beav q412 transcript

8/13/2019 BEAV Q412 Transcript

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THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPTBEAV - Q4 2012 BE Aerospace Inc Earnings Conference Call

EVENT DATE/TIME: JANUARY 31, 2013 / 2:00PM GMT

OVERVIEW:

BEAV reported full-year 2012 revenues of $3.085b and EPS (adjusted to excludedebt prepayment costs) was $2.83. 4Q12 revenues were $803m and EPS was $0.73.Expects full-year 2013 revenues to be approx. $3.35b and diluted EPS to be approx.$3.45.

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C O R P O R A T E P A R T I C I P A N T S

Greg PowellB/E Aerospace - VP, IR

Amin KhouryB/E Aerospace - Chairman, CEOWerner LieberherrB/E Aerospace - President, COO

Tom McCaffreyB/E Aerospace - SVP, CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Howard RubelJefferies & Company - Analyst

Robert SpingarnCredit Suisse - Analyst

David StraussUBS - Analyst

Noah PoponakGoldman Sachs - Analyst

Robert StallardRBC Capital Markets - Analyst

Joe NadolJPMorgan Chase & Co. - Analyst

Myles WaltonDeutsche Bank - Analyst

P R E S E N T A T I O N

Operator

Good morning. My name is Jessica Morgan and I will be your conference facilitator today. At this time, I would like to welcome everyone to the B/E

Aerospace fourth-quarter 2012 earnings conference call. All audience lines have been placed on mute to prevent any background noise. After the

speakers' remarks, there will be a question-and-answer period. (Operator instructions).

As a reminder, ladies and gentlemen, the conference is being recorded this day, January 31, 2013. 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- B/E Aerospace - VP, IR

Thank you, Jessica. Good morning and thank you for joining us this morning. Today we are here to discuss our financial results for the fourth quarte

and full year ended December 31, 2012. By now, you should have received a copy of the news release we issued earlier today. If you have not

received it, you will find a copy on our website.

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

For today's call we have prepared a few slides to help you follow our discussion. You can find our presentation on the investor relations page o

the B/E Aerospace website at BEAerospace.com.

In addition, copies of the slides will be posted on our website for you to refer to after the call.

Joining us for the call this morning are Werner Lieberherr, President and Chief Operating Officer; and Tom McCaffrey, Senior Vice President and

Chief Financial Officer.

As always, in our prepared remarks and our responses to your questions, we rely on the Safe Harbor exemptions under the various the securities

acts and our Safe Harbor statements in the Company's filings with the SEC. We will address questions following our prepared remarks. At that time

Jessica will provide instructions. Please limit your questions to no more than two at times so that we can get to everyone.

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the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliatedcompanies.

JANUARY 31, 2013 / 2:00PM, BEAV - Q4 2012 BE Aerospace Inc Earnings Conference Call


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Now I'll turn the call over to Mr. Amin Khoury. Amin?

Amin Khoury- B/E Aerospace - Chairman, CEOThank you, Greg, and good morning, everyone. We are pleased this morning to be able to discuss our excellent 2012 financial results. Our full-yea

2012 results were the best in the Company's history. We achieved record for sales, operating earnings, operating margin, bookings and backlog

and net earnings and earnings per share adjusted to exclude debt prepayment cost were also records.

Our full-year 2012 results include revenue growth of 23%, operating earnings growth of 26% and an operating margin of 17.5%, representing a

40-basis-point increase. EPS adjusted to exclude debt prepayment costs increased 26%.

Throughout the year, each of the Company segments had solid market successes, as indicated by record bookings of approximately $3.2 billion

an increase of approximately 10% as compared with 2011, and full-year 2012 total booking, including awarded but unbooked programs, were in

excess of $3.3 billion.

Our revenue growth continues to be driven primarily by the robust new aircraft delivery cycle. Approximately 61% of full-year 2012 revenues was

driven by demand for products for new buy aircraft, reflecting both robust new aircraft deliveries and weaker aftermarket demand. Today, we

increased our 2013 EPS guidance by $0.07 per share to $3.45 per diluted share, representing an increase of approximately 22% as compared to

2012 EPS, and is based upon our high-quality backlog, the expectation of strong wide-body deliveries, a modest recovery in the aftermarket and

significant continuing margin expansion. Our guidance does also reflect the recent changes in tax legislation.

Before discussing details of our fourth-quarter and full-year 2012 financial performance, I would like to spend a few minutes discussing the curren

market environment. In addition, I will ask Werner to briefly review some of the important operating and marketing highlights during the year fo

each of our businesses. Lastly, we will review our financial guidance for 2013.

