rockwell collins (col) earnings report: q1 2016 conference ... · rockwell collins (col) earnings...

CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense

EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24

©2014TheStreet,Inc.Al l R ightsReserved Page1of23

RockwellCollins(COL)EarningsReport:Q12016ConferenceCallTranscriptThefollowingRockwellCollinsconferencecalltookplaceonFebruary17,2016,10:45AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

RyanMiller;RockwellCollinsInc;VPofIRKellyOrtberg;RockwellCollinsInc;Chairman,President&CEOPatrickAllen;RockwellCollinsInc;SVP&CFO

OtherPart icipants

DavidStrauss;UBS;AnalystPeterArment;Sterne,AgeeCRT;AnalystRichardSafran;BuckinghamResearchGroup;AnalystKenHerbert;CanaccordGenuity;AnalystCarterCopeland;BarclaysCapital;AnalystSamPearlstein;WellsFargoSecurities,LLC;AnalystSethSeifman;JPMorgan;AnalystRobertStallard;RBCCapitalMarkets;AnalystPeteSkibitski;DrexelHamilton;AnalystMylesWalton;DeutscheBank;AnalystRobertSpingarn;CreditSuisse;AnalystCaivonRumohr;CowenandCompany;AnalystGeorgeShapiro;ShapiroResearch;AnalystNoahPoponak;GoldmanSachs;AnalystMichaelCiarmoli;KeyBancCapitalMarkets;AnalystJasonGursky;Citigroup;AnalystHowardRubel;JefferiesLLC;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheRockwellCollinsfirst-quarterFY16earningsconferencecall.

Today'scallisbeingrecorded.

Foropeningremarksandmanagementintroductions,IwouldliketoturnthecallovertoRockwellCollinsVicePresidentofInvestorRelations,Mr.RyanMiller.Pleasegoahead,sir.

RyanMiller (VPofIR):

Thankyou,Operator.Goodmorningtoallofyouonthecall.

WithmeonthelinethismorningareRockwellCollinsChairman,PresidentandChiefExecutiveOfficer,KellyOrtberg;andSeniorVicePresidentandChiefFinancialOfficer,PatrickAllen.

Today'scallisbeingwebcastandyoucanviewtheslideswe'llbepresentingtodayonourwebsiteat




www.rockwellcollins.comundertheinvestorrelationstab.Theseslidesincludecertainnon-GAAPfinancialinformationandareconciliationtotherelatedGAAPmeasure.

Pleasenotetoday'spresentationandwebcastwillincludecertainprojectionsandstatementsthatareforward-looking.Actualresultsmaydiffermateriallyfromthoseprojectedasaresultofcertainrisksanduncertainties,includingthosedetailedonslide2ofthiswebcastpresentationandfromtimetotimeintheCompany'sSecuritiesandExchangeCommissionfilings.Theseforward-lookingstatementsaremadeasoftodayandtheCompanyassumesnoobligationtoupdateanyforward-lookingstatement.

Withthat,I'llnowturnthecallovertoKelly.

KellyOrtberg (Chairman,President&CEO):

Thanks,Ryan,andgoodmorning,everyone.

Ifyourecallonlastquarter'searningscall,wesaidthatweexpectedthefirsthalfofFY16tobeaslowstarttotheyear,followedbygrowthinthesecondhalf.Weexpectedthefirstquartertobetheweakestandinfact,itwasevenalittleweakerthanweanticipated,mostnotablyinGovernmentSystems.Soletmetakethathead-onandsummarizetheperformanceandoutlookofeachofthebusinessesandI'llstartwithourGovernmentSystemsbusiness.

Duetoprogramtiming,weexpectedourGovernmentSystemsbusinesstobedownmidsingle-digitsinthefirsthalffollowedbynicegrowthinthesecondhalf,resultinginoveralllowsingle-digitgrowthfortheyear.Inthefirstquarter,wedidexperiencetheanticipatedheadwindsthatweoutlinedonlastquarter'searningscall.

However,wewerealsoimpactedbytwoissuesthatwedidnotanticipate.Onewasasupplierissuethatimpactedlatequarterdeliveriesofsomeproducts.Andtheotherwasadelayinsomeexpectedfollow-onorders.All-in,thesupplierissueandtheordertimingdelaycausedabouta500-basispointimpacttoourGovernmentSystemsforthequarter.

Thegoodnewsisthatwe'vealreadyresolvedthesupplierissueandwehavebookedoneofthedelayedorders.Iexpecttorecoverboththeordertimingandproductdeliverycatch-upwithintheyear.

Now,Iknowthatitmakesinvestorsnervouswhengrowthisback-endloaded,soIwouldliketoprovidesomeadditionalcoloronwhatweexpecttodrivethatgrowthinourGovernmentSystems'secondhalf.Roughly60%oftheback-halfgrowthiseitherinbacklogorannualfollow-onbusinesswhereourcustomersmakeannualbuysthroughouttheyear.Allthislookstobewellfunded,soIdon'tseemuchriskhere.

About25%ofthesecond-halfgrowthisinprogramsthatwehavewon,butarenotyetawarded.Theonlyriskisthetimingofthecontractactionandwe'retrackingthatverycloselyandareconfidentthatwe'llcloseinatimelymannerforouryear.

Andthenthelast15%ofthesecond-halfgrowthareprogramsthatwehaveyettogooutandwin.Andthatnumberisinlinewithournormalhistoricalanticipatedsalesprofileforthispointintheyear.Sodespitethechallengingfirstquarter,Iremainconfidentinourlowsingle-digitgrowthforthefullyearinGovernmentSystems.

Now,beforeImovefromGovernmentSystems,Idowanttomakeafewcommentsaboutthebudgetoutlook.Firstofall,thenewbudgetisnetgoodnewsforourgovernmentbusiness.Ifyourecall,we'vebeenforecastingourgovernmentbusinesswithsequestrationasthebudgetbaseline.AndasI'msureyouknow,theagreementisanimprovementfromthatbaseline.




Ialsobelievethatwe'rewellpositionedtoatleastgetourfairshareofthebudgetincreases,giventheirprioritiesandthebreadthofourportfolio.Iwouldexpectthatwe'llstartseeingsomeofthisimprovementasearlyasnextyear.Infact,Iwouldn'tbesurprisedifwegetalittletailwindonshortcycleordersbytheendofthisyear.SothisisastrongboosttoourplantoreturnGovernmentSystemstosustainedgrowth.

MovingnowtoCommercialSystems,first-quarterresultswereinlinewithourexpectations.OEMsalesweredown,primarilydrivenbytheimpactofthepreviouslyannouncedglobalexpressratereductionsatBombardier.ButwedidseenicegrowthinourCommercialSystemsafter-market.

Wedeliveredanotherquarterofstrongoperatingperformance,headlinedby22.2%operatingmargins.OurCommercialSystemsteamdidareallygreatjobofcontrollingtheirspendingtomanagethemarginimpactfromtheglobal5,000-6,000productioncutsatBombardier.

