Goodrich Corporation Q2 2008 Earnings Conference Call Transcript

Goodrich Corporation (GR)

Q2 2008 Earnings Call Transcript

July 24, 2008 10:00 am ET

Executives

Paul Gifford – VP, IR

Marshall Larsen – Chairman, President and CEO

Scott Kuechle – EVP and CFO

Analysts

Gary Liebowitz – Wachovia Securities

Robert Spingarn – Credit Suisse

Carter Copeland – Lehman Brothers

David Strauss – UBS

Ron Epstein – Merrill Lynch

Joe Nadol – J.P. Morgan

J.B. Groh – D. A. Davidson

George Shapiro – Citi

Cai von Rumohr – Cowen And Company

Colin Campbell – Societe Generale

Alok Chopra – Oppenheimer

Ted Wheeler – Buckingham Research

Howard Rubel – Jefferies

Peter Arment – American Technology

Presentation

Operator

Good day everyone and welcome to the Goodrich Second Quarter 2008 Results Conference Call. Today’s call is being recorded. The press has been invited to participate in today’s conference in a listen-only mode. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Paul Gifford. Mr. Gifford, please go ahead sir.

Paul Gifford

Thank you, Richard [ph], and thank you for joining us today as we discuss our second quarter 2008 results. Joining us today are Marshall Larsen, our Chairman, President and CEO, and Scott Kuechle, our CFO.

We will start with brief prepared remarks followed by Q&A. A presentation is available at our Web site www.goodrich.com which together with our press release provides the basis for most of our remarks. Before we start, let me remind you that today’s remarks include forward-looking statements that involve risks and uncertainties and actual results could differ materially from those projected in the forward-looking statements. The risks and uncertainties are detailed from time to time in our reports filed with Securities and Exchange Commission including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. They are also detailed in today’s earnings press release. I urge you to read them carefully. This conference call is being webcast and replays will be available at our Internet site beginning this afternoon. Now I’ll turn the call over to Marshall, who will provide you with an overview of the second quarter 2008 results in our increased full year outlook for 2008 net income per diluted share.

Marshall Larsen

Thanks Paul. I’m sure you all had the opportunity to review today’s earnings release and their related presentation. But today, I’ll describe the key factors that led to our strong performance during the second quarter 2008 and the increased EPS outlook for the remainder of the year. Our second quarter was another excellent quarter with strong organic sales growth of 17% including double-digit growth in each of our major market channels. Our second quarter 2008 net income per diluted share was $1.46 compared to the second quarter of last year of $0.98 per diluted share, an increase of 49%.

During the second quarter, we had an effective tax rate of 28% slightly lower than the effective tax rate of 29% we reported during the second quarter of 2007. The effective tax rate for the second quarter 2008 included the benefits from the settlement of a foreign tax audit and additional state research and development tax credits. Compared to our previous expectations this provides a benefit of about $0.13 per diluted share. This is a very clean quarter. Our income from changes in estimates for long-term contracts was only $4 million, far lower than the $16 million reported in last year’s second quarter and the $41 million reported in the first quarter of 2008.

In addition to excellent sales growth for our commercial aftermarket products and services, we enjoyed continued double-digit growth in our other major market channels. This led – these sales led to another great quarter of earnings growth and solid cash flow. Based on our current forecast, we now expect that the full year earnings per diluted would in the $4.80 to $4.95 range, significant increase from our prior outlook of $4.30 to $4.45. Our financial and operational performance has been excellent. Our growth in sales by market channel in the second quarter 2008 compared to the second quarter 2007 has been impressive.

Large commercial airplane original equipment sales grew about 28%; regional business in general aviation, airplane original equipment sales increased by about 26%; large commercial regional business in general aviation aftermarket sales increased by about 12%, and defense and space sales increased by about 11%.

As we had said frequently in the past, we enjoy the benefit of having excellent positions on the newer more fuel efficient airplanes currently in service. These positions have enabled us to continue to have strong commercial aftermarket sales growth. Even though many airlines have announced that they will remove some of their older planes from their fleets, we do not expect these removals to have a significant impact on Goodrich results in 2008. These older airplanes primarily in the MD-80s and 737 Classic’s represent approximately 31% of the world’s fleet of large commercial aircraft, but only 8% of our large commercial aftermarket sales or approximately 2% of total Goodrich sales.

During the second quarter and early July, we had several accomplishments. Goodrich was selected by Pratt & Whitney to be the exclusive provider of the complete nacelle systems for its new Geared Turbofan engine for both the Mitsubishi Regional Jet and the Bombardier CSeries aircraft families. The award is expected to generate more than $5 billion in original equipment and aftermarket revenue for Goodrich during the 25-year period following entry into service.

On July 1, Standard & Poor's Rating Services raised its corporate credit rating on Goodrich to 'BBB+' from 'BBB', reflecting improved credit protection measures resulting from solid demand in key markets, increasing profitability, and some debt reduction.

Goodrich received production contracts from Lockheed Martin and General Electric Aircraft Engines to supply pylons and nacelle systems for the U.S. Air Force C-5 Galaxy strategic airlifter Reliability Enhancement and Re-engining Program. Goodrich content is expected to generate $600 million in revenue for the 49 aircraft planned to be upgraded in the program, excluding any aftermarket revenue, through the year 2015.