Now let's briefly discuss the current commercial aerospace market environment. In spite of high full-year average fuel prices and a slowing world

economy, 2012 airline profits were better than expected. Historically, when GDP growth has fallen below 2%, the airline industry has generated

losses. However, during 2012, the airlines cut costs and carefully managed capacity and accordingly have generated better-than-expected financia

performance.

In December, IATA made a second upward revision to its financial outlook for the global airline industry. For 2012 airlines are now expected to

report a profit of approximately $6.7 billion, up from the IATA October forecast of $4.1 billion and up from the March forecast of $3 billion.

Overall, performance has been positively impacted by strong passenger traffic growth of approximately 5.3%, near record load factors of abou

80% and continuing yield improvements that reflects both steadily increasing load factors and a 22.7% increase in the airfare CPI over the last three

years.

For 2013, IATA expects global airline profits to improve to $8.4 billion or 25% higher than 2012 and, extremely importantly, reversing a three-yea

trend of declining profits. The 2013 IATA forecast is based on 2013 global passenger traffic of around 4.5% growth and capacity growth of abou

4%.

In 2012, new aircraft deliveries were strong and should continue to be robust for the next several years as order books at the OEMs are at all-timehighs while our airlines are operating as close to capacity as they ever have. In aggregate, net aircraft additions are a relatively small percentage

of the overall fleet. We estimate the world fleet is in excess of 18,000 aircraft, including regional jets, and that the fleet grew by approximately 550

aircraft in 2012 or about 3%.

As we have reported over the course of 2012, we are experiencing weaker aftermarket demand. We believe this is due to several factors. First, the

growing markets of the world are for the most part operating new, still-under-warranty aircraft, which do not yet require heavy aftermarket

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maintenance services. Second, new aircraft deliveries into the developed markets are primarily for replacement of aged equipment. Finally, airline

are carefully controlling capacity and more efficiently utilizing their aircraft.

Nevertheless, the airlines have been dealing with thin margins and a negative three-year trend of declining profits. As I mentioned earlier, theairlines' profits trend appears to have made a significant positive turn, which bodes well for a slowly improving aftermarket environment. We do

continue to expect a significant improvement in aftermarket demand by 2014.

Now let's turn to slide 2 and discuss our fourth-quarter financial results. The bar chart on slide 2 reflects our consolidated fourth-quarter 2012

financial performance compared to the fourth quarter of 2011. Fourth-quarter revenues increased 23% to $803 million. Operating earnings were

$138 million, an increase of 27% on the 23% increase in revenues, and represents an operating margin of 17.2%, which is up 50 basis points as

compared to the same period last year.

EPS was $0.73 per share, an increase of 30% as compared to the fourth quarter of last year.

Turn to slide 3 and we will discuss our full-year 2012 financial results. The Company achieved record revenues of $3.085 billion in 2012, an increase

of 23%. Operating earnings were also a record at $540 million, representing an increase of 26% on the 23% increase in revenues. An operating

margin of 17.5% increased 40 basis points. EPS adjusted to exclude debt prepayment costs was $2.83 per share, an increase of 26%. EPS on a GAAPbasis, to include debt prepayment costs, was $2.27 per share.

Let's review slide 4, which summarizes our current bookings and backlog status. Bookings during the fourth quarter of 2012 were approximately

$810 million and reflect a book-to-bill ratio of approximately 1-to-1. Approximately 60% of bookings in the current quarter were driven by a highe

level of demand for products to outfit new buy aircraft. As I mentioned earlier, throughout the year each of our segments had solid market successe

as shown by record bookings of approximately $3.2 billion, an increase of nearly 10% as compared with 2011, and full-year 2012 total bookings

including awarded but unbooked programs were in excess of $3.3 billion.

Backlog at the end of the quarter was approximately $3.75 billion, an increase of approximately 7% as compared to 2011. And total backlog, both

booked and awarded but unbooked, was a record at approximately $8.25 billion.

Before we discuss performance in each of our segments, I would like to ask Werner to briefly review some of the important operating and marketing

highlights for each of our businesses.

Werner Lieberherr- B/E Aerospace - President, COO

Thank you, Amin, and good morning, everyone. During the fourth quarter, we were awarded a number of significant programs. I would like to

mention four major aircraft cabin interior awards. These four awards are initially valued in excess of $250 million and are indicative of the breadth

of our innovative product offerings.