FY16isanimportantyearofprogramexecutionforourCommercialSystems.Wecompletedalargenumberofmilestonesinthefirstquarter,includingthecertificationoftheCSeriesandtheARJ-21aircraft,firstflightoftheMitsubishiRegionalJet,entryintoserviceoftheChallenger650atBombardier,entryintoserviceofthefusion-equippedKingAirsatCessna,andentryintoserviceoftheLegacy450atEmbraer.Alloftheseprogramsareimportantinourlong-termgrowthplanforourCommercialSystemsbusiness.

Now,finally,letmeturntoInformationManagementServices,wherewedeliveredmidsingle-digittop-linesalesgrowthforthequarterandsomereallystrongoperatingmarginperformance,130-basispointimprovementovertheprioryear.Ourcoreaviationbusinessgrewat7%andcontinuestodrivetheincrementalmarginimprovementthatweexpectfromthatbusiness.

Lastyear,mostofourrevenuesynergiesfromthebusinessaviationsideofthebusinesswereleveragingsynergiesbetweentheARINCDirectservicesandRockwellCollinsinternationalflightserviceportfolios.Andwhileweanticipatesomeadditionalopportunitiesinthispartofthebusiness,we'renowstartingtoseesynergiesinotherareasofthebusiness.

Forexample,we'vesecuredanumberofnewagreementstoprovideglobalexpressconnectivityserviceinthecabin,allowingustoaddressthebroadbandconnectivitymarketthatwehavenotpreviouslyserved.WealsosignedlaunchcustomersforourARINCMultiLinkflighttrackingservice,whichiscompliantwiththenewEuropeanmandatethatwillhelpairlineskeeptrackoftheirfleet.

IknowIprobablysoundlikeabrokenrecord,butIcontinuetobeextremelypleasedwiththeacquisitionofARINCfrombothafinancialperspectiveandhowwellthecultureoftheARINCteamandtheRockwellCollinsfamily.Ithinkwecontinuetoexpectmoregoodthingstocomefromthisbusiness.

Soinsummaryforthequarter,Ifeelreallygoodaboutachievingourfull-yearplan.Wehavegoodlineofsighttosecond-halfgrowth,andwesuccessfullyexecutedourrestructuringplaninthefirstquarter,whichwilldeliverbenefitgoingforward.

ThepermanentreinstatementofthefederalR&Dtaxcreditandthe2015governmentbudgetdealarebothverypositivecatalystsforRockwellCollins'future.Icontinuetobelievewithstrongexecutiononnewprograms,wehaveaveryoptimisticoutlookforthelong-termgrowthdriversofourCompany.

Sowiththatasanoverview,letmeturnitovertoPatrickandhavehimwalkthroughthefinancialdetails.

PatrickAllen (SVP&CFO):

Thanks,Kelly.Goodmorningtoeveryoneaswell.

Iwouldnowliketowalkyouthroughtoday'spresentationslidesthatsummarizeourresultsforthefirstquarterofFY16.I'llbeginonslide3,wherewehighlightourtotalCompanyfirst-quartersales,earnings




pershare,incomefromcontinuingoperationsandsharesoutstanding.

TotalCompanysalesforthequarterdecreased$57million,or5%,comparedtothefirstquarteroflastyear,primarilyduetolowerGovernmentSystemsales.Incomefromcontinuingoperationsdecreased$36millionor21%.Andearningspersharefromcontinuingoperationsdecreased$0.26or21%,comparedtothesameperiodlastyear.

Incomefromcontinuingoperationsincludesa$28millionafter-tax,or$0.21persharerestructuringcharge,primarilyrelatedtoheadcountactionsacrosstheCompanywhichwearetakingasaresultofchallengingmarketconditions,particularlyinbusinessaviation.Inaddition,thefirstquarterofbothFY15andFY16includesourretroactivebenefitfromthefederalR&Dtaxcreditof$0.16and$0.18,respectively.

Asweturntoslide4,CommercialSystemsachievedrevenueof$562millionforthequarter,down1%comparedtothesameperiodlastyear.SalesrelatedtoaircraftOEMsdecreased$18million,or5%,to$313million,primarilyduetolowerbusinessjetaircraftOEMproductionrates,unfavorableairlineselectableequipmentmix,andlowerAirbus330productionrates.AllofthatwaspartiallyoffsetbyhigherdeliveriesinsupportoftheAirbusA350andEmbraerlegacybusinessjetproductionramps.

After-marketsalesincreased$17millionor8%,primarilyduetohigherhead-updisplayretrofitsalesinChina,higherinorganicsalesfromtheacquisitionsofPacificAvionicsandInternationalCommunicationsGroupandhigherregulatorymandatesales.CommercialSystemsoperatingearningswerebasicallyflatcomparedtolastyear,withoperatingmarginsimproving20basispointsfrom22%to22.2%.OperatingearningsandmarginbenefitedfromlowerCompany-fundedresearchanddevelopmentexpense,partiallyoffsetbynegativemix,asanincreaseincustomer-fundeddevelopmentsalesoffsetlowerbusinessaviationproductsales,aswellashighercostsfromthePacificAvionicsandICGacquisitionsandhighercostsfromfurtherexpansionininternationalemergingmarkets.

Now,movingontoslide5,you'llseethatwereclassifiedGovernmentSystemssalescategoriesintoavionicsandcommunicationandnavigation.Thesesalescategorieshavebeenconsolidatedfromthepreviouscategoriestobeconsistentwithaninternalreorganizationandaredelineatedbasedontheunderlyingproducttechnologies.

GovernmentSystemsoverallrevenuedecreasedby11%to$451million,drivenbylowerrotarywinghardwaresales,thetimingofdeliveriesfortheE6program,thewind-downofinternationalelectronicwarfareprogram,lowerstimulationintrainingsales,andlowerinternationaltargetingsystemsales.GovernmentSystemsfirst-quarteroperatingearningsdecreased$20millionto$86million,resultinginanoperatingmarginof19.1%comparedto20.8%inthefirstquarteroflastyear.Thedecreasedoperatingearningsandmarginresultedfromlowersalesvolume.

Turningtoslide6,InformationManagementServicessalesincreased5%overtheprioryear,ascommercialandbusinessaviationservicessalesincreased7%,whilethenon-aviation-relatedbusinesseswereflatcomparedtolastyear.InformationManagementServicesfirst-quarteroperatingearningsincreased$3millionto$24million,resultinginanoperatingmarginof15.4%comparedto14.1%inthefirstquarteroflastyear.Theincreaseinoperatingearningsandmarginwasduetoincrementalearningsandthehighersalesvolume.

Slide7providesanupdateofourR&Dinvestment.Totalspenddecreasedfrom$231millioninthefirstquarterofFY15to$228millioninthefirstquarterof2016.Company-fundedR&Ddecreased$17millionduetolowerdevelopmentexpendituresfortheEmbraerLegacy450andAirbusA350,aswellaslowerbusinessjetproductlinedevelopmentcosts.

Customer-fundedresearchanddevelopmentexpenseincreased$5millionduetohigherdevelopment




costsforinternationalprogramsinCommercialSystems.AndpreproductionengineeringinvestmentnetincreasedduetohighercostsincurredforcertainmilitarytransportprogramsinGovernmentSystems.

