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Goodrich Corporation (NYSE:GR)

Q1 2008 Earnings Call

April 24, 2008 10:00 am ET

Executives

Paul Gifford – Vice President of Investor Relations

Marshall O. Larsen – Chairman of the Board, President & Chief Executive Officer

Scott E. Kuechle – Chief Financial Officer & Executive Vice President

Analysts

Robert Spingarn – Credit Suisse

Troy Lahr – Stifel Nicolaus & Company, Inc.

Steve Binder – Bear Stearns

David Strauss – UBS

Ronald Epstein – Merrill Lynch

Howard Rubel – Jefferies & Company

Joseph Nadol – JP Morgan

George Shapior – Citigroup

JB Groh – D.A. Davidson & Co.

Peter Arment – American Technology Research

Joe Campbell & Carter Copeland – Lehman Brothers

Cai von Rumohr – Cowen & Company

Ted Wheeler – Buckingham Research

Gary Liebowitz – Wachovia

Operator

Good day everyone and welcome to the Goodrich first quarter 2008 results conference call. Today’s call is being recorded. The press has been invited to participate in today’s conference in a listen only mode. At this time for opening remarks and introductions I would like to turn the call over to Vice President of Investor Relations, Mr. Paul Gifford, please go ahead sir.

Paul Gifford

Thank you for joining us today as we discuss our first quarter 2008 results. In the room with us today are Marshall Larsen, our Chairman, President and CEO and Scott Kuechle our CFO. We will start with brief prepared remarks followed by Q&A. Our presentation is available on our website www.Goodrich.com which together with our press release provides the basis for most of our remarks.

Before we start let me remind you that today’s remarks include forward-looking statements that involve risks and uncertainties and actual results could differ materially from those projected in the forward-looking statements. The risks and uncertainties are detailed from time-to-time in our report filed with the Securities & Exchange Commission including our annual report on Form 10K and quarterly reports on Form 10Q. They are also detailed in today’s earnings press release. I urge you to read them carefully. This conference call is being webcast and replays will be available on our Internet site beginning this afternoon.

Now, I’ll turn the call over to Marshall who will provide you with an overview of our first quarter 2008 results and our increased full year outlook for 2008.

Marshall O. Larsen

I know you’ve all had the opportunity to review our earnings release and the related presentation. Today I’ll briefly talk about our quarter. I’ll describe the key factors that led to our strong performance during the first quarter and increased sales and EPS outlook for Goodrich for the full year. Our first quarter was another excellent quarter with strong organic sales growth of 13% including double digit sales growth in each of the major market channels. Our first quarter net income per diluted share was $1.24 compared to first quarter 2007 of $0.78 per diluted share, an increase of 59%.

During the first quarter we had an effective tax rate of 34% which was consistent with our expectation and slightly lower than last year’s 35%. The 2008 tax rate does not include any benefit from the R&D tax credit which has yet to be renewed. The main drivers of this improvement were double digit sales growth in all of our three major market channels. Large commercial airplane original equipment sales grew by about 13%, large commercial and regional business in general aviation aftermarket sales increased by about 10% and the defense and space sales increased by 13%. We believe that the global nature of our sales will provide us with continued strong growth prospects even in the face of current economic conditions in the US. Our sales to Boeing and Airbus comprise 26% of our total and these manufacturers will deliver most of their airplanes this year to non-US customers. Within 50% of our aftermarket sales go to non-US customers and many of these sales are through our extensive worldwide network of MRO service centers. Finally, a significant portion of our defense and space sales are for non-US customers such as the sales associated with our DB-110 surveillance systems to the UK, Poland and Greece. Given our strong international presence, we are definitely a well balanced global company.

Also included in our earnings for the first quarter 2008 compared to the first quarter 2007 was a benefit of about $20 million or $0.10 per diluted share for contract account cumulative catch up adjustments. We had anticipated that many of these adjustments would occur during 2008 but we had thought some would occur later in the year. Remember, and I want to emphasize this that these adjustments are a result of many operational factors including improved operating efficiencies, higher unit volume, better overhead absorption and negotiated price changes with our customers. These same operational factors will generally provide us with improved performance in successive quarters and years through higher margins on the contracts that were affected.

During the first quarter in early April we had several significant accomplishments. We completed the acquisition of TEAC Aerospace Holdings. Their proprietary airborne mission data products will provide us with an additional presence in the defense and space market. We were selected by Gulfstream to supply a wide array of products for their new Gulfstream G650 business jet including the main and nose landing gear. We increased our share repurchase plan to $600 million with the expectation that this plan will be used primarily to offset dilution from our company share-based compensation plan.

