Executives
Greg Powell - VP, IR
Amin J. Khoury - Chairman of the Board and CEO
Thomas P. McCaffrey - Sr. VP and CFO
Michael B. Baughan - President and COO
Analysts
Robert Spingarn - Credit Suisse
Myles Walton - Oppenheimer & Company
Troy Lahr - Stifel Nicolaus & Company, Inc.
Peter Arment - American Technology Research
David Strauss - UBS
Patrick McCarthy - FBR Capital Markets
B/E Aerospace, Inc. (BEAV) Q1 FY08 Earnings Call April 28, 2008 8:30 AM ET
Operator
Good morning. My name is John Daniel, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the B/E Aerospace First Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and 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, April 28th, 2008. Thank you.
I would now like to introduce B/E's Vice President of Investor Relations, Greg Powell. Mr. Powell, you may begin.
Greg Powell - Vice President, Investor Relations
Thank you, John. Good morning, and thank you for joining us today. My name is Greg Powell, and I'm the Investor Relations Vice President for B/E Aerospace. Today, we are here to discuss our financial results for the first quarter ended March 31st, 2008. By now you should have received a copy of the news release we issued earlier this morning. If you haven't received it, you'll find a copy of it on our website.
We’ll begin with remarks from Amin Khoury, Founder, Chairman, and CEO of B/E Aerospace, and then we will take your questions. We've prepared a few visual slides to help you follow our discussion this morning. You'll be able to find our presentation by logging on to the B/E Aerospace website at www.beaerospace.com. Please go to our Investor Relations page and follow the Webcasts link. In addition, copies of the slides will be posted on our website for you to refer to after the call. Joining us this morning for the question-and-answer session are Mike Baughan, President and COO, and Tom McCaffrey, Senior Vice President and CFO.
As always in our prepared remarks and our responses to your questions, we will rely on the Safe Harbor exemptions under the various securities acts, and our Safe Harbor statements and the company's filings with the SEC. We will address your questions following our prepared remarks. At that time, the operator will prompt you to input your instructions to get on the call. As in the past, please limit your questions to no more than two at a time, so that we can get to all of you this morning during the call.
And now, I would like to turn the call over to Amin Khoury.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Thank you, Greg, and good morning everyone. As I noted on our last conference call, the segments of the aerospace industry, which drive demand for B/E Aerospace products, are strong. Specifically, aftermarket retrofit, upgrade, and refurbishment programs for the first and business class cabins of the major international airlines, new wide-body deliveries, and growing aftermarket demand for aerospace fasteners are all strong.
I'm pleased to report that the outlook for revenue growth for all three segments, which drive demand for our company, continue to look robust over the next several years. Revenue growth and aftermarket retrofit activity will come from our backlog, shadow backlog, and follow-on orders, while growth from the new aircraft build sector will come from the 1,150 new wide-body aircraft to be delivered over the next four years, representing a 16% compound annual growth rate in wide-body aircraft deliveries. And finally, growth in our Distribution segment is being driven by revenue passenger mile growth globally and very significant market share gains.
We are pleased to be able to tell you this morning that B/E Aerospace is poised to deliver compound annual growth rate in earnings per share over the next three years of approximately 30%, and today for the second time this year, we are raising our financial guidance for 2008. Despite all the positive factors impacting B/E Aerospace and our markets, the financial community still doesn't appreciate the magnitude of our opportunities and the fact that B/E Aerospace is poised to deliver the aforementioned 30% EPS CAGR over the next three years.
Our EPS compound annual growth rate over the past three years was the highest EPS growth rate of any aerospace company. We were rewarded for that performance by being named by the Wall Street Journal as the number one best-performing aerospace stock over the last one, three, and five years. That historical performance, together with our excellent earnings visibility, a projected three-year EPS CAGR of approximately 30% over the 2008 to 2010 period, and our history of raising and beating quarterly guidance, all point to a substantial undervaluation of our shares. It seems as though investors are looking for something to be wrong with B/E Aerospace. The fact of the matter is, our business is growing, our backlog is growing, and our margins are expanding. So, what is it that investors or analysts are worried about? I'd like to address a few recurring misperceptions before we review our results, so we can focus on the key drivers of our company's performance.
One of the misperceptions we've heard include the potentially negative impact of the pending airline consolidation. Consolidation of the world's airline is a trend, which is underway and will continue. Over the past several years, Air France has acquired KLM making it the world's largest airline, Lufthansa has acquired Swiss Air and Sabena, Air France has been trying to acquire Alitalia, and we expect further additional international combinations over time. This consolidation has continued in the U.S. with the recent announcement of the Delta-Northwest merger and further speculation about other combinations of legacy carriers. In addition, we’ve recently seen four weaker airlines seek protection under the bankruptcy laws. We view all of these actions as positive for the airline industry and for B/E Aerospace. Over the long term, industry consolidation will result in higher ticket prices and higher airline profitability and the parking of older aircraft, creating demand for newer, more fuel-efficient airplanes. When that does occur, we expect to get our share of the orders. In the meantime, we continue to support the aging worldwide fleet with our spare parts and with our broad base of fasteners. The airlines are fully dependent upon us to keep their cabin interiors functioning. This is a solid and highly profitable business.