The first of these was a [Life Flight] business-class seating program to outfit the major international airlines' new buy Boeing 787 fleet. In addition

B/E Aerospace will provide retrofit LED lighting for these same airlines' Boeing 737, 767 and 777 aircraft.

The second was a full cabin interior retrofit program to outfit a major global airline's long-haul aircraft with Life Flight business class seating, Pinnacle

main cabin seating and LED lighting.

The third award includes a business-class seating program, a Pinnacle main cabin seating program and a comprehensive food and beverage

preparation and storage equipment program to outfit new buy wide-body aircraft for a major Chinese airline.

Finally, B/E Aerospace has won a Pinnacle main cabin seating program and a comprehensive food and beverage preparation and storage equipment

program to outfit a Russian airline's new buy 737 and A320 aircraft.

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Earlier in the year, our seating business was once again awarded Boeing's Gold rating. In fact, our score increased as we maintained our status as

Boeing's best-performing seating supplier. Similarly, at Airbus we are the preferred seating supplier. Embraer recognized our wastewater system

business with its Supplier of the Year award.

Our global sourcing, lean continuous improvement and program management initiatives continue to return powerful results, as evidenced by the

40 basis point expansion in operating margin. During 2012, our low-cost country sourcing and our operational excellence efforts generated nearly

$40 million of savings.

As Amin mentioned earlier, 2012 was an outstanding year from a marketing perspective. Our seating business recorded record bookings in 2012

The quality of our seating product portfolio is stronger than ever and is reflected in our coach, business-class and first-class market shares.

Seating awards for the year were diverse both geographically and by product type. Some of 2012's highlights included awards from Air Canada

Air China, Air France KLM, Delta, (inaudible), Japan Airlines, JetBlue, Korean Airlines, Lufthansa, Qatar and Silk Air, a subsidiary of Singapore's Airlines.

We continued to maintain a strong leadership position for our food and beverage preparation and storage equipment products with record awards

and a record win rate.

We had an outstanding reception for our new to Essence line of food and beverage preparation storage equipment at the Hamburg Interiors ExpoThis new product line won the prestigious Crystal Cabin Award, two international design excellence awards and the Airbus Most Innovative Produc

award.

We made significant progress expanding our lighting systems across a number of new platforms. As you might remember, more than a year ago

we introduced our all-LED lighting systems for the Boeing 737 sky interior. Market acceptance of these products has developed a head of steam

Accordingly, we have begun to book orders to convert a number of airlines on a retrofit basis with our LED lighting systems across a number of

aircraft platforms, including the 737, 757, 767 and 777.

Our Consumables Management segment also had a very successful year. The management team successfully managed a great deal of complexity

and change, achieved outstanding customer satisfaction and on-time performance metrics and made solid progress integrating La Salle, [DAT Air

and UFC. They were also successful in the marketplace where CMS retained 100% of the more than 160 contracts up for renewal in 2012 as well as

capturing additional market share.

During 2012, CMS was presented with notable awards and recognition. CMS was named Honeywell's 2012 Supplier of the Year. In addition, CMS

was named Platinum Supplier at Aviation Partners Boeing, supplier of the year at US Airways; received (inaudible) Achievement of Excellent Award

named preferred supplier at [G Hamble] and received the performance excellence award from Boeing Defense and Space.

Clearly, from an operational perspective, our Consumables segment is operating on all cylinders and achieving outstanding performance metrics

while at the same time integrating several acquired businesses. We are expecting significant margin expansion at our Consumables Managemen

segment as the acquired businesses are integrated and as the cost of the integrations dissipates.

I will now turn the call back over to Amin.

Amin Khoury- B/E Aerospace - Chairman, CEO

Thank you, Werner. Now I will briefly review the fourth-quarter operating performance for each of our business segments. Let's turn to slide 5 and

review the fourth-quarter results for our Commercial Aircraft segment.

Commercial Aircraft segment leadership team turned in another strong performance during the quarter. Revenues of $398.6 million increased

13.9%. Operating earnings of $68.6 million increased 17.9%. Operating margin of 17.2% expanded 60 basis points due to operating leverage a

the higher revenue level and ongoing operational efficiency initiatives.

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Let's turn to slide six and review fourth-quarter results for our Consumables Management segment. The leadership team for the Consumables

Management segment also delivered a strong quarter, a quarter during which the CMS team was and continues to be deeply engaged in acquisition

integration activities which are expected to continue throughout 2013. Revenues of $302 million increased about 29%. Operating earnings were

$54.8 million, an increase of just under 29%, and operating margin of 18.2% was flat despite the drag from lower-margin acquisitions. Operatingmargin adjusted to exclude the AIT cost was 19.5%.

