relationship with American Airlines is very different. It's more of an opportunistic-type relationship. They haven't been our customer, although we do a lot of business with American Airlines on consumables and inserts and so on and so forth, but we haven't had a strong partnership with American Airlines. We've had a closer relationship with U.S. Air. So we're there to be an acquisition of American by U.S. Air. I think on balance, we would view it as a positive.

Operator

And we'll take a question now from Eric Hugel with Stephens Inc.

Eric Hugel - Stephens Inc., Research Division

Can you talk about, with regards to the lavatory contract, can you talk about sort of the level of focus you're putting on right now with regards to winning aftermarket awards? Are you -- are we at a point right now where it's still pretty early on, you're just focused 100% in terms of getting up to speed, in terms of delivering for the OE and you're not really going after aftermarket, or are you -- is that really a part of your plan still?

Amin J. Khoury

Well coming out of the expo, we had a number of customers pushing us on the aftermarket and retrofit. And so we are -- in terms of what's going on in the company, I mean, it is like minute to minute and hour to hour. I mean, getting ready to deliver product before the end of 2012 out of the new plant with the new manufacturing system and so on and so forth. We are really -- we're working it hard, and it is going well. We do have customers pushing us on the retrofit side, and I would not be at all surprised if we were to announce an order or 2 on the retrofit side, certainly by 2013 but possibly even in 2012. Now delivery on 737 retrofits could not start until the latter part of 2013. That would -- I feel pretty confident about that. We need to focus on making sure that as a partner with Boeing that we are rate-ready and moving product into that line at the rate that they're moving 737s down the line. So we won't take orders for delivery sooner than that. However, the customers understand that and are basically trying to get themselves into position to be first in the retrofit, first out of the block in terms of being a retrofit customer. So it's dynamic as we speak. We are all involved. Werner is personally involved in determining which customers are going to get what, when, and more on that I would say later in the year.

Eric Hugel - Stephens Inc., Research Division

Is it still a moving target or can you give us a sense as to like as you get up to full production on lavatories what you're capacitizing yourself to sort of look at to be at? I mean, Boeing's going on the 37 around 38 a month, sort of -- are you looking at sort of maybe like 50 in terms of dealing with both OEM and aftermarket? Can you sort of give us a sense as to where you're looking at?

Amin J. Khoury

No, we can't. We can't give you a sense, but you should expect us to be able to get ourselves into position to provide these lavs not only for 737s in line that is to Boeing, but 737s in retrofit and also other aircraft platforms. So we are building our capacity to build these modular lavs far in excess of what is required by Boeing.

Eric Hugel - Stephens Inc., Research Division

And Amin, just to follow up on Rob's question about the guidance, just to be clear, if you do not pull the trigger on an acquisition, is -- basically can you make that $2.75?

Amin J. Khoury

We wouldn't guide you to $2.75 unless we believed we could do it, so we are confident that we are going to deliver the number. And it would be a bad thing for us to guide to that number and then not achieve it and let everybody down. So we haven't done anything like that. You should not expect us to do so.

Operator

We'll move now to Peter Arment with Sterne Agee.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Amin, quickly on the -- going back, I guess, on the wastewater system. You're approved for the 737. Can you remind us again what your expectations are for other platforms? I know you just addressed longer term, and the points getting in line. But how are you -- are you setting this up for other, whether it's A320s or other potential platforms?

Amin J. Khoury

Well, the first task was to convince the OE, in this case Boeing, that our toilets belonged in our lavs and should be in every 737 which they produce beginning at sometime in the future, and they bought off on that. And that has helped us tremendously in terms of -- with the airlines and leasing companies getting the Boeing [indiscernible] of quality and reliability for our systems. So we are currently in trial. We're building up hours of operation with our toilet on 747s, 767s, 737s. I think those are the only aircraft types -- and 777s, sorry. So those are all the aircraft types on which the toilet is flying. So far, it's only been certified on 737, and we've actually got one order. We've actually got an order for the toilet, not the entire system or not the entire lav, but just the toilet from one of our airline customers. So we have booked that first order, and those are the aircraft platforms that we are currently building hours on and beginning a marketing program for those aircraft. It's in a very early stage.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Yes, okay, that's helpful. And then just on the $3 billion kind of number you quoted coming out of -- or opportunities coming out of the expo. How do you characterize that -- the rate of the mix exchange from $2.3 billion to $3 billion? Is it just the bigger percentage of wide-bodies that are stacking up in terms of deliveries or is it just a lot of the new products, combination of both? Could you give us some more color on that?

Amin J. Khoury

I think it's being driven by the airlines receiving all these large aircraft, and in some cases for the first time. But I mean, it's the A350 and it's the 777 and it's the 747-8. I mean, it's all the aircraft types. It's just a volume of new aircraft types that are being received by the airlines. And in the case of 777, there are number of airlines receiving it for the first time. So I wouldn't say there's anything noteworthy. Werner, would you, do you think you can...