As we look at the full year 2008, we have significantly increased our outlook for net income per diluted share. Our strong EPS growth in the second quarter, coupled with our sales expectations and continuing operational improvements have resulted in a revised outlook for net income per diluted share of $4.80 to $4.95 with a 10% over our prior outlook of $4.30 to $4.45. Additionally, we now expect sales to be about $7.3 billion at the top of our prior range.

For our major market channels, we now expect the following growth rates in 2008. Large commercial airplane original equipment sales are expected to increase by about 20 %, and regional, business and general aviation airplane original equipment sales are expected to increase by more than 20%. Commercial aftermarket sales are expected to increase in the range of about 8% to 11%, and defense and space sales are expected to increase by about 13%, compared to our prior outlook of 9% to 11%.

Our 2008 outlook assumes, among other factors, a full-year effective tax rate of approximately 32%, including the benefit of extension of the U.S. research tax credit. This effective tax rate is slightly higher than 31% rate we experienced in 2007. Thus, during the second half of 2008, we expect an effective tax rate of about 36% before research and tax credit benefit, and an effective tax rate of about 34% including the benefit.

For 2008, we continue to expect net cash provided by operating activities, minus capital expenditures to exceed 75% of net income. Our expectations for capital expenditures for 2008 remain in a range of $275million to $325 million.

Our second quarter results and our increased outlook for 2008 demonstrate our confidence and our ability to grow the top line of rates faster than the overall market, and drive significant increases in income per diluted share. Over the last several years, we’ve grown our market share and key businesses in product areas and continued to invest in our businesses. We expect these actions to drive above market growth rates and sales for the foreseeable future. We have excellent positions on the newer more fuel efficient airplanes. We expect that 2009 airline capacity is measured by airplanes in the active fleet will grow. In that environment, we would expect that we would have a solid aftermarket growth at levels above capacity growth for 2009. We continue to believe that our strong aftermarket presence should continue to drive earnings growth and our cash flow improvement trends should continue.

Now, we would be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) And for our first question, we go to Gary Liebowitz with Wachovia Securities

Gary Liebowitz – Wachovia Securities

Good morning, gentlemen.

Marshall Larsen

Good morning, Gary.

Gary Liebowitz – Wachovia Securities

Actually I noticed that in this quarter’s presentation, you admitted your large commercial aircraft delivery forecast, the last time that was updated you suggested that could be over 12,000 deliveries in 2010 and 2011. Is that’s what your thinking or is that being reevaluated?

Marshall Larsen

No. We haven’t changed our outlook.

Gary Liebowitz – Wachovia Securities

Okay. And also can you just remind us what are some of the remaining opportunities on the A350 that could be decided this year?

Marshall Larsen

Sure. We have won the nacelle on both engines for that, but we will be looking at wheels and brakes, sensors, possibly evacuation systems, seating, made a number of lighting, a number of things that sequentially will end up being bid. But timing isn’t exactly concrete.

Gary Liebowitz – Wachovia Securities

I understand. Thank you.

Operator

And for our next question we go to Robert Spingarn with Credit Suisse.

Robert Spingarn – Credit Suisse

Good morning.

Marshall Larsen

Good morning.

Robert Spingarn – Credit Suisse

There’s some already out there with this guys, but I have to say again this is an outstanding quarter.

Marshall Larsen

Thank you.

Robert Spingarn – Credit Suisse

On that note, could you talk a little bit – you touched on regional and business jet, Marshall. I think there was some commentary from your piers a week or so ago that there’s somewhat of a decline in utilization of biz jet, are you seeing any evidence of this?

Marshall Larsen

I haven’t seen any – we haven’t seen anything in the business jets. I really – on the regional either. I mean, there is some concern out there that 50 passenger business jets are less efficient and they end up being utilized less. In future, that could be a possibility with more turbo props coming to – as for their fuel efficiency, but so far we haven’t seen it. The other thing as you look at those 50-seaters, which are relatively new airplanes, kind of expect the number of those will end up else where in the world. Not just part, as those things are effected by fuel prices.

Robert Spingarn – Credit Suisse

Okay. Outstanding growth really on the commercial side, and you pointed that out a moment ago that Airbus and Boeing numbers. Can you talk a little bit about the mix there and what’s going on because on an absolute basis, their unit numbers aren’t up nearly what your growth is? And perhaps you can explain more about how your contents increasing, maybe the shift to wide bodies etcetera?

Marshall Larsen

The mix part of that question, but Scott will take it.

Scott Kuechle

Yes. We had really outstanding growth in the Airbus side in particular in Q2 of ’08 versus the prior year, it was up close to 40% over prior periods. Boeing was up just a little bit less than 10%. So, it’s little bit unusual mix. It’s really just timing of shipments that we make into Airbus that was a little unusual in the quarter. Those tend to even out and will even out in Q3 and Q4. But we had a lot of shipments on A320s, some shipments on A380. And the mix of the product going into the A320s favored us because on certain engine types, we have more contents. So, that’s pretty much drove the higher-than-expected growth on the Airbus side of the equation.

