Moog Inc (MOG.A) 2016 Q4 法說會逐字稿

Good day and welcome to the Moog fourth-quarter and year-end earnings conference call. Today's conference is being recorded, and at this time I would like to turn the conference over to Ann Luhr. Please go ahead.

Good morning. Before we begin, we call your attention to the fact that we may make forward-looking statements during the course of this conference call. These forward-looking statements are not guarantees of our future performance, and are subject to risks, uncertainties, and other factors that could cause actual performance to differ materially from such statements. A description of these risks, uncertainties, and other factors is contained in our news release of November 4, 2016, our most recent Form 8-K filed on November 4, 2016, and in certain of our other public filings with the SEC.

We have provided some financial schedules to help our listeners better follow along with the prepared comments. For those of you who do not already have a document, a copy of today's financial presentation is available on our Investor Relations homepage and webcast page at www.Moog.com.

John?

Good morning. Thanks for joining us.

This morning, we report on the fourth quarter of FY16, and reflect on our performance for the full year. We will also provide our initial guidance for FY17. As usual, I'd start with the headlines for the quarter. First, our operations came in strong this quarter, with earnings per share of $0.92. This brings full-year FY16 earnings to $3.47, $0.12 ahead of our projection from 90 days ago. Second, we incurred a total of $0.24 of restructuring and impairment charges during the quarter versus our plan from 90 days ago of $0.12. Third, we had another good quarter for free cash flow, to close out the year at a conversion ratio of 120%. Fourth, we're integrating our medical devices segment into our components segment, and simplifying our reporting structure accordingly. And finally, we're providing a first look at FY17 today. Our segments are stable relative to FY16, but we had some adverse mix shifts and a $0.15 higher tax burden. Therefore, we're initiating guidance for FY17 at $3.50 plus or minus $0.20.

As we reflect back on FY16, the following headlines stand out. First, it was another year of technical achievements for Moog products in many different applications. Examples include the successful first flight of the Embraer Air E2 jet; the performance of the F-35 STOVL at the Farnborough Air Show; the entry of the Juno spacecraft into orbit around Jupiter; and the successful beta test of our new wind products with lead customers. Second, it was a tough year in several of our markets, particularly energy, industrial, and defense. As in previous years, we responded with restructuring and portfolio pruning. Third, it was a year of heavy R&D spend, as we continued to invest for the long-term future of the Company.

Fourth, we won several new military aircraft development contracts, which will position us well for long-term growth. Fifth, we acquired a controlling interest in Additive Manufacturing company, a technology we view as key to our future. Sixth, it was another good year of cash flow. We used about a quarter of our cash to repurchase shares. And finally, we completed the strategic review of our medical devices segment, and based an excellent performance over the last couple of years, decided to keep the business and integrate it into our components group.

FY16 will go down as another challenging year for many of our markets, but also a year in which our operations responded to the challenges and delivered solid results. As always, it was the dedication and commitment of our 11,000-plus employees around the world that made all happen, and I would like to thank them for their hard work.

Now let me provide some more details in the quarter. Sales in the quarter of $619 million were down 1% from last year. Sales were down marginally in aircraft and components, and up in space and defense and industrial. Taking a look at the P&L, our gross margin was about flat. R&D was up $1 million, but SG&A expenses were down $5 million. We incurred $12 million of restructuring and impairment expense in the quarter, spread across various segments. Interest expense was up slightly year over year. Our effective tax rate was 31.3%, down from last year's unusually high rate of 33.3%. The overall result was net earnings of $33 million, and earnings per share of $0.92.

For the full year FY16, sales were down 4% from the prior year. Weaker foreign currencies accounted for almost a quarter of the sales decline. Sales were down in aircraft, space and defense, and components, and about flat in industrial. Our components group was hardest hit, with sales down 13% from the prior year. Full year Company-wide operating margins were 9.9%. Operating margins exclusive of restructuring were up in aircraft, space and defense, and industrial. Operating margins were down in components, as they struggled with challenges across all of their markets. Net earnings were down 4%, while earnings per share were up 4% on a lower share count. Free cash flow for the year of $149 million was 120% of net earnings, the fourth year in a row where free cash flow conversion exceeded 100%.