Movingtoslide8,weshowthestatusofourcapitalstructureasoftheendofthefirstquartercomparedtotheendoflastyear.Duringthequarter,ourdebttoEBITDAratioincreasedto2.0from1.7atyearend.Theincreaseisprimarilyduetoanincreaseincommercialpaper,asthefirstquarterhadtypicallylightcashflows.Iexpectthelevelofdebttocomedownoverthebalanceoftheyearasalargerportionofourcashflowistraditionallygeneratedlaterintheyearandwepaydownaportionofthatshort-termdebt.

Theupdatedstatusofthesharerepurchaseprogramasoftheendofthefirstquarterisdetailedonslide9.Duringthefirstquarter,werepurchased1millionsharesatanaveragecostof$87.40.Ourrepurchaseauthorityremainingattheendofthequarterwasabout$290million.

Nowontoslide10,whereweprovideasummaryofourFY16financialguidance,whichhasbeenupdatedasaresultofthepermanentreinstatementofthefederalR&Dtaxcredit,aswellasupdatedrestructuringcharge.Totalsalesandsegmentoperatingmarginsremainunchangedfromthepreviousguidance.Theearningspersharerangehasbeenincreasedby$0.25.

ThefederalR&Dtaxcreditprovidedabouta$0.35benefittoourFY16earningspershareguidanceandispartiallyoffsetbyhigherrestructuringexpenseandhigherincentivecompensationexpense.Thecashflowfromoperationsrangehasbeenincreasedby$50million,primarilyduetothebenefitofthatfederalR&Dtaxcredit.FY16guidanceforresearchanddevelopmentinvestmentandcapitalexpendituresremainsunchanged.

OureffectivetaxratefortheFY16isnowexpectedtobeintherangeof22%to23%,downfromthepreviousguidanceofabout28%,dueagaintotheretroactiveandprospectivebenefitfromthefederalR&Dtaxcredit.Thesecondquarteroftheyearwillhaveaneffectivetaxrateofabout30%,whichincludesthebenefitofthattaxcredit.

Andthethirdandfourthquarterswillbesimilartothesecondquarter.However,weexpectsomelumpinesstohappeninthequarters,asabenefitfromcertaintaxplanningstrategiesisexpectedtoberealized.Thatcompletesmyreviewofthefinancialresultsandprojections.

Ryan,backtoyoutokickofftheQ&Asession.


Thankyou,Patrick.

Inordertogiveeveryonetheopportunitytoaskquestions,weaskthatyoulimityourquestionstoonepercaller.Ifyouhavefurtherquestions,simplyreinsertyourselfintothequeueandwewillanswerthoseadditionalquestionsastimepermits.

Operator,wearenowreadytoopentheline.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

DavidStraussfromUBSSecurities.

DavidStrauss (Analyst-UBS):




Goodmorning.


Goodmorning,David.


Morning.


Kelly,maybetouchonbusinessjet,businessjetOE,howyou'refeelingaboutthings.IthinksinceyougaveusguidancelasttimeDassaultcameoutwithsomeprettyweaknumbers.Seemslikealltheindicatorsonthebusinessjetsidecontinuetoweaken.Maybetalkaboutnotonlytheguidanceforthisyear,butyouthinktheabilityoftheOEMstoholdattheselowerproductionratesandnothavetogodownevenlowerfromhere.Thanks.


David,ifyourecall,wehadputalittlebitofdiscountinourforecastsassociatedwithanticipatedfurtherchallengestoOEMproductionrates.Whatwenormallyhavehappenisatthistimeoftheyear,alltheOEMsreallygiveusatrued-upforecastastowhattheyaregoingtodofortheyear.Andinfactwedidseethatproductionratedecline.Really,wesawdeclinesfrommostoftheOEMsandyou'veheard,asyou'vepointedout,you'veheardsomeweaknessdescribedinthemarketfromthosefolks.Infact,we'veusedupthereservethatIhadallocatedforthat.

Now,theytypicallyholdprettywellthroughthefiscalyear.Ifthere'sanotheradjustment,itusuallycomesaroundthesummerfurloughworktime,time-offperiod.Sowe'rehopefulthatwe'retruedupfortheyearandthat'swhyweputthatdiscountthere.Unfortunately,itisn'tgoingtobeopportunity;weneededthatdiscounttoreflectthis.

Asfarasthelong-termoutlook,itstillremainssoft,David.Andwecontinuetobefairlyconservativeinouroutlookforbusinessaviation.Theseratelevelsareprettylow.Ithinktheycanbesustained,butwedoneedtocontinuetowatchthatmarketgoingforward.Idon'thaveabettercrystalballforwhatproductionratesaregoingtolooklikenextyear.We'lltruethatupwhenweprovideourguidancefornextyear.

Operator :

PeterArmentfromSterneAgeeCRT.

PeterArment (Analyst-Sterne,AgeeCRT):

Yes,thankyou.Goodmorning,KellyandPatrick.Patrick,maybeyoucouldremindusintermsofthecadenceofhowthesavingskicksinfortherestoftheyear,fromaperspectiveontheEPSfront.Andtherestructuring.


Peter,Iwouldsaywerealizedverylittlesavingsfromtherestructuringinthefirstquarter.AndIwouldsaythesavingsisgoingtoprettymuchspreadoutevenlyoverthenextthreequarters.Soweshouldseeaprettybalancedsavingsprofileoverthenextthreequarters.

PeterArment (Analyst-Sterne,AgeeCRT):




Okay,thankyou.

Operator :

RichardSafranfromBuckinghamResearch.

RichardSaf ran (Analyst-BuckinghamResearchGroup):

Hi,goodmorning.


Hi,Richard.


IwantedtoaskyouaquestionontheaftermarketandaboutIntertradeanddemandyou'reseeingfromrefurbishedparts.Therearesomeindicationsofincreasingdemandforrefurbishedparts.Wanttoknowifyoucancommentonthat,whatyou'reseeingthere.Also,giventhattheinventoryofaircrafttocannibalizeforrefurbishedpartsisfinite,justwonderingifyou'reseeingimprovingdemand,howlongyoumightexpectthattolast?


OurIntertradebusinessisseeingimproveddemandorincreasingdemandforusedcomponents.Richard,that'sreallynotnew;wesawthatallthroughlastyear.We'reexpectingtobeupdouble-digitinourIntertradebusinessthisyear.AndIthinkthat'satrendthat'sheretostay.SoIthinkyoujustgottolookatwherethatusedcomponents--it'sgoingtobeafunctionofwhataircraftarebeingretiredandthepaceofretirement,andthat'swhat'sgoingtodrivethatmarket.Ithinkit'sbecomingabestpracticeintheindustry.AsImentionedinthelastcall,we'reseeingitnowbeingusedcomponentsrecyclingisbeingutilizedinAsia-Pacwherewetypicallytheyhavealwaysboughtnewsparesinthepast.

SoIthinkit'sheretostay.That'swhywe'vefactoredouraftermarkettogrowalittleslowerthanwhatyou'regoingtoseethetrafficgrow.BecauseIthinkthataftermarketisgoingtobeimpactedbytherecyclingoftheusedcomponents.Now,luckilywehaveausedcomponentbusiness.Unfortunately,it'snotquitebigenoughtooffsettheimpactthatwe'llseeinouroverallMRO.ButIthinkthat'sheretostay,Richard.