Robert Spingarn – Credit Suisse

Okay. And then Scott, all I’ve got just on cash flow, you are still looking at it about 75% conversion?

Scott Kuechle

That’s correct.

Robert Spingarn – Credit Suisse

Can you just walk us through with the higher guidance and the higher net income, the flat absolute guidance on cash flow. If you could talk a little bit about what the moving pieces are there?

Scott Kuechle

It’s a higher absolute dollar delivery of cash flow. But obviously with the earnings going up, the conversion has stayed about the same.

Robert Spingarn – Credit Suisse

Okay. So, the 75% is consistent.

Scott Kuechle

Right.

Robert Spingarn – Credit Suisse

And going further out, when do you – how do you think about that conversion rate as we go into next year and beyond?

Scott Kuechle

We’ve got – we continue to have a lot of inventory right now to support the entry into service of the 787 and a production ramp up on A380. We’ve got more than $250 million of production inventory for those two aircraft types. So, until they start producing and we start to get sales from that, we’re going to struggle trying to get cash flow conversion up to 100%. So, like we said before, when that OE cycle starts to hit a peak and which we still anticipate to be in the 2010, 2011 timeframe, that’s when we are going to see cash flow conversion at or maybe above 100%. So, we’ll trend up over the next year toward that 100% number.

Marshall Larsen

We would be further along in that even now, but with the last delay and particularly on three, four month delay on A380, we got inventory sitting there and that’s not going to move as quickly as we originally thought.

Robert Spingarn – Credit Suisse

I see. Thanks very much.

Operator

(Operator instructions) We go next to Carter Copeland with Lehman Brothers

Carter Copeland – Lehman Brothers

Good morning, guys. Really, really a nice quarter, Marshall.

Marshall Larsen

Thank you.

Carter Copeland – Lehman Brothers

I wondered if we could talk about a bit about the aftermarket. Obviously we’ve addressed the issue of having access to a fleet that’s not coming out of the – or airplanes, they are not coming not of the fleet. But it seems to me that theirs is a bit of a non-discretionary aspect to your aftermarket portfolio that seems to make it grow a little bit faster than the rest of some of your piers. Have you guys looked at what portion of that portfolio is discretionary or not, obviously wheels and brakes would be something that is not, but any color you can provide in thinking you’ve done about that would be helpful?

Marshall Larsen

No. If you look at, obviously the smaller portions of our sales in some of the evacuation slide don’t turn as often because they have a 3-year cycle in seats. But when you think about lighting, you think about wheels and brakes, you think about thrust reversers on the nacelle and other moving parts on the nacelle, you think about landing gear. Almost everything we make, you need to fly that airplane or you have to have it in a state of readiness before you leave the ground. So, we do have as you say a fair amount of sales that are proprietary non-discretionary that you have to have an airplane. The wheels and brakes are probably the greatest example and of course every time there’s an airline bankruptcy, they take $1 million in receivable write off but before you – when you go into Chapter 11, before they can run that airline, they got to pay cash to have those wheels and brakes

Carter Copeland – Lehman Brothers

Yes. That’s helpful. A couple of quick ones for Scott. The FX headwind if you could provide us with the update for how that not’s changed three months later, fee contract adjustment in itself and interior is that $8 million. Any color on what that related to would be helpful?

Scott Kuechle

Sure. Relative to foreign exchange really no change from what we talked about a quarter ago. Through 2008, we are still looking at an increase fully year to full year of about $27 million. We are a little better than 95% hedge for the year. So, again the foreign exchange volatility isn’t going to affect us this year. We are looking at probably $29 million year over year going into 2009, which is exactly where we thought we would be a year ago or even three months ago, so, really no changes. We are about 75% hedged in ’09, and a little over 50% hedged in 2010. Relative to your other question on cume corrects, we had favorable cume correct adjustments in Q2. So, again the trend continues to be favorable from an operational standpoint. They were smaller that what we saw a year ago and smaller than in the first quarter. And some of the dynamics there were raw material cost continued to trend up a little bit, but the other trends on volume absorption, good cost control continued to move to lower cost country sourcing in both manufacturing and supply chain continued to benefit us in those areas. So, again the trends continue to be favorable on balance.

Carter Copeland – Lehman Brothers

So they are more macro of cost related things than any specific adjustment to a specific program?

Scott Kuechle

Yes, that’s correct.

Carter Copeland – Lehman Brothers

Great. Thanks guys.

Operator

We go next to David Strauss with UBS.

David Strauss – UBS

Hi, good morning.

Marshall Larsen

Good morning.

David Strauss – UBS

Just thinking about the aftermarket in 2009, I know you’ve given some color. It looks like if you look at 2008, you aftermarket business is going to grow roughly double the rate of fly hours. If hypothetically 2009 global flight hours are flat to slightly down, what kind of growth do you think you could see here aftermarket business in that kind of environment?

Marshall Larsen

I think reasonably safe to say that we can grow faster than the market. Based on the platforms that we are on, supply [ph] the A320 and the 737 next generation because those are the most fuel efficient airplanes out there. I think the question for next year is not whether airplanes like that don’t fly, it’s the frequency. So, I’ve seen a couple of our peers come out and say 1% to 2% growth next year, I would expect us to be able to grow beyond that. I’m not going to give you a specific number at this point in time. We’ll do a better job of that after we give you the third quarter earnings, and give you our estimates for next year. But we – if you look historically, we’ve pretty much been able to grow at a significantly higher rate than the market.