FY17 outlook. For this coming year, we're projecting sales of $2.44 billion, up 1%. The growth is all in commercial OEM sales as the A350 continues to ramp up. Sales in space and defense and components should be about flat with FY16, while industrial sales will be down about 5%. We're anticipating full-year operating margins of 10.3%, and earnings per share of $3.50, plus or minus $0.20. Cash flow next year is projected to be $130 million, or about 100% of net income.

Now to the segments. I'd remind our listeners that we have provided a two-page supplemental data package posted on our website, which provides all the detailed numbers for your models. We suggest you follow this in parallel with the text. Starting with our aircraft segments. Sales in the fourth quarter of $265 million were down 4% from last year. On the military side, sales were down 13% from last year, with lower volumes across most of the OEM portfolio, including F-18, F-15, V-22, Black Hawk and several foreign programs. Sales were also down in the military aftermarket, as the C-5 refurbishment program is essentially ended. On the commercial side, higher sales to Boeing and Airbus more than compensated for lower business jet sales. The commercial aftermarket was up marginally from last year.

Aircraft FY16. FY16 was another challenging year for our aircraft business, with full-year sales down 2% from FY15. As anticipated, we saw growth in our major new programs, the F-35 and A350, but these were more than offset by softness across the broader military OEM portfolio, the military aftermarket, and in our business jet programs. In addition to the lower sales, our negative mix shift weighed on margins, as we saw declines our legacy military OEM programs, as well as in the military aftermarkets. We also had lower commercial aftermarket sales and weakness in the business jet markets.

Aircraft FY17. We're projecting FY17 sales of $1.11 billion, an increase of $46 million over FY16. The growth is all on the commercial side, driven by the A350 rampup. We're forecasting the commercial aftermarket will be down next year on lower 787 initial provisioning. On the military side, we see growth on the F-35 program, and a shift in sales from mature OEM programs to welcome some new, cost reimbursed development jobs.

Aircraft margins. Margins in the quarter of 10.3% were up 130 basis points from last year, despite an adverse mix shift. Last year's fourth quarter included about $3 million in restructuring charges, as it had just over $1 million in restructuring this quarter. R&D this quarter was up about $2 million from last year, but lower overhead expenses more than offset this increase. For the full year, aircraft margins of 9.3% were up marginally from FY15. We incurred a total of $7 million of restructuring expense in FY16, $4 million higher than FY15. We also absorbed $16 million of higher R&D expense, and experienced an adverse shift in our sales mix. Despite these margin headwinds, the combination of cost-containment activities, lean improvements, and the continued movements down the cost curve on the major commercial OEM programs resulted in comparable margins with FY15.

Looking to FY17, we're projecting aircraft margins up slightly from FY16. On the positive side, R&D will come down about $10 million relative to FY16, and we continue see improvements on our new commercial OEM programs, as we move down the learning curve on the 787 and A350. These positive effects are being negated by the shift in the mix of military programs, with cost-plus development jobs replacing some nicely profitable foreign military programs. We're also seeing lower sales on our mature commercial programs, in particular the 777, as well as lower initial provisioning in the aftermarkets. Looking beyond FY17, R&D will continue to abate as a percentage of sales, and the new commercial programs will continue to improve. We're also optimistic that our military book of business will strengthen, as foreign programs recover and US defense spending moves beyond the era of sequestration. Taken altogether, we should see margins expand over a multi-year period.

Turning now to space and defense. Sales in the fourth quarter of $97 million were up 5% from last year. Sales on the space side of the business were up, on stronger sales of our satellite propulsion products. Defense sales were down slightly in the quarter, due to lower sales on various military vehicle programs. Full-year FY16 sales for space and defense were 4% down from last year. Space sales were lower across most satellites and launch programs. This reflects the cycle in our space market, which we have described before. Defense sales were also slightly lower this year, as sales for missiles and to European (inaudible) customers weakened, compensated somewhat by higher US military vehicle sales.

Space and defense FY17. For FY17, we're forecasting sales in line with FY16. Sales will be about the same in both the space and the defense markets. Slightly higher satellite component sales will compensate for slightly lower NASA sales. But on the defense side, higher military vehicle sales will compensate for marginally lower missile sales.