Let's talk about the U.S. airlines. First, it is important to note that relative to the global market, U.S. airlines have not been major buyers of cabin interior equipment for new-buy aircraft. In fact, U.S. airlines comprise only 11% of Boeing's backlog, and they represent only 12% of the B/E Aerospace backlog and most of that is for retrofit programs. What is also important to note is that our installed base of products with the U.S. airlines totals approximately $3 billion. This $3 billion installed base drives demand for a large and growing spares and repairs business. Additionally, our fasteners and oxygen systems are used on essentially every aircraft flown. So, we are actively supporting the U.S. carriers' ongoing aircraft maintenance requirements. Clearly, the U.S. airlines are important to us for the parts they need to keep their planes operating everyday. This is a great business for B/E Aerospace. In fact, during the quarter, our U.S. sales were very strong driven primarily by aftermarket demand.
We’ve also seen research reports that have concluded that the retrofit programs, which have driven our record $2.3 billion backlog, represent discretionary spending and that they are likely to be pushed out or canceled. Based upon 20 years of historical results, that couldn't be further from the truth. International airlines must have competitive products to differentiate their premium cabins and service from those of their competitors. The premium class sections of wide-body aircraft serving international long-haul routes are very important to the airlines, it is where they generate their profits. The airlines simply cannot afford to have non-competitive premium cabin offerings. As I have stated in the past, we have never experienced a major retrofit program cancellation, not one time in our 20-year history.
Finally, the 787 push-out wasn't a surprise to anyone. It obviously will have some negative impact in 2009 and 2010, but a strongly positive impact thereafter. On the other hand, aftermarket activity and strong wide-body aircraft deliveries of other aircraft types, and substantial demand growth and share gains in the distribution business, together with substantial margin expansion, is what drove us to increase our guidance for 2008 and confirm guidance for 2009 and ‘10. As in the past, we will update our three-year guidance when we release our third quarter results in October. I hope that you find this overview helpful.
Let's now turn to our first quarter results, thereafter we will discuss the outlook for the company. We are very pleased to be able to report that our record first quarter 2008... to report our first quarter 2008 record performance. The quarter was stronger than consensus expectations and was a record quarter for the company in terms of revenues, operating earnings, net earnings, and backlog. As expected, first quarter revenue growth, earnings growth, and margin expansion were driven by exceptional performance by the Interior Systems, Distribution, and Business Jet segments. Seating segment revenues and operating earnings were in line with our expectations, but lagged the outstanding performance of the three aforementioned segments due to start-up and learning curve issues and reflect both the timing of scheduled deliveries on these new programs, as well as start-up and learning curve costs on the new programs.
Our corporate consolidated operating margin expanded by a whopping 190 basis points during the quarter compared to the same period last year. The operating margin, which came in at 16.4%, reflects excellent performance at our Distribution, Interior Systems, and Business Jet segments and is expected to expand further as we get through start-up issues on new programs in the Seating and Engineering Services segments. In addition to our strong operating results, we had very strong bookings during the quarter, which further expanded our high-end quality record backlog. Our backlog plus shadow backlog plus associated follow-on orders and the record level of RFQ activity that we are currently seeing from our airline customers are factors, which provide us with excellent multi-year visibility and provide the foundation for our expectations for superior earnings growth over the next three years.
Let's turn to slide 2 and review our financial results for the first quarter of 2008. We hope you are as pleased as we are with our record first quarter financial performance, which was $0.04 per share better than our most recent guidance and was $0.02 per share better than consensus expectations. The bar chart on slide 2 graphically illustrates our first quarter 2008 financial performance versus the first quarter of 2007. It can be seen that first quarter revenues increased by 22% to $473 million. That is all organic growth. Operating earnings were up 37% on the 22% revenue growth. Our operating margin of 16.4% expanded by 190 basis points as compared to the first quarter of last year in spite of start-up and learning curve costs on new programs in both the Seating and Engineering Services segments.
Our consolidated incremental operating margin for the first quarter was 24.6%. First quarter net earnings of $49 million were a full 51% higher than net earnings in the first quarter of the prior year. I'd like to repeat that. First quarter net income was up 51% versus the quarter... first quarter of last year.
Net earnings per diluted share of $0.53 increased by 33% as compared with the prior-year period in spite of the 500 basis point increase in the effective tax rate and a 16% increase in the number of weighted average shares outstanding in the current period. On an equivalent tax rate basis, 2008 first quarter earnings per share were 43% higher than the same period last year.