Let's turn to slide 7 and review the fourth-quarter results for our Business Jet segment. The Business Jet segment leadership team delivered an

excellent quarter as shown by the substantial and continuing improvement in our Business Jet segment, which, of course, is being driven by the

Super First Class portion of that business. Revenues of $102.8 million increased 45.8%. Operating earnings of $14.7 million increased 77%. Operating

margin of 14.3% expanded 250 basis points, reflecting a 45.8% increase in revenues and improved mix of revenues and ongoing operationa

improvements.

Let's briefly review our financial position on slide 8. Free cash flow of $110 million in the just completed fourth quarter represents a free cash flow

conversion ratio of 146% of net earnings. For the full year ended December 31, 2012 free cash flow of $230 million represents a free cash flow

conversion ratio of 98% of net earnings and a free cash flow conversion ratio of 79% of net earnings adjusted to exclude debt prepayment cost

As of December 31, 2012, cash was $514 million; net debt, which represents total long debt of $1.96 billion less cash, was $1.45 billion; and the

Company's net debt to net capital ratio was 39.9%. The Company has no debt maturities until 2020 and no borrowings outstanding on its $950million revolving credit facility.

Let's now briefly review our outlook. Our full-year 2013 EPS guidance of approximately $3.45 per diluted share represents an increase of approximately

22% as compared to our 2012 adjusted EPS of $2.83 per share. Our 2013 EPS guidance is based upon our high-quality backlog, the expectation o

strong wide-body deliveries, a modest recovery in the aftermarket and significant continuing margin expansion.

We expect 2013 revenues to be approximately $3.35 billion with revenue growth expected to be stronger in the second half of the year due to the

timing of scheduled program deliveries.

Although both the Commercial Aircraft and Business Jet segments booked record orders in 2012 and have achieved record year-end backlogs, the

timing of program deliveries is such that commercial aircraft revenues are expected to be stronger in the second half of the year while the Biz Je

revenues are expected to show modest single-digit growth in 2013 followed by double-digit growth in 2014. Revenue growth rates for both

segments are expected to accelerate in 2014 due to the timing of program deliveries from both our booked backlog and our awarded but unbooked

backlog.

In addition, we expect strong continuing double-digit operating earnings growth in both 2013 and 2014 due to significant additional margin

expansion driven by backlog quality and operational efficiency initiatives. Looking forward, our total backlog both booked and awarded but

unbooked of approximately $8.25 billion, our expectation for a 14% compound annual growth rate and wide-body aircraft deliveries over the nex

three years, our expectation of rapidly growing revenues from our supplier-furnished equipment program deliveries, the expectation for continued

growth in global passenger travel and attendant increases in capacity all provide a foundation for expected solid revenue growth in 2013 and an

acceleration in our revenue growth rate beginning 2014.

Now let's turn to slide 9 and review our 2013 financial guidance. The Company expects continued strong bookings in 2013 driven by the robus

wide-body aircraft delivery outlook, bookings from prior SFE awarded programs and a modest recovery in aftermarket demand and expects to

end the year with a book-to-bill ratio in excess of - to-1.

2013 revenues are expected to be approximately $3.35 billion and based on scheduled program deliveries are expected to be stronger in the

second half of the year. The Company expects 2013 EPS of approximately $3.45 per diluted share. The EPS guidance of $3.45 per diluted share

represents an increase of approximately 22% as compared with 2012 EPS of $2.83 per diluted share.

The Company's 2013 earnings per diluted share guidance is inclusive of approximately $20 million of expected 2013 AIT cost. The 2013 free cash

flow conversion ratio is expected to be approximately 70% of net earnings, weighted more heavily towards the second half of 2013.

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And with that, I will now turn the call back over to Greg.

Greg Powell- B/E Aerospace - VP, IROkay, Jessica, we are now ready for the Q&A session. Can you queue everyone up? And please remember, two questions per person. Thank you.

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator instructions) Howard Rubel, Jefferies.

Howard Rubel- Jefferies & Company - Analyst

(technical difficulty) and I know that -- just two things. One is, could you talk a little bit about the competitive dynamics in the seating market? Iseems that you have done well, but in a couple of cases some customers have -- you have lost a couple of opportunities.


