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Executives

Greg Powell - Vice President of Investor Relations

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

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

Werner Lieberherr - President and Chief Operating Officer

Analysts

Noah Poponak - Goldman Sachs Group Inc., Research Division

Julie Yates - Crédit Suisse AG, Research Division

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

Gautam Khanna - Cowen and Company, LLC, Research Division

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

Myles A. Walton - Deutsche Bank AG, Research Division

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

Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division

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

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

Darryl Genovesi - UBS Investment Bank, Research Division

BE Aerospace (BEAV) Q2 2012 Earnings Call July 24, 2012 9:00 AM ET

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 Quarter 2012 Earnings Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded this day, July 24, 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 second quarter ended June 30, 2012. By now, you should have received a copy of the news release we issued earlier today. If you haven't received it, you'll find a copy on our website.

We will begin this morning with remarks from Amin Khoury, our Founder, Chairman and Chief Executive Officer; and then we will take your questions.

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

Joining us this morning for the call will be Werner Lieberherr, our President and Chief Operating Officer; and Tom McCaffrey, Senior Vice President and our CFO.

As always, in our prepared remarks and our responses to your questions, we rely on the Safe Harbor exemptions under the various securities acts and our Safe Harbor statements in the company's filings with the SEC. After we present today, we will address your questions following our prepared remarks. [Operator Instructions]

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

Amin J. Khoury

Thank you, Greg, and good morning, everyone. We are very pleased with our record second quarter results, which were announced earlier this morning and which were above earlier expectations. Our strong revenue growth is being driven primarily by the robust new aircraft delivery cycle and substantial market share gains, which are offsetting weaker aftermarket demand.

Approximately 65% of second quarter bookings were driven by demand for products for new-buy aircraft. So our historical 50%-50% OE aftermarket split has become strongly skewed to the OE side of the ledger both because of the strong new aircraft delivery cycle and also because of a weaker aftermarket environment.

Over the past 3 years, the company has been booking orders well in excess of the market growth rate. And we are now recording significant market share gains while delivering at a rate well above the market growth rate. It is our successful R&D investments which are driving the significant market share gains. And with robust demand from the strong new aircraft build cycle, we are experiencing strong revenue growth. In addition, essentially our entire $4.4 billion SFE backlog represents additional market share gains. And as deliveries from our SFE backlog ramp up, we expect to see our revenue generation per new aircraft continue to increase.

Our record second quarter results included an operating margin of 18.5%, excluding items, an increase of 100 basis points as compared with the prior year period. The substantial margin expansion was driven by the 20% revenue growth in our higher-margin distribution business and by margin improvements in our Commercial Aircraft and Business Jet segments, which more than offset the margin drag from recent Consumables Management segment acquisitions and related integration costs.

During the quarter, we agreed to acquire Interturbine, a leading provider of material management logistics services to global airlines and maintenance, repair and overhaul providers. Interturbine is a one-stop source reducing aircraft downtime for airlines. Over 60% of Interturbine's business is generated on an urgent aircraft-on-ground basis, requiring response within 4 to 24 hours. The acquisition, when closed, will add about 500,000 SKUs, doubling our Consumables product portfolio and, more importantly, positions our company to offer a comprehensive range of products and services on a single-source basis to our customers globally.

A bit on the financing front. Two weeks ago, we opportunistically took advantage of historically low interest rates and issued $800 million of senior unsecured notes priced to yield 4.9%. We issued those notes as an add-on to our existing $500 million issue, a 5.25% senior unsecured notes due March 2022. At the same time, we launched a tender offer to acquire any and all $100 million [ph] issue of 8.5% senior unsecured notes due July 2018. We intend to use excess funds remaining after the tender for general corporate purposes, which may include acquisitions. Exclusive of a onetime charge of approximately $0.55 per share for debt prepayment cost, these financing transactions are expected to be neutral to slightly positive to 2012 earnings per share and to be approximately $0.07 per share accretive to 2013 earnings per share.

During the second quarter, we accomplished 2 very significant new product introductions into service on 2 aircraft types -- 2 new aircraft types, I should say. Both introductions were executed flawlessly and received tremendous acceptance by our customers and their passengers. First, at the Farnborough Airshow, with great fanfare at a major VIP-only press event, Qatar Airlines rolled out their new 787 with 2-class service and utilizing complex and highly customized B/E Aerospace business class seats and bespoke B/E Aerospace cabinetry. It was widely reported during the show that Qatar's business class section, which also includes a complete suite of B/E Aerospace food and beverage preparation and storage equipment, represents a paradigm shift for airline business class cabins, which has taken the business class cabin to a totally new level.