Now let's turn to slide 3. Slide 3 summarizes our continuing backlog growth. The first quarter was another stellar bookings quarter during which we achieved a number of strategic marketing successes. First quarter orders were approximately $600 million and represent a book-to-bill ratio of approximately 1.2 to 1. The bar chart on slide 3 graphically depicts the year-over-year increase in backlog. Our record backlog of approximately $2.3 billion increased by approximately 25% over March 2007. It is important to note that the high quality of the backlog supports our expectation for continued margin expansion, while the size of the backlog plus shadow backlog plus expected follow-on orders and the robustness of current RFP activity support our expectation of strong revenue growth.
The strong bookings performance in the quarter was broad based and encompass all of the company's business segments. Order activity from international customers was especially strong, as a number of current customers expanded existing programs and/or placed orders for cabin interior equipment for additional aircraft types. Aftermarket and spares demand was robust in all geographic regions, as airlines continue to make investments to maintain and upgrade their existing fleets. In addition, the pie chart on slide 3 indicates that the backlog continues to be very well balanced geographically. 63% of backlog is with international customers and over 38% of the backlog is with customers in the emerging markets, particularly in Asia and in the Middle East, while only 12% of the backlog is with domestic airlines. Clearly, the length and breadth of the current cycle is being driven by the developing nations of the world. So, first quarter bookings were strong and of high quality, and the geographical diversity of our customer base is expected to provide excellent future revenue stability.
Finally, as we have discussed in the past, we have a large and growing shadow backlog. The shadow backlog represents expected follow-on orders from current customers for their existing fleets, orders not yet placed for new aircraft on order of the same aircraft type and for programs awarded, which we haven't yet entered into our system. As we have previously mentioned, an example of the latter are the Oxygen Awards for the new Boeing 787 and for the Airbus A350 XWB. We are the sole source supplier on both aircraft types. These programs alone will generate over $0.5 billion of revenues for our company, none of which is in our backlog.
Now, I will briefly review the operating performance for each of our business segments. Let's start with our Distribution segment, which is summarized in slide 4. The Distribution segment continues to be executing very well operationally and hitting on all cylinders, reflecting the first full quarter of synergies from the New York Fasteners integration and the segment's highly-efficient information technology and automated sales and retrieval system. Revenues of $122 million for the quarter grew 26%, reflecting the significant 2006 and 2007 investments in product line expansion, the broad-based increase in aftermarket demand for aerospace fasteners, and continued substantial market share gains. Operating earnings increased 79% for the quarter. Operating margin expanded by 860 basis points as compared with the first quarter of 2007, reflecting the first full quarter of synergies from the New York Fasteners integration, a significantly improved and expanded mix of products on a number of long-term just-in-time agreements negotiated during 2007, and higher margins on these programs as a result of the company's inventory stocking business model.
If we can now look at slide 5, we can see that our Interior Systems segment also had a strong quarter. The Interior Systems segment is beginning to reap the benefits of the Draeger acquisition integration, operational efficiency initiatives, and operating leverage. Revenue growth of 15% reflects both higher aftermarket demand and new aircraft deliveries. Operating earnings grew by 26% to $18.4 million, as the operating margin increased by 170 basis points to 19.7% as a result of additional synergies arising from the Draeger Aerospace integration, operational efficiency initiatives, and operating leverage. Q1 bookings and current RFP activity are at record levels for this segment. Outlook is for continued strong revenue growth driven by the large number of wide-body aircraft deliveries from 2008 to 2011, all of which require significant quantities of food and beverage preparation and storage equipment and oxygen storage, distribution and delivery equipment. In addition, we expect further significant margin expansion.
Now, let's turn to slide 6 where we can see that our Seating segment had a good quarter, but one which pales by comparison to our expectation for Seating in future quarters of 2008. The Seating segment 5% revenue growth was consistent with scheduled initial deliveries of major new retrofit programs, which have just now begun. Seating segment revenues are expected to be significantly higher in the second, third, and fourth quarters of 2008. Operating earnings during the first quarter of 2008 were $15.5 million or 10.3% of sales, reflecting the negative impact of the expected start-up and learning curve costs on these new programs. The Seating segment operating margin, which has expanded by 590 basis points over the last three years and which expanded by 180 basis point during 2007, is expected to begin to deliver significant additional margin expansion in the second half of 2008, as production on new programs becomes more normalized. Revenue growth during 2008 through 2010 will be delivered... will be driven by the large backlog, additional follow-on programs, new retrofit orders, and demand created by the approximate 1,150 new wide-body aircraft, which are expected to be delivered over the 2008 to 2011 time period. Operating margins for 2008 to 2010 should continue to expand significantly, due primarily to improved product mix, learning curve efficiencies, operating leverage inherent in the business, and continuous improvement initiatives.