As we look at the full year of 2008 we’ve increased our outlook for sales and net income per diluted share. We increased our expected sales growth for our commercial aftermarket and defense market channels which resulted in an increased sales expectation of between $7.2 and $7.3 billion compared to our prior outlook of between $7.1 and $7.2. Our strong EPS growth in the first quarter coupled with our expectations for higher sales and continuing operational improvements have resulted in a revised outlook for net income per diluted share of $4.30 to $4.45, a significant increase over our prior outlook of $4.15 to $4.30. For our major market channels we now expect the following growth rates in 2008: large commercial airplane original equipment sales are expected to grow about 20% and regional business and general aviation airplane original equipment sales are expected to grow about 15%; commercial aftermarket sales are expected to increase by about 8 to 11% compared to our prior outlook of 8 to 10%; defense and space sales are expected to increase by about 9 to 11% compared to our prior outlook of 5 to 8%. Regarding the 787 program our current outlook incorporates the production and delivery information received from Boeing regarding the latest delays in this program.

Airline load factors remain very high at about 75% and capacity in the worldwide airline system will continue to grow for the foreseeable future. Goodrich remains very well positioned to take advantage of these trends because of our strong balanced portfolio of products and our key positions on the most popular aircraft. As we noted last quarter if you look at an expected aircraft retirements over the next several years, we have far less content on the airplanes that are most likely to be retired especially the older McDonald Douglas airplanes than we do on airplanes that are likely to remain in service. We believe that the active fleet of commercial airplanes should grow at about 4% this year net of retirements but the portion of the fleet with a high Goodrich content such as the A320, the 737NG, the 787, the A380, etcetera will grow at about double that rate.

The recent bankruptcy filings by several smaller US carriers have done nothing to change our position regarding future growth of the airline industry. Our 2008 outlook continues to assume among other factors a full year effective tax rate of 33 to 35% which includes the benefit of the extension of the US research tax credit. The effective tax rate is higher than the 31% we experienced in 2007. For 2008 we continue to expect net cash provided by operating activities minus capital expenditures to exceed 75% of net income. This quarter we increased our expectations for capital expenditures for 2008 to a range of $275 to $325 million. The increase in cap ex is primarily due to a decision to purchase rather than lease certain equipment, increased spending on low cost country manufacturing and MRO facilities and acceleration of US capital spending to take advantage of bonus depreciation on 2008 capital spending as part of the US government stimulus plan. Even with these higher expenditures we are still comfortable with our prior outlook for cash flow conversion.

Our first quarter results and our increased outlook for 2008 demonstrate our confidence in our ability to grow the top line at rates faster than the overall market and drive significant increases in income per diluted share. Over the last several years we have grown our market shares in key businesses and product areas as we continue to invest in our businesses. We expect these actions to drive above market growth rates and sales for the foreseeable future. Our strong aftermarket presence should drive margins and earnings growth after the OE cycle peaks and our cash flow improvement trends should continue over the balance of the cycle.

Now, we’d be glad to take your questions.

Question-and-Answer Session

Today’s question and answer session is held electronically. (Operator Instructions) We’ll start today with Robert Spingarn with Credit Suisse.

Robert Spingarn – Credit Suisse

A very nice quarter, a lot of different things I could ask about but one thing I think the market is focused on is the aftermarket trend and you really rebounded from that sequential decline in the fourth quarter. Can you give us a little more color on what you see out there and particularly with regard to what you see so far in April regarding the aftermarket? Then, I have a follow up.

Marshall O. Larsen

We had a 10% growth in the aftermarket in the first quarter which was not unexpected. I think as we went through the last earnings call we have averaged about 10% in the fourth quarter of each of the last three years so we didn’t really expect any decline. The numbers are getting big in terms of our – when you take a 10% on top of a previous year’s aftermarket total sales so we’re still seeing very good earnings from that. We see no reason that we’re not going to continue. You’ll notice that we increased our aftermarket outlook to 9 to 11% this year so no reason to think that’s going to change.

Robert Spingarn – Credit Suisse

Then, just to look at a component of it and in the cell business you clearly have a great position in the large airframe market particularly on the aftermarket with A320 and elsewhere you talked about the G650 win, the regional biz jet area for you is quite small in the cells from what I can tell in the aftermarket, what’s the long term trend here for you? Are you going to move further in to that business?

Marshall O. Larsen

Well, we evaluate each airframe as we go. We’ve generally shied away from the smaller airframes on the cell side because we’ve had more than adequate opportunities on the large side. We don’t see it the same way in some of our other businesses like landing gear. In fact, you may not know this but way back before we bought [Roar] they actually sold the rights to the smaller and the cell business to Nordam and that rights time has expired so we could move in to that any time we wanted to but we’ll pick and choose the right spots.

Robert Spingarn – Credit Suisse

Okay. Then, just the final thing on aftermarket, do we see a down tick on the commercial aftermarket in electronics?

Marshall O. Larsen

No. It’s pretty flat in electronics. I mean, that’s over 50% military in that segment. In fact, we had basically a lot of increased R&D in the electronics segment for the first quarter but we’ll see that getting back in the second quarter to 13 or 14% margin.

Operator

We’ll go next to Troy Lahr, Stifel Nicolaus.

