Kaman Corp (KAMN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-four 2016 Kaman Corporation earnings conference call.

(Operator Instructions).

As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Eric Remington, Vice President Investor Relations. Sir, you may begin.

Good morning. Will come to the Kaman Corporation fourth-quarter 2016 earnings call. Conducting the call today are Neal Keating, Chairman, President and Chief Executive Officer; and Rob Starr, Executive Vice President and Chief Financial Officer.

Before we begin this morning please note that some of the information discussed during today's call the consist of forward-looking statements setting forth our current expectations with respect to the future of our business, the economy and other future events. These include projections of revenue, earnings and other financial items, statements on a plans and objectives of the Company or its management, statements of future economic performance and assumptions underlying the statements regarding the Company and its business. The Company's actual results could differ materially from those indicated in any forward-looking statements due to many factors, the most important of which are described in the Company's latest filings with the Securities and Exchange Commission, including Company's 2016 annual report on Form 10-K and the current report on Form 8-K, both filed yesterday evening together with our earnings release.

In addition, we expect to discuss certain financial measures and information that are non-GAAP financial measures as defined in applicable SEC rules and regulations. Reconciliations to the most comparable GAAP measures are included in the earnings release out with yesterday's 8-K, a copy of which can be found on the investor section of our website.

With that, I'll turn the call over to Neal Keating. Neal.

Thank you him Eric. Good morning and thank you for joining us on today's call.

We closed 2016 focused on executing our key strategic and operational initiatives that form the foundation for continued profitable growth. Our results reflect strong performance in Aerospace and a difficult backdrop in distribution combined with effective cost controls across the Company. At a consolidated level, these factors led to fourth quarter revenue of $433 million a modest decline from the prior year.

GAAP diluted earnings-per-share were $0.53 with adjusted diluted earnings-per-share $0.56. The comparable amounts in the prior year were $0.32 on a GAAP basis and $0.69 on an adjusted basis.

Results for the fourth quarter reflect differences in product mix, particularly in Aerospace when compared to the prior year as well as certain expenses that we do not expect to recur going forward positioning us to achieve increased earnings and cash flow in 2017. Most importantly, we delivered higher consolidated gross margin of 31.3% in the quarter, 310 basis points higher than the 28.2% recorded a year ago primarily driven by our ongoing productivity initiatives at distribution and improved the margin at Aerospace. As we move into 2017 we expect the cost associated with distributions initiative, which were $4.6 million or 180 basis points in the quarter to be significantly reduced, providing a positive impact on operating margin.

Turning to the full year, many of the key trends that persisted in the fourth quarter also shape our 2016 results. On the top line, total sales were $1.8 billion which was up 1.9% compared to the prior-year. Higher sales were driven by a 17.5% increase in Aerospace volume which was comprised of a 7% organic growth and the contribution from recent acquisitions. This strong Aerospace performance was partially offset by a 6% full-year sales decline in distribution.

Full-year GAAP diluted earnings-per-share were $2.10 or $2.25 adjusted, compared to $2.17 or $2.42 adjusted in 2015. Lower earnings-per-share were the result of lower operating profit levels at distribution which included $12.6 million in cost associated with our productivity initiatives, a more normalized tax rate in the year and a higher level of diluted shares associated with our convertible debt.

Before moving onto segment level details I would like to take just a moment to discuss our cash flow performance and touch on the dividend announcement that was issued yesterday. In 2016 we generated $108 million of cash from operating activities and $78 million in free cash flow marking aren't third consecutive year of free cash flow generation in excess of 130% of net income. This strong and consistent cash flow provides the opportunity to position our Company for future growth.

During the year we invested $30 million in our operations through capital expenditures, repaid over $20 million and increased our cash on hand by $25 million. This level of cash generation has also allowed us to return cash to shareholders through dividends in our stock repurchase program which combined returned a record $33 million to shareholders in 2016. Given our consistent cash generation over the last several years, and our confidence in the sustainability going forward, our Board of Directors increased the quarterly dividend 11% to $0.20 per share, our third dividend increase in 6 years.

Turning to our operating segments beginning with distribution, organic sales during the quarter were down 3.4% or 4.9% on an organic sales per day basis as the industries we serve continue to experience week market conditions. Many of our key markets were under pressure when compared to the prior year including paper manufacturing, mining, transportation equipment and chemical manufacturing. These headwinds were partially offset by an increase in non-metallic mineral products, fabricated metals and merchant wholesalers durable goods which were bright spots in the quarter.