Now, let's turn to slide 7 where we can see that our Business Jet segment, like our Distribution and Interior Systems segments, had an outstanding quarter. The Business Jet segment is just beginning to reap... just beginning to benefit from our prior investments in both traditional business jet operations, as well as in our super first class suite of products and this is reflected in our outstanding first quarter results. Revenues of $73 million increased by 65% over the prior year, that's all organic growth. Operating earnings increased by 141% compared to the prior year on a 460 basis point expansion in operating margin to 14.6%. The significant margin expansion reflects substantially improved operational efficiency, particularly on new programs begun in 2007 and operating leverage at the higher sales level. The Business Jet segment is expected to deliver strong revenue growth driven by robust demand for new business jet aircraft and as a result of having captured 80% of the available super first class orders in 2007. Strong revenue growth and continued improvement in operating efficiency are expected to drive substantial additional margin expansion over the 2008 to 2010 period.
Slide 8 summarizes first quarter performance for our Engineering Services segment. Revenues of $34 million were up 62%, reflecting the higher level of engineering design, program management, and certification activities. The operating earnings loss was the result of start-up and learning curve costs on the initial ramp-up of the new programs. The Engineering Services segment is expected to generate positive earnings in 2008, as production on new programs becomes more normalized later in the year.
If you will now please turn to slide 9, which reflects our financial position as of March 31, I will briefly review our capital structure. As of March 31, 2008, our debt-to-capital ratio was 10% and net debt was $111 million, which represents total debt of $152 million less cash and cash equivalents of $40 million. As of March 31, 2008, the company had no borrowings outstanding on its $200 million revolving credit facility. As expected, working capital as of March 31 of $769 million increased by $58 or 8.1% as compared with December 31, 2007. Accounts receivable increased by $62 million on the higher sales level, while inventories increased by $48 million, reflecting the expected jump in second quarter revenues, the substantial increase in backlog, and further expansion of our fastener product line. The company continues to expect free cash flow during 2008 of approximately $150 million plus or minus 10% to 15%.
Now, I'd like to ask Michael Baughan to jump in and provide you with some color related to current market dynamics and the recent activity associated with our highly successful efforts at the cabin interior show in Hamburg, Germany.
Michael B. Baughan - President and Chief Operating Officer
Thank you, Amin. As many of you know, the Annual Hamburg Interiors Expo is the premier marketing event for our industry. Airline executives from all over the world gather to review new cabin interior concepts and to evaluate these offerings for their new aircraft buys and retrofit programs. This year's attendance was a new show record with 150 airlines present from all regions of the world. We had the largest exhibit at the show and our traffic seemed to be even heavier than last year. We had numerous meetings with senior airline teams and several multi-day sessions covering significant RFP opportunities.
Several themes emerged from the show, which I'd like to share with you. First, we were impressed with the geographic diversity of the customer base. There was almost 100% attendance from airlines in the Middle East, India, Southeast Asia, and South America. In Europe, we saw large teams from the Big Three players, British Airways, Air France, and Lufthansa. Most of the North American majors attended as well, and we had specific project discussions with American, Delta, US Airways, Air Canada, Continental, and United. In almost all of these cases, the airlines were at the show to review specific project ideas. There was very little tire kicking.
Second, the demand for super first class and lie-flat business class seating remains very robust, particularly with international carriers. Our super first class products were hits of the show and generated huge interest from a number of Middle Eastern and Asian carriers. Our Crystal Cabin Award for innovation and our installed position with Emirates, Jet Airways, Qantas, and others has given us a commanding market share and created strong interest from other competitive carriers who now need to upgrade their first-class offerings. With regard to business class, airlines are now focused on optimizing passenger comfort with overall cabin density. Our new United lie-flat seat, which involves a unique forward and aft facing configuration and which optimizes passenger density, was very well received and we expect that concept to be highly successful with other global carriers.
Lastly and not surprisingly, weight reduction was a key topic of interest for most airlines and we noted much stronger interest in our newer weight reduced products. As an example, most of our Interior Systems products are lighter than the competition and the weight differential can be significant when considering the number of units required on a typical wide-body aircraft. For example, our suite of premium beverage makers and steam ovens can save over 250 pounds of weight per aircraft. While we have traditionally benefited from strong airline brand marketing interest in these products, we are now also seeing significant interest from the standpoint of reduced fuel burn and cost of ownership. The same dynamic applies to our lightweight Pulse Oxygen system and our new coach seating platform, both of which are the lightest offerings in the industry.
In summary, I'd say that the Hamburg show reinforced what we are seeing in our daily bookings activity and our RFP tracking. The market is as strong as we've ever seen it and continues to be driven primarily by airlines and leasing companies outside of the U.S. However, revenue growth in the U.S. also remained strong driven by the increased domestic aftermarket demand. And as a matter of fact, revenue growth in the U.S. for the first quarter actually exceeded international growth due to aftermarket demand and the need to support the aging domestic fleet.