Sure. Our win rate on bidding programs this year was very, very high. And, actually, it was the best year ever for seating orders. And our CAS segmen

had a record year and had a record backlog. So it was really a great year.

In terms of dynamics, dynamics of the industry -- we can't win them all -- we are doing (technical difficulty) --


You have been cut off or I have been cut off. Hello?


I cannot hear Amin, either.

Operator

We apologize, everyone. Mr. Khoury's line has disconnected.


Okay. Tom, you still there?

Tom McCaffrey- B/E Aerospace - SVP, CFO

Yes, I am. Howard, did you have another question?

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Yes, I did. Thank you. And you are the target, so thanks for volunteering.


It's always good to be the target.


So great fourth-quarter cash flow numbers, Tom. Can you talk a little bit about some of the challenges in doing a little better than 70% free cash

flow for the upcoming year? And how did you -- I will leave it at that.


Well, yes, it was a strong cash flow quarter. As you know, we do business on a global basis, and so it's difficult to forecast with a high degree of

certainty a lot of international sales and when we will receive them. And it just turned out that we had a very strong collection period during the

fourth quarter, which helped bring cash flow up above the levels which I think we had originally expected, so feel good about that.

Going into the 2013, the first half of the year for B/E is typically a little weaker in the first half, and that is a function of the timing of payments of

incentive comp and interest accruals and a lot of other things that just -- it's really just timing-driven, along with the timing of CapEx for the programs

that we have underway. CapEx this year will be $135 million, and so there's a lot of that going on in the first half of the year. When you couple that

with paying accrued liabilities in the first half, it's going to -- and stronger revenues in the second half, the impact will just result in stronger fo

cash flow in the second half of the year.


But you don't need to grow inventories a lot from here?


No, that is not our plan. You should expect for inventories to grow more or less at the revenue growth rate.


Thank you very much.

Operator

Robert Spingarn, Credit Suisse.

Robert Spingarn- Credit Suisse - Analyst

I don't know if we got Amin back. In the meantime, Tom, I've got another one for you. On the $0.07 guidance increase on the earnings, how do we

split that between operational improvement and tax?

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Well, I think the way you ought to think about it, Rob, is that we expect an overall effective tax rate in 2013 of a little over 29%, or it's about the

same as 2012. So the 2012 rate, while it does not reflect the good news from the R&D credit, as we mentioned in the release, 2013 will. But on theother hand, we've got some other tax items which we will expect some of that goodness that will come out of the R&D credit. We have got a lo

of R&D initiatives -- not R&D -- tax planning initiatives are underway right now on a global basis, and it's really too soon to see how they may play

out.

So for now, I think you should expect the effective rate to be a lover 29%, or about the same as 2012.

In terms of timing, I think you know that because the law wasn't passed and signed into law until 2013, the 2012 credit didn't get reflected last yea

and it will get reflected in the first quarter. So our first-quarter rate will be lower than the other quarters because all of the 2012 benefit will flow

through in the first quarter, and then the tax rate for the other quarters will be higher than what we have in the first quarter, but overall you should

expect about a 29% rate, a little bit above it.


Okay, just to clarify that, and then I have a question for either Amin or Werner, whoever is there -- but what was the tax rate prior to today? In othe

words, the slightly over 29% was what in the old guidance?


It was right about 30%, and the rate we had for the year was 29.8%.


Okay, and then the other question (multiple speakers) --


So, it was a little bit under 30% for the full year and it will be a little over 29% for 2013.


Okay, so it's something like 0.5% or so.


Yes, something like that.


Right. So the other question -- again, either Amin or Werner -- we know you are highly correlated to the wide-body ramp. But we are now part o

the way through that, and I wanted to ask you -- you have held bookings at around a 1.0 or a little bit better ratio very consistently. As this ramp

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starts to slow and perhaps with a period of pause between now and when the A350 comes in, can you maintain a 1.0 or better book to bill for the

next several years, or should we look for that to drop off at some point?


If you look at our total bookings this year, it's about $3.3 billion if you include awarded programs. It was pretty strong.


I know.


And we do expect our SFE program to begin to enter bookings more strongly, and we do expect a 14% CAGR in wide-body deliveries to continue

for the next three years.

So what we're looking at here is strong wide-body deliveries continuing at a double-digit growth rate for three years; SFE programs entering

bookings and deliveries, so helping both bookings and shipment; and some recovery in the aftermarket. So, yes, we expect our book-to-bill to

remain above 1-to-1. I think we said so in my prepared remarks, for 2013. We have not giving guidance on bookings for 2014, but we expect strong

bookings for the next several years.