The overall tone during the quarter improved with 5 of our top 10 industry it or flat or slightly positive year-over-year. Our distribution segment operating margin came in at 2.2% of sales were 2.4% when adjusted to exclude restructuring and severance costs, both lower than the prior year. There were two primary causes of this margin decline. First is the loss leverage on lower organic sales, which includes a 50 basis impact from reduced vendor incentives; and second, cost related to our productivity initiatives focused on process improvements and data analytics.

While these productivity initiatives impacted our 2016 operating expenses, they have strengthened our distribution operations as we move into 2017. Adjusting for these costs as well as restructuring costs and we expanded operating margins by 50 basis points for the year and in a declining sales environment, a very solid result.

Turning to our Aerospace segment, fourth quarter revenues were $176 million, down $10 million relative to the fourth quarter of 2015. Revenues were negatively impacted by lower JPF shipments partially offset a full quarter of contribution from our 2015 acquisitions. As a basis of comparison, we shipped nearly 10,000 fuses in the fourth quarter of 2015 compared to approximately 5500 unit in the fourth quarter of 2016.

Looking at the balance of Aerospace, starting with the specialty bearings products we had a strong year capped by record quarterly shipments of our self lube bearings. We continue to ramp up new programs at our German bearing facility and our 2015 acquisitions were accretive to EPS and adjusted EBITDA for the quarter and for the year.

We've also made considerable progress on the relaunch of the K-MAX and closed the year with six aircraft under contract and a deposit on the seventh aircraft. The first airframe manufactured in Jacksonville arrived in Bloomfield in the fourth quarter and we remain on track for our first delivery in the first half of 2017.

Moving to our largest single program, the joint programmable fuse. There are a number of factors that can impact performance from quarter to quarter and I would like to walk you through some of those to better understand 2016 and expectations for 2017.

We delivered almost 5500 fuses in the fourth quarter and over 31,000 for the full year. While fuse deliveries were favorable to our top line during the year, mix presented headwind with 63% of our 2016 shipments going to the US government versus 54% in 2015.

As we mentioned last quarter, we are awaiting an export license for a $93 million direct commercial sales order from State Department which based on our current expectations has been delayed into the second half of 2017. As you can see from our program backlog of $175 million, demand for the joint programmable fuse remains strong and we are in ongoing negotiations with the US Air Force and other customers for additional orders that would provide visibility into 2020.

In the year ahead we are very focused on execution to drive sustainable long-term growth and improvement in our operating results. There are many areas of positive momentum in our business including the underlying margin improvement in our distribution segment and an exciting program development and opportunities including our bearing products, K-MAX, JPF and a number of our structures program. As Rob will detail in his discussion of our outlook, we are focused on margin improvement and in volume stabilization at distribution and sales growth in our Aerospace segment.

Now I will turn the call over to Rob.

Thank you, Neal and good morning, everyone. I would like to begin this morning by touching on our fourth-quarter results which came in lower than our prior forecast. This was driven primarily by two factors, we incurred higher than forecast implementation costs relating to our productivity initiatives as the distribution team achieved better than anticipated results. Additionally, JPF unit deliveries in the quarter were approximately 3000 lower than we had estimated and the latest outlook. We anticipate shipping those units during the 2017.

We remain highly focused on expense management and have successfully reduced our core SG&A spend by 2% over the prior year while continuing to invest in both the distribution and in critical product development such as new specialty bearing applications and advanced fusing technologies acquisition products. Our balance sheet remains strong with our leverage well within our long-term target range guiding inviting us excellent strategic flexibility.

I would like to focus the balance of my remarks on our the outlook for 2017 and capital deployment priorities. Starting with Aerospace, we expect continued strong sales growth in 2017 primarily from higher volumes for the joint programmable fuse program, additional revenue from the K-MAX improve programs, and higher shipments of missile fuses. Partially offsetting these increases is a projected $10 million negative impact from foreign currency exchange rates.

Achieving our sales range outlook, of $720 million to $760 million will depend in part on the time of receipt of government approvals for a large JPF order that Neal referenced earlier in the booking of additional K-MAX orders by the end of the year. The outlook for aerospace operating margins at 16.5% to 17% is in keeping with our long-term target range for the segment although it is a bit lower than our adjusted 17.2% we achieved in 2016. This is primarily a result of lower profit contribution from JPF as Neal described earlier and higher K-MAX revenues at margins that are below segment average.