Troy Lahr – Stifel Nicolaus & Company, Inc.

I’m wondering if you guys can talk a little bit about the aftermarket again. In the first quarter it grew 10%, how much of that growth came from international versus US? You don’t have to get too specific but maybe just ballpark was international growing 15% and US was 5%? How should we think about that?

Scott E. Kuechle

Troy, we don’t track it at that level of detail on a quarter-by-quarter basis but I can tell you in general that more than half of our aftermarket sales go to customers outside the US. So, as they continue to grow at a pretty robust pace, they’re a big part of the order book going forward so we expect sustained growth in that respect. So, I would say that’s a significant factor in fueling our aftermarket growth both in terms of the parts side as well as the MRO side. We’ve got very well positioned in terms of MRO facilities outside the US, particularly in Asia where we continue to see very rapid growth consistent with where the fleet is growing.

Troy Lahr – Stifel Nicolaus & Company, Inc.

Okay. Then, I guess just a follow up, if you look out it seems like there is pressure on US airlines and even some international airlines, US guys are talking about scaling back of capacity, I guess in light of that I guess what gives you confidence to kind of creep up a little bit in your aftermarket guidance from 8 to 10 up to 8 to 11%? Can you just kind of quantify what you’re seeing out there, why the guidance is higher?

Marshall O. Larsen

When you look at the domestic airlines the likely I guess parking of what they might consider of excess capacity are going to be the older aircraft like the MD80s and DC9s and so on and we have very little content on that so we expect those work horses like the A320s to continue to be used in the US at a good rate so that’s one factor. The other factor is the international side as Scott has said and with a fleet growing at 4% over the course of – the worldwide fleet we’re going to naturally have a lift in units and then add to that we’ve been taking market share and our MRO facilities around the world have really been paying off for us. I think all of that gives us a little bit more confidence going forward.

Scott E. Kuechle

I’d maybe give you one other factor there too which is there’s often anywhere from one to five year lag between the time aircraft enters service and a point at which we start to get a material amount of aftermarket parts and MRO. So, the fleet that we’re seeing growing today from a MRO and aftermarket standpoint has been delivered several years ago so that growth is pretty well locked in from that perspective.

Operator

We’ll go next to Steve Binder, Bear Stearns.

Steve Binder – Bear Stearns

Marshall, can you maybe just touch on defense and space where you saw the strength this quarter and also you revised the outlook upwards for 08 and you did touch a little bit in your MDA with respect to international presence but can you maybe touch on platform where you’re seeing the strength number one? And two, would you characterize the margins you’re fetching in defense and space this year so far? Do you see the quarter to be better than a year ago?

Marshall O. Larsen

Well, we had very good growth in our actuation and landing systems business this quarter in defense and space as well as in the cell and interior systems. Electronic systems is a little flat but that is not unexpected because fourth quarter is always their largest military quarter. The orders come in the third quarter towards the end of the annual budget cycle and we deliver them in the fourth quarter. The first quarter is always the low quarter for electronics systems militarily. But, as we polled all of our businesses and looked at their outlook on individual product lines we saw an increase demand coming through pretty much across the board on the businesses I just mentioned in particular so, that gave us our increase in that. For margin wise, I think you can say that the vast majority of what we sell is commercial off the shelve kind of pricing because a lot of it goes on platforms where we’ve got in some cases dual use but the amount that’s direct to government that’s cost plus is much small a percentage. Scott, do you want to add anything to that?

Scott E. Kuechle

Yes. Steve you asked about specific platforms, it was actually pretty broad, different businesses have different products and different platforms but landing gear we had great volume in C17s, F22s, the aftermarket add C5s to those platforms as well. Wheel and breaks was strong in some of the heavy transport aircraft. Actuation we started to ship some JSF hardware as well, so it was really pretty broad by platform and some of the other businesses benefitted from some of the helicopter positions that they have as well both OE and aftermarket.

Steve Binder – Bear Stearns

And also Marshall can you may be just touch on pricing in the aftermarket for services and parts this year compared to a year ago? And, how much better is the pricing environment? You did touch in the language I think with respect to the actuation segment where you saw some benefits from higher pricing but can you ballpark out how much better the pricing environment is right now than it was a year ago?

Marshall O. Larsen

Well, it really varies. Sometime we’re going and trying to take market share, we actually don’t take any pricing in order to get that increased volume. In other instances where we’ve got out of production parts we’ve got a much better chance of raising that several percentage points. I would say that on average it could be anywhere two to four and in some cases it’s higher than that, some cases we don’t get any. We’ve been trying to drive more to flight hour agreements on some of our systems which you really lock in a price for a longer period of time and you make your increase margins by how efficient your products are for that airline. So, it really varies but I guess the bottom line is where we’ve needed to get the pricing increases we’ve been able to do it.

Steve Binder – Bear Stearns

I guess where I was going was when you look at 08 are you going to get stronger pricing this year against 07 and then you got 07 versus 06?