I'll now turn it back over to Amin.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Thank you, Mike. I'd like to conclude our prepared remarks this morning by noting that the outlook continues to be strong. We believe market forces will continue to drive demand for our cabin interior products for both aftermarket programs and new-buy aircraft for many years to come. RFQ and order activity are robust and we expect continued backlog growth through 2010. It is important to note that to date, our backlog and revenues have been driven primarily by retrofit programs associated with the existing international wide-body fleet.
Aftermarket programs are and are expected to continue to be the most powerful driver of demand for B/E Aerospace. We expect retrofit program demand to continue indefinitely. Regarding new aircraft deliveries, as we have mentioned before, we expect approximately 1,150 new wide-body aircraft to be delivered over the four-year, 2008 to 2011, time period representing a 16% compound annual growth rate in new wide-body aircraft deliveries with a market potential of approximately $2 billion to $3 billion of cabin interior products for these 1,150 aircraft.
With respect to the B-787 announced delays, to date almost 900 787 aircraft have been ordered, making the 787 the most successful product launch in Boeing's history. Boeing will eventually sort out their current production issues and when they do, we expect that they will manufacture well over 1,000 of the 787, each it will be of... of which will be equipped with various B/E Aerospace cabin interior products. And if there are fewer 787s delivered in 2008 and 2009, there will be more of them delivered in the out years. Perhaps even a blessing in disguise, as the OE cycle is extended due to 787 delays, A350 XWB launch, and next-generation narrow-body introduction.
Regarding recent merger news involving Northwest and Delta, we view this as a positive for the airline industry. The U.S. sector will have fewer, more rational, fewer and larger airlines, the remaining airlines will be able to raise their prices, buy new aircraft, and expand their international businesses. As you know, the long-haul routes are where the airlines can increase their yields and profitability and become stronger competitors to the international carriers. In addition, there is a short-term potential for increased business with the merged airline to upgrade and/or retrofit their various fleets for commonality. Along those same lines, a few airlines have been forced into bankruptcy. Clearly, oil prices are a headwind for the U.S. airlines. The U.S. carriers’ fuel-inefficient [ph] aircraft will at some point need to be replaced. However U.S. load factors continue at record levels, the bankruptcies of the weaker airlines is a positive factor for the remaining airlines, which will have the ability to raise fares to cover swelling fuel bills.
As we have stated in the past, our long-term visibility arising from our current backlog and its associated expected follow-on orders, the expected strong new aircraft delivery rates particularly for wide-body aircraft, along with growth in orders from the U.S. domestic market, and continuing aftermarket demand from carriers globally serve as a foundation for our expectation of continued revenue growth and superior earnings performance for the next three years. As a result, we are today again increasing our earnings guidance for 2008 and confirming guidance for 2009 and 2010. We are raising our guidance for 2008 to approximately $2.35 per share. Throughout 2008, we expect continued revenue growth and significant additional margin expansion driven by continued excellent performance in the Distribution segment and improved performance in the Interior Systems and Business Jet segments. In addition, the Seating segment operating margin is expected to begin to deliver significantly improved margins in the second half of 2008, as production on new programs becomes more normalized throughout the year.
Now, I'd like to briefly review the summary slide, slide 12. I've mentioned before that we have continued... we have a continued strong outlook, excellent visibility, and expected EPS three-year compound annual growth rate of approximately 30%. Revenue growth will be driven both by aftermarket retrofit and new-buy aircraft, and that's the uniqueness of B/E Aerospace versus the other aerospace companies. We have a record high in quality backlog, it's about a two-year backlog plus our shadow backlog plus follow-on orders. We are not yet substantially benefiting from the approximately 1,150 new wide-body aircraft, which are expected to be delivered over the 2008 to 2011 period. And our superior earnings growth will be driven both by revenue growth and continued margin expansion. 2008 to 2010 margin expansion will be driven by our backlog quality, our continuous improvement and supply chain initiatives, our lean initiatives, our product mix, and operating leverage.
So, we're raising 2008 EPS guidance today to $2.35 per share, and 2009 and 2010 financial guidance are confirmed, that is EPS of $2.80 in 2009 and $3.50 in 2010. And as you know in the October time period, we’ll review our three-year plan again and we will again look at 2010 and 2009 guidance at that time.
And with that I’ll turn it back to Greg to begin the Q&A portion of the call.
Greg Powell - Vice President of Investor Relations
This completes our prepared remarks. And now we will be glad to take your questions. Please limit your questions to no more than one at a time, so that we can get to as many of you as possible on this call and that we’d like to get everybody off in time for the market opening this morning.
John, I will now turn it back over to you to provide instructions on how to submit the questions.