David Strauss – UBS

Okay. Great, thanks for the color. Scott, I guess one for you. Your guidance, if you look at it for the second half, it seems to imply that your margins are going to come down pretty significantly relative to what you’ve put up in the first half. Obviously, you’ve got the negative OEM aftermarket makeshift, but appears you had a little bit of that in the second quarter, you still put up close to 17% or a little bit above 17% segment margins, that also looks like on the FX side, that you’ve taken most of the hit this year already in the first half. So, just how do we think about why margins would come down so significantly in the second half of the year?

Scott Kuechle

Yes, David, the real drive in the second half would be, whenever we start to ramp up sales, and again 787s or some of the early work there and A380 because those are very immature OE programs, which as we’ve said before have very low margin. So as we ship product into those platforms, we are going to see a margin deterioration. On the OE side in the first part of the year and particularly the second quarter, that mix was pretty good in terms of A320 volume and the types of products that we were shipping in. So, we got pretty good margin accretion relative to the mixed content of the OE side in the first half. That’ll change a little bit in the second half of the year. So, it’s really mostly driven by mix, and as soon as we start significant shipments on those two platforms, that’s when we’ll see some impact there. Again not much of an impact on EPS, but it’s more of an impact on the margin size.

David Strauss – UBS

Okay. One last one, share repurchase any change in thought there given where your stock is obviously gained buy back much stock in the second quarter? Thanks.

Scott Kuechle

We missed your question, sorry.

David Strauss – UBS

I’m sorry. I was just asking about share repurchase. Any change in thinking there given where the stock is today, you didn’t buy back much stock in the second quarter?

Scott Kuechle

We originally have – buying stock to offset dilution but we are going to – we’ve got enough authorization in what the Board has given us to take advantage of some times when the – we think the stock is (inaudible) low, which it has been lately. So, we are going to be more opportunistic.

David Strauss – UBS

Great. Thanks a lot.

Operator

For our next question we go to Ron Epstein with Merrill Lynch.

Ron Epstein – Merrill Lynch

Yes, good morning, guys.

Scott Kuechle

Good morning.

Ron Epstein – Merrill Lynch

In the Actuation and Landing Systems, you guys had an outstanding quarter. Was anything one-time things that happened or if you can just give us more color on what’s going right there?

Marshall Larsen

Not, no one-time things. It’s just a good drum beat of shipments. The team there has done a great job on cost control and throughput. They are staying up to speed on all of Boeing deliveries and if anything they’ve hurt a little bit by the inefficiency of being able to ship A380 landing gear. But done a nice job, then some military shipments and we’ve also had a fair amount of industrial gas turbine shipments.

Ron Epstein – Merrill Lynch

Interesting. Can you give us any feel for may be what percentage of that was industrial gas turbine?

Marshall Larsen

It’s a smaller portion of the whole thing. But it’s ramping up. The frame, the engines that GE is selling have increased significantly. So, we are starting to see more and more sales, but it is still relatively a small portion of the total segment.

Ron Epstein – Merrill Lynch

Okay. And then Marshall over at Farnborough, Bombardier launched the CSeries, and you’ve mentioned that platform in the past. Do you have any updated thoughts on it?

Marshall Larsen

We are actually fairly bullish on the CSeries. We’ve been working with Pratt for the last three years on the nacelle systems for their Geared Turbofan. We think that engine has the capability of delivering a much more efficient airplane. That airplane is built for that market of 100 to 130 peaks [ph]. It will be much more efficient than a downsized A320 or 737. So, I think it has a very good chance of doing well.

Ron Epstein – Merrill Lynch

Very good. Thank you.

Operator

We go next to Joe Nadol with J.P. Morgan

Joe Nadol – J.P. Morgan

Thanks. Good morning. Wondering Scott if you could breakout just the $0.50 increase in guidance. Anyway you can break that out by first of all just operations in taxes, and then within the operations would have even give us on may be sales or margins or segments or anything?

Scott Kuechle

The way we look at the $0.50, you got about $0.11 benefit from tax, $0.03 from discontinued operations and the balance was all operations. So, that’s roughly $0.30 or so – $0.36, $0.37 of improvement purely from operations. And again it continues to be the same things that we’ve spoken of in prior quarters, good execution by our businesses, good cost control, we continue to trend higher on aftermarket than we had anticipated earlier. Military and space sales were strong. The mix in our OE business was good, and the businesses executed extremely well. So, the same things that we’ve talked about before.

Joe Nadol – J.P. Morgan

Okay. And then I guess some of the segment margins just back on that one, you are over 17% in each of the first two quarters. Do you have – can you give us what the implied number is for the year, I know it is going to trail down the next two quarters because of mix, but what are you looking for?

Scott Kuechle

Certainly, I think we’ll north of 16%. And again the margin number depends on what kind of shipments we have on the new platforms in the back half of the year.