Marshall O. Larsen

Wheel wise, that’s different because we have long term contracts. We have some that are up for renegotiation and have some indexes that will allow us to get some increase pricing on 08 and in some others, for instance we signed that new long term agreement with Boeing, the pricing would be pretty much the same.

Operator

Next to David Strauss at UBS.

David Strauss – UBS

On the EPS guidance, if you kind of walk through it you’ve obviously increased the sales guidance by $100 million, part of that assumes reflects the acquisition that you’ve announced. It would imply that you’re assuming higher margins now than you would before. Can you just kind of walk through what you’re thinking is there? I know you’ve been talking about margins relatively flattish this year because of a higher mix of OEM business.

Scott E. Kuechle

The margins probably incrementally a little bit better than what we had thought previously. Part of that is the OE changes that we’ve seen on 787 moving a bit to the right, that gives us a little bit higher margin in the early parts of 2007 than we probably otherwise would have expected. We did edge up our aftermarket guidance a little bit from 8 to 10 to 8 to 11% so that obviously has an improving impact on margins as well. Military and space was up fairly considerably in terms of our guidance currently versus last time and good operational execution out of the businesses so all those things are tending to drive that favorably. I will tell you that the second half of the year we do expect to get a ramp up further in OE sales so we still see that mix effect coming but a little bit later in the year than we otherwise would have thought.

David Strauss – UBS

So do you think now margins year-on-year 08, if you exclude the Northup settlement from 07, is 08 higher than 07?

Scott E. Kuechle

We still think they’re broadly similar; they could be a little higher.

David Strauss – UBS

Okay. Then Scott, if you could just run us through where you stand on the fx side in terms of your hedging now for 08, 09 and 10 if you have it?

Scott E. Kuechle

Sure. In 08 we’re 94% hedged so year-over-year we’re looking at a $24 million pre-tax impact negative from 2007 to 2008 and we saw about $13 of that effect come through in the first quarter so second quarter will be a little bit of a drag as well and then it will even out a bit in the second half of the year. If you look towards 2009 we’re 74% hedged and in 2010 we’re 48% hedged. I would say kind of similar numbers, $25 million negative going in to 2009 versus 8, 10 versus 9. The same kind of range as what we’ve seen the last few years.

Operator

We’ll go next to Ron Epstein with Merrill Lynch.

Ronald Epstein – Merrill Lynch

Cash flow, when we think about cash flow conversion as we go through the year, this is a question for Scott, how should we think about that?

Scott E. Kuechle

Well, I mean historically we’ve had a little better conversion in fourth quarter of the year than first quarter of the year. We’re trying to do our best to stabilize level load debt to the extent we can. So, I think you should expect to see reasonable conversion through the year. We’re still guiding towards 75% or better on cash flow conversion. And again, as the income base continues to grow, the dollar of cash flow continue to increase but I don’t think you’ll see any major changes. You get a little bit of lumpiness when we choose to make pension contributions and things like that. But, it should be reasonably stable.

Ronald Epstein – Merrill Lynch

Okay. Then maybe a follow up question for you about pension actually, with interest rates coming down pretty dramatically over the last say nine months, what impact will that have on pensions for Goodrich? I guess that’s maybe looking in to next year but, how should we think about that?

Scott E. Kuechle

Well, treasury rates have come down and spreads have gone back up so actually discount rates if you were to cut the year today would actually be higher than they were at year end for pension purposes. So, the discount rate right now wouldn’t be the issue it would be asset returns, they’ve been negative for the first quarter of the year I think for most pension plans. So, my hope would be to get some recovery in the equity markets between now and the end of the year and interest rates stabilize around where they are now, you shouldn’t see a big impact going in to 2009 but there’s eight more months to deal with here in 2008.

Ronald Epstein – Merrill Lynch

Then just a point for Marshall, on M&A what are your current thoughts on M&A, post the TEAC deal? Are you still looking at more of little niche build on things? How should we think about it?

Marshall O. Larsen

Well, we’re still looking at bolt ons. We’ve got a number of them that we’re examining at any one time. We actually turned one down recently because of an environmental issue. We’re being cautious about bring the right assets on board. As I said before there’s still no large one out there that we feel compelled we have to do. We’ve got a lot of organic growth and company’s like TEAC are going to add not just to the top line but the bottom line also and we’ve found a number of good properties out there. So, we’re still concentrating more on the build on side.

Operator

We’ll go next to Howard Rubel, Jefferies & Company.

Howard Rubel – Jefferies & Company

Something that’s on everyone’s mind Marshall is energy costs, could you talk about what you’re doing? How big of an impact it is on the company? Then second, what you’re doing to sort of avoid it or elevate it, mitigate it?