Question and Answer
Operator
Thank you, Mr. Powell. [Operator Instructions]. And our first signal comes from Robert Spingarn of Credit Suisse.
Robert Spingarn - Credit Suisse
Good morning, guys.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Good morning.
Greg Powell - Vice President of Investor Relations
Good morning.
Robert Spingarn - Credit Suisse
Very good quarter. Amin, thanks again for the description at the front of the call on the macro. And you’ve already talked about a lot of things, a very detailed report. But can you just tell us what's going on with margins in fasteners, they're just incredible, and how sustainable it is?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Sure. Yes, the margins are sustainable and they are sustainable as a result of the depth of our inventory position plus our locked-in cost on outstanding purchase orders. So, I think we've really done a good job of identifying which products to buy and which products to buy long. In addition, a significantly improved and expanded mix of products on a number of long-term agreements negotiated during 2007 and higher margins on these programs as a result of the company's stocking business model are expected to drive continued revenue growth and sustain the Distribution segment margins. While there isn't much room for further margin improvement in the Distribution segment, there are significant opportunities to expand margins at each of the other four segments.
Robert Spingarn - Credit Suisse
Just going back to something you said a moment ago about revenue growth, if we look at the '07 quarterly progression in revs in fasteners, you kind of had a reset. You're up in the high-90s or $100 million per quarter throughout the year after being significantly lower in '06. You’ve now had a big sequential growth right here in the March quarter versus December. Are we flattish for the rest of the year in fasteners in the 120 range or will we see sequential growth there as well?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Well, the big impact is from a number of long-term agreements, usually five term agreements, which kicked in during the quarter. We don't... we don't talk about revenue growth on a quarterly basis and so I'm not going to... I'm going to address that, but suffice it to say that the business continues strong and we monitor the revenues in that business on a daily basis and I can tell you that activity is robust and expected to continue.
Robert Spingarn - Credit Suisse
Okay. Thanks, and a quick one for Tom. Tom, we understand the business model in fasteners, it's inventory driven, great return on assets. I saw the inventories rise, I think you seasonally expected here because you talked about the receivables, a little bit bigger increase than I expected there?
Thomas P. McCaffrey - Senior Vice President and Chief Financial Officer
Sure. Let me just specifically address that. The receivables were up $62 million as a result of the 22% increase in revenues and importantly consistent with our international customer base. So, our DSO was up a little bit. It was a little over 51 days, it's up a few days from the December quarter. But it wasn't out of line with what our expectations are. In terms of the free cash flow for the quarter, it was use. I think we had indicated down on the last call, we used $43 million during the quarter. So, that’s $62 million growth in receivables and a $48 million increase in inventories, which are expected to require to handle the big jump in revenues in the second quarter. So, our working capital growth during the quarter reflects both the timing of program shipments and scheduled deliveries of fasteners on order, cash payments related to incentive comp and higher CapEx. You should expect to see the company generate free cash flow in the second quarter and consistent with our prior guidance for free cash flow to increase throughout the year, as we deliver on major programs that have now begun and for... and taking into consideration the expected delivery dates for fasteners with our various suppliers. We put it into relation, Amin commented on it during the call; we expect free cash flow to be in the range of $150 million plus or minus 10% to 15%. And that depends on [inaudible] revenue growth rate, the size and composition, and rate of growth of our backlog and the inventories necessary to support the growth in business. And finally, from a CapEx perspective, you should be thinking in the neighborhood of $40 million to $45 million, which reflects the current run rate to expand our capacity and improve our efficiencies in the manufacturing operations.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Rob, I'd like to comment further because the two go together, I mean the use of cash and the growth of the business. The first question was about our Distribution business. During the past year, we've been able to negotiate long-term agreements with our JIT customer base, which has allowed us to significantly expand the number of parts covered under the agreement. We've been able to expand the parts covered under these long-term agreements because we have the right parts in inventory following our very successful efforts to expand the product lines offered by the Distribution segment. Margins expanded in the Distribution business primarily as a result of the significantly improved mix of products sold during the quarter and the substantially lower cost of those products. Our product costs were lower due to our inventory stocking model and the mix of products sold was improved because of the highly successful program to expand our product offering. We could not have done that with reinvesting the cash, which our business is generating in that business. The Distribution segment's return on net tangible assets in the first quarter was about 35%. So, clearly our decisions to expand our product line, acquire New York Fasteners, and invest in working capital and our Distribution business is beginning to yield outstanding results.
Operator
From Oppenheimer & Company, we have Myles Walton.
Myles Walton - Oppenheimer & Company
Thanks, good morning. Good quarter.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Thank you.
Greg Powell - Vice President of Investor Relations
Thanks, Myles.