Before moving onto distribution, I thought it would be helpful to provide more context on our expectations for the JPF program in 2017. As we ended, 2016 we completed option 11 deliveries to the Air Force and began shipping under option 12.

Option 12 pricing which is based on higher initial order of quantities from the Air Force is lower than option 11 is expected to have an unfavorable margin impact of approximately $7 million in 2017. In addition, we are obligated to complete option 12 deliveries by the end of the third quarter which will require us to dedicate production capacity to the Air Force in the first part of the year. Overall, we expect JPF volume to be higher in 2017 with a range of 33,000 to 37,000 fuses.

Distribution sales are expected to be in the range of $1.1 billion to $1.15 billion. This reflects negative sales growth of slightly less than 1% than at the low end and positive sales growth of 4% at the high-end and is reflective of the challenging end markets we continue to experience.

Operating margin at distribution is expected to be between 4.9% and 5.3%, significantly better than the adjusted 3.9% we achieved in2016. This level of profitability reflects the continued contribution from our productivity initiatives and the absence of the cost associated with implementing the program.

Corporate expense levels and 2017 are expected to revert back for more normalized levels with our current expectation at $55 million. In 2016 we benefited from a number of items and putting better than expected group health experience that are difficult to anticipate whether they will recur in 2017. The primary factors driving higher expense and 2017 are healthcare, regulatory compliance and incentive compensation.

As noted in our earnings release, our diluted share count assumption for 2017 is approximately 400,000 shares higher than 2016. This increase primarily relates to additional dilution from a convertible debt instruments based on our current share price. Future share price movements will impact our diluted share count going forward.

As you are aware we have historically earned greater than half of our full-year earnings in a second half. We anticipate this pattern to be more pronounced in 2017 due to a number of factors mostly within Aerospace.

The items having most impact on our 2017 earnings cadence are the normal cyclicality of bearing product deliveries and a margin patterns, and the mix and timing of JPF deliveries with all of our projected direct commercial sales occurring in Q3 and Q4. Also impacting our cadence is a push out of missile fuse deliveries from the first quarter into the second quarter. Our expectation is that we will recognize less than 10% of our full year net earnings in the first quarter and approximately 50% of our net earnings in the fourth quarter.

We expect our strong free cash flow generation of the last several years to continue with additional contributions from our 2015 acquisitions. We are projecting 2017 free cash flow to be between $70 million and $100 million, approaching or exceeding 100% of net income once again this year.

Based upon current projections we anticipate our 2017 year-end leverage will be approximately 2 times debt to EBITDA, the low end of our targeted range. This will allow us to continue to pour in cash to organic growth opportunities and strategic acquisitions. These investments will be balanced with returning cash to shareholders as of evidenced by our dividend increase and share repurchase program.

With that I will turn it back over to Neal for his closing comments.

Thanks, Rob. I'd like to close with just a few comments highlighting both our near-term performance and several ongoing development that will help drive longer-term growth across demand.

The diversity of our products in the markets we serve has been one of our key strengths and 2016 was no exception. Our distribution business has dealt with more challenging market conditions than anticipated, but we remain focused on long term operational improvement to drive stronger return on investment. Aerospace delivered a solid performance led by Bearings and JPF and we are encouraged by the contributions of our late 2015 acquisitions of EXTEX and GRW.

Looking at 2017 we expect operational improvement for the full year to continue across our businesses and product lines as we negotiate some quarter to quarter volatility. Overall, we saw a terrific progress in 2016 and are positioned to end 2017 even stronger. We have a great team in place and I have confidence in our strategy to drive long-term shareholder value.

With that, turn it back over to Eric for questions. Eric?

Thanks Neal. Chelsea may we have the first question please?

Certainly.

(Operator Instructions)

Our first question comes from the line of Edward Marshall with Sidoti. Your line is now open.

Hey, guys, how are you? Good morning.

Good morning, Ed.

I guess the first question is centered around the export license and understanding that the JPF and foreign military sales are delayed because of that. Is this export license related to governance first pecking order or something that is a new customer and therefore is taking a little bit longer to get through the red tape.

Ed, it is Neal. It is not a new customer for us. We are new ally for the US government.

I think that as we went into the election and now post election timeframe, a number of other factors have moved up on the agenda in Washington and some of the one normal activities related to foreign export licenses have been somewhat delayed. That's why we believe that it may be in the late second quarter or early in the third quarter that we may actually have this export license move through the process but is not it is not something that is new.