In addition, during the quarter, Lufthansa took delivery of their first 747-8, which included 8 of our bespoke Super First Class suites and 92 of our unique custom business class seats. The 747-8 has been flying for a couple of months now. And the passenger feedback about our products has been exceptional.

Before discussing second quarter financial performance, I would like to spend a few minutes discussing the current market environment; 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 current commercial aerospace environment. Global traffic grew 4.5% year-over-year in May compared to capacity growth of 4%. Although traffic slowed from April, when it was up 6%, May traffic was still ahead of capacity, which helped maintain load factors at historically high levels. Airlines are successfully managing capacity. And the domestic carriers have now successfully pushed through 3 price increases this year. In addition, fuel prices have dropped a bit, which has led IATA to confirm their forecast of a third straight year of industry profitability.

As you are well aware, Farnborough was a huge success for Boeing, which booked 396 net orders at the show. Boeing's recent order success, particularly with respect to 737, was extremely important for B/E Aerospace, not only because B/E Aerospace oxygen lighting and modular lavs are an integral part of future 737 deliveries, but also because several major 737 buyers get 4 to 6 extra seats on their 737 configurations, which bodes well for eventual major retrofit programs for those airlines. Suffice it to say that as a result of successful B/E Aerospace R&D initiatives, we have been able to garner numerous Airbus and Boeing SFE program awards, many of which portend retrofit opportunities.

It is worth mentioning here that the B/E Aerospace Pinnacle coach class seating platform continued its strong marketing performance during the quarter and has become our most successful new seating product launch ever, having now garnered orders to outfit more than 1,600 aircraft, valued in excess of $850 million, with success across both Boeing and Airbus, both narrow-body and wide-body platforms.

Finally, while discussions at Farnborough regarding the record OE backlogs and build rates served to reinforce the OEM outlook, cautions were raised by numerous suppliers regarding the aftermarket. We, too, are experiencing weaker aftermarket demand, particularly in the U.S. and Europe. And we expect aftermarket demand to continue to be temporarily muted as airlines manage inventories down and defer maintenance in order to conserve cash in the face of current macroeconomic weakness.

We are nevertheless confident in our future due to the future market share gains, which are now embedded in our backlogs, and the successful R&D programs, which have now generated $4.4 billion in SFE awards, which will increasingly support growing bookings and deliveries over the next several years.

In our view, justifications for the planned ramp-up in deliveries by Airbus and Boeing from 2012 to 2015 remain convincing: A 7.5-year industry backlog following nearly a decade of undersupply; structural growth in emerging markets' air traffic; the need for fuel-efficient aircraft to replace thousands of older aircraft; and high airline load factors.

Now let's turn to Slide 2 and discuss our second quarter financial results. The bar chart on Slide 2 reflects our consolidated second quarter 2012 financial performance compared to the second quarter of 2011. Record second quarter revenues increased 26% to $768 million. Pro forma revenue growth, giving effect to all acquisitions completed during 2011 and 2012 as if they had occurred on January 1, 2011, was almost 18%. Record operating earnings of $138 million increased 29%, and operating margin expanded 40 basis points to 17.9%. Exclusive of items, that's AIT cost, operating earnings of $142 million increased 33% on the aforementioned 26% increase in revenues, and operating margin of 18.5% expanded by 100 basis points. Record net earnings and earnings per share were $71 million and $0.69 per diluted share, increases of 30% and 28%, respectively. Exclusive of items, net earnings and net earnings per share were $74 million and $0.72 per share, increases of 35% and 33%, respectively.

Let's review Slide 3, which summarizes our current bookings and backlog status. Bookings during the second quarter were strong at approximately $770 million and reflect a book-to-bill ratio of 1:1. Approximately 65% of bookings in the current quarter were driven by a higher level of demand for products to outfit new-buy aircraft. Backlog at the end of the quarter was approximately $3.7 billion, while total backlog, both booked and awarded but unbooked, stood at $8.1 billion, an increase of approximately 25% as compared with June 30, 2011.

Now I will briefly review the second quarter operating performance for each of our business segments. Let's turn to Slide 4 and review the second quarter results for our Commercial Aircraft segment. The Commercial Aircraft segment leadership team turned in another outstanding performance during the quarter. Revenues of $392 million increased 27%, while operating earnings of $70 million increased 35%. Operating margin of 17.8% expanded 100 basis points due to an improved revenue mix and ongoing operational efficiency initiatives.