Marshall O. Larsen

Well, I think that as we go across the board we have a lot of cost reduction programs and where we can we’ve done spot deals on energy and hopefully locked in a little better price at certain times. But, we’ve really more than anything been taking costs out elsewhere because it’s hard to reduce the energy in the short term. But, over time we’re working more on conservation programs going forward. One of the things, as we look at our market and the airlines, obviously the US airlines are getting the lion’s share of the brunt of the high energy costs for them because of the weak dollar. That’s not necessarily true with some of the European and Asia airlines that buy in other currencies and bring revenue in other currencies. They don’t feel it as much. But, by and large I think high energy prices are here to stay for a while so we continue to do everything we can to take costs out across the board and over time we’ll conserve more on the energy side.

Howard Rubel – Jefferies & Company

I was thinking specifically the carbon break business clearly is a very big natural gas user.

Marshall O. Larsen

It is but we’ve managed to work pretty well on it because most of that is natural gas. It certainly has fluctuated but it hasn’t been quite as bad for us as in some of the other areas, if we were still in chemicals for instance.

Howard Rubel – Jefferies & Company

The second thing is inventories grew around 5% and I think sales sequentially were up about 2 or 3, how much of that increase is due to just preproduction and excess over average? And, the rest of it I guess is probably volume?

Scott E. Kuechle

Our inventories in dollar turns grew about $90 million, $30 of that was non-product inventory which is the excess over average pre-production. $60 was what we would consider actual product type inventory so that was up consistent with sales. Our sequential sales were up about 5% and that’s about what the inventory grew so our turns held at 4.0 which is where they were at the fourth quarter of last year. Typically, we see a reduction in turns in the first quarter so I’m actually in a cautiously optimistic. Going in to the year, we’ve had a lot of focus in our businesses on working capital and they really did a nice job in the second half of 2007 focused on inventory management as well as receivables controls and I think that’s carrying on in to 2008.

Howard Rubel – Jefferies & Company

Then Scott, just to follow up on that, with respect to the 787, I think that’s your largest program where you have excess over average today. Because you’re keeping the inventory longer than what you had originally expected have you been able to get any compensation from them?

Marshall O. Larsen

The answer is that we kind of keep track of that stuff and we deal with Boeing on an ongoing basis but we’re not counting on anything but that doesn’t mean that we won’t have some opportunity based on some of the things we’re doing towards the Boeing programs.

Operator

We’ll go next to Joe Nadol with JP Morgan.

Joseph Nadol – JP Morgan

My first question is that you mentioned I think some of the key adjustments that you had anticipated in your guidance but that came maybe earlier than expected, I’m just wondering you’ve had a number of these, you’ve had great performance in that segment over the last several quarters, I think you’ve had them every quarter. Are there more in your guidance? Or, do you think we may have more positive surprises? Is there a chance that there could be further upticks?

Marshall O. Larsen

I can’t tell you magnitude but we think we’re more likely to do better than worse because we continue and particularly in the cell segment is very far along on lean manufacturing and becoming more and more efficient. They also because of some of the increases in volume of some of these programs have been able to take advantage of that and some limited price adjustments. So, all in all we don’t see that environment changing during the rest of the year so we feel pretty good about it.

Joseph Nadol – JP Morgan

But, is it fair to say since you said that your margin expectations aren’t really up that much for the full year that you’re not baking in further adjustments so that would be a positive surprise?

Marshall O. Larsen

No. If you look on the cells and the interior systems segment we have for instance in 06 – you can’t look at any one quarter because we do, do adjustments, you’ve got to look at the full year. We were 18 to 22% in that segment and last year we were anywhere from 23 to 26% depending on the quarter. So, it can vary by a few percentage points by quarter but in general we’re dealing with a fairly good environment.

Scott E. Kuechle

Joe, we are assuming that we’ll get some continued favorable contract adjustments. Probably not the same magnitude we got in Q1 but the expectation is that we’ll continue to get some of those as we go forward.

Joseph Nadol – JP Morgan

Would that be each quarter Scott? Or, any specific quarter?

Scott E. Kuechle

They’ve been favorable every quarter for the last year and a half, two years. So, it’s just magnitude is the issue.

Joseph Nadol – JP Morgan

Okay. Then secondly, you mentioned I think a number of the past several quarters there’s the improved break life situation. Can you explain that a little bit and maybe help characterized what the further upside could be there? Is this sort of breaks by the hour or breaks by the landing and you’re just getting better life so you’re providing fewer of them and getting the same sales? If that’s the case is it a matter of getting more of these contracts lined up? How do we think about what might happen there going forward

Marshall O. Larsen

Well, in some of our programs we’ve put in a new carbon lot a few years ago and when you do that you’re not entirely sure how it’s going to perform compared to the old line but we figured it would be better. So, you don’t book everything and I can let Scott kind of tell you how we go through this because it’s a pretty detailed analysis on contracts every quarter.

