beav q212 transcript

8/13/2019 BEAV Q212 Transcript

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THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPTBEAV - Q2 2012 BE Aerospace Inc Earnings Conference Call

EVENT DATE/TIME: JULY 24, 2012 / 1:00PM GMT

OVERVIEW:

BEAV reported 2Q12 revenues of $768m, net earnings of $71m, and diluted EPS of$0.69. Expects 2012 revenues to be approx. $3b and diluted EPS to be $2.75.

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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 PowellBE Aerospace Inc - VP, IR

Amin KhouryBE Aerospace Inc - Chairman, CEOThomas McCaffreyBE Aerospace Inc - SVP, CFO

Werner LieberherrBE Aerospace Inc - President, COO

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

Noah PoponakGoldman Sachs - Analyst

Julie YatesCredit Suisse - Analyst

Rama BondadaRBC Capital Markets - Analyst

Gautam KhannaCowen and Company - Analyst

Peter ArmentSterne, Agee & Leach, Inc. - Analyst

Myles WaltonDeutsche Bank - Analyst

Yair ReinerOppenheimer & Co. - Analyst

Kevin CiabattoniKeyBanc Capital Markets - Analyst

Carter LeakeBB&T Capital Markets - Analyst

J.B. GrohD.A. Davidson & Co. - Analyst

Darryl GenovesiUBS - 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 BE

Aerospace second-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, this conference is being recorded this day, July 24, 2012. Thank you.

I would now like to introduce BE Aerospace's Vice President of investor relations, Greg Powell. Mr. Powell, you may begin your conference.

Greg Powell- BE Aerospace Inc - 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 second quarter ended June

30, 2012. By now, you should have received a copy of the news release we issued earlier today. If you haven't received it, you will find a copy on

our website.

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2012 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without

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

JULY 24, 2012 / 1:00PM, BEAV - Q2 2012 BE Aerospace Inc Earnings Conference Call


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

For today's call, we have prepared a few slides to help you follow along with our discussion. You can find our presentation on the Investor Relation

page of the BE Aerospace website at BEAerospace.com. In addition, copies of the slides will be posted to our website for your review after the call

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

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

and our Safe Harbor statements in the Company's filings with the SEC. After we present today, we will address your questions following our prepared

remarks. At that time, Jessica will provide instructions on how you can ask questions. Please limit your questions to no more than two at a time, so

that we can get to everyone.

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

Amin Khoury- BE Aerospace Inc - Chairman, CEO

Thank you Greg, and good morning everyone.

We are very pleased with our record second quarter results, which were announced earlier this morning, and which were above earlier expectations

Our strong revenue growth is being driven primarily by the robust new aircraft delivery cycle and substantial market share gains, which are offsetting

weaker aftermarket demand. Approximately 65% of second quarter bookings were driven by demand for products for new buy aircraft. So ou

historical 50%/50% OE aftermarket split has become strongly skewed to the OE side of the ledger, both because of the strong new aircraft delivery

cycle, and also because of a weaker aftermarket environment.

Over the past three years, the Company has been booking orders well in excess of the market growth rate, and we are now recording significan

market share gains, while delivering at a rate well above the market growth rate. It is our successful R&D investments which are driving the significant

market share gains. And with robust demand from the strong new aircraft build cycle, we are experiencing strong revenue growth. In addition,

essentially our entire $4.4 billion SFE backlog represents additional market share gains. And as deliveries from our SFE backlog ramp up, we expec

to see your revenue generation per new aircraft continue to increase.

Our record second-quarter results included in operating margin of 18.5%, excluding items, an increase of 100 basis points, as compared with the

prior-year period. The substantial margin expansion was driven by the 20% revenue growth in our higher-margin distribution business and by

margin improvements in our commercial aircraft and business jet segments, which more than offset the margin drag from recent consumables

management segment acquisitions and related integration costs.