Let's turn to Slide 5 and review second quarter results for our Consumables Management segment. The leadership team for the Consumables segment also delivered a strong quarter, a quarter in which the team was deeply engaged in acquisition integration activities. Revenues of $286 million increased 20%, while operating earnings of $55 million increased 15%. Operating earnings adjusted to exclude AIT costs were $60 million, and adjusted operating margin was just under 21%, an increase of 70 basis points as compared with operating margin for the prior year period.

Let's turn to Slide 6 and review the second 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, driven by the Super First Class portion of the business. Revenues of $89 million increased by 47%. Operating earnings of $12 million increased by 91%. Operating margin of just under 14% expanded by 320 basis points, reflecting the 47% increase in revenues and improved mix of revenues and ongoing operational improvements.

Let's briefly review our financial position on Slide 7. Second quarter 2012 free cash flow of $47 million represents a free cash flow conversion ratio of 66%. Free cash flow in the current quarter reflects capital expenditures of $30 million and a 20% increase in working capital in support of the 26% increase in second quarter revenues and the 25% increase in total backlog as compared to June 30, 2011.

As of June 30, 2012, cash was $464 million. Net debt, which represents total long-term debt of $1.75 billion less cash, was $1.28 billion. And the company's net-debt-to-net-capital ratio was 39%. As of June 30, 2012, the company had no borrowings outstanding on its $750 million revolving credit facility. And after giving effect to the pending debt retirement of our 2018 notes, we will have no debt maturities until 2020.

Slide 7 also includes pro forma liquidity information giving effect to the $800 million issue of senior unsecured notes priced to yield 4.9%, the redemption of our $600 million issue of 8.5% senior unsecured notes, and the closing of the Interturbine transaction as though those transactions had been completed by the end of the quarter. Pro forma, as of June 30, 2012, cash would have been $342 million; net debt would have been $1.62 billion, which represents total long-term debt of $1.96 billion less cash; stockholders' equity adjusted for the onetime charge of approximately $0.55 for the debt prepayment expense would have been $1.97 billion; and the company's net debt-to-net-capital ratio would have been 45%.

Let's now briefly review our outlook. Our record backlog, both booked and awarded but unbooked, of approximately $8.1 billion; our expectation of significantly higher levels of wide-body aircraft deliveries; the expectation for continued growth in global passenger travel; and attendant increases in capacity, all provide a solid foundation for strong revenue and earnings growth. We are confirming our 2012 full year guidance of $2.75 per diluted share in spite of the approximately $0.13-per-share interest expense drag on earnings, resulting from our first quarter 2012 $500 million senior notes issuance. The third quarter of 2012 senior notes issuance and tender, exclusive of a onetime charge of approximately $0.55 per share for debt prepayment expense, is expected to be approximately neutral to slightly accretive to 2012 EPS and approximately $0.07-per-share accretive to 2013 EPS. The $2.75 EPS guidance represents earnings per share growth of approximately 23% over 2011. On a comparable interest expense and comparable tax rate basis, our $2.75-per-share guidance represents a 38% increase compared to 2011 EPS.

So the company expects continued strong orders in 2012, driven by the robust wide-body aircraft delivery outlook, as well as continued market share gains, and expects to end the year with a book-to-bill ratio in excess of 1:1. 2012 revenues are expected to be approximately $3 billion. The company expects 2012 EPS of approximately $2.75 per diluted share in spite of the $0.13-per-share interest drag as mentioned a moment earlier. The third quarter of 2012 senior notes issuance and tender, exclusive of the $0.55-per-share debt prepayment expense, is expected to be approximately neutral to 2012 EPS. The EPS guidance of $2.75 per diluted share represents a year-over-year increase of approximately 23%. And finally, 2012 free cash flow conversion ratio is expected to be approximately 75% of net earnings.

And with that, I'll turn the call back over to Greg to begin the question-and-answer period.

Greg Powell

Thank you, Amin. Jessica, we're ready now for the question and answers.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Noah Poponak.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Amin, I wondered if you could speak to -- within the context of your comments there on a little bit slower aftermarket, if you could speak to the difference in what you consider to be discretionary versus nondiscretionary within your business in terms of the trends you're seeing?