Scott E. Kuechle

The way to think about that is you have a long term contract, often time a 10 year kind of contract where you’re receiving cash essentially on a monthly basis as the airplane lands and then you have a certain number of overhauls that you anticipate to make over that 10 year period and you book the revenue and the margin when you do the overalls not when you get the cash. So, you’re always making estimates of how long your break life is going to be and therefore how many overhauls you’re going to make in the contract. But, as we’ve seen our break life improve overtime we’re having fewer overhaul events but each individual event must therefore attract more revenue, more margin. So, as we go through time and these breaks mature and the performance continues to improve we have to recognize on a backwards looking basis that we need to recognize more revenue for each of those maintenance events that have already occurred in the contract. So again, we continue to see favorable developments there and as Marshall said that was product change from a couple of years ago that we’re seeing not only in the A320s, the 737 fleet but also in regional jet fleets as well.

Joseph Nadol – JP Morgan

Is there more of a roll up that has to take place? Do you have more visibility on this continuing to take place? Or, is it simply just changes in your estimates on a quarter-by-quarter basis?

Scott E. Kuechle

It’s quarter-to-quarter. We’ll expect it to slow down because we do now have maturity on those programs so the benefits have been there, we’ll retain those but they won’t be quite as favorable if you look out to 2009 or 10.

Operator

We’ll go next to George Shapiro with Citigroup.

George Shapior – Citigroup

Marshall I wanted to pursue a little bit more your confidence in this 8 to 11% raise in the guidance in aftermarket slightly so a couple of questions. You’ve got over half the aftermarket to customers outside the US, that would still strike me as you’re more exposed than average, proportionally more exposed to North America since I would think that traffic is 60 to 65% outside the US. So, if you could just comment on that. Then, the second one would be if you could just break out how much of that aftermarket goes to Europe versus Asia?

Marshall O. Larsen

Let’s again talk about domestic airlines. You’re unlikely to see too many A320s and next generation 737s for instance end up getting parked. They’re still going to be used fairly heavily even if other parts of the fleets get parked like the MD80s and DC9s which we have hardly any content on. As we look at that A320 fleet in particular around the world its continuing to grow and those number of aircraft coming in to the maintenance cycle continue to grow at a pretty good rate. So, we’re going to grow faster because of our content on that than someone who doesn’t participate on that family of aircraft as much as we do. I also think you have to look at the total fleet growth too and we’re estimating about 4% worldwide. We’re pretty confident in the way we see this going and, I said we’re taking market share. We’re getting more and more flight hour contracts with multiple product lines on them and that’s attributable a lot to our worldwide customer service initiative as well as having MRO centers in the right spots, the right regions around the world. So, this isn’t just looking at it top down, this is look at bottoms up in our individual business and product lines and going through and looking at orders and what’s taking place so it’s a combination of all of that, that gives us the confidence to raise that estimate to 8 to 11.

George Shapior – Citigroup

And, if you split the half that’s outside the US, how would it split between Asia and Europe?

Marshall O. Larsen

I think you have to look at the fleet, the way the fleet is split and then it’s a question of which airlines are running which aircraft.

George Shapior – Citigroup

Then would it be safe to assume that the book-to-bill in this spares business must have been above one in the quarter?

Marshall O. Larsen

Well, we don’t really follow a book-to-bill on that because in some of our businesses like in the cells, we turn around some of those orders in three days to 15 days. In fact, we’re shooting for 15 days across the board. We haven’t achieved that yet in our enterprise but [inaudible] we’ve got all those MRO centers because it allows us to very quickly service the airlines in the region.

Operator

We’ll go next to JB Groh with D.A. Davidson.

JB Groh – D.A. Davidson & Co.

I had a question on the G&A I don’t know if you can cover this or not but it was down pretty significantly sequentially and also year-over-year. Can you explain that impact and maybe talk about what you think run rate should be for the balance of the year?

Scott E. Kuechle

Well, if you look over the last couple of years, SG&A has grown fairly rapidly, not quite at the same pace as sales but close to that. If you think about what’s going on in the industry, we’re trying to keep up with some very aggressive delivery rate expectations by our OE customers and trying to grow our aftermarket so we’ve put in a lot of infrastructure to support that over the last couple of years and at some point you’re going to start to see that growth rate start to level off and we’ll get more leverage off the fixed costs space. I can tell you there’s a lot of focus across our company at making sure we manage that SG&A cost level now particularly as we get closer to the peak of the OE cycles making sure we’ve got good discipline on that is very important to us.

JB Groh – D.A. Davidson & Co.

So where does the drop of $10 million come from, from Q4 and the drop of roughly $6 million on the segment basis?

Scott E. Kuechle

There’s some on the crop G&A side, some of that is just generally cost controls some of it is just timing of how we recognize expense related to stock-based compensation so there’s some benefit this quarter compared to a year ago. We had a special stock option program that was in place for 2007, all the expense was recognized in 07, it’s not there this year. As the stock price declined from the end of the year to where it ended in the first quarter we got some benefit there. We hope to lose all of that in the second quarter.

JB Groh – D.A. Davidson & Co.

I hope you do too. But, as far as run rate it’s probably closer to a low 30s as opposed to low 20s?