During the quarter, we agreed to acquire Interturbine, a leading provider of material management logistic services to global airlines and maintenance

repair and overhaul providers. Interturbine is a one-stop source, reducing aircraft downtime for airlines. Over 60% of Interturbine's business is

generated on an urgent aircraft-on-ground basis, requiring response within 4 to 24 hours. The acquisition, when closed, will add about 500,000

SKUs, doubling our consumables product portfolio, and more importantly, positions our Company to operate a comprehensive range of product

and services on a single-source basis to our customers globally.

A bit on the financing front. Two weeks ago, we opportunistically took advantage of historically low interest rates, and issued $800 million of senio

unsecured notes, priced to yield 4.9%. We issued those notes as an add-on to our existing $500 million issue of 5.25% senior unsecured notes, dueMarch 2022.

At the same time, we launched a tender offer to acquire any and all of our $600 million issue of 8.5% senior unsecured notes, due July 2018. We

intend to use excess funds remaining after the tender for general corporate purposes, which may include acquisitions. Exclusive of a one-time

charge of approximately $0.55 per share for debt prepayment costs, these financing transactions are expected to be neutral to slightly positive to

2012 earnings per share, and to be approximately $0.07 per share accretive to 2013 earnings-per-share.

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During the second quarter, we accomplished two very significant new product introductions into service, on two aircraft types -- two new aircraf

types, I should say. Both introductions were executed flawlessly, and received tremendous acceptance by our customers and their passengers

First, at the Farnborough Airshow, with great fanfare, at a major VIP-only precedent, Qatar Airlines rolled out their new 787 with two class service

and utilizing complex and highly-customized BE Aerospace business-class seats and bespoke BE Aerospace cabinetry.

It was widely reported during the show that Qatar's business-class section, which also includes a complete suite of BE Aerospace food and beverage

preparation and storage equipment, represents a paradigm shift for airline business class cabins, which has taken the business class cabin to a

totally new level. In addition, during the quarter, Lufthansa took delivery of their first 747-8 which included eight of our bespoke Super First Class

suites and 92 of our unique custom business-class seats. The 747-8 has been flying for a couple of months now, and the passenger feedback abou

our products has been exceptional.

Before discussing second-quarter financial performance, I would like to spend a few minutes discussing the current market environment. Then we

will discuss our results for the quarter, and lastly, we will review our current financial guidance for 2012.

Now let's briefly discuss the current commercial aerospace environment. Global traffic grew 4.5% year-over-year in May, compared to capacity

growth of 4%. Although traffic slowed from April, when it was up 6%, May traffic was still ahead of capacity, which helped maintain load factors a

historically high levels. Airlines are successfully managing capacity, and the domestic carriers have now successfully pushed through three priceincreases this year. In addition, fuel prices have dropped a bit, which has led IATA to confirm their forecast of a third straight year of industry

profitability.

As you are well aware Farnborough was a huge success for Boeing, which booked 396 net orders at the show. Boeing's recent order success,

particularly with respect to 737, was extremely important for BE Aerospace, not only because BE Aerospace oxygen lighting and modular labs are

an integral part of future 737 deliveries, but also because several major 737 buyers get four to six extra seats on their 737 configurations, which

bodes well for eventual major retrofit programs for those airlines. Suffice it to say that as a result of successful BE Aerospace R&D initiatives, we

have been able to garner numerous Airbus and Boeing SFE program awards, many of which portend retrofit opportunities.

It is worth mentioning here that the BE Aerospace Pinnacle coach class seating platform continued its strong marketing performance during the

quarter, and has become our most successful new seating product launch ever, having now garnered orders to outfit more than 1,600 aircraft,

valued in excess of $850 million, with success across both Boeing and Airbus, both narrow-body and wide-body platforms.