Thanksalot.

Operator :

YournextquestioncomesfromKenHerbertfromCanaccordGenuity.

KenHerbert (Analyst-CanaccordGenuity):

Hi,goodmorning.Thankyou.


Goodmorning.

KenHerbert (Analyst-CanaccordGenuity):




Kelly,IwonderedifIcouldstartoff--there'sbeenobviouslyalotofspeculationwiththeannouncementyesterdayonthe747cutfromBoeing,abouthealthoftheoriginalequipment,commercialcycle.IwonderedifIcouldgetyourthoughtsonifyouseeanyincrementalriskinthelastmonthorsorelativetosomeofyourinitialplansoneitherbuildratesonthe737,787.Anyparticularincrementalareasofriskyouwouldhighlightbeyondwhat'sbeenpubliclyannounced?OranyupdatedthoughtsontheOEoutlookonthetransportsideherethisyearandinto2017.Thankyou.


Ken,reallynothingnewthatIwouldhighlight.Idon'tthinkthe747-8ratechangeprobablysurprisesanyofus.Obviously,alleyesareonthebasic777backlogandtheabilityofBoeingtosustainthat.Andwe'restillwatchingthatjustlikeyouare.I'vegotnothingtoupdateyouonthat.

OnethingI'vesaidisthatBoeingwouldneedtogiveusanupdatedrateforecastontheexisting777hereprettysoontohaveanyimpactonourFY16.Andthefactthattheycameoutwithratechangeson747-8anddidn'tdothaton777tellsmethattheyarestillmarchingtotheirplantosustainthebasic777rates,atleastthroughthedemandforourFY16.

Sonothingnew,really,toreportonthat;stillveryhealthybacklogforus.Andasyouknow,we'vegotnewsharegainopportunitiescomingintothemarket.

Operator :

CarterCopelandfromBarclaysCapital.

CarterCopeland (Analyst-BarclaysCapital):

Hey,goodmorning,guys.


Hi,Carter.


Justaquickquestionontheaftermarket.WhendoyouexpecttoseeanymaterialimpactfromA350provisioningsales?Isthatalater-this-yearimpactordoesittakeFY17toreallyseeanymaterialuptickthere?


You'reprobablynotgoingtospikeoutseematerialimpactfromA350provisioning.We'vealreadyseeninitialprovisioningandyoureallydidn'tseethatasamajorspikelikewesawon787.It'salittlebitofafunctionofthecommoditiesthatweprovideonthetwodifferentairplanes;theyaredifferent.AswellasthefewernumberofnewairlinestakingtheA350asopposedto87whenitcameout,hadalotofdifferentairlines.

Ithink,Carter,thenextbigprovisioningspikeforusisreally737MAX.Andwe'llstarttoseethatmaybealittlebitattheendofthisyearandcertainlyintonextyear,we'llseesomegoodprovisioninginputforthat.


Awesome.Thanksforthecolor,Kelly.

Operator :




SamPearlsteinfromWellsFargo.

SamPearlstein (Analyst-WellsFargoSecurities,LLC):

Goodmorning.


Hi,Sam.


Hi.Wanttoknowifyoucantalkmoreabouttheaftermarketingeneral.Howmuchofthe8%overall,the16%businessjetaftermarket,wasorganicversusacquired?Thencanyoutalkalittlebitabouttheparts,theretro-fits,theupgrades,theprovisioning,inthedifferentbuckets,howtheyallperformed?


Yes,ifyoulookoverall,wewereup8%,aswedisclosed.Airtransportwasuplowsingle-digit.AndthatwasreallyHUDretro-fits,somecabinwirelessactivity.Mandatesaredowninairtransport.We'regoingtoseethatthroughouttheyear,thatthemandaterevenueisdownthere.

Interestingenough,mandatesoverallwereupbecausemandateswereverygoodforthequarterinbusinessaviation.Andfinally,wesawareallynicequarterofavionicsupgradeswheretheyareputtingfans,updates,tothebizjetavionics.I'mveryhopefulthatwillcontinueandactuallyprovideusalittlebitofopportunityforthefullyear.Intermsofinorganicrevenue--


It'sabout$8millionintheaftermarketandalmostallofitisinairtransport,actually.


So,Sam,ifIgaveyoualittlebitofanoutlook,Ithinkwe'regoingtoincreaseourgrowthratethroughouttheyearinairtransport.You'regoingtoseethebusinessaviationnumbersmutealittlebit.We'renotgoingtoseequiteashighagrowthrate.Butoverall,westillfeelgoodaboutthathighsingle-digitgrowthinouraftermarket.


Thanks.

Operator :

SethSeifmanfromJPMorgan.

SethSeifman (Analyst-JPMorgan):

Thanksverymuch.Goodmorning.Patrick,historically,withtheR&Dtaxcredityouguyswouldhavearateofabout30%.Butasyousaid,you'veimplementedsometax-savingstrategies.Whenwethinkaboutgoingforward,abaselinetaxrateforyouguyswiththepermanentR&Dtaxcreditandperhapssometax-savingstrategiesthatcanbepermanentaswell,whatkindoftaxratedoyouthinkaboutoveralongerterm?





Ithinkoverthelongerterm,Seth,we'relookingatrightaround30%.Maybeaitwouldbelittlehigher,butrightaround30%.


Okay,verygood.Thanksverymuch.

Operator :

RobertStallardfromRoyalBankofCanada.

RobertStallard (Analyst-RBCCapitalMarkets):

Thanksverymuch.Goodmorning.


Goodmorning.


Kelly,you'vementionedonthegovernmentsideaboutthepotentialpositiveimpactoftheFY16DoDbudget.Iwaswonderingifyoucouldcommentonwhatyouareseeinginthedefenseexportmarket,whetherthere'sanyimpactasyetfromthedeclineintheoilprice.


No,nonewhatsoever.It'ssomethingwekeepaneyeon,butinfactallthepriorityfunding,ourSaudiF-15programcontinuestobefundedasexpected.We'vegotsomefollow-onbusiness,highprioritybusinessintheMiddleEastintargeting.Allthoseprogramsseemtobewellfunded.So,no,I'mnotseeingany--theoilissuesseemtobeplayingthroughthecommercialbusinessmuchmorethanthedefensebusiness.


That'sgreat.Thankyouverymuch.

Operator :

PeteSkibitskifromDrexelHamilton.Mr.Skibitski,

PeteSkibitski(Analyst-DrexelHamilton):

Oh,sorry.Goodmorning,guys.


Hi,Pete.


Guys,there'sbeenacouplequestionsonairtransportaftermarket.Iwanttogetalittlemorecolorthere.Itlookslikeorganicallyitwasdownabout4.5%inthefirstquarter.Kelly,youtalkedaboutthenewtrendsthataregoingonthere.Onafull-yearbasis,Ithinkpreviouslyyouwereexpectingmidsingle-digitgrowth.

Isthislong-termnow,moreofverylowsingle-digits,2%,3%typeofmarketforyouguys?BecauseofthenewtrendsthereandmaybeAsiaweakness,Asiachanges?Canyouaddalittlebitmorecolor?