Joe Nadol – J.P. Morgan

So, north of 16% in each of the next two quarters?

Scott Kuechle

No, for the EPS for the full year.

Joe Nadol – J.P. Morgan

For the full year? Okay, so we could see an individual quarter that drops, maybe Q4 when the sales falls or drops a little bit below that level?

Scott Kuechle

It’s real mix dependant on those new platforms, just from a margin standpoint. But don’t look too closely at margins because that’s not the big driver of earnings per share growth as we go forward. As you get sales that come in at fairly low margins that can move your sales growth and your margins around, but it doesn’t really fundamentally drive the EPS.

Joe Nadol – J.P. Morgan

Okay. And then just one more if I might. Just on the cume catches which were much lower this quarter, particular over in the nacelle business. How do we think about how that might evolve the next couple of year with things macro environment obviously looking more challenging, a good part in the nacelle business is definitely baked in because it’s due to the profile of the fleet as opposed to flight hours, but certainly these are long-term contracts that you are accounting for. If the volume does disappoint the downsize there, is there any danger of this goodness over the past couple of years could reverse or do you see that is just really unlikely?

Scott Kuechle

I don’t think you are going to see a volume issue in the nacelle’s business because again there’s been the nacelle’s that they are producing are primarily going to A320, and in the future they are going to 787, A350 and the Embraer 190 aircraft. So, the core volume in that business is pretty secure going forward because that’s – because the platforms that they are on are going to continue to drive up. And just remember the cume catches are all related to the OE side of the business, the aftermarket, dynamics continue to be driven off of the installed base of the fleet. And given the deliveries on the aircraft that we have a lot of content, that fleet that’s serviced by on thrust reverser business continues to grow pretty rapidly.

Joe Nadol – J.P. Morgan

So, implicit in those cume catches are volume assumptions, OE volume assumptions for the next two, three years. Are those really important inputs because if there is down cycle say, in (inaudible) of 737 would that make a big difference?

Scott Kuechle

No. We don’t have much content on 737. We have some content –

Joe Nadol – J.P. Morgan

777.

Scott Kuechle

We don’t have much content on 777 and the nacelle and thrust reversers.

Joe Nadol – J.P. Morgan

Okay, A320.

Scott Kuechle

The A320 because it’s a pretty mature fleet, we’ve already passed the initial production contract on A320. So, as we add incremental volume to that, it has very little effect on the overall status in that program. It’s almost more on an accrual basis at this point in time because you are so late stage in that production.

Joe Nadol – J.P. Morgan

Yes. Okay, that’s helpful. Thank you.

Operator

We go to next J.B. Groh with D. A. Davidson.

J.B. Groh – D. A. Davidson

Good morning. Thanks for taking my call. First of all I want to say thanks to that slide 19, I think that’s real helpful. So, thanks for including that. And then I had a question on – Scott on the G&A expense that’s been down quite a bit from last year. The level we are seeing now is the sustainable rate or is there things in the second half that nudge that up?

Scott Kuechle

No, we still think sustainable levels are right around $30 million per quarter of G&A. So, it is little less than that in both Q1 and Q2. Some of that was driven just share price coming down during the first half of the year from where we ended last year. But we are hoping that that reverses in the second half. But a run rate of about 30 a quarter is still a pretty good number.

J.B. Groh – D. A. Davidson

So, you had some share based plans or something that declined and the stock price drove that a little but?

Scott Kuechle

Yes. That’s correct.

J.B. Groh – D. A. Davidson

Okay. And may be one from Marshall. Marshall what are you seeing on the acquisition front in terms of asking prices trends there and opportunities, volume of opportunities versus say a year ago?

Marshall Larsen

I mean you’ve seen us do some hold-on [ph] type acquisitions. You’ll continue to see us do that. We’ve been focusing more on military, defense side than on the commercial side right now. And we still got some opportunities on that side, but those valuations haven’t necessarily come down on the larger properties. So, we’ve been more cautious on the larger defense kinds of things. But we are watching on the commercial about what may happen with these valuations and who recovers, who doesn’t as we go forward, and may be some opportunities there. So, it would be I think very nice to find to something in the $250 million to $500 million revenue range to add to our portfolio to balance it. But that being said, there’s nothing out there that’s so compelling that’s large that we have to have. We’ve got the critical mass and we’ll continue to grow.

J.B. Groh – D. A. Davidson

I think in the past you’ve said you are more focused on the military side, but what I think you are saying is that you are going to be opportunistic if you find something in the commercial side that’s attractively priced?

Marshall Larsen

That’s right. Especially if it will fit into the existing portfolio of businesses we have. There aren’t too many new platforms out there that are available, but there may some that will fit in.

J.B. Groh – D. A. Davidson

Great. Thanks a lot, and congratulations on the quarter.

Marshall Larsen

Thank you.

Operator

We go next to George Shapiro with Citi.

George Shapiro – Citi

Good morning, Marshall.

Marshall Larsen

Good morning, George.

George Shapiro – Citi

Just curious in your sales projections, you increased the region of business OE market to grow over 20% versus only about 15% in the first quarter. It would seem that would have been pretty predictable. So, what caused that big a change?