Finally, while discussions at Farnborough regarding the record OE backlogs and build rates served to reinforce the OEM outlook, cautions were

raised by numerous suppliers regarding the aftermarket. We, too, are experiencing weaker aftermarket demand, particularly in the US and Europe

and we expect the aftermarket demand to continue to be temporarily muted as airlines manage inventories down, and defer maintenance in orde

to conserve cash in the face of current macroeconomic weakness.

We are nevertheless confident in our future, due to the future market share gains, which are now embedded in our backlogs, and the successfu

R&D programs which have now generated $4.4 billion in SFE awards, which will increasingly support growing bookings and deliveries over the

next several years. In our view, justifications for the planned ramp-up in deliveries by Airbus and Boeing from 2012 to 2015 remain convincing. A

7.5 year industry backlog, following nearly a decade of under-supply, structural growth in emerging markets' air-traffic, the need for fuel-efficien

aircraft to replace thousands of older aircraft, and high airline load factors.

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

financial performance, compared to the second quarter of 2011. Record second quarter revenues increased 26% to $768 million. Pro forma revenue

growth, giving effect to all acquisitions completed during 2011 and 2012, as if they had occurred on January 1, 2011, was almost 18%.

Record operating earnings of $138 million increased 29%, and operating margin expanded 40 basis points to 17.9%. Exclusive of items, that is AIT

costs, operating earnings of $142 million increased 33% on the aforementioned 26% increase in revenues, and operating margin of 18.5%, expanded

by 100 basis points. Record net earnings and earnings per share were $71 million, and $0.69 per diluted share, increases of 30% and 28% respectively

Exclusive of items, net earnings and net earnings per share were $74 million and $0.72 per share, increases of 35% and 33% respectively.

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The third quarter of 2012 senior notes issuance and tender, exclusive of the $0.55 per share of debt prepayment expense is expected to be

approximately neutral to 2012 EPS. The EPS guidance of $2.75 per diluted share represents a year-over-year increase of approximately 23%. And

finally, 2012 free cash flow conversion ratio is expected to be approximately 75% of net earnings. And with that, I'll turn the call back over to Greg

to begin the question-and-answer period.


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

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

Operator

(Operator Instructions)

Your first question comes from Noah Poponak.

Noah Poponak- Goldman Sachs - Analyst

Amin, I wanted to could speak to, within the context of your comments there on a little bit slower aftermarket, if you could speak to the difference

in what you consider to be discretionary versus non-discretionary within your business, in terms of trends you are seeing?


Well, I think, Noah, we should expect the aftermarket to be muted for some period between 6 months and 18 months. In our planning now, we

are looking at the aftermarket to be muted right through the end of next year. The environment in Europe is pretty negative. I mean, you have the

two largest carriers in Europe each laying off between 3,000 and 4,000 people. China has slowed down substantially, and the US is barely growing

So, the airlines are doing what they can to conserve cash. They are deferring maintenance, they are depleting inventories, and living hand-to-mouth

again. They will be able to do that for some period of time. I think that the outlook is that at some period of time here, either in the latter part o

2013 or 2014, you will have a major upswing.

Tom, maybe you want to comment a little bit about both spares and consumables?

Thomas McCaffrey- BE Aerospace Inc - SVP, CFO

Yes, with respect to the outlook on the aftermarket, I think you were talking about the aftermarket, Noah, and specifically your question about

discretionary spending. It is the spares spending that we are seeing, which has slowed down. And that is the expectation, really the driver behind

the expectation with respect to tepid or muted growth, until the economy picks back up, and we see more activity in revenue passenger miles and

MRO activity.


But I guess it seems like there's a case to be made that, if the airlines are being really tight on capacity, you see that show up in the MRO and spares

side and the meat and potato stuff, but they are actually making money as a result. And they've delayed -- they've deferred some of the large retrofi

projects that perhaps they are actually doing some of that today, and that would drive the segment's organic growth we saw from you guys this

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quarter. Very low at CMS, much better at CAS and business jet. Is that correct, and is that what we should be modeling, it sounds like, for the next

few quarters?