Amin J. Khoury

Well, I think, Noah, we should expect the aftermarket to be muted for some period between 6 months and 18 months. In our planning now, we are looking at the aftermarket to be muted right through the end of next year. The environment in Europe is pretty negative. I mean, you have the 2 largest carriers in Europe each laying off between 3,000 and 4,000 people. China has slowed down substantially, and the U.S. is barely growing. So the airlines are doing what they can to conserve cash. They are deferring maintenance. They are depleting inventories and living hand-to-mouth again. They'll be able to do that for some period of time. I think that the outlook is that at some period of time here, either in the latter part of 2013 or 2014, you'll have a major upswing. Tom, maybe you want to comment a little bit about both spares and consumables.

T. P. McCaffrey

Yes. With respect to the outlook on the aftermarket, I think when we're talking about the aftermarket, Noah, and specifically your question about discretionary spending, it's the spare spending that we're seeing which is -- has slowed down. And that is the expectation -- really, the driver behind the expectation with respect to kind of tepid or muted growth until the economy picks back up and we see more activity in revenue passenger miles and MRO activity.

Noah Poponak - Goldman Sachs Group Inc., Research Division

But I guess it seems like there's a case to be made or that if the airlines are being really tight on capacity, you see that show up in the MRO and spare side, in the meat-and-potatoes stuff. But they're actually making money as a result, and they've delayed -- they've deferred so much of the large retrofit projects that, perhaps, they're actually doing some of that today. And that would drive sort of the segment organic growth we saw from you guys this quarter, very low at CMS, much better at CAS and Business Jet. Is that correct? And is that what we should be modeling, it sounds like, for the next few quarters?

Amin J. Khoury

Yes, during the quarter, maybe this is another way to look at it, of the programs, the RFPs that we are actively engaged in, about 85% are related to new aircraft delivery activity, and about 15% is related to retrofit activity. So I would say that the retrofit activity is down. It's more discretionary. And these really excellent revenue growth rate numbers is really due to our market share gains and the robust new airplane delivery cycle. So I would basically -- so I would say that the news is pretty darn good, that we've been able to grow at almost 18% organically in spite of a very tepid aftermarket. I mean, on a pro forma basis, the CM [ph] business only grew at about 3.5% or 4% this past quarter. So when you had that kind of growth rate in a business that is responsible for 40% of the total business and still have 17% organic growth, basically the orders that we have booked over the past couple of years, which are well in excess of market growth rates, are allowing us to deliver now well in excess of market growth rates. And we booked the program at healthy margins, so our backlog is a high-quality backlog. And it's one of the reasons why, if you look forward at the balance of the year, the second half of 2012, we have relatively muted growth. It's like a 15% growth rate as compared to the second half of last year in revenues. But operating earnings growth is about 25%. So basically what we have is a very high-quality backlog with substantial market share gains which had been booked and which are now flowing into revenues, which are enabling the company because, basically, of the strength of the franchise to be able to cover lower aftermarket spending with higher deliveries on the OE side.

Operator

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

Julie Yates - Crédit Suisse AG, Research Division

This is Julie for Rob. Amin, your free cash flow conversion guidance for the year dropped slightly to 75%. Does this reflect an accelerated investment in inventory? Or is it something else?

T. P. McCaffrey

Julie, the change in the free cash flow guidance, really, is a result of acceleration of spending for SFE programs, which we'll begin to deliver in 2013 and should be very strong contributors to both revenue and earnings in 2014 as the programs roll out. So it's an acceleration of the SFE.

Julie Yates - Crédit Suisse AG, Research Division

Okay. Great. And then can you guys offer any initial thoughts on 2013 at this point in terms of revenue growth? Or will you reserve that for October?

Amin J. Khoury

I think we can make a couple of qualitative comments, Julie. Assuming that the aftermarket growth rate remains muted through 2013, we would expect the revenues to grow I'd say right through the end of next year. We would then expect revenues to grow by about 10% next year, driven primarily by backlog, and earnings to grow about 20%, driven by margin expansion, as compared with our current 2012 guidance. So 2013 is a transition year for the company as we complete the development and certification of our SFE programs, and that sets up 2014 for a very strong revenue and earnings growth year. In fact, all 3 segments are expecting to deliver significant 2014 revenue growth: Commercial aircraft for major SFE program deliveries, which we've talked about for quite a while now; Business Jet, from a significant increase in SFE deliveries on several new business jet platforms and a very significant upswing in the delivery schedule for Super First Class; and Consumables Management is expected to benefit from the cessation of AIT spending and from an improvement in aftermarket spending after 18 months of controlled or deferred spending by the airlines. So we're looking at 2013 as a transition year for us but a transition year where we have 20% earnings growth, and 2014 as a really big up year for the company.

Julie Yates - Crédit Suisse AG, Research Division

Okay. Great. And does that 20% EPS growth include the $0.07 accretion from the financing transactions?