That's what I was getting at, through the wide-body ramp. And then just lastly, Amin, 787 -- what is B/E Aerospace's exposure if, for whatever reason

they should halt production?


You know, there are not many 787s that don't have B/E Aerospace equipment on them, and a lot of B/E Aerospace equipment, given our marke

shares with all the airlines. So for the time being, Boeing has told us that we should keep shipping at the same rate and meet all of our [on-dot]

dates. And if that changes, we will let you know, but we really don't know anything more than you know at this point.


How much is in your 2013 guidance?


I don't know the answer to that question.


Okay, thank you.

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Operator

David Strauss, UBS.

David Strauss- UBS - Analyst

Amin, on the Business Jet side, a couple months back you talked about you were a little bit more positive with regard to the outlook on Business

Jet. Can you give us an update there? Obviously, the Business Jet segment was a lot stronger in the quarter. I assume that is Super First Class and

not Business Jets, but any color around what is going on in Business Jet (multiple speakers).


Yes, it's really all Super First Class, David. And I think one positive thing I can say about the Biz Jet -- about biz jets, per se, is that it looks like the

prices of used aircraft have firmed, and prices are beginning to move up and inventories are between 12% and 13%. So it looks like we may have

to turn in orders here in 2013. But basically, what is driving our business is the Super First Class part of the business, which you implied during the

question.

And we did end the year for our Biz Jet segment with a record backlog, the best backlog they have had. But the Biz Jet segment, because of the

timing of deliveries, particularly on the Super First Class side -- we're going to have low-single-digit revenue growth, but a very healthy expansion

in margin. So we will turn in a really good year this year on the earnings line for Biz Jet, but not so much on the revenue growth rate. And then in

2014, we expect a double-digit increase driven primarily by what's in the backlog now, the Super First Class part of the business.

I would expect that we would begin to see some improvement in Business Jet deliveries, per se, at least by 2014.


Okay, thanks. On the aftermarket side, how were spares orders at CAS? And what have you seen also on the aftermarket side at Consumables?


Yes, it's still a little soft. In our Consumables business, it looks like daily orders are holding steady. It looks like there is no deterioration in the busines

in the fourth quarter versus the third quarter on a sequential basis. It looks like the legacy business, if you strip out all the acquisitions, is up slightly

something like 1% year-over-year. So it looks like the business has stabilized. Aftermarket demand is still soft, but we continue to expect

mid-single-digit improvement in demand over the course of the year, leading to a stronger year in 2014.


Okay, great, thanks a lot for the color.

Operator

Noah Poponak, Goldman Sachs.

Noah Poponak- Goldman Sachs - Analyst

In the SFE business, there have not been any brand-new SFE awards on the original equipment side since you announced the 737 lav. It looks like

you are starting to take retrofit orders for skylight interior, but we have not had the first lav retrofit order yet, at least announced. 100% understand

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this is a long cycle business and a long process and a long-term growth driver, but I'm just wondering if either of those time frames have been

surprising to you internally or not, and what we should look for in 2013.


Well, we continue to hope and expect that we will book a 737 retrofit order in the future. We do have discussions going on with a few folks. The

interest is very high. These programs are very complicated; for the airlines, they're complicated. They have to do with their C checks and D checks

and the locus of the balance of their fleets and all sorts of things that go into this. So discussions are slow; they are very methodical. We will have

a dozen people involved on our side, the airlines the same.

But I think it will play out pretty much as we have indicated and that we will be able to announce a first retrofit program in the near future on the

737 lav.


And any similar thoughts or comments on brand-new SFE product that you may or may not be working on?


Well, we actually have -- we don't announce every single booked order. We have booked additional SFE orders, on the wastewater treatment side

for example. We have done some stuff on the oxygen side. We just don't announce every single SFE program. I think, if I want to remember, I think

that SFE backlog increased by some amount. Maybe, Greg, maybe you can --


It was about $100 million this year, a little over $100 million.


And we shipped a lot out of our SFE backlog during the past year, something like $150 million. So we are continuing to book SFE programs.


Okay. And then, Amin, it sounds like you are calling for a slightly back-end-loaded year on revenue and cash. I don't know if maybe you wanted to

a little bit more precisely quantify what to look for in the first half, whether it's on absolute revenue or an organic growth rate, just to get everyone

on our side of the table on the same page.