Myles Walton - Oppenheimer & Company
Question for you on the… Amin, you pointed out in your opening remarks 16% growth in wide-body. Is that a measure of the unit, the markets or your revenue, and also…
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Units, wide-body deliveries in units and with the 787 substantially reduced taken out of the number. Including the 787 at the original rate expected in 2008 through 2011, it would have been about a 20% CAGR, so we backed the 787 out and its units.
Myles Walton - Oppenheimer & Company
Okay. That's really helpful. And so then would your revenue be in line or in excess of that?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Well, it depends upon which customer is buying which airplane. So, I really can't... I can't comment specifically without looking at the waterfall chart.
Myles Walton - Oppenheimer & Company
Fair enough, fair enough. And…
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
But you know that the wide-body airplanes, all of them, all of them, have very significant quantities of B/E Aerospace content.
Myles Walton - Oppenheimer & Company
And could you comment a bit on the RFQ activity globally maybe, Mike, in terms of the U.S. obviously had really strong sales in the quarter. But I think maybe the backlog may have retreated slightly, but obviously outside the U.S. even better than we would have expected?
Michael B. Baughan - President and Chief Operating Officer
Sure, I can do that. I mean you have to keep in mind, I think as Amin mentioned, we have a large installed base, 3 billion or so in the U.S. So, we get a considerable amount of aftermarket demand just to support the agent fleet and that continues unabated, in fact we grew substantially in the first quarter. I’d say speaking more broadly, the super first class and business class retrofit demand is extremely robust and that's driven at this point by international customers, particularly in the Middle East and Asia. That continues unabated. We see tremendous demand there, we saw that at the show and we see it... other aspects of that as well. The Interior Systems demand is global, that’s supporting. As we get into the growth in wide-body aircraft that we were just talking about, that has a direct positive impact on our Interior Systems business. We are just getting into that portion of the market right now. It's just only now started. I’d say an interesting dynamic there is that traditionally demand for our Interior Systems products has been almost exclusively new aircraft demand. We're starting to see even in that segment now retrofit opportunities. That can be driven by the need to standardize the fleet or increasingly to reduce weight. So, we see global demand for Seating primarily driven by international. We see global demand for Interior Systems products and the start of even some retrofit activities broadening the market in that product line and that's why we're seeing the highest number of RFPs that we’ve ever seen there, and then a continued strong demand to support the aging fleet through aftermarket and spare parts, etcetera in the U.S. market.
Operator
We are joined by Troy Lahr of Stifel Nicolaus.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Thanks. You also had a pretty good growth or pretty good margin improvement at the Business Jet segment. Can you talk a little bit about that and how that’s sustainable at this kind of 14.5% level? Is that how we should think about that and how do you get margins going forward about there?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
No, you should think about margins expanding further in the Business Jet segment, and it's primarily a function of having gotten through the learning curve issues on some new programs, which were begun in 2007. So, the Business Jet segment has a very strong backlog, RFQ activity is strong, it's very robust. So, what we should expect from the segment is both continued revenue growth and significant additional operating margin expansion.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Okay. And how should we think about volumes on super first class seat? I mean should that be pretty smooth for the next few years or I mean are we going to have like pockets where you have really good volumes for maybe two to three quarters and then it kind of stops for a quarter and then it kind of starts back up. Could that be pretty lumpy or should that be smooth?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
I think it ought to be fairly smooth. I mean I think we've reported that we got about 80% of the available orders last year and so we've got a very healthy backlog. And there isn't anything at this point that causes us to believe that the quarterly revenue growth will be lumpy.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Okay. And the margin is impacted by that, I guess?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Well, I did mention that our expectation is for continued margin expansion.
Troy Lahr - Stifel Nicolaus & Company, Inc.
Great. I'm just wondering if all the super first class volume comes down in one quarter, then would margins be impacted that much by kind of reduced revenue or reduced volume in super first class? Is it... are the margins that much different between the business jets, the stuff you put in business jets and super first class?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
No, we don't talk about the margins by different pieces of any segment. But I think what I am trying to tell you is that our expectation is for continued revenue growth and margin expansion and no unusual quarterly dips or increases.
Operator
From the offices of American Technology Research, we go to Peter Arment.
Peter Arment - American Technology Research
Nice quarter. Amin, could you just quickly follow up on that related to the Seating segment, I guess the takeaway here after a very strong quarter across the board is that, this quarter was sort of a blip in terms of overall timing demand. I think generally speaking you're going to see much stronger growth going forward?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Yes. It's more... timing of course is part of it, but it's more to start up on some new programs. And our expectation is that nice junk in revenues even in the second quarter and a nice improvement in operating margins beginning... beginning primarily in the second half of the year. I mean I want to point out that the Seating segment operating margin has expanded by 590 basis points over the last three years, and 170 or 180 basis points last year alone. So, a little depth in the quarter, as we go through… as we start up some new programs, is to be expected and it’s not really of cause for concern.