Is it a philosophy that changed from the current administration versus the administration that may have put some delay or is it just about the quantity of work that's actually being done?

I don't think it is had to do with necessarily a change, Ed. I think it is more posturing actually at the end of the last administration and now there's a lot of things that need to move through the process. While this is a very high priority for us, it is probably going to be a little bit further back in the line for the legislators right now.

Got it and what other [fine] military sales in the quarter aside from this particular -- that had received recent export licenses in the quarter or in the first quarter this year?

Ed, this is Rob. We did ship a small amount of DCS fuzes in the fourth quarter. Which as you would appreciate, require export license so we were able to do that in the fourth quarter.

As of this point we're not anticipating any commercial sales to occur in the first quarter or really very nominal amount in the first half. It's all I can loaded in the third and fourth quarter just based on expectations for timing a receipt of that export license.

Got it and if the export license became proved would you put out an announcement stating that would be an approval and we anticipating that would be a period of time.

Ed, I don't know that we would necessarily put out a press release if it is approved, but we would certainly comment on it as soon as we could and a call or other open environment.

Okay because I'm assuming it would change the cadence of the year for as far as the recognition of [DCS].

It may. If it were to come earlier we would certainly work to feather in those deliveries earlier in the year than we currently anticipate. As Rob outlined as well we have a requirement to deliver the entire current option for the US Air Force before the end of the third quarter so we will be focused on fulfilling that commitment.

Got it. Okay, thanks very much, guys.

Thank you, Ed.

You next question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is now open.

Good morning guys. Neal, I guess we had a real delay here in the FY17 DoD budget, and we've seen JPF backlog come down. Are you expecting if we get approval here of the 2017 budget over the next couple of months that you would get a fairly quick replenishment of the JPF backlog at that point?

That's what we would anticipate, Pete, you are right. We are [late] and we've and commented on current negotiations with the US Air Force. We would expect as those to come in and large chunks we've been working down the last large chunk, but we are in current negotiations and we would anticipate that we would have an order shortly.

Okay, great. Then either for you or Rob, I'm little surprised you guys said the Aerospace sales time depends on K-MAX I was assuming a slow start and program this year so just wondering how many deliveries for K-MAX you're factoring into your guidance? How with the prospects are for incremental sales?

Sure. Pete, this is Rob. In terms of K-MAX the reason we referenced that is those programs are currently being accounted on a cost to cost basis so upon signing of another contract.

We would be able to recognize revenue upon the mentor that we are currently building to really process the line. In terms of expectations we do expect to begin delivering K-MAX roughly one unit every other month beginning sometime in a second quarter or sometime in the first half.

We would expect receive somewhere in the range of all it is been a three to four K-MAX deliveries this year but the revenue side is going to be also dependent on our ability to execute your contracts. We have a number of opportunities that we are pursuing with the number of interested potential customers and next week we do have the Heli-Expo conference which is an important conference for us in the helicopter space.

Got it, very helpful. Thank you. I will sneak one last one maybe for Neal.

Neal, and Aerospace probably we are seeing the ramp in the Airbus A320neo and pretty soon the 737 Max. I'm just wondering I lost track you talk about your content on these new aircraft and maybe the bearing content and how that compares to prior generation aircraft?

Sure, Pete, in fact that got a lot of attention since the Wall Street Journal article from last week. We have a relatively low amount of content about $35,000 to $50,000 on the narrow body aircraft.

We certainly like it when they go to 40 aircraft a month but it certainly much less than we would have on for example and A350 which helped drive some of the increase in our self lube bearing revenues from 2015 to 2016. Relatively small just because it is a smaller aircraft and still important to us based on the volumes that they are going to be shipping those aircraft or delivery those aircraft at in the coming years.

Understood. Okay, thanks, guys.

Thank you, Pete

Thank you. Our next question comes from the line of Shannon Burke with Gabelli. Your line is now open.

Hi. Good morning. Just touching more on question on the K-MAX I was -- is there a large capture seat included upon delivery of the vehicle or how does the cash apply?

Shannon, for the K-MAX there are a number of milestone payments. Upon contract signing we receive a certain amount then as we hit key production milestones and certainly, delivery is one of those.

Certainly a very large percentage of the overall cash flow relating does come upon delivery as we would expect. But we do receive meaningful in process payments or advance payments from our customers on the program.

Okay, great and then could you comment on how many orders you would need to book to make the guidance based on your cost to cost accounting?