I don't think we can do that. You are right; based on the timing of program deliveries, our expectation is that the second half will be better than

the first half of the year. But I don't think we can do any more than that at this point in time, Noah. I think when we get through the first quarter

we will have a much better feel for the second quarter and the balance of the year, but I think we just need to work through the first quarter.

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Okay. And what was the Consumables organic revenue growth rate in the fourth quarter?


The organic revenue growth rate in the fourth quarter was a little less than 1%.


Okay, thanks a lot.

Operator

Robert Stallard, Royal Bank of Canada.

Robert Stallard- RBC Capital Markets - Analyst

Amin, I was wondering if we could have some comments on how cabin retrofit and upgrade growth could be expected to pan out in 2014 -- 2013

and maybe into 2014, if you are prepared to give that.


Well, our retrofit cabin upgrades -- so, at the current time, a lot of the major airlines of the world are in the midst of receiving large numbers of new

wide-body aircraft -- 787s; they are getting ready for their first A350s, they are getting 777s, 747-8s. So they are really preoccupied to a large exten

with the number of new aircraft that are entering their fleets, and they are also dealing with some significant issues associated with some of the

new airplanes entering their fleets, as we all know.

So our retrofit backlog for this year looks fairly healthy. It's not -- there are orders that were booked in prior periods that are rolling out during thi

period of time, but no substantial growth in retrofit deliveries during this year. Most of what -- most of our growth in the CAS and in the Biz Je

segment are coming from new aircraft deliveries.


So is this an area that could pick up maybe in 2014 or maybe into 2015 as we get through the bulk of these big wide-body deliveries?


Yes. Our expectation actually is that orders for retrofits -- we expect orders for retrofits to strengthen in 2014.


Okay. And on the capital side, you mentioned you don't have any debt maturities out until 2020. So can we expect no further debt paydown? And

in relation to that, do you see cash deployment this year being again focused on bolt-on acquisitions?

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Yes. We ended the year with about $514 million in cash. We expect about a 70% free cash flow conversion ratio in the coming year. So we've got

a significant amount of excess cash which could be deployed for acquisitions. We are seeing some interesting acquisition opportunities, primarily

for the manufacturing side of our business, but also for distribution, but primarily on the manufacturing side. I do think that it's reasonably probablethat we will do at least one acquisition during the course of the year, maybe more like two.


But no debt paydown, you expect?


Well, our debt for the most part is bonds. They are notes with significant prepayment penalties, so we do not expect to do further debt paydowns

prepayments to take the charges associated therewith. We have looked at it, and the penalties are very significant at the current time. So we are

just going to continue to serve as our debt. We have $1.3 billion outstanding, as you know.

And Tom, what is our average interest cost on all of that debt over the course of the year? I think it's about $122 million in interest.


Yes, interest costs will be about $122 million.


What is the average interest cost, Tom?


It's in the mid-5% range. Most of the debt was placed right at 5%. We have a little bit out at 6.5%.


That's great, thank you very much.

Operator

Joe Nadol, JP Morgan.

Joe Nadol- JPMorgan Chase & Co. - Analyst

Werner, I think you mentioned in your prepared remarks that you were gaining share in CMS. And I was just wondering how you were measuring

that or thinking through that. Is that within your addressable markets, maybe just looking at the aftermarket part? Or is that overall?

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It is in the addressable market, but we carefully, actually, review our hit rate. And so as part of that, we could see that we were able to actually make

some market share gains.


So it is based on your hit rate on bids or --?


When we looked, actually, for accounts we didn't have before, we were able to make market shares, gains.


Okay. And, then, I guess a second question on CMS is on pricing and what you are seeing there because you're looking for margin improvementas you mentioned, looking further down the line. Is there pricing pressure or is the pricing okay? And is the margin improvement you're looking

for really based on volume? What's the gross margin outlook, I guess, as you get that margin improvement?


Well, I think it's twofold. I think the pricing is okay. I think it's volume and then, secondly, it's also cost reductions. And we look at parts cost reduction

and we look at the organizational cost reductions.


And you mentioned that everyone is very busy with the integration effort. What is the latest update there on how much further there is to go and

how much cost opportunity there still might be?


We expect to spend about $20 million this year. We guided to about $20 million of expenditures in 2012 and spent a little less. We expect to spend

all of the $20 million in 2013. We should be essentially complete by the end of the year. There's still a little bit of stuff to do in the first quarter o

2014, but essentially complete.