Peter Arment - American Technology Research
Great.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
We've got a high-quality backlog in the Seating business. High-end margin embedded products in the backlog, and so our expectation is for a nice jump in revenues beginning in the second quarter and some nice margin expansion beginning in the second half of the year.
Operator
[inaudible] to David Strauss from UBS.
David Strauss - UBS
Thank you. Good morning.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Good morning.
Greg Powell - Vice President of Investor Relations
Good morning.
David Strauss - UBS
Amin, would you just… Mike touched on this a little bit, but could you just kind of comment on where you think we are in terms of the retrofit cycle by region of the world, explain it between premium and coach seating?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Well, I think Mike mentioned that at the Hamburg show, we had American, United, Delta, Continental, US Air, Air Canada. I mean it was like a blowout, and they were not there to kick tires, and it was a very, very serious conversation. And while the domestic carriers may not be able to buy new aircraft, there's only one business left for them, which is profitable and that's the international portion of their business. And right now they are losing market share. And so they don't really have any alternative except to address the issue at least in their premium cabins and to try to make their offerings competitive and try to maintain or win back some market share. So, there isn't any question about that… the domestic carriers are becoming major orders at least for the aftermarket for retrofit, for upgrades, or refurbs for spares. I think Mike mentioned that in the quarter, our U.S. revenue growth was even stronger than our international revenue growth and that's basically after market driven.
David Strauss - UBS
So, would you say, I guess kind of quantifying that, the international side, how far do you think the international carriers are in terms… through in terms of their retrofit program on the premium side? I guess you're seeing the U.S. side is basically just starting, but where is the international side would you say?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
RFP activity for international carriers for the premium cabins is very strong, very strong. There is a lot of continued interest and a lot of folks that haven't placed orders and our expectation is, this is a business that's going to continue indefinitely because of the size of the wide-body fleet and its continued growth. By the time we get through this, the folks that have... that we've already been delivering products to will be ready for the next... be ready for the next cycle. So, we've got... we've got a lot of orders in backlog from large carriers, example, Emirates who are buying new airplanes and who are now moving the retrofit products into those new aircraft. And we've got a lot of airlines that have bought retrofit products for existing... for certain existing fleets, but not for others. So, I mean we don't see... we don't see a decline in demand for retrofit activity for the international carriers’ premium cabins. We don't see it in the foreseeable future.
David Strauss - UBS
Okay, great. And do you have any exposure at all to... obviously we've had a number of airlines domestically declare bankruptcy. Do you have any exposure at all there?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Tom, do you want to talk about…
Thomas P. McCaffrey - Senior Vice President and Chief Financial Officer
We have some exposure to Frontier. We don't think that it's an issue because of the timing of the shipments and the ability to file what’s referred to as a reclamation claim. And when you do that, you get put to the top of the list and you get paid at the same time, the bankruptcy lawyers get paid. So, we feel pretty good about that. And I think the recent announcement with respect to yields, I don't think that there is anything outstanding in terms of receivables.
David Strauss - UBS
Great. Thanks a lot guys.
Thomas P. McCaffrey - Senior Vice President and Chief Financial Officer
You're welcome.
Greg Powell - Vice President of Investor Relations
We probably got time for one more call because we promised to get everybody through this call before the market opens.
Operator
Our final question comes from Patrick McCarthy, FBR Capital Markets.
Patrick McCarthy - FBR Capital Markets
Hi, good morning. Thanks for taking my call. I was wondering if you could just take a second and characterize the domestic backlog. Has it expanded much beyond your two primary customers, I know that you mentioned Air Canada as being represented at Hamburg, but anything else?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Well, Air Canada would not be in the domestic backlog, most of what's in the domestic backlog is retrofit program, overwhelmingly, it's retrofit program.
Patrick McCarthy - FBR Capital Markets
And is there... could you to talk about how deep you are into…
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
That's the domestic airline backlog, right? And we have a lot of backlog… domestic backlog, which is not the U.S. carriers. Right?
Patrick McCarthy - FBR Capital Markets
Sure.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
The amount of U.S. carriers is 12% and that's primarily retrofit and refurb orders.
Patrick McCarthy - FBR Capital Markets
And could you talk about potentially how deep you are into the United retrofit program from a production perspective?
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
We're just getting started.
Patrick McCarthy - FBR Capital Markets
Okay, great. Thanks.
Greg Powell - Vice President of Investor Relations
Okay. That was our last question this morning. We appreciate all of you joining us this morning for the call. And as always we are available for follow-ups, so please feel free to give me a call.
Amin J. Khoury - Chairman of the Board and Chief Executive Officer
Thanks everybody. Have a good day.
Operator
Ladies and gentlemen, this concludes today's B/E Aerospace conference call. Thank you all for participating in the call, and have a good day.
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