Amin J. Khoury

Yes.

Operator

And we have a question now from Rama Bondada.

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

So when we look at your backlog, particularly the $3.7 billion that's the booked backlog, how much of that is retrofit? How much is -- of that is the original equipment manufacture, the new airplane push? And how much of that [indiscernible]...

Amin J. Khoury

It's primarily related to new airplanes.

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

Okay. So there's not that much retrofit in [indiscernible]...

Amin J. Khoury

Vast majority is new airplanes. No, there's some retrofit, but I don't know the exact percentage.

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

Okay. And then last quarter, you mentioned the ATI (sic) [AIT] cost for the full year was expected to be about $15 million to $20 million.

Amin J. Khoury

Right.

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

Is that -- has there been any change to that?

Amin J. Khoury

No. We continue to expect $15 million to $20 million this year in AIT expenses.

Operator

And we have a question now from Gautam Khanna.

Gautam Khanna - Cowen and Company, LLC, Research Division

Could you give us a couple of things? One, can you update us on the rollout of the lavatory business, how it rolls in the next year itself [ph] and then across the 737 line? And then a follow-up.

Amin J. Khoury

Yes, I would -- I think that's a very bright light for the company. Boeing booked a lot of 737 orders during the show. Those 737s are all going to contain our modular lavs [lavatories] and our lighting and our oxygen systems. This is a really big deal for B/E Aerospace. We have a pretty good push on us now to get modular lavs out the door as early as we can. And as Tom mentioned a moment ago, we have significantly stepped up our spending. So while we see 2013 as a transition year where we begin to shift the modular lavs for line installation at Boeing, we also expect to have our first retrofit orders for modular lavs either in 2012 and/or 2013 and to book more than one during that period of time. This is going to become a very big deal for us. So our expectation for 2014 is a very significant ramp-up in modular lav deliveries, both for line fit and for retrofit, as early as 2014. And we are stepping up our spending to be ready to do that as we speak.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And then just to shift gears on CMS, were there any competitive losses in that segment in the quarter? Or have you seen any impact from the Boeing direct buys? And if you could comment on -- I know one of your competitors bought Interfast, if that changes the competitive dynamics in any meaningful way.

Amin J. Khoury

Okay. No. Absolutely 0 competitive losses; in fact, a couple of competitive wins. So no competitive losses. It's just a matter of spending slowing down is what happened during the period. No change in the BASN [ph] program. I mean, 0 change in the BASN [ph] program and no impact. And as far as Interfast is concerned, I mean, it's a relatively minor transaction, as you know. So Interfast, in fact, was a customer of ours, a very small customer of ours. I assume that, that piece of our business over some period of time will go away, but it's basically immaterial to our business.

Operator

And we'll move now to Peter Arment with Sterne Agee.

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

Amin, I guess, I wanted to explore the aftermarket kind of by geography a little bit, if you could. I know last year, you finished with your revenue mix for the total company, it was roughly 52% in the U.S. and then 24% in Europe and 24% in your rest of world category. And you kind of split it up, and you talk about the aftermarket demand here is certainly normalizing, or they're managing their inventories in the U.S. and Europe. Can you give us a little more color? Are you seeing any kind of further deterioration in Europe more than you are in the U.S.? I know GE mentioned that on Friday, where they had some pretty significant declines in their spares volume in Europe versus other parts of the world.

Amin J. Khoury

Yes. Europe is having a really tough time. The second-tier airlines in Europe nearly disappeared in terms of aftermarket spending in the quarter. And the first-tier airlines, as I mentioned earlier, the really big guys, are laying off thousands of employees as we speak. So Europe is a really tough situation now. And 2 or 3 years of crisis that they've been in are really beginning to take their toll. The U.S., we saw a slowdown, but that was primarily because of -- there are 2 issues there: one, really strong compares in the prior year in the U.S.; and then 1.5% or less than 2% growth rate for quite some time and a lot of uncertainty in the environment, so pretty much everybody's pulled back a little bit. And now we've even seen a significant reduction in activity in the Pac Rim in Asia. So China, for example, is down significantly. So basically, there is a global slowdown in a macroeconomic situation, and that is being reflected in aftermarket spending by airlines pretty much all over the world. I would say the one place where it isn't being impacted is the Middle East as a region of the world.

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

Okay. And then does this change any of your, I guess, thoughts on your acquisition strategy regarding how you've broadened out with Satair and now Interturbine and just kind of your focus there in building the global franchise?