Scott E. Kuechle

Yeah. Corp G&A we think our run rate is $30 million a quarter.

Operator

Next to Peter Arment at American Technology Research.

Peter Arment – American Technology Research

Most of my questions have been answered but Marshall could you just talk more about your market share gains you’re seeing on the MRO side? Can you give us a little more color on any further expansion plans you’re seeing? I know you had Dubai last year and you invested in Monroe, any other additional plans for 2008?

Marshall O. Larsen

Well, you’re right we did expand in Dubai, we also just finished up in Singapore expansion and our Foley, Alabama MRO also. As we go forward we evaluate across the region but we’re evaluating another facility in China right now. We have one there but we’ll probably look very seriously at adding another one because that market has really been growing.

Peter Arment – American Technology Research

Okay. Scott, any of those plans in your cap ex for the year or anything additional?

Scott E. Kuechle

Yes, that is part of the reason we increased cap ex in guidance for the year, making those investments.

Operator

Next to Carter Copeland at Lehman Brothers.

Joe Campbell & Carter Copeland – Lehman Brothers

We don’t see too many 60% up EPS quarters so congratulations that was a great job. Carter and I wanted to ask about how the new airplane programs are going at Goodrich? You don’t have a lot I guess on the 87 but Boeing is slowing down considerably and whether that would have some impact? Then, the Airbus is stepping up the A380 and how that one is going? Then, when do you expect to hear on the various packages that you have out on the A350?

Marshall O. Larsen

Well, going in reverse order, on the A350 we know we’ve won the cells on both those engines. We’ve submitted bids on flight controls and wheels and brakes and air data sensing and evacuation slides and those things will start coming in over the next quarter or two I believe.

Joe Campbell & Carter Copeland – Lehman Brothers

What is the hold up there? I would have thought they were going faster or is this the schedule you thought they would be on?

Marshall O. Larsen

Well, it’s more of the schedule we thought they’d be on because every system has a different schedule. I mean wheels/brakes are generally towards more in the end then the landing gear and the cells for instance, they all start with engines and the big infrastructure first and slides can be again, towards the end. So, that’s the A350. On the A380, that program we’ll be stepping up our landing gear shipments next year in to the mid teens so that’s coming along. I think they’re starting to ramp up and we’ve heard nothing that says that they’re not going to be able to do that. On the 787, it wasn’t fully unexpected to have another delay so we’ve been cautious in some of our areas on working capital. We certainly have got some extra, that’s for sure.

Joe Campbell & Carter Copeland – Lehman Brothers

Do you have to stop dead? I mean if they’re only going to need say six airplanes they think they’re going to have flying by the end of the year, another four or five in the finally assembly area or in transit most people were pretty far ahead of say 10 or 11 chipsets.

Marshall O. Larsen

No, we will not have to stop dead on that. We’re working two different engine programs on the cells and you’re still tweaking the product as the engines are tweaked, we didn’t build that far ahead which was a good thing. We’ll continue down the road, we’re supporting First Flight and we’re still pushing on the development to get to the certification phase on some of our [inaudible].

Joe Campbell & Carter Copeland – Lehman Brothers

Well Marshall you were always paid on delivery though, right? So, this wasn’t a huge working capital issue to go through though, right?

Marshall O. Larsen

That’s right. We do get paid on delivery for all of our major systems. There are a few minor things that we weren’t but for the most part the big cash items were paid when we delivered.

Operator

Next to Cai von Rumohr at Cowen & Company.

Cai von Rumohr – Cowen & Company

Some other companies have kind of mentioned that they had more working days or billing days in the quarter. Was that an issue for you guys at all?

Marshall O. Larsen

Frankly, Cai I didn’t even look at it. Yeah, I guess we had leap year this year. We treat every day the same so whether we got an extra day in there or not I just didn’t pay that much attention to it.

Cai von Rumohr – Cowen & Company

Okay. Secondly, back to Joe’s question, if we back out the $20 million net plus at the cell, it looks like the margin is 25.8 and while the mix will be shifting to OE, if in fact you have more cumul adjustments would that kind of normalize 25.8 taking the cumul adjustments out of the first quarter be sustainable?

Marshall O. Larsen

Well, you can’t really take them out.

Cai von Rumohr – Cowen & Company

What I’m saying is we do take them out, its still 25.8 is my point.

Marshall O. Larsen

Yeah, it’s still a great business. We’re not expecting that magnitude of cumul adjustments going forward but as I’ve said in that business you can see a two or three margin point change from quarter-to-quarter and in general I think we’ll do just fine.

Scott E. Kuechle

Cai, there’s a big mix shift coming in terms of OE too. We were only up a couple points in OE sales versus a year ago but we’re thinking 20% for the full year in that segment so there’s a lot of growth coming in OE in the back half of this year.

Cai von Rumohr – Cowen & Company

So unless the numbers really – if the numbers grow that’s really OE but should we expect the aftermarket from where it was in the first quarter to come off? Or, does that continue to grow also?