W. Lieberherr

I would exactly confirm that it's just the higher level of activity, also well distributed across the regions.

Operator

Carter Leake with BB&T Capital Markets has our next question.

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

Let's see, can we talk about the retrofit, the $150 million retrofit deal? Is this a number that we can -- is this a typical number, the $150 million? Just trying to understand the sizing of these deals. Is this the high end, middle or the low-end, a deal of this size?

Amin J. Khoury

It's -- there are 2 of them. They're 2 different orders from 2 different airlines, and I would say that they're modest. I mean, they're not particularly large. I mean, we had -- we booked $250 million with United a couple of years ago, for example. So I would say that they're average-sized.

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

So because we talked about the multiplier effect or a fleet standardization as people take new aircraft and they need to communize their fleet. When we think is that what this deal was, was this a customer who was buying new and then wanted to standardize his legacy fleet?

Amin J. Khoury

One of the customers, yes, was -- is equipping existing aircraft of a different type with the same equipment which they were ordering for new aircraft and the other customer is just doing a retrofit.

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

Okay. You mentioned the lessors. Could you give any color on what the lessors are doing with regards to their cabins? So let's just say if 1 was a vanilla cabin and 5 were sort of fully tricked out, are they more middle of the road? Where are they on that spectrum?

Amin J. Khoury

Yes, they're more middle of the road. And a lot of the leasing companies -- a large part of the leasing company business with us is narrow-body airplanes. And I think we've got 6 of the 7 -- 6 of the 7 major leasing companies have us as their preferred supplier. They standardize on our equipment.

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

Business jet segment, the Super First Class is clearly doing well. But I worry does that -- I'm assuming that the concentration is on the A380 and -- is it all on the A380? Does any twin-engine, wide-body have a Super First Class?

Amin J. Khoury

It's a 747. It's a 777. It's the A380. It's the A350. It's all these airplanes.

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

The Super First Class. Is -- right now are these orders mostly going on A380s?

Amin J. Khoury

No.

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

Okay. It's spread about?

Amin J. Khoury

Yes.

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

Okay, great. And last one, how's Satair doing with regards to...

Amin J. Khoury

This is your fourth of 2 questions. How's Satair doing...

Operator

We'll move now to D.A. Davidson's JB Groh.

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

I'll only give you 2. Could you give us kind of a sense of inventory levels of customers on the consumer side, do you sense if there's a -- where are we at the sort of restock? Is there any surge there? Give us your thoughts on that.

Amin J. Khoury

There's certainly no restocking going on now. They may have done a little bit of restocking in the middle of last year, the third part of last year. But orders are still -- they're still pretty small, JB, and we delivering more and more orders. What was it, I think we delivered -- I think we were at 11,000 orders a day at some point during the middle of last week, which is a record. So they're still small, but there are more and more of them, and it doesn't appear to us to be any signs of restocking. As I say, orders are pretty small and that's true in both commercial aircraft segment spares business, as well as consumables.

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

So as to read through there, that maybe customers are doing a little bit better job managing stock?

Amin J. Khoury

I would say so.

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

Okay. And then last question on just -- you've got, what, roughly, call it $12 million to $16 million in remaining AIT, so $3 million to $4 million in the next 3 quarters. Is there any one quarter it'd be more than the others? It's sort of even in the way that spending goes over the course of the...

Amin J. Khoury

I don't know. I would guess it would be more or less even, but I wouldn't take that to the bank.

T. P. McCaffrey

A lot of it just depends on the timing of the actions and when they accomplish certain milestones and the costs are going to be incurred. So they're pushing forward in a methodical but very aggressive rate.

Amin J. Khoury

So we've got severance costs. We've got lease costs, building shutdown, but then we have leases continuing on some of those. I think those are the 2 biggest items.

Operator

And that final question today will come from Yair Reiner with Oppenheimer.

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Just one. If I take the 1Q revenue and I annualize it, I get to a number that's slight north of what you've guided to for the year. And obviously, 1Q reflected UFC only partially, and seasonally I think 1Q typically isn't your peak season in terms of quarterly. So I guess, why are you able to guide a bit higher? Were there any onetime factors in 1Q that won't be repeating, or are you discounting some risk of a fundamental slowdown in the back half?

Amin J. Khoury

I think if you annualize the numbers something like $3 billion and we're at $2.95 billion and we just hadn't changed our guidance yet, and it's based on how we plan our shipments of which products, on which dock date and so on and so forth. So we wouldn't have -- we would not have reviewed that and changed it at this point in time. I understand your math. Your math says our revenues might be $50 million higher than our forecast, but it is what it is at this point.

Operator

And this concludes our question-and-answer session. Mr. Powell, I'll turn the conference back to you for closing comments.

Greg Powell

Thank you, everyone, for joining us. Have a good day.

Operator

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

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