Sure. We currently anticipate roughly on the range of somewhere between three and four orders on K-MAX. That is a key top line metric for us and certainly we would also have a cash flow benefit to that out what's really important is that to make sure our production costs stay in line.

And that we are able to get the aircraft off the line because we have six firm orders and one under deposit so we are in pretty good as it relates to 2017, Shannon. There is a little bit of -- (multiple speakers) execute those contracts but we feel very confident in our ability to get there.

Okay, great. Then just switching to distribution you stated that the cost of these productivity initiatives were slightly higher than anticipated. What exactly happened there?

Did you have to implement something else or did something go wrong? And are these costs fully completed?

Shannon, actually nothing went wrong, things went a little bit better than anticipated and as you can see from our underlying performance in distribution they really made significant progress during the year. The impact from the overall performance in particular in the fourth quarter was that they reached levels that resulted in higher costs.

It had disproportionate impact on the fourth quarter as we trued up for the full-year, but those costs we believe our now behind us -- the vast majority of those costs are behind us. It's really been an investment to build a much stronger business which I think is indicative from the underlying gross margin improvement that we demonstrated year-to-year.

Definitely. Okay, great, thank you so much.

Thank you, Shannon.

Our next question comes from the line of Robert Majek with CJS Securities. Your line is now open.

Good morning. Just following up on the previous question, how should we think about any lingering cost impacts specific to Q1?

Robert, this is Rob. We certainly in conjunction with this productivity initiative program have invested in infrastructure to support this program going forward because this is really important for us.

We anticipate that, as we mentioned the vast majority of expenses or incurred and 2016, there will be some ongoing cost that are reflective in built into the outlook that we have for 2017 or distribution. I would say rougher magnitude about 75% to 80% of the cost are behind us as we move into 2017.

Thank you. Then on top line trends in distribution organic sales per day were down 5% or so in the quarter. Can you perhaps break that out by month or maybe comment if that your you are year comparison got worse or better as the quarter went on and maybe discuss and what you are seeing so far in Q1?

Sure. It was actually very interesting. For each of the months in the fourth quarter we were quite literally down about 4.8%, it was eerily similar performance month to month.

We certainly were anticipating a stronger result on what we've got missing the line of the range by just a bit. In the first quarter we are also running about mid-single digits but I would point out that our expectations for the first quarter daily sales rate is below prior year and we expect that to improve as we move through to the balance of the year. So we are actually tracking fairly close to our original expectations so far through the quarter.

Thank you. Then obviously you saw Trump's [pro] defense plan, I appreciate the fact that details are sparse at this point but any thoughts on how that might impact you at this point in time?

Robert, it certainly an environment where higher defense spending is good for us. Obviously for Lockheed, Martin and Sikorsky with the Black Hawk we benefit greatly from that. As you know we are a key team mate with Bell on the AH-1Z for the Marine Corps so as they continue to increase requirements for the Marine Corps and also for foreign military sales that's certainly good for us.

We are seeing another 15% unit volume increase in JPF from 2016 to 2017 after 25% increase from 2015 to 2016. That and if we keep the A-10 program going it is really going to be favorable for us, but as you said, we need to have the proposed budget turn into a real budget and then have it come through the appropriation process. I think perhaps one of the most significant advantages for us would be that if we actually have a defense budget as opposed to operating under a continuing resolution that it would provide the opportunity for the US Marine Corps to initiate a new program of record for the unmanned K-MAX.

With a continuing resolution the only way that you are able to start a new program is under an urgent operational need which is how we were able to deliver two aircraft to the Marine Corps for use in Afghanistan that are now out in Yuma. We see certainly advantages to higher defense spending and certainly other key advantages to action having a budget.

Thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Robert Kirkpatrick with Cardinal Capital. Your line is now open.

Good morning. I was wondering if you could talk a little bit about the plans for the convertible debt which is coming due shortly and how you think you might be looking at addressing that a review of the potential possibilities?

Sure. Rob, we're certainly -- currently we're doing our alternatives. Take a look at command in our spending in the capital markets.

We do have never of options available to us ranging from replacing it with another convertible note or perhaps even considering high-yield offering. Even just replacing it with bank debt. Those are our three broad options that we look at.

I don't think we're going to do anything exotic. We are in a good place. The capital market environment today is still remains very favorable and as you would anticipate looking at the general pricing levels even though Treasurys have sold off since the election overall corporate spreads have tightened in as much if not more.

We feel very encouraged by the conditions and we are working with our financial counterparties on addressing the upcoming maturity. Certainly we will be keeping everyone informed as we move to that process and certainly as we announced what we are going to do with that upcoming maturity.