Marshall Larsen

I think it’s just primarily the experience we’ve had so far this year. We’ve done a lot better on the Embraer side on the 90-seater. So, that’s primarily we hit.

George Shapiro – Citi

Okay. And then if I push it a little bit more in the aftermarket, can you breakdown how much of your aftermarket is basic spares versus maintenance and repair?

Marshall Larsen

I won’t give you an exact percentage of it. The vast majority are spares. Yes, we turn ranches in doing that but the real sales and margins are in the spare parts.

George Shapiro – Citi

Okay. And has the percentage of flight hour contracts gone up like, do you have those on wheel and brakes or it’s still basically when the brakes get repaired?

Marshall Larsen

Remember wheels and brakes really are the equivalent of flight hour agreements because we sell them on cost per landing. So, the more landings take place on our brakes, the more money we make. But we have been increasing the number of flight hour agreements in our other products like nacelle’s in particular, and also in fact a number of our businesses like on the A380 for Singapore we’ve flight hour agreements there with all of our products mixed in.

George Shapiro – Citi

Okay. And in another slice, may be at the aftermarket, can you breakout how much is roughly Airbus at this point versus Boeing?

Marshall Larsen

Boeing is going to continue to be a significant aftermarket only because they have the biggest fleet out there, and we have the military side. So, you think about 45% or so of our total sales between military regional business and commercial aftermarket, Boeing would still be large. If you were just talking about 100 passengers and above, it would be slightly in favor of Airbus.

George Shapiro – Citi

Okay. Thanks very much.

Operator

We go next to Cai von Rumohr with Cowen And Company

Cai von Rumohr – Cowen & Company

Yes, terrific quarter guys.

Marshall Larsen

Thanks Cai.

Cai von Rumohr – Cowen & Company

Other income, I guess you did better in terms of operations, in terms of corporate G&A. You mentioned a (inaudible). But you also did better that I’ve guessed in terms of other income, and you mentioned you broke four of those items out. Can you talk to us about why was that better, and if going forward what should be look for those line items for the year approximately, simply the divested retiree held?

Scott Kuechle

Yes. The other income line was about $8 million of expense in the quarter, and we had guided in the past that in normal quarters somewhere around $14 million. So, a little bit of benefit in the quarter. It tends to be mostly timing. We got a little bit of help on our annual actuarial re-valuation on FAS 16 retiree medical. So, we got a little bit of help in the quarter for that, but that tends to be pretty stable if you look over a full year. There’s some differences quarter to quarter just as we’ve phased through on legal expenditures, environmental things, litigation, insurance collection and things like that. But generally it stabilizes around that $14 million level. So, we got a little of help. Couple of things to share off with that in the quarter.

Cai von Rumohr – Cowen & Company

But should we assume that it goes back to $14 million per quarter in the second half or that goes above it as you catch up?

Scott Kuechle

No. I think roughly $14 million per quarter, gong forward continues to be a good number. Could go a little bit higher than that but it shouldn’t material.

Cai von Rumohr – Cowen & Company

Okay. And then it’s not a big item, but IGT, you’ve had terrific numbers. I guess that’s in other. Can you give us some sense as to how big that number is and do you expect that 20% growth to accelerate in the second half?

Scott Kuechle

The other category includes two things. One is – two primary activities, one is IGT and the other is commercial helicopter. And we continue to get good growth, up strong double digit growth out of both of those market channels. I don’t know the split between those, right of the top of my head. But I can tell you we’re getting strong 20% growth currently in those markets. And there’s a lot of service associated with that business as well.

Cai von Rumohr – Cowen & Company

Okay, terrific. Thank you very much.

Operator

We go next to Colin Campbell with Societe Generale

Colin Campbell – Societe Generale

Good morning, gentlemen. Just wanted to ask a little bit more on your Turbofan entry. How did you arrive at your $5 billion estimated sales across flight? Is it based on a number of engines and service? And have you had to pay a significant entre frees to get on to that engine? Thank you.

Marshall Larsen

What was the second part of that?

Colin Campbell – Societe Generale

Have you had to pay a significant entre frees to get on to that engine?

Marshall Larsen

The answer to the second question is, no. The answer to the first one is that we based it on a certain number of aircraft in our estimate that may or may not be the same as yours or others such as Pratt or Canada or – but we have in our model a certain number of aircraft to the life of the program. We also model both the OE portion of it, and what portion we will see in the aftermarket. So, it’s a combination of all those how we get to that number. I’m going to give you the number of aircraft because that’s a proprietary number for us.

Colin Campbell – Societe Generale

Okay, just and a big number for a regional jet that may not have a significant place in the marketplace?

Marshall Larsen

I guess that’s a matter of opinion.

Colin Campbell – Societe Generale

Okay. Thank you.

Operator

We go next to Alok Chopra with Oppenheimer.

Alok Chopra – Oppenheimer

Hi, congratulation on a great quarter. The question I had was in actuation and landing gear, you touched on this in the past, Marshall, that you are going to try to sell landing gear components directly to the airlines rather than going through the OE’s. Have you made any progress there, and if so, when does that kick in? Is it in ’09 event?