Amin J. Khoury

Not at all. I mean, that's a long-term investment. We started in this business in 2001, if you remember, it was a $100 million business with a 15% margin. Now it's a $1 billion business with a 20% margin. So absolutely not. I mean, it is -- this has to do with the direction in which the airlines are growing and the direction in which we're going to be able to supply airlines and MROs globally with all of their requirement of consumables, including fasteners, as those requirements grow over the years and as the installed base of aircraft doubles in size, driven by growth in revenue passenger miles, primarily driven from structural increases in travel, in those parts of the world that are beginning to travel for the first time. We want to be in a position to be the supplier to airlines and MROs all over the world.

Operator

We have a question now from Myles Walton with Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

Amin, I wanted to follow up on the 65% of the bookings in the quarter OEM. I'm curious, is this a quarter that's a turning point? Have you been trending in this direction, just without the exact metrics? And then also can you give us some perspective as to what your sales mix is currently? Is it still closer to the 50/50 but just we're going to be, over the next couple of years, moving towards that 2/3, 1/3?

Amin J. Khoury

I think it is trending in that direction for 2 reasons. First -- first is the robust new airplane delivery cycle, and that is supplemented in no small way by our market share gains and then will be further supplemented by these SFE programs, which begins causing revenue growth in a big way in 2014. So it's not -- it's a trend which is underway. And then the other thing that I would -- but which is not a trend, but it's a temporary thing, is the slowdown in aftermarket spending. So when you have these 2 big things going on, which is the robust new airplane delivery cycle and these outsized market share gains, supplemented by the SFE program wins, those are the really big things, which in the short term are offset somewhat by the muted aftermarket spending. But it's a trend which has been established in the company for sure.

Myles A. Walton - Deutsche Bank AG, Research Division

How long would aftermarket have to be soft for you to kind of question the new product cycle? Those 2 things are often coupled. They weren't terribly coupled the last cycle because of lots of things. But obviously, aftermarket can't be weak for an extended period of time before you start to question some of the production increases.

Amin J. Khoury

Aftermarket's going to be -- you have to think about the aftermarket in a couple of different ways. I mean, we expect very strong retrofit activity arising from our SFE programs in 2014. So that's a really big deal. And the larger airlines in the world compete by retrofitting the business class and first class sections of their aircraft. So that has to be a temporary thing. It's been this way for the 25 years that I've been in the business, and it's going to remain that way. That is how the airlines complete -- compete. I mentioned that at the 787 Qatar rollout at Farnborough, which is a VIP-only event, was really a mind-blower. I mean, that business class cabin, it was widely reported as basically a paradigm shift in business class cabins globally. It is going to create a lot of attention, and a lot of airlines are going to begin looking at that to think about what they have to do to compete. So we don't -- I don't see the retrofit market declining. I see it growing because -- being driven by SFE activity and competition. Nevertheless, the new airplane delivery cycle is so strong. It's so robust for all the reasons that I mentioned during the call. The undersupply for so long and the revenue passenger mile growth and the thousands of old aircraft that have to be replaced, et cetera, that is such -- that is so strong, together with our market share gains in SFE programs, that we are likely going to have to trend towards that side.

Operator

Moving now to Yair Reinar with Oppenheimer.

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

I have a question about the guidance. Your full year revenue guidance of about $3 billion suggests that you see revenue staying about flat with 2Q levels through the back half. That seems somewhat conservative. I mean, understanding that aftermarket was weak in the quarter, it was still up, and you do have all these other tailwinds from share gains and commercial aero deliveries. So just wanted to get a sense of why it's flat and to what extent you're building in a kind of healthy level of conservatism.

Amin J. Khoury

Well, you're right. The 2012 full year outlook of $3 billion in sales and $2.75 a share assumes a second half 2012 with sales up about 15% versus the second half of 2011, with operating earnings up about 25% as compared to the second half of 2011 and relatively flat compared to the first half. And we are guiding in that direction because of the slowdown in the aftermarket primarily. So it does represent a pretty good increase over the prior year but flat compared to the first half of the year on the revenue side and up substantially on the earnings side.

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

Are you assuming that aftermarket is going to go negative on a year-on-year basis in the second half?

Amin J. Khoury

No, we're assuming relatively flat.

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

And then just one more. Could you give us an update on the 787, maybe you could characterize how your shipping rate now is relative to Boeing's build rate, and then how you may expect that to evolve over the coming months now that production seems to be a little more normalized?

Amin J. Khoury

Werner, you want to comment on the 787 and the shipping?