Yes,IthinkthebasicMROcomponentoftheaftermarketyou'reprobablyaboutrightbecauseofthatrecyclingthatItalkedabout.Butthenwehavethediscretionarysidethattendstobealittlemorelumpy.We'vegotmandate-drivenrevenue.We'vegottheseretro-fitsofheads-updisplaysandhead-downdisplaysystemson[some57/67].Thenwehavetheprovisioningthingsthatwetalkedaboutearlierthattendtospikethat.ButIthinkifyoustripthediscretionaryawayandlookatthefundamentalMRO,Ithinkyou'reprobablyaboutright.


Okay,okay.AndthenanyincrementalheadwindsatallfromAsia,givensomeofthevolatilityoverthere?


Well,wehaveseenalittlebitofincrementalheadwindsinourflightservicesbusinessinIMS,wherewe'redoinginternationaltripsupport.Ifyoulookatourgrowthrate,itwasalittlelowerthanwhatwe'vebeenexpectingandalmostallofthatsoftnessisjustinternationaltrips.Infact,ourinternationaltripsforthequarterweredownabout6%.We'regainingcustomers,buttheyareflyingfewerinternationallegsrightnow.AndIthinktheChina,RussiaandBrazilaretheareasIwouldspikeoutthatarecausingthat.Hopefully,thatstabilizesheregoingforward.


Okay,that'shelpful.Thanks,guys.

Operator :

MylesWaltonfromDeutscheBank.

MylesWalton (Analyst-DeutscheBank):

Thanks,goodmorning.


Goodmorning.


Iwashopingyoucouldtouchonthegovernmentside.Iknowyoudon'twanttogivequarterlyguidance,buthowquicklycanyourecoverin2Qbacktothatdownmidsingle-digittrendyouhadoriginallythoughtabout?Areyouatapointwhereyou'rebackontherecoveryprofile?Oris2Qtrendsgoingtolooksimilarto1Q?


Yes,soletmetalkaboutthat.Firstofall,it'sunfortunateanddisappointingthatwehadtheseissuesthatkindofpiledonasoftquarter.Theproductissue,ifithadbeenanyotherquarterthantheholidayquarter,Ithinkwewouldhavehaditresolvedandwouldn'thaveevenhadtotalktoyouaboutit.We'vealreadygottheissuesresolvedwiththecustomers;we'remakingthedeliveries.Sothatwillgoprettyquickly.

We'vebookedoneofthemajorordersthatwasaPakistanC-130thatweanticipated,sothatwillmoveforward.I'mprettyconfidentthatwe'llbeabletorecoverthatinthefiscalyear.Maybenotallinthesecondquarter,butcertainlybytheendoftheyear.Sowe'restillforecastingdownmidsingle-digitsfor




thefirsthalfandthengrowthinthesecondhalf.


Okay,andthenjustoneother.Ofthe[dime],Patrick,thatyoumentionedwasbeingabsorbedbyhigherincentivecompandextrarestructuring,howmuchisextrarestructuringofthatandwhereisitgoing?


Thinkofitasabouthalfandhalf.And,youknow,theincreaseislargelyinthevoluntaryretirementprogram,whichisspreadacrossthebusinesses.


Okay,allright.Thanks,guys.

Operator :

RobertSpingarnfromCreditSuisse.

RobertSpingarn (Analyst-CreditSuisse):

Hi,goodmorning,everybody.Hopefullyyoucanhearme.


Goodmorning.Wecan.


Goodmorning.


Kelly,wantedtogobacktoARINCandaskifyoucouldgiveusalittlemoreofawindowintowhat'sgoingoninthatbusiness.Maybeseparatetheaviationfromthenon-aviation,andtalkabouthowyou'regoingtogettothathighersingle-digitgrowthratelaterintheyear.Andalsoifyoucouldcommentontherelativeprofitabilityofthedifferentbusinessesinthere,becauseitseemslikethenon-aviationisthelower-marginbusiness.


Yes,itis.Ifyoulook--reallytheeconomicengineasImentioned,andtheincrementalmargin,comesfromthegrowthinthecoreaviationbusiness.

Thenon-aviationbusiness,wecalledthatlumpyinthepast,wherewe'vetendedtohaveproject-orientedprograms.I'lladmitit'sbeenconsistentlylumpydown.Soifyoulookattheperformanceofthatbusiness,it'sbeenprettyflat.Anditwasflatthisquarter.

Iamexpectinggrowthinthenon-aviationcomponentofthebusiness.Sowe'llseeanimprovedoverallgrowthrate.Andweputsomestrategiesinplacetoaddressthegrowthinthatbusiness.Ithinkthisisgoingtobeanimportantyeartoseewhetherthosestrategiesaregoingtoplayout.

ButweareachievingouroverallEBITDAgrowthexpectationsbecauseofthefactthatweareachievingthecoreaviationgrowththatweexpectandthatweareachieving,oralittlebitexceeding,theincrementalmarginperformancethat'scomingwiththatgrowth.Again,Ifeelprettygoodaboutit.




TheonlyheadwindthatIseethatmaybewedidn'tanticipatewasthisinternationaltripsupport.Ithinkthat'stemporaryforusandwe'llbebackwiththegrowthininternationaltrips.Butwe'rejustgoingtohavetoworkthroughtheeconomicissuesherethatwe'vegotinthoseregions.


SowouldyousaythatQ1wasbelowplan?Revenues?


Alittlebit,yes.


Yes,Q1wasmaybeapointbelowwhatIwasexpecting.


Okay,butyoustillfeelprettygoodaboutyouroriginalguide?


Yes,Ido,yes.


Okay,thankyou.


Andjusttobeclear,whereitwasbelowplanwasinthenon-aviationbusiness.


Right.


Andreallythetimingofsomedeliveriesthere.


Yes,butthequestioniscantheaviationmakeupforthat?Orcanthenon-aviationmakeupforthat?


Well,look,we'vebeenabletomakeupforitfromaprofitperspectivebydrivingthegrowthintheaviation.Wehavegottogetthisnon-aviationbusinessoffthisflatforecast,andthat'sthestrategies.Myteamknowsthatverywell.Ithinkwe'vegotsomeplanstodothat.Ifwecanjustgetsomeaveragegrowthoutofthenon-aviationandcontinuewiththatreallystronggrowthoutoftheaviationbusiness,Ifeelreallygoodaboutachievingourlong-termoutlooks.


Right,thankyou.





Thanks.

Operator :

CaivonRumohrofCowenandCompany.

CaivonRumohr (Analyst-CowenandCompany):

Yes,thankyouverymuch,guys.Soyou'veraisedyourEPSguidanceby$0.25.IthinktheR&Dtaxcreditisplus$0.30.Andyouhadmentionedonthenegativesidetherestructuringandincentivecomp.

Myunderstandingwastherestructuringsavingsinthelastninemonthswouldatleastequalthefirstquarter'scharge.AndthenIdon'tunderstandwhytheincentivecompisupwhenyoumissedyourplaninthefirstquarter.Soifyoucouldexplainthoseissues.Thanks.