During the quarter, this is another way to look at it, of the programs, the RFPs that we are actively engaged in, about 85% are related to new aircraf

delivery activity, and about 15% is related to retrofit activity. So, I would say that retrofit activity is down, it is more discretionary, and these really

excellent revenue growth rate numbers is really due to our market share gains and the robust new airplane delivery cycle. So, I would basically -

I would say that the news is pretty darn good, that we've been able to grow at almost 18% organically, in spite of a very tepid aftermarket. I mean

on a pro forma basis, the CM business only grew at about 3.5% or 4% this past quarter.

So, when you have that kind of growth rate in a business that is responsible for 40% of the total business, and still have 70% organic growth,

basically, the orders that we have booked over the past couple of years, which are well in excess of market growth rates, are allowing us to delive

now, well in excess of market growth rates and we booked the programs at healthy margins. So, our backlog is a high-quality backlog and it is one

of the reasons why, if you look forward at the balance of the year, the second half of 2012, we have relatively muted growth. It is like a 15% growth

rate as compared to the second half of last year in revenues. But operating earnings growth is about 25%.

So, basically, what we have is a very high-quality backlog with substantial market share gains which had been booked, and which are now flowing

into revenues, which are enabling the company, because basically of the strength of the franchise to be able to cover lower aftermarket spending

with higher deliveries in the OE side.


I understand. Thanks very much.

Operator

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

Julie Yates- Credit Suisse - Analyst

Good morning. This is Julie for Rob.

In your free cash flow conversion guidance for the year dropped slightly to 75%. Does this reflect an accelerated investment in inventory, or is i

something else?


Julie, the change in the free cash flow guidance really is a result of an acceleration of spending for SMB programs, which will begin to deliver in

2013. And should be very strong contributors to both revenue and earnings in 2014, as the programs roll out. So it is an acceleration of the SFE.


Okay, great, thanks. And can you offer any initial thoughts on 2013 at this point, in terms of revenue growth, or will you reserve that for October?

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I think we can make a couple of qualitative comments, Julie.

Assuming that the aftermarket growth rate remains muted through 2013, we would expect revenues to grow. But say right through the end onext year, we would expect then revenues to grow by about 10% next year, driven primarily by backlog, and earnings to grow about 20%, driven

by margin expansion, as compared with our current 2012 guidance. So, 2013 is a transition year for the Company, as we complete the developmen

and certification of our SFE programs. And that sets up 2014 for a very strong revenue and earnings growth year.

In fact, all three segments are expecting to deliver significant 2014 revenue growth. Commercial aircraft from major SFE program deliveries, which

we have talked about for quite a while now, business jet from a significant increase in SFE deliveries on several new business jet platforms, and a

very significant upswing in the delivery schedule for Super First Class. And consumables management is expected to benefit from this cessation

of AIT spending and from an improvement in aftermarket spending after 18 months of controlled or deferred spending by the airlines.

So, we are looking at 2013 as a transition year for us, but a transition year where we have 20% earnings growth. And 2014 as a really big up year

for the company.


Okay, great, and that 20% EPS growth include the $0.07 accretion from the financing transaction?


Yes.


Okay. Excellent. Thank you.

Operator

And we have a question now from Rama Bondada.

Rama Bondada- RBC Capital Markets - Analyst

When we look at your backlog, particularly the $3.7 billion that is the booked backlog, how much of that is retrofit? How much of that is the origina

equipment manufacture, the new airplanes push? How much that coming from--?


It is primarily related to new airplanes.


So there is not that much retrofit?

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The vast majority is new airplanes, there is some retrofit, but I don't know the exact percentage.


Last quarter, you mentioned the AIT cost for the full year was expected to be about $15 million to $20 million. Has there been any change to that?


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


Great, thank you.

Operator

And we have a question now from Gautam Khanna.