Werner Lieberherr

Sure. I mean, the way we see it, I think, you just said it, Boeing production rate stabilized and will go up, and as part of that, that actually we -- we'll deliver actually according to their production rate.

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

So you should be increasing along with their production rate over the coming year?

Werner Lieberherr

Yes.

Operator

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

Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division

It's actually Kevin on for Mike. You mentioned numerous times market share gains, both on the call and in the press release. Could you maybe give us some more color on where specifically you're seeing those? Are those tied to SFE specifically or separate?

Amin J. Khoury

They're not tied to SFE at all because SFE deliveries are just beginning. They are, for the most part, very substantial awards from carriers like Emirates, Qatar, Etihad, Lufthansa, Air France, British Airways, Air Canada, Japan Airlines, et cetera, where we have garnered more -- much more than our fair share of the business and more than our prior market share of high-priced, high-margin programs which are beginning to deliver and which are -- that's how we measure market share, by the way, is based on deliveries, not on bookings. So our market shares will grow again when we start delivering the SFE products. But what's carrying us now is the deliveries above market growth rates from our backlog, which had been booked above market growth rates for the last several years.

Kevin Ciabattoni - KeyBanc Capital Markets Inc., Research Division

Okay. That makes sense. And then you talked about -- a couple of minutes ago about how you don't expect retrofit to really slow, kind of driven by SFE in the out-years. What kind of pace are you guys seeing in your current programs? Are you seeing kind of carrier behavior change at all? Have they been slowing their pace of retrofits?

Amin J. Khoury

The carriers right now are constipated. I mean, they're so busy getting ready to receive initial deliveries of 777s or A380s or 787s or whatever, that they are really, really not able to deal with both categories at the same time. So we have some retrofit in our backlog. We are negotiating significant retrofit orders. About 15%, I think, of our RFPs that we're dealing with right now in CAS are retrofit programs. But it is reduced as compared to prior periods, as the airlines are much more focused on the new airplane deliveries. The SFE activity is very different. I mean, those will be initial retrofit orders for the first time ever of products that we have never delivered. So we have market share gains on the products being delivered for line fit for the first time ever. And then those will be generating retrofit opportunities in lighting, in modular lavs, in seating, in galleys, in all kinds of things, so we expect a pretty big uptick in retrofit activity of SFE-type products beginning in 2013.

Operator

And we'll hear a question now from Carter Leake with BB&T Capital Markets.

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

I'm going to follow up on the SFE comments. So lavatory retrofit, I get, but do you expect aerostructures retrofits when you -- can you clarify that? What type of SFE retrofit would you have besides the lavatory?

Amin J. Khoury

So if the airline's going to retrofit an airplane or 100 airplanes, because that what these are -- these are large fleets, with the modular lavs, and they're going to get -- they're, for -- oftentimes, they will also do lighting because we are now the exclusive supplier of lighting on 737s. They will get extra seats. In several instances it's 6 extra seats in an airplane, which is a huge deal financially. And oftentimes, the airline will take that opportunity to retrofit the seats. So you get the lighting, the modular lav, the seating, and in some instances, you're going to get new overhead bins. It's basically a redo of the interior of that airplane. It's a very big opportunity, which is being driven by the extra seats, which are being driven by the modular lavs.

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

Okay. And then on the lighting, would we -- we wouldn't limit ourselves just to a narrow-body Sky Interior, could be across all platforms. Is that right?

Amin J. Khoury

That's correct.

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

I want to go back to the Pinnacle seating comment, that those -- we've talked about that before, but I don't know if I've put -- did you say $850 million is currently in backlog against 1,600 aircraft?

Amin J. Khoury

Yes, I said we booked $850 million worth and 1,600 ships. That's correct. I don't know if it's all in backlog. We may -- we've actually begun shipping, so it's not all in backlog.

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

Okay. And then the -- what is the total potential on that Pinnacle seating?

Amin J. Khoury

We don't know. We don't know. It's already done. It's beyond our expectations, and it's continuing to book very strongly, so I don't know the answer. But it's going to be well over $1 billion.

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

And just one more. The comment on single-source basis on Interturbine, could you give any extra color on that and how that might flow through to margins for Interturbine?

Amin J. Khoury

Well, I mean their -- Interturbine's business is all about urgent aircraft-on-ground activity. And 60% of their shipments are done within 4 to 24 hours of the receipt of the order. It's all about logistics and customer service more than it is about products, right? And so -- and they handle 0.5 million, 500,000 different SKUs. They actually handle more stuff than we do. And with Interturbine and ourselves, we basically handle essentially everything the airline needs, from fasteners to chemicals to supplies to -- you've read the news release -- bonding equipment, and so on and so forth. So it is an effort by us to be the go-to company for airlines and MROs globally.