Marshall Larsen

It’ll probably take place right around year end. I mean in terms of starting some deliveries, we’ve signed a deal with Boeing where we can ship directly based on a – giving them a royalty, which would allow us to be much more efficient in our aftermarket shipments.

Alok Chopra – Oppenheimer

So, the follow-up question to that would be then, assuming this ramps up in some significant size, would this effectively offset dilution from new programs like 787 and A380 kicking into segment or is it too early to tell?

Marshall Larsen

It really will only be on the Boeing programs. And the idea is to be able to help us – help Boeing faster serve airline customers. Boeing doesn’t have to keep as much inventory, we can ship it direct from the factory instead of shipping it to Boeing, and then Boeing shipping it out to the airline. So, Boeing still makes a margin because we give them a royalty fee, but they have to run through a fair amount of inventory in their warehouses before it’s really going to kick in too much for us. And that’s why we say herein.

Alok Chopra – Oppenheimer

Okay. Okay, thank you very much.

Marshall Larsen

Welcome.

Operator

We go next to Ted Wheeler with Buckingham Research.

Ted Wheeler – Buckingham Research

Hi, good morning in echo of the wonderful performance. The – Scott one of the questions I had was that on your aftermarket commercial guidance of 8% to 11% for the year. In the second half, what do you see for I guess which you described as global flying and capacity growth? What is your estimate for the second half for that data point?

Scott Kuechle

We certainly see it lower than what we are seeing in the first part of the years, but still positive

Marshall Larsen

I think you have to look at the mix of capacity for the rest of the year. Most of the announcements by US Airlines of capacity going out are really not going in until end of the fourth quarter and the first quarter of next year, and if all with a normal reduction because of seasonality in the winter. So, there’ll be some less frequencies anyway. But we don’t see quite as much of an effect on us because if most of those announcements, which they had been, have been old McDonnell Douglas aircraft and old 737 Classics. We should be still be able to grow faster than the market.

Ted Wheeler – Buckingham Research

I was just trying to back into that number and try to determine maybe how to think about ’09. At the low end it looks like your guidance is for 5% growth for the second half, and in the mid point you are looking about may be 9.5% growth for your sales in the second half?

Marshall Larsen

We’ve said 8% to 11%. So, you could see – if were around the low end of that range, you would get a little bit lower growth in the second half but a lot of it’s going to depend on what the mix of the aircraft is out there, and right now we haven’t seen the change in that mix.

Ted Wheeler – Buckingham Research

Do you see any particular commentary – do you have any particular commentary on the status of inventory, airline inventory of aftermarket product?

Marshall Larsen

We have not seen any material change in airline inventory. If at all possible an airline would want us to deliver instantly and them not carry any inventory because of the cash costs of doing so. And so we’ve been really working hard on speed and ease and trying to deliver faster –

Ted Wheeler – Buckingham Research

I think in past cycles, there has been an issue. I just was wondering if there was any (inaudible)?

Marshall Larsen

Yes. But I don’t think the airlines aren’t treating inventory like a bank. They are really working all aspects of cash.

Ted Wheeler – Buckingham Research

Okay, great. Just lastly, you talked about the 50-seaters within the regional pocket. Do you have any idea of what your aftermarket percentage allocated to those 50-passenger – 50-seater planes would be? You gave it on the older commercial aircraft, do you have a sense of what the mix is of that?

Marshall Larsen

No, our full regional business in general aviation aftermarket is about 6% of total sales. So, it’s a relatively small percentage.

Ted Wheeler – Buckingham Research

And of that, do you think the 50-seaters are –?

Marshall Larsen

They are real small.

Ted Wheeler – Buckingham Research

Okay, great. That’s it. Thank you very much, great quarter.

Operator

We go next to Howard Rubel with Jefferies.

Howard Rubel – Jefferies

Thank you. For Mr. Scott, just a quick question. On the tax rate, you gave an (inaudible) problem is at the moment the R&D credit has not been passed. So, we should think at the moment that really we’d look at the 36% rate in the third quarter the way you have it constructed?

Scott Kuechle

Our guidance assume that it passed in the second half of the year retroactive to one one. We think that’s the most likely scenario here. So, we’ve included the benefit of that in our guidance for the full year, that’s worth about $0.08 a share assuming that it’s done retroactive to one one. But again I think most people believe that that at some point during the second half of the year that will be implemented retro to one one.

Howard Rubel – Jefferies

So, we can get $0.08 in the fourth quarter and you mean the third – in the third we shouldn’t be surprised in other words that it would either – you could end up showing us – that’s what I’m sort of struggling with. Are you going to show us like 36% if it’s not passed until after the third quarter is reported?

Scott Kuechle

Yes. If it doesn’t – if it gets passed in the third quarter, then we’ll get $0.06 benefit from that, and that would be consistent with our 34% view for the second half of the year. If it’s not passed at all, then the guidance would – then the tax rate would go up closer to 36%.

Howard Rubel – Jefferies

(inaudible) in your guidance. So, it’s like let’s not get too fine with it.

Scott Kuechle

Right.

Howard Rubel – Jefferies

And then just one more thing, Marshall, the military business was a little bit better than you had originally thought. Could you elaborate a little bit more on what it is that’s happening here? Is it some share gains? Is it in some of the optics area where you are getting some new platforms?