Gautam Khanna- Cowen and Company - Analyst

Could you give us a couple of things? One, can you update us on the rollout of the lavatory business, how it rolls the next year in Delta across the

737 line? And then a follow-up.


Yes, I think that is a very bright light for the Company. Boeing booked a lot of 737 orders during the show. Those 737s are all going to contain ou

modular lavs and our lighting, and our oxygen systems. This is a really big deal for BE Aerospace. We have a pretty good push on us now to get

modular lavs out the door as early as we can, and as Tom mentioned a moment ago, we have significantly stepped up our spending.

So, while we see 2013 as a transition year, where we begin to shift the modular lavs for line installation at Boeing, we also expect to have our firs

retrofit orders for modular lavs either in 2012 and/or 2013, and to book more than one during that period of time. This is going to become a very

big deal for us.

So, our expectations for 2014 is a very significant ramp-up in modular lav deliveries, both for line fit and for retrofit, as early as 2014. And we are

stepping up our spending to be ready to do that, as we speak.


Okay, and then just to shift gears on CMS, were there any competitive losses in that segment in the quarter, or have you seen any impact from the

direct buys? And if you could comment, I know one of your competitors brought Interfast, if that changes the competitive dynamics in any meaningfu

way? Thanks.

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Okay. No. Absolutely zero competitive losses, in fact, a couple of competitive wins. So no competitive losses. It is just a matter of spending slowing

down, is what happened during the period.

No change in the BASN program, I mean zero change in the BASN program had no impact. And as far as Interfast is concerned, it is a relatively

minor transaction, as you know. So, Interfast, in fact, was a customer of ours, a very small customer of ours. I assume that piece of our business ove

some period of time will go away, but it is basically immaterial to our business.


Thank you.

Operator

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

Peter Arment- Sterne, Agee & Leach, Inc. - Analyst

Amin, I wanted to explore the aftermarket by geography a little bit, if you could. I know last year you finished with your revenue mix for the tota

company, it was roughly 52% US and then 24% in Europe and 24% in your rest of world category. And you split it up and you talk about the

aftermarket demand here is certainly normalizing, or they are managing their inventories in US and Europe.

Can you give us a little more color? Are you seeing any further deterioration in Europe, more than you are in the US? I know GE mentioned that on

Friday, where they have some pretty significant declines in their spares volume in Europe versus other parts of the world?


Europe is having a really tough time. The second-tier airlines in Europe nearly disappeared, in terms of aftermarket spending in the quarter. And

the first tier airlines, as I mentioned earlier, the really big guys, are laying off thousands of employees as we speak. So Europe is a really tough

situation now and two or three years of crisis that they have been in are really beginning to take their toll.

The US, we saw a slowdown, but that was primarily because of -- there are two issues there. One, really strong compares in the prior year in the US

and then 1.5% or less than 2% growth rate for quite some time, and a lot of uncertainty in the environment. So, pretty much everybody has pulled

back a little bit. And now we've even seen a significant reduction in activity in the Pac Rim in Asia, so China for example is down significantly.

So, basically, there is a global slowdown in the macroeconomic situation, and that is being reflected in aftermarket spending by airlines, pretty

much all over the world. I would say the one place where it isn't being impacted is the Middle East, as a region of the world.

Peter Arment- Sterne, Agee & Leach, Inc. - AnalystOkay and does this change any of your thoughts on your acquisition strategy regarding how you have broadened out with Satair and now

Interturbine, and your focus there, building the global franchise?

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Not at all. That is a long-term investment, and we started in this business in 2001, if you remember, with a $100 million business with a 15% margin

Now it's a $1 billion business with a 20% margin. So absolutely not.

This has to do with the direction in which the airlines are growing, and the direction in which we are going, to be able to supply airlines and MROs

globally, with all of their requirement of consumables, including fasteners, as those requirements grow over the years. And as the installed base

of aircraft doubles in size, driven by growth in revenue passenger miles, primarily driven from structural increases in travel in those parts of the

world that are beginning to travel for the first time. We want to be in a position to be the supplier to airlines and MROs all over the world.