Sure,Cai.Iwouldsayboththerestructuringchargeandthesavingsareupfromouroriginalestimate.Iwouldsaythechargeisupalittlebitmorebecausewe'vewehavesomeneedtobackfillsomeofthepeoplewhotookthevoluntaryearlyretirementprogram.Soit'sreallyadisparitybetweenthesizeofthechargeandthesizeofthesavingsthat'sgeneratingwhat'sroughlyanickelofheadwindtotheR&Dtaxcredit.

Andtheimpactonincentivecompensation,ifyourememberlasttimewehadabigcatch-upinR&D,wehadEPSasagoalinincentivecompensation.Wetookthatout,butwestillhaveagoalassociatedwithcashflow.TheR&Dtaxcreditgeneratedincrementalcashflow,whichisgeneratinghigherincentivecompensationbecausewe'veraisedourcashflowgoalby$50million.Sothat'stheothercomponentofthe,I'llsay,roughlydimethat'soffsettingthe$0.35benefitinR&Dtaxcredit.

CaivonRumohr (Analyst-CowenandCompany):

Thankyouverymuch.

Operator :

GeorgeShapiroofShapiroResearch.

GeorgeShapiro (Analyst-ShapiroResearch):

Yes.IfIlookatthecommercialmarginex-R&D,sinceitclearlybenefited,itwasdropped170basispointsfrom30.1%to28.4%.Now,youmentionedyouhadalittleimpactwithhigherlow-margincustomer-funded,highercostsfromPacificAvionics.

Myquestionis,willR&Dstayatthislowerlevelthroughouttheyear?Orarethereother--someofthoseotherissuesIjustmentioned,one-timeitems?Orwhat'sgoingontoeffectivelycausea170-basispointdropintheunderlyingmargin?Thanks.


George,Ithinkyourmathisspot-on.AndIthinkyou'veidentifiedthecausalsofwhythemarginhasbeenimpactedinthefirstquarter.

What'sgoingtohappengoingforwardiswe'regoingtosee,I'llsay,asteadyshiftbetweenCompany-fundedR&Dgoingupandourdeferredengineeringinvestmentcomingdownoverthecourseofthequarters.That'sgoingtobeoffsetbyrestructuringsavings,whichasImentionedearlierinthecall,wedidn'tgetmuchofanyinthefirstquarter.Sowe'llbebenefitingfromtherestructuringsavings.




Plus,weshouldbegettinghighervolumeandwithhighervolumegettingtheincrementalflowonthat.SoI'mconfidentwe'llcontinuetogenerategoodmarginsonthecommercialsideofthebusiness.ButthedynamicswillbeasIdescribed.


Okay,thankyou.

Operator :

NoahPoponakfromGoldmanSachs.

NoahPoponak(Analyst-GoldmanSachs):

Hi.Goodmorning,everyone.


Hi,Noah.


WantedtogobacktotheGovernmentSystemsgrowthrateinthequarter.Withthesupplierqualityissue,anyincrementaldetailyoucanprovideonexactlywhatthatwasorwhereitwas?

Andthenontheordertiming,whichsoundslikeaseparateissue,somebodyelseindefensehasbroughtuptheholidays.I'mwonderingiftherewasasystem-wideabnormalend-of-yearissue.Andcanyouquantifywhatthegrowthratewouldhavebeeninthebusinesswithoutthesetransitoryitems?


Yes,itwasabout5pointsofimpacttoourGovernmentSystemsgrowthrate.Soweweredown11;wewouldhavebeendown6withoutthem.

ThesupplierissuewasanonconformingmaterialissueonaconnectorthatweusedinourARC-210radios.Infact,wedidn'thavetorework,wejustneededtogothroughthequalitypaperworkandgetawaiverinplace.Unfortunately,thatwasattheendoftheyearandwiththeholidays,wecouldn'tgetthatwaiverapproved.Sowe'vegotthatwaivernowapproved;theproductsareshipping.Soitreallywasjustablip;youshouldn'tthinkofthatasanykindofsystemicissue.

Intermsoftheordertiming,theonethatIhighlighted,thePakistanC-130,wehadexpectedquiteearlyinthefiscalquarter.Weactuallygotthathereearlythiscalendaryear,butitdelayed.Andthat'sanFMSorder.Idon'tthinkthatwasholiday-related,Noah.Ithinkthatwasjustthenormalchallengewehaveoftryingtopredicthowfastthingsgothroughthatcycle.Idon'thaveanythingelsetohighlightinGovernmentSystemsthatwasabnormalaroundtheholiday.


Okay.Andyourshort-cycledefensecomment,wasthatachange?Hadthatstartedtofirmandthenhasmaybeturnedalittlebit?Oristherenochangeinhowyou'reseeingthatprogressing?


No,no.Nochange.Short-cyclethingslikeradios,munitions,arethetypesofthingswewouldexpecttosee.NREprogramswouldbeanotherexample,thethingsthatwe'llseeoutofthebenefitofthisbudget




update.Andsothere'snochangeinoutlookthere.


Okay,thanksverymuch.

Operator :

MichaelCiarmolifromKeyBancCapitalMarkets.

MichaelCiarmoli(Analyst-KeyBancCapitalMarkets):

Hey,goodmorning,guys.Thanksfortakingmyquestions.Kelly,justtostayonthegovernmentsystem,specificallyIthinkyoucalledout15%ofthebackhalfthatyouneedtogoout,getandwin.Canyougiveussomecolor?IstherealotofFMSsalesinthere?AndalsoontheFMStopic,canyoutouchonanyrisksrelatedtotheKC-390program,giventhecurrentstateoftheeconomyinBrazil?


Yes,letmewalkthrougheachofthosecategoriesthatIwentthrough.Forthoseofyouwhoareprogram-specificingovernment,you'llunderstandwhatprogramsaredrivingthat.Italkedabout60%beingfirminfollow-on.Ifyoulookatthefirmcontracts,KC-390,KC-46,somerotarywingatAgustaWestlandandSikorsky,SaudiF-15,areallfirmprogramsthathavefirsthalf-secondhalfgrowth.

I'mconfidentthattheKC-390firsthalf-secondhalfgrowthwillbeachievedinspiteoftheeconomicsituation.We'refundedbyEmbraer.Thatdoesn'tmeantheyarenecessarilyfundedbytheircustomer,buttheyaregoingforwardwiththat.Idothinkwe'llprobablyseesomefuturedelaysontheKC-390program,butatthispoint,nothinginthisfiscalyear.

Theninthat,Ialsotalkedaboutfollow-oninthat60%.Theseareourannualbuys.ThingsliketheARC-210,MIDSdatalinks,ourKC-135Block45program,wherethecustomerbuystheannualworkonayearlybasis.Theyareallfunded;theyareintheplanandIdon'tseereallyanyriskthere.The15%thatItalkedaboutisreally--there'snoreallargeprogramdrivers.Someofthemareinternational.Thesearethingswe'veeitherbidonorwe'rewaitingadecision.Wealsohavequiteabitofshort-cyclestuffwherewegetanorderandsellitoutoffinishedgoods.Andsowetrackthat--it'salotoflittleorders.

Wetrackthatrelativetohowdowelookfirmthisyearversushistoricalandwelookprettygood.Andwiththeimprovingbudgetenvironment,thatmaybeactuallyopportunityforus.ButIdon'tseeanythingthat'soutofthenormal,nordoIseeanymajoroneprogramdriverinthat15%.