So we expect to see our margins expanding in the business even as we are expending on AIT due to reduction in excess facilities and reduction in

excess personnel and reduction in excess IT costs. And so mostly what we think about in terms of driving the margin expansion in that business is

cost reduction.

We do expect some improvement in volume over the course of the year. We talked about mid-single digits.

In terms of pricing, as Werner had mentioned earlier, we renewed 100% of the 160 contracts that came up for renewal over the course of the yea

and added some additional customers as well. So it was a really good year for CMS in the marketplace. They won 7 or 8 supplier of the year awards

incredible on-time performance. They are really operating on all cylinders, as Werner mentioned earlier. The goodness of some volume growth

would be wonderful for some additional operating earnings and margin growth, but we don't expect much in the way of growth this year, as we

said earlier; maybe mid-single digits.

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Okay, and then just one more, going over to CAS and honing in on the premium seat market. I think Howard asked earlier about market share and

were you losing some. You mentioned that this was your best year, or last year was your best year ever. And I did see that your major competitodidn't grow as much as you did in the quarter. I think they were single-digit, and you were double organically.

As you look forward, do you think that -- if you have been gaining a little bit of share there, do you think that might continue into the next couple

years, just given the profile of your customers, the profile of how the deliveries are ramping on 87? Do you expect to continue to grow that marke

faster than -- grow that business faster than the market?


We expect to book orders at a higher rate than -- well, first, let's talk about how we measure share. Okay? So share is measured in each year

depending upon what has been delivered by us as compared to delivered by our competitors over the course of the year. And because we have

been looking at a rate which is higher than our market share, our market shares will have to grow as the backlog is rolled out into deliveries. And

we have been booking at a rate in excess of the market growth rate for three years now, and we have been gaining share on the bookings side foabout three years. We had a great year this past year, so our expectation is that shares will grow in 2013, 2014 and 2015 as we roll out the backlog

and that will basically reflect the orders that we have taken and the size of the backlog that we currently have.


No, understood, understood. And the 787 is a key driver there; is that accurate?


787, 747-8, 777, A380, A350 -- all of these wide-body aircraft types have -- there's important backlog associated with pretty much all those aircraf

types, but 787 for sure, just as all the other wide-bodies that I mentioned a second ago.


Okay, fair enough. Okay, thank you.

Operator

Myles Walton, Deutsche Bank.

Myles Walton- Deutsche Bank - Analyst

Amin, just a clarification on the CMS -- the mid-single digit, was that your market organic growth, or has that got a touch of benefit from Interturbine?


We expect our business, we expect our business, our CMS business, to grow at a mid-single digit rate during the course of the year compared to

2012. Everything (multiple speakers) Interturbine --

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Got it.


-- and all the businesses in 2012 and 2013.


And then it looks like, if I look at your revenue buildup, that there's a healthy amount of, I don't know, conservatism, I guess is the best way to pu

it. Business Jet had a 40% CAGR this year, and you are talking single --


Hold on one second. Hey, Tom, would you just take a look at that question and make sure I answered it accurately for Myles? I don't want to mislead

anyone. And just thinking about the question, I am not sure I answered it 100% accurately.

What is your second question, Myles, while Tom is looking?


Yes. It was more -- it looks like there's a lot of revenue opportunity upside to your number. If Business Jet is growing 40% this year and you are

talking about a single-digit growth next year; and Consumables, given the backlog and the SFE kicking in. I'm just curious -- it seems, again -- is

there any push-back you give to me to think about the revenue outlook as being on the conservative side?


Yes. As I mentioned earlier, both Commercial Aircraft segment and Biz Jet segment ended the year with the biggest backlogs they have ever had

with record backlogs. But the timing of deliveries from the backlog, particularly for the Biz Jet segment, has very modest growth in Biz Jet in 2013

It's just the timing of deliveries, so we expect low-single-digit growth, revenue growth in the Biz Jet segment in 2013, and acceleration and

double-digit growth in 2014. And it has to do with the backlog and the timing of backlog and all these Super First Class programs that we have

won.

Now, we expect earnings, operating earnings, to grow at a double-digit rate, but it's because of margin expansion and the quality of the backlog


Okay, alright, thanks for the (multiple speakers) --


Myles, in response to -- just to clarify I think what Amin was saying is that organic growth at CMS next year will be mid-single-digit. And so to tha

you would add a half-year of Interturbine.

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Great, thanks a lot.

Operator

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


Okay, thank you for joining us today, and we look forward to speaking to you again after we report our first quarter results. Thank you.


Have a good day, everyone.

Operator

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

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