Peter Arment- Sterne, Agee & Leach, Inc. - Analyst

Okay, Thank you. Helpful.

Operator

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

Myles Walton- Deutsche Bank - Analyst

I wanted to follow up on the 65% of the bookings in the quarter are OEM. I'm curious, is this a quarter that is at a turning point, have you been

trending in this direction? Just without the exact metrics. And also, can you give us some perspective as to what your sales mix is currently, is it stil

closer to the 50/50, but are going to be over the next couple of years moving towards that two-thirds one-third?


I think it is trending in that direction for two reasons. First is the robust new airplane delivery cycle. And that is supplemented in no small way by

our market share gains. And then will be further supplemented by these SFE programs, which begin causing revenue growth in a big way in 2014

So, it is not -- it is a trend which is underway.

And then the other thing that I would say, which is not a trend, but is a temporary thing, is the slowdown in aftermarket spending. So, when you

have these two big things going on which is the robust new airplane delivery cycle, and these outsized market share gains, supplemented by the

SFE program wins, those are the really big things, which in the short-term are offset somewhat by the muted aftermarket spending. But it is a trend

which has been established in the Company, for sure.


How long would aftermarket have to be soft for you to question the new product cycle? Those two things are often coupled, they weren't terribly

coupled the last cycle because of lots of things, but obviously, aftermarket can weak for an extended period of time before you start to question

some of the production increases.


Aftermarket is going to be -- you have to think about aftermarket in a couple of different ways. We expect very strong retrofit activity arising from

our SFE programs in 2014. So, that's a really big deal.

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And the larger airlines in the world compete by retrofitting these business class and first-class sections of their aircraft, so that has to be a temporary

thing. It has been this way for the 25 years that I've been in the business, and it's going to remain that way. That is how the airlines compete.

I mentioned that at the 787 Qatar roll-out at Farnborough, which was a VIP-only event, was really mind blowing. That business class cabin, it waswidely reported as basically a paradigm shift in business class cabins globally. It is going to create a lot of attention and a lot of airlines are going

to begin looking at that, to think about what they have to do to compete.

So, I don't see the retrofit market declining, I see it growing, because it is being driven by SFE activity and competition. Nevertheless, the new

airplane delivery cycle is so strong, it's so robust for all the reasons that I mentioned during the call, the under-supply for so long, and the revenue

passenger miles growth and the thousands of old aircraft that have to be replaced et cetera, that is so strong, together with our market share gain

and SFE programs, that we are likely going to have to trend towards that side.


Got it, okay. Thanks.

Operator

Moving now to Yair Reiner with Oppenheimer.

Yair Reiner- Oppenheimer & Co. - Analyst

I have a question about the guidance. Your full-year revenue guidance of about $3 billion suggests that you see revenue staying about flat through

Q2 levels through the back half. That seems somewhat conservative. I mean, understanding that aftermarket was weak in the quarter, it was stil

up, and you do have all these other tailwinds from share gains and commercial aero deliveries. So, just wanted to get a sense of why it's flat, and

to what extent your building in a healthy level of conservatism?


Well you are right, the 2012 full-year outlook of $3 billion in sales and $2.75 a share assumes a second half 2012 with sales up about 15%, versus

the second half of 2011, with operating earnings up about 25%, as compared to the second half of 2011. And relatively flat compared to the firs

half.

And we are guiding in that direction, because of the slowdown in the aftermarket, primarily. So, it does represent a pretty good increase over the

prior year. But flat compared to the first half of the year on the revenue side, and up substantially on the earnings side.


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


No, we are assuming relatively flat.

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And then just one more, can you give us an update on the 787? Maybe you could characterize how your shipping rate now is relative to Boeing'

build rate. And then how you may expect that to evolve over the coming months, now that production seems to be a little bit more normalized?