And is a straight equity offering on the table as one of those possibilities?

At this point I would say that's highly unlikely. Certainly, we appreciate where the value of the currency but I think we would use that certainly more in line with a something more strategic than refinancing the existing debt on the balance sheet.

Great, that leads into the second question which is I was wondering if Neal you could talk a little bit about the M&A environment that's out there at this time and whether the changes in Washington both actual and talked about respectively have caused any changes in that M&A environment?

Rob, I will start with the second part of the question. I cannot say that we have seen any change in the M&A environment due to the transition of administration or any of the proposed either tax or export import discussions that we have heard about and that we've all heard about.

But I would say that obviously we did two very important acquisitions late in 2015 including GRW, the largest acquisition we'd ever done. We very consciously took a step back so that we could focus on the integration of those businesses and to assure that we had a focus on delivering to the acquisition plan we presented to our Board.

We just crossed over that year and we did meet those expectations so we are very interested and now very active again in the M&A area. We have looked at a couple of Aerospace businesses that would fit very nicely with our engineered products focus. They continue to be highly priced but we will continue to be active in pursue those that we think can make sense in where we can deliver value as we have with the last few.

That's really it. Certainly tax law changes what impact those returned but until we know what it is really going to be we have not brought any of those new calculations into our existing analysis.

Great, thank you so much, I appreciate the answers.

Thanks, Rob.

Thank you. Our next question comes from the line of Chris Dankert with Longbow. Your line is now open.

Morning guys, thanks for taking my question. I guess first thought, you're in negotiations now, so I'm sure there is a limited amount you can say as far as JPF and the new USG order, I suppose. Should we expect that pricing in future looks more like option 12 than anything in the past or any commentary there as far as what pricing looks like for the JPF going forward?

Chris, I don't think we can comment on that. It will be -- when the contract is awarded there will be an ability for people to look at that and work backwards and understand what that pricing is, but at this point in time at this stage of negotiations we're really going to shy away in fact were not going to make any comment on pricing.

Understandable, thank you so much. That's all I had left so thanks again, guys.

Thank you, Chris.

Than you. We have a follow-up question I'm Pete Skibitski with Drexel Hamilton. Your line is now open.

Pete, are you there?

Sorry about that. Rob, did you guys change your methodology they would you calculate backlog at distribution? Looks like those numbers got restated.

We did have a bit of a change in the methodology. We did have a bit of a catch up adjustment that we made on our backlog. Certainly that's really been indicative of rough backlog levels that we've had. We just -- in terms of how we recognize it we [didn't] make a change.

Okay.

Those are firm, similar to how we view our Aerospace backlog, those are all firm POs.

Understood. Just want to get an update on SH-2 Peru program. I wasn't sure how far along we were, if that was going to be ramp in 2017 and effect down in 2018, just wonder if you can give us an update on how far along that roughly $50 million program you are at right now?

Pete, we are -- I would call it towards the middle innings on that program but we do expect to see a year over year positive increase on the top line top line relating to Peru this year. We do expect that to contribute positively to the top line.

That should end in 2018?

2018 -- if I had to estimate of this is what is difficult to say based on how the program will completely unfold, Pete. I would say it is probably on level with where we are going to see on a 2017, not materially different.

Okay. Then last one just because Neal mentioned the AH-1Z earlier, anybody can answer this but I know there are a lot of International opportunities out there for AH-1Z sales. I'm just wondering how you guys are thinking about the prospect of improving that margin there to above zero if it is more volume would help or if you need some sort of contractual change just curious how things were looking there

Sure, Pete. Obviously what we would be looking at is two factors. One, as we go past our current contractual commitments with Bell is that we will benefit hopefully from slightly higher pricing as well as being well down our learning curve so we will attack both sides of that, both price and the cost side.

We think we made some actually some good progress over the course of the last six to nine months. Bell is very encouraged by the reception of the aircraft in the world market today in fact they was news this morning about Australia and competition in Australia including the AH-1Z. We feel very good and we're doing everything that we can to support them and those efforts.

Okay so the improved pricing that's starts in 2018 to take effect, is that accurate?

That would be right.

Okay. That is great. Thanks so much guys.

Thank you, Pete

I'm not showing any further questions at this time. I would knowledge of that to Mr. Eric Remington for any closing remarks.

Thank you for joining us for today's call. We look forward to speaking with you again when we report our first-quarter results in May.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.