MichaelCiarmoli(Analyst-KeyBancCapitalMarkets):

Gotit,veryhelpful.Thanks,guys.


Okay.

Operator :

JasonGurskyfromCitiInvestmentResearch.

JasonGursky(Analyst-Citigroup):

Goodmorning.Thanks.IjustwantedtostickwithGovernmentSystems,onelastquestionhere.Youmentionedinyourpreparedremarksthatyouareexpectingsomelevelofannualrenewalsthatcome




through.Butoneofthethingswe'veheardfromothersisthattheseannualrenewalsarebeginningtogetdescopedinsize.Sothegovernmentbuys100oneyearandbuysonly96or95thefollowingyear.Canyougiveusasenseofwhatyou'reseeingonyourannualrenewalsandwhetherthere'sbeenanydescopeoccurringforyouguys?


Iwouldn'tsayanacross-the-boarddescope.Ithinkitdependsonwhat.Wedoseesomedescope,butwealsoseesomeincreaseinscope.OurJDAMordersarehigherthanwhatweexpected.WealwayslookatthequantitiesontheKC-135Block45,butthat'smoredrivenbythepaceatwhichthegovernmentcantakethekitsandgettheaircraftmodified.

We'realwaysdealingwiththat,butnothingsystemicornothingthatIwouldexpectwouldbeacross-the-boardandcauseusanychallenges.Radioquantities,MIDSquantitiesfortacticaldatalinks,alllookgoodgoingforward.SonothingthatIwouldbeabletosayweseethattrend.


Okay.Thenaclarificationquestion,ifIcan.OntheIMScommentaroundinternationalflightoperationsbeingunderalittlebitofpressure,canyouletusknowwhetherthatwasforcommercialflightsorbizjetflights?Orwhatthemixofthatweaknessis?


Oh,I'msorry.That'sallbusinessaviation.Thisiswherewedotrips,internationaltripsupport.Sowhenabusinessaircraftmakesaninternationaltrip,weprovideservicetothemforthattrip.Andthat'swherewe'reseeingtheweakness.Hasnothingtodowithairtransport.


Perfect.Thankyou.

Operator :

HowardRubelfromJefferies&Company.

HowardRubel(Analyst-JefferiesLLC):

Thankyouverymuch.Iwanttotalkaboutimplementationforamoment.You'vegotalotofthingsthataregoingonthisyear,Kelly.Maybeyoucouldaddressacouplethings.Howareyoudoingintermsofimplementingthisrestructuringprogram?Youdidmakeachangetothegovernmentbusinessunit.

The737MAXisatthecriticalpointbeforefirstflightandyouhavetobalancewhatI'llcallcertrequirementsandproductionrate.Andthenyou'vegotCSeries.Andthentofinishonthatisthechangeintheglobalandwhetherinfactyoufeellikeyouunderstandthedepthandthemagnitudeofthatchallenge.


Well,okay,alotinthatquestion.Firstofall,Ithinktherestructuringhasgoneverywell.It'smainlyaheadcountreductionforusandtheheadsallwentoutinthefirstquarter.SoI'mverypleasedwithwhereweare.Wedohavesomeconsolidationandrestructuringofourbusinesstorunmoreefficientlywithfewerheads.That'swhatdrove,forexample,thechangethatwemadeinourGovernmentSystemsportfolio.

Ourdevelopmentprogramsaregoingverywell.We'reingreatshapeonMAX.I'mveryexcitedaboutthe




supportandgettingthataircraftintofirstflight.Everythinglooksreallygood.Sodevelopmentprogramsaretrackingquitewell.ImentionedtheCSeriescertification.Nowourteam'sfocusedwithsupportingBombardiertogettoentryintoserviceheremiddleoftheyear.

Asfarasbusinessaviationandtheglobals,wesawglobalimpact,asImentioned,thisquarter.Thatimpactactuallyincreasesalittlebitthroughouttheyear.ThatwasanareathatwesawsomeadditionaltruingupfromBombardierhere,aswewentintothefiscalyear.Soyes,Ithinkthatwe'regoingtobechallengedwiththatproductionrate.ButIthinkwe'vegotitwellsizednowfortheyear.


Thankyouverymuch.

Operator :

(OperatorInstructions)

DavidStraussfromUBSSecurities.


Thanksagain.Kelly,youhadmentionedtheupsidefromtheFY16budget.WantedtoseeifyouwouldcaretospeculatewhatthatcouldmeanforGovernmentSystemsgrowthlookingout2017,2018,2019.Ithinkyou'vepreviouslysaidgettingbackto2%,3%growthrate.Couldyoutalkaboutthekindofupsidewecouldseefromthe2016budgetoutinthoseyears?Thanks.


Theteam'sstillgoingthroughtheactualprogrampedsandhowthatallisgoingtoflow.ButIwouldhopethatwe'llseeapointortwoofhighergrowththanwehadpreviouslyanticipated,becausethat'swhatwe'reseeingoutofthisbudgetenvironment.Again,Ithinkwe'reprettywellpositionedtoatleastgetourfairshare.Long-term,Ithinkit'scertainlyfirmsupourabilitytogetthisbusinessbacktolowtomidsingle-digitgrowth.


Thankyou.

Operator :

SamPearlsteinfromWellsFargo.


Hi.Patrick,canyoutalkalittlebitaboutthepreproductionengineering?Witha$40millionincreaseinthefirstquarter,youtalkedabout$100millionfortheyear.Areyoustillseeingthatkindofanincrease?Doesthatmeanitincreasesmoreearlierintheyearandthenitstartstoactuallyreverse?Orisitjust--


Iwouldsayyes.Whatwe'regoingtoseeisoverthecourseoftheyear,theamountthatgoesintothedeferralisgoingtoreduceovertime.AndactuallyIthinkImentioneditwithGeorge'squestion.You'regoingtoseeCompany-fundedtickupalittlebit,Company-fundedR&Dtickupoverthecourseofthequarter.You'regoingtoseealittlebitofamixshiftoverthecourseoftheyear.Andwe'reonplanwithrespecttodeferred.SoIstillfeelverycomfortablewiththat$100millionnetincrease.





Thanks.

Operator :

SethSeifmanfromJPMorgan.


Thanksverymuchandthanksfortakingthefollow-up.IfwecouldgobacktothecommercialaftermarketandyoucouldtalkalittlebitmoreaboutIntertrade.You'vetalkedforawhileaboutthestructuralfactorsdrivinggrowththere.Butfromacyclicalstandpointwithlowoilprices,alotofthedatathatweallhaveseenshowsretirementsweredownlastyear.Inanenvironmentwheremaybenotasmanyaircraftarebeingretiredandmaybeolderaircraftareflyingalittlebitmore,howdoesthatcyclicaldynamicaffectIntertradeandplayoutagainstthestructuraldynamicofmoreairlineslookingtoharvestusedparts?