Werner?

Werner Lieberherr- BE Aerospace Inc - President, COO

The way we see it, I think you just said that Boeing production rates stabilized and will go up, and we deliver actually according to that production

rate.


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

Werner Lieberherr- BE Aerospace Inc - President, COO

Yes.

Operator

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

Kevin Ciabattoni- KeyBanc Capital Markets - Analyst

This is actually Kevin on for Mike. You mentioned numerous times the market share gains, both on the call and in the press release. Could you give

us some more color on where specifically you are seeing those? Are those tied to SFE specifically or separate?


They are not tied to SFE at all, because SFE deliveries are just beginning. They are, for the most part very substantial awards from carriers like

Emirates, Qatar, Etihad, Lufthansa, Air France, British Airways, Air Canada, Japan Airlines, et cetera, where we have garnered more, much more than

our fair share of the business and more than our prior market share of high-priced high-margin programs, which are beginning to deliver and which

are -- that how we measure market share, by the way, is based on deliveries not on bookings. So, our market shares will grow again when we star

delivering the SFE products, but what is carrying us now is the deliveries above market growth rates from our backlog, which had been booked

above market growth rates for the last several years.


Okay, that makes sense. Thanks.

And then you talked about, a couple minutes ago, about how you don't expect retrofit to really slow, driven by SFE in the out years. What kind o

pace are you seeing now on your current programs? Are you seeing carrier behavior change at all? Have they been slowing their pace of retrofits

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The carriers right now are constipated. They are so busy getting ready to receive initial deliveries of 777 or A-380s or 787s or whatever, that they

are really not able to deal with both categories at the same time. So, we have some retrofit in our backlog. We are negotiating significant retrofiorders, about 15% of our RFPs that we are dealing with right now in CAS are retrofit programs. But it is reduced as compared to prior periods, as

the airlines are much more focused on the new airplane deliveries.

The SFE activity is very different. Those will be initial retrofit orders for the first time ever, of products that we have never delivered. So, we have

market share gains on the products being delivered for line fit for the first time ever, and then those will be generating retrofit opportunities in

lighting, in modular lavs, in seating, in galleys, and in all kinds of things. So, we expect a pretty big uptick in retrofit activity of SFE-type product

beginning in 2014.


Great, thanks.

Operator

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

Carter Leake- BB&T Capital Markets - Analyst

A follow-up on that SFE comment. So lavatory retrofit I get, but you expect aerostructures retrofits? Can you clarify that? What type of SFE retrofi

would you have besides --?


The airlines are going to retrofit in airplane or 100 airplanes because these are large fleets, with the modular lavs. And they are going to get -

oftentimes they will also do lighting, because we are now the exclusive supplier of lighting on 737s. They will get extra seats in several instances

It is six extra seats on an airplane, which is a huge deal financially, and oftentimes the airline will take that opportunity to retrofit the seats.

So you get the lighting, the modular lavs, the seating, and in some instances, you are going to get new overhead bins. It is basically a redo of the

interior of that airplane. This is a very big opportunity, which is being driven by the extra seats, which are being driven by the modular lavs.


Okay, and then on the lighting, would we ten limit ourselves to just a narrow-body sky interior could be across all platforms, is that right?


That is correct.

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I want to go back to the Pinnacle seating comment. We've talked about that before, but I don't know if I'd put, did you say $850 million is currently

in backlog against 1,600 aircraft?


Yes, I said we booked $850 million worth and 1,600 chips, that is correct.


I don't know if it's all in backlog, we've actually begun shipping, so it's not all in backlog.


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


We don't know. We don't know. It's already gone, it is beyond our expectations, and it is continuing to book very strongly. So, I don't know the

answer, but it is going to be well over $1 billion.


Okay and just one more. The comment on single source bases on Interturbine, could you give any extra color on that, and how that might

flow-through to margins for Interturbine?