Marshall Larsen

We had what we expected out of electronics, but we got more than normal shipments in our aerostructures and interior segment.

Howard Rubel – Jefferies

Okay. Is it like C5 driven because of what’s happened?

Marshall Larsen

Probably too early to say C5 at this point in time. But just general military structural components that we make some time flaps things like that.

Scott Kuechle

Then it was pretty broad based, not just the heavy mechanical stuff but also some of the things that we do in the electronic side of the business, health and usage monitoring systems were good.

Marshall Larsen

I would think 50% of that electronic segment is military.

Scott Kuechle

Wheel and brake performance was real good and C5 as well as F16s.

Howard Rubel – Jefferies

Thank you.

Operator

We go next to Peter Arment with American Technology

Peter Arment – American Technology

I was in the queue but all the questions have been answered. So, Howard (inaudible) with the tax rate. Congratulations on the quarter.

Marshall Larsen

Thank you very much.

Operator

And we go next to George Shapiro with Citi.

George Shapiro – Citi

And Marshall just one follow up, the margin in actuation and landing was far and away better than we’ve ever seen. I think obviously a good part is the landing gear contract, how much of that margin was unique to mix this quarter versus how much should we think is sustainable in the rest of the year?

Marshall Larsen

Certainly there was some mix in there. So, that’s a higher margin than we had expected on the run rate through the year. But we’ll still do a pretty good double-digit margin for the entire year in that business.

Scott Kuechle

I’d add to that. In the last five quarters, we’ve been consistently above 10% in each of those quarters and we’ve been trending up towards this number the last couple of quarters. It was a very good quarter, good mix. We may track down slightly from that, but the business performance there has been very, very good.

George Shapiro – Citi

If I mean to echo your point, you go back to the last few quarters, it was 10.9, 10.6, the third quarter of last year had a one-time benefit, so it’s been about 10. So, I think you really had a significant step up this quarter, and that’s why just wondering how much was mix versus how much was may full benefit from the landing gear re-negotiation?

Marshall Larsen

If you look this quarter versus the quarter a year ago, where we had about 10% margins. Most of the benefit came from volume. Remember that that segment George also has wheels and brakes and has our engine components business. And the engine component business is getting more on the industrial gas turbine, but wheel and brake has done pretty well too.

George Shapiro – Citi

Okay. What you are implying is it relatively high incremental margins we are seeing there are true measure of reflection of the higher volume to some extent?

Marshall Larsen

That’s right.

George Shapiro – Citi

Okay. Thanks very much, Marshall.

Marshall Larsen

You are welcome.

Operator

And we go next to Cai von Rumohr with Cowen and Company.

Cai von Rumohr – Cowen & Company

Yes, just a quick follow-up. The ERP, that was down, can you say how do you feel you are doing there? For the full year, are you still going to be 18 to 19 and should we still expect that to trend down as go into 2009?

Scott Kuechle

The overall ERP really has stabilized. We are a couple of years now into that program, and we’ve got – we put our wheel and brake business up last year and we’ll be putting landing gear and our aftermarket aerostructure business up on the ERP system in the back half of 2008. So, the number of resources that we need both inside and outside the Company have very much stabilized. So, I would expect that to stay fairly constant over the next couple of years as we push that through.

Cai von Rumohr – Cowen & Company

Constant or does that expense trend down as you get more of it on-line? It’s been relatively constant.

Scott Kuechle

The total expense to the Company will stay above where it is for the next several years as we go through a series of implementations out through 2012.

Cai von Rumohr – Cowen & Company

Okay, and terrific. And if we take out the foreign tax credits, any sort of (inaudible) going forward beyond the tax credit continues, what’s your normalized tax rate in 2009, and range if we have no foreign special foreign tax credits and we continue to have the R&D tax credit. Are you – is it 33? Is that about where the normalized rate would be?

Scott Kuechle

We said 33 to 35 for (inaudible) here at the beginning of the year basically on that same set of assumptions. So, I would assume that they would be in that range going forward again using the assumptions I just articulated.

Cai von Rumohr – Cowen & Company

Okay. Thank you very much, and again a great quarter.

Scott Kuechle

Thanks.

Operator

We go next to David Strauss with UBS.

David Strauss – UBS

Just one follow-up. As you think about the A320 fleet, there are a decent amount of the A320s that are older. What do you assume as far as retirements out of the A320 fleet?

Marshall Larsen

I think the retirements aren’t going to be a big factor here. Going forward there’s still a pretty – because of those engines that are on them the CFM56 and B2500 engines are pretty efficient engines compared to some of the old 737 Classic engines and so on. So, I don’t think we are going to see a great number of retirements, especially compared to the number of deliveries going to service.

David Strauss – UBS

Okay, great. Thank you.

Operator

And with that ladies and gentlemen we have no further questions on our roster. Therefore, Mr. Gifford, I’ll turn the conference back over to you for any closing remarks.

Paul Gifford

Thank you, Richard, and thank you for joining us today on this call. And I look forward to talking to you over the next couple of months.

Operator

And ladies and gentlemen, this does conclude the Goodrich second quarter 2008 results conference call. We do appreciate your participation and you may now disconnect at this time.

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