Operator

And D.A. Davidson's J. B. Groh has our next question.

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

Just a couple. Given this ramp-up that you're talking about and the huge opportunity in the modular lavs and those sorts of things, can you sort of address capacity utilization and sort of longer-term CapEx needs, where you think you are in terms of your plans and those sorts of things?

Amin J. Khoury

Yes. We have substantially stepped up our capital spending. And Tom, why don't you talk about this year and next year and getting ready for 2014.

T. P. McCaffrey

Sure. In terms of CapEx for this year, we'd -- you should expect us to spend up to $145 million. So previously, our guidance was $130 million to $135 million. It looks like it could be as much as $145 million, depends on the timing, obviously, and whether or not we actually are able to complete that. But that's what we're driving towards now, so it's a pretty significant uptick. We haven't -- we don't have -- obviously, have CapEx guidance out for next year. It should be at a somewhat lower rate because we're pulling some of that forward. And as you know, we work through the third quarter as we start our preliminary planning. And so we'll be in a position to talk about our financial guidance and our expectations for CapEx more quantitatively and definitively at the end of the third quarter when we do our investor meeting.

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

But as far as the utilization rate, can you ballpark that?

T. P. McCaffrey

Utilization rate, we're running -- capacity utilization is between 65% and 70% in most of the plants. And as you know, we have the capability of just adding incremental shifts or partial shifts as we move on. So we would expect to do that as we see our revenues ramp up.

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

And then a quickie on Interturbine, if I may. Given that it's servicing this AOG market, can you address sort of inventory investment needs? And then question 2 on that is given that market probably is not real price sensitive, can you talk about margin expectations versus your traditional Consumables Management business, excluding AIT?

Amin J. Khoury

Well, Interturbine has a healthy margin as we speak. I mean, Interturbine will be only a very slight drag on margins in the business. Interturbine's margin is around 20%. So they are paid well for the service which they provide. It's much more being paid for the logistics capability and the ability to get the product to the customer on a same-day basis to get the airplane off the ground, than it is anything unique about the specific products which they deliver. Does that answer your question?

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

Yes, I think so. I mean, I think I understand the business. It's -- but it's going to be, I don't want to say inventory-heavy, but the reason you get the margin is because you've got the stuff, right? I mean...

Amin J. Khoury

No. In fact, it's less inventory-heavy than the business we now have. Their inventory turns are substantially better than ours.

T. P. McCaffrey

It could be -- a lot of that is because it is a commodity, and the products are more readily available than long-lead items such as fasteners.

Operator

And our final question today comes from Darryl Genovesi with UBS.

Darryl Genovesi - UBS Investment Bank, Research Division

Just a couple of mechanical questions here. When you say that Interturbine is going to be neutral EPS in '12 and '13, are you talking exclusive of interest expense associated with the debt you already raised? Or does that include interest expense?

Amin J. Khoury

No, we're talking about AIT expenses. Neutral this year because it happens late in the year -- later in the year. We don't have it for that long. And next year, it's offset by AIT expenses. So we'll have another $20 million in integration expenses next year. And then it ends next year. So 2014 should be a really nice upswing in earnings in our Consumables business, including Interturbine, in 2014.

Darryl Genovesi - UBS Investment Bank, Research Division

Okay. So we should think about -- I guess, the $20 million integration expense would relate to both UFC and Interturbine? Or is that exclusively for Interturbine?

Amin J. Khoury

Most of it is for the existing business, but a piece will be for Interturbine, yes.

Darryl Genovesi - UBS Investment Bank, Research Division

Okay. So including the financing, then, you'd be slightly dilutive next year, correct?

Amin J. Khoury

Including the finance, we'll be slightly dilutive?

Darryl Genovesi - UBS Investment Bank, Research Division

Well, you're saying the operating income is offset...

Amin J. Khoury

Interturbine has cost us 200 -- let's call it $230 million or something like that. And the interest cost on that is 100 -- put it at 5% of $230 million. It's only $10 million. And the operating earnings are substantially more than that, so it would be accretive if it weren't for AIT expenses. All right? And the interest has nothing to do with it. It's significantly accretive above interest expense.

Operator

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

Greg Powell

Okay. Thank you for joining us today, and we look forward to reporting next quarter. Thanks.

Operator

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

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