Well, I mean -- Interturbine's business is all about urgent aircraft-on-ground activity. And 60% of their shipments are done within 4 to 24 hours o

the receipt of the order. It is all about logistics and customer service, more than it is about products. Right? And so, they handled 500,000 differen

SKUs, they actually handle more stuff than we do.

And with Interturbine and ourselves, we basically handle essentially everything the airline needs from fasteners to chemicals to supplies to you

read the news release, bonding equipment and so on and so forth. So it is an effort by us to be the go-to company for airlines and MROs globally

Operator

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

J.B. Groh- D.A. Davidson & Co. - Analyst

Just a couple. Given this ramp-up that you are talking about, and the huge opportunity in the modular lavs and those sorts of things, can you

address capacity utilization, and longer-term CapEx needs, where you think you are in terms of your plans and those sorts of things?

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


Sure. In terms of CapEx for this year, you should expect us to spend up to $145 million, so previously, our guidance was $130 million to $135 million

Looks like it could be as much as $145 million, depends on the timing obviously, and whether or not we are actually able to complete that, bu

that is what we are driving towards now, so it is a pretty significant uptick.

We don't obviously have CapEx guidance for next year. It should be at a somewhat lower rate, because we're pulling some of that forward, and as

you know, we work through the third quarter as we start our preliminary planning. So we will be in a position to talk about our financial guidance

and our expectations for CapEx more quantitatively and definitively at the end of the third quarter when we do our investor meeting.


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


The utilization rate we're running capacity utilizations between 65% and 70% in most of the plants. As you know, we have the capability of just

adding incremental shifts or partial shifts as we move along. So, we would expect to do that as we see our revenues ramp-up.


And a quickie on Interturbine, if I may. Given that it's servicing this AOG market, can you inventory investment needs? And then question two on

that is, given that market is probably not real price-sensitive, can you talk about margin expectations versus your traditional consumables managemen

business, excluding AIT?


Well, Interturbine has a healthy margin, as we speak. Interturbine will be only a very slight drag on margins in the business. Interturbine's margin

is around 20%, so they are paid well for the service which they provide.

It is much more being paid for the logistics capability and the ability to get the product to the customer on a same-day basis to get the airplane

off the ground than it is anything unique about the specific products which they deliver. Does that answer your question?


Yes, I think so. I think I understand the business, but it's going to be -- I don't want to say inventory heavy, but the reason you get the margin is

because you have the stuff, right?


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

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Okay, interesting. Okay.


A lot of that is because it is a commodity and the products are more readily available for long lead items such as fasteners.


Okay, helpful. Great. Thank you.

Operator

Our final question today comes from Darryl Genovesi with UBS.

Darryl Genovesi- UBS - Analyst

Just a couple of mechanical questions here. When you say that Interturbine is going to be neutral to EPS in 2012 in 2013, are you talking exclusive

of interest expense associated with the debt you already raised, or does that include the interest expense?


No, we are talking about AIT expenses. Neutral this year because it happens late in the year. Later in the year, we don't have it for that long.


Right.


Next year, it is offset by AIT expenses, so call it another $20 million in integration expenses next year and then it ends next year. So 2014 should be

a really nice upswing in earnings in our consumables business, including Interturbine in 2014.


Okay, so we should think about I guess the $20 million integration expense would relate to both USC and Interturbine? Or is that exclusively fo

Interturbine?


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

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Okay, so including the financing, you would be slightly dilutive next year, correct?


Including the finance you would be slightly dilutive?


You are saying the operating income --


Interturbine's cost is, let's call it $230 million or something like that. And the interest cost on that is only -- put it 5% of $230 million, it's only $10

million, and the operating earnings are substantially more than that, so it would be accretive if it weren't for AIT expenses. Right? Interest hasnothing to do with it.


Okay.


It is significantly accretive above interest expense.


Okay, thank you.

Operator

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


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

Operator

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

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