Marshall O. Larsen

We’re not expecting the aftermarket to fall off. The wild card on the cells and interior side in the aftermarket is majors and if you get rather than a piece part component and you can’t predict those things very well because they’re very lumpy. You could get quite a few in one quarter and nothing the next quarter and I think that’s what dictates the swing in the margins. We’re seeing a steady aftermarket there.

Operator

We’ll go next to Ted Wheeler at Buckingham Research.

Ted Wheeler – Buckingham Research

Just I guess a top down question that has sort of been nagging, I understand there’s a mix shift coming and it will be somewhat adverse and I think you’re generally conservative but this is shaping up to be the first year I can find where the first quarter earnings will be the higher quarter of the year. I don’t know, there might be something else I am missing, if you could comment on that, that would be good.

Marshall O. Larsen

I think you get that high quarter because we got those cumul corrects early than we expected. We expected them to be later on in the year and we were able to move forward on our efficiencies and our pricing and volume that allowed us to take them in the first quarter. It’s a different dynamic than you’ve probably seen in the other first quarters.

Ted Wheeler – Buckingham Research

Well yes, the typical step up is pretty noticeable too.

Marshall O. Larsen

Right. And, the good news is it’s operational. It is from good solid blocking and tackling on those businesses.

Scott E. Kuechle

We saw an 11% increase in aftermarket from Q4 to Q1 so we’re at very nice robust levels in the first quarter of 2008 and we expect to sustain those kinds of absolute levels in our $2.5 billion aftermarket for 2008. If we do that you’re going to see 8 to 10%, 11% year-over-year comparisons on aftermarket.

Ted Wheeler – Buckingham Research

It just all kind of leads me to a higher number than you’re sort of guiding for the full year, that’s all, which is okay.

Marshall O. Larsen

You have to make that determination.

Ted Wheeler – Buckingham Research

I was just trying to make sure there wasn’t anything I missed. One other sort of specific thing, the pricing you talked about in actuation and landing improvement. I would suspect that’s just the roll through of the arrangements that you’ve made going out with Boeing and that those will anniversary but for the rest of this year they’ll probably still be pretty positive?

Marshall O. Larsen

That’s right. It’s just a roll through from last year. We’ve not increased our OE pricing.

Ted Wheeler – Buckingham Research

But, it recurs until we anniversary that arrangement?

Scott E. Kuechle

In the other businesses we continue to get escalation kinds of price increases consistent with increases in raw materials and what not. So as those contracts roll over or have escalation adjustments we get a benefit from that that continues going forward until the next opportunity.

Ted Wheeler – Buckingham Research

I guess just lastly for me, the ERP implementation is that a run rate that’s going to continue for the rest of this year?

Marshall O. Larsen

That run rate will continue not only through the rest of this year but for the next several years. We’re a little less than half way through an implementation program that takes us in to beyond 2010.

Ted Wheeler – Buckingham Research

Right. And, it’s pretty much at the level we’re seeing now, it doesn’t change a whole lot?

Marshall O. Larsen

At some point we hope it will come down a little bit but not in 08.

Operator

We’ll go next to Gary Liebowitz with Wachovia.

Gary Liebowitz – Wachovia

Marshall, I have a follow up question regarding the A320 fleet that you talked about earlier. Some of these planes are now coming in on 20 years of age, they might be falling out of favor with some of the carriers and if I think longer term if this plane goes through a passenger to freighter conversion program what kind of impact does that have on you? Does the plane continue to generate the same aftermarket level of sales as a freighter aircraft as compared to a passenger aircraft?

Marshall O. Larsen

Yes it does because on that particular platform the cells are our largest product, they’re not going to change on it at all. So, if it gets converted to a freighter and they still fly it we’re still going to get the revenues.

Gary Liebowitz – Wachovia

So interiors wouldn’t be a big part of that?

Scott E. Kuechle

No. The two biggest systems we have Gary are the cells and thruster as Marshall mentioned and flight controls as well so it’s structural not on the interior package. The other dynamic here on the A320s is you’ve got something like 3,500 aircraft in the active fleet right now, most of those – we’re probably two thirds of those are in active maintenance repair for us because the rest of the fleet is pretty new. So what we’re seeing in our parts and maintenance shops is not that whole active fleet right now and if you project forward over the next 10 years the size of that fleet is going to double close to 7,000 aircraft so for the next 15 to 20 years you’ve got what I believe is a very rapidly growing aftermarket opportunity there.

Operator

This does conclude our question and answer session for today. I’d like to turn the conference back to Mr. Gifford for any closing or additional comments.

Paul Gifford

Thank you all for joining us today for this conference call. I am sure I’ll be talking to several of you over the next days and weeks as we get in to the second quarter. Thank you very much.

Operator

This does conclude today’s conference. We do thank you for your participation. You may disconnect at this time.

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Source: Goodrich Corporation Q1 2008 Earnings Call Transcript
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