Well,Idon'tthinkIcanpointtoexactlyhowmuchthatdynamicwouldchangeourIntertradebusiness.Thefocusofthatbusinessisallaroundmakingsureyouhavetherightdemandfortherightassetandyougobuytherightassetthatyoucanturn.Andsoitreallygetsdowntoaprogram-by-programaircraft-type-by-aircraft-typespecificdynamicthatthatteamworks.

Intheend,iftheyslowtheretirementrate,thatwillmeanthatthere'sprobablyfewersparesoutthere.Butitalsomeansthere'sprobablylargerdemandforthoseusedspares.Sothetrickwillbeourabilitytogettothoseusedpartsinthemarkettocontinuetogrow.Ifeelprettyconfidentthatwithinthebusinessthatwe'reforecasting,weshouldbeabletogrowthatagaindouble-digitherefortheyear.


Great.Thanksverymuch.

Operator :

GeorgeShapirofromShapiroResearch.


Justwantedtopursuealittlebitmore.Thebusinessjetaftermarket'sup17%.Youweresayingthattheinorganicwasallairtransport.Sowhatdoyoulookforbusinessjetaftermarketgoingforward?Lastyear,Iguessit'saprettyeasycomp,butstill,that'saprettyhealthyincrease.


Well,remember,we'veguidedthatbizjetaftermarketwouldbefairlymuted,kindoflikewhatwesawlastyear.Obviously,17%isagangbusterstartto--Ithinkwesaw2%lastyearingrowth.AsImentioned,Idon'tthinkwe'regoingtocontinueatthat17%ratebecausesomeofthemandateactivitieswillcomedowninbusinessaviation.ButI'mhopefulthatifwecontinuetosee,likewe'veseenthisquarterwithgoodsalesofavionicsmods,thatwe'llbeabletocreatesomeopportunitytoourforecastthere.


AndKelly,Idon'tknowwhetheryouwanttoforecastornot,butbasedoneverythingyousaid,wouldsecond-quarterrevenuesagainbelowerthanlastyear'ssecondquarter?Likethefirstquarterwaslowerthanlastyear'sfirstquarter?





Ithinkitwillbemuchclosertoflat,butmaybedownalittlebit.


Okay.Thanksverymuchagain.

Operator :

RobertSpingarnfromCreditSuisse.


Hi,justafollow-uponthecommentontheARINCandthebizjetsoftnessthere,ifthat'stherightcharacterization.Wasthatfromtheservicedemandorwasitfromthevolumeofflights?


Itwasfromthevolumeofflights,whichdrivesthedemandfortheservices.Ifyouthinkaboutthat,wegetpaidtoprovidetripsofportforaflight,iftheydon'ttakethatflight.Bytheway,it'sbyleg.Eveniftheytakeaflight,butit'sfewerlegs,thatmeanslessrevenueforus.Themoretrips,themorelegstothetrip,thehighertherevenue.


Sothisisnon-discretionaryservice.Thisisn'tsomethingthattheyselectbyflight.Thisistiedtothenumberoftrips,asyoujustsaid.


Yes,generallyanybodywhoisflyingalargebizjetlikethathascontractedwiththeflightsupportservicesorganization,ortheymaydosomeofitthemselves.Butit'sthingstheyhavetodotosupportthatflight.


SotyingthattoGeorge'squestiononthestrongaftermarketbizjet,areweactuallyseeingaflightactivitydeclineherethat'sworrisome?


Well,that'saverysmallsegment.Ithinkifyoulookatbizjetoverallflightactivity,itwasuplowsingle-digitgrowth.AndifyoulookatourcommercialMRO,ittracksverycloselytothatoverallflightactivity.Soyes,Ithinkwe're--wewatchthatverycarefully.Wesawlowsingle-digitinourbizjetMROherethisquarter.Andthattracksprettyclosetothatactivity.Iftheactivitypicksup,ourrevenueswillpickup.Iftheactivityslowsdown,we'llseeheadwinds.


Okay.Andthenswitchinggearsslightly,commercialOE.Last,Idon'tknow,yearorso,you'vehadthis--ontheairtransportside--about$180millionto,callit,$210millionquarterlysales.Butofcourseyoutalkedearlieraboutallofthesenewprogramsthatyou'vewon,Max,777X,A350,soon.Whenshouldwestarttoseethatquarterlynumberreallystarttomovenorth?Inotherwords,whendoes--





Inthesecondhalfofthisyear,we'llseetheproductionrateincreasesatAirbusforthenarrowbodies.Andwe'reseeingA350consistentlyrampup.WewillstarttoseesomerevenuesverylateinthefiscalyearonMAX,butitreallyticksupinFY17.


Okay.Andyou'llgetthe78benefitatsomepointhere.


Yes,yes.


Areyoualreadyrunningthatat12?


No,Ithinkthatstartstohitussecondhalf.Secondhalfoftheyeariswherewe'llseethebenefitfrom87,alongwiththe320s.


SoitsoundslikethatJuneorSeptemberquarterwecouldseeameaningfulmoveinthatcommercialOEairtransportfigure.


YoushouldseemuchbettergrowthinthesecondhalfoftheyearinairtransportOE.


Okay.Thankyou.


Absolutely.

Operator :

HowardRubelfromJefferies&Company.


Thankyouverymuch.ChinaAviationhasbeenaveryimportantdriverforyourbusinessforquiteawhile.There'stwopartstoit.OneisyouarticulatedtheHUDpickup,butalsofromtimetotime,thosecarriersalsoadjusttheirsparesandtheirdemandandotherthings.Andthenlast,growthhasbeenprettygood.Andalsorelated,you'vehadsomeR&Dprogramsinthere.SoKelly,couldyouaddressthemarketandprovidesomecolor,please?


Well,themarketdemandforourservices,forourproductsandfortheaircraftcontinuestobeverystrong.Whereweareseeingweaknessistheoverallthingsthatarerelatedtotheeconomicslowdown,thingslikeflightactivityasanexample.ButI'mnotseeinganysoftnessintheirdemandforaircraft,numberof




flightstheyaredoingintheairtransportmarket.Theaftermarketremainsveryrobust.TheyarecontinuingtofundHUDretro-fitstomeettheirmandatedservice.Theoveralleconomyisslowingdown,butIthinkit'sstillaveryrobustmarketforairtransport.


Soyoucanstillseevaryinganywherefrommidtohightoevenlowdouble-digitgrowth?Isthatfair?


I'msorry,inwhatsegment?


Ifyouweretocharacterizeit,itstillprobablyrangessomewherebetweenmidorhighsingle-digittomaybeevenlowdoubledigit.Isthat--


Oh,yes.ForourChinabusiness,ifIputall-in,yes.Idon'thavethenumberinfrontofme,Howard,butIwouldsaythat'sadouble-digitgrowthbusinessandcontinuestogrowatthatrate.


No,that'skindofthereadIhaveandIjust--youseeitandtouchitmorethanIdo.Sothankyou.

Operator :

Thisconcludesthequestion-and-answersession.IwouldnowliketoturnthecallovertoRyanMillerforanyclosingremarks.


Thankyou,Sean.Weplantofileour10-Qlatertoday,sopleasereviewthatdocumentforadditionaldisclosures.Thankyouforjoiningusandparticipatingontoday'sconferencecall.

Operator :

Thisconcludestoday'sconferencecall.

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