Space and defense margins. Margins in the quarter of 6.2% included two unusual items. First, we increased our product reserves by $3 million for an engineering issue on some of our satellite engines. Second, we took a $5 million non-cash impairment charge on our Additive Manufacturing acquisition. Over last year, we have learned an enormous amount about how to make additive products in production, and are more convinced than ever of the long-term potential for the technology. However, we also learned that the anticipated sales rampup in this business will not materialize as quickly as we originally thought, and are therefore taking a writedown on the goodwill. Full-year FY16 margins of 11.3% are up nicely from last year, on improved operating performance, lower restructuring costs, and the absence of the accounting correction in FY15. For FY17, we're forecasting margins of 13.2%.

Turning now to industrial systems. Sales in the quarter of $131 million were 2% higher than last year. The increase was mostly due to slightly stronger foreign currencies relative to the US dollar. Sales were up in energy, about flat in simulation and test, but down in our industrial automation markets. For the full-year FY16, sales of $515 million were down marginally from last year. Sales were up in energy on stronger wind sales into China, but were also up in simulation and test, reflecting increased activity at our key customers. Sales to industrial automation customers were down in metal forming, steel production, and in the aftermarkets. Our general industrial automation markets continued to move sideways, awaiting a structural recovery in the global capital investment cycle.

Industrial systems FY17. We're projecting a 5% sales decline in FY17 to $490 million. Sales into the energy market will be lower, as a result of lower wind sales in Brazil, as a consequence of the GE takeover of Alstom. Sales to non-renewable energy customers will also be lower, on the assumption that oil prices remain depressed. Sales to industrial automation customers will be marginally lower, based on the softness we've seen in bookings over the last few quarters. Finally, sales of simulation systems will be slightly lower, after a strong year in FY16. Unfortunately, there continues to be little positive news in the macroeconomic front which might suggest a structural improvement in our industrial business anytime soon. Therefore, FY17 will be another year of cost-containment, focus on lean, and continued investment in longer-term organic growth opportunities.

Industrial systems margins. Margins in the quarter of 7.7% included $4 million of restructuring expenses. As in prior years, we've continued to respond to the challenges across our industrial markets with cost reduction activities. Margins for the full year of 9.4% were up from last year, despite a negative shift in the mix. For FY17, we're forecasting margins of 10%.

Now to the components group. As I mentioned in my opening remarks, we're integrating our medical devices segment into our components group going forward. My comments in this section on the components group relate to this combined segment. Components Q4. The steady recovery in sales from the low point in Q1 FY16 continued this quarter. However, as in previous quarters this year, the comparison with last year continued unfavorable. Sales in the quarter of $125 million were down 1% from last year. Sales into our aerospace and defense and medical markets were about flat with last year, but we continued to see softness in the general industrial markets, which include our sales for oil and gas exploration products.

For the full-year FY16, sales of $467 million were 13% lower than last year. It's been a very tough year for our components group, unlike any other we've seen since we acquired this business back in 2003. Sales were down across every major market we serve. Sales into the aerospace and defense markets were down in almost every category, with the Guardian program being one of the few bright spots. Sales to our energy customers were down 50% in FY16, following on from a 26% decline the year before. Finally, sales of motors to our customers for sleep apnea equipment were also down 50% from FY15, as they changed consumer models, and added a second source of supply.

Components FY17. We're projecting sales next year of $477 million, up from combined sales of $467 million in FY16. Within our components group, we're creating a new medical category for reporting purposes, where we're combining our medical devices sales with sales of other components into various medical applications. All of the sales increase next year in our components group is in this new medical category, driven by increased comp sales. Sales will be about flat in our [RK&D] portfolio, but we anticipate some further deterioration in our energy markets, compensated by slightly higher sales into our industrial markets.

Components margins. Margins in the quarter were strong at 14.3%, continuing their sequential improvements throughout FY16. Higher sales and a favorable mix upped the margins in this quarter. For full-year 2016, margins of 10.7% were very respectable, given the very weak first half. For FY17, we're forecasting margins at 10.4%. As we folded our medical devices segment into components, I'd like to recognize the tremendous improvement the leadership of the medical devices segment has achieved over the last three years, with operating margins increasing from 3.1% in FY14, to 8.7% in FY15, up to 11.5% in FY16. It's a great turnaround story, and we look forward to further success in the coming years, as part of the components group.

Now, let me provide some summary guidance. As we look to FY17, we are optimistic that our aircraft, industrial, and components businesses are starting to turn the corner to multi-year performance improvement. Our new commercial aircraft programs are coming down the cost curves, R&D is starting to wane, and new military development programs bode well for the future. Our industrial businesses are introducing new products to the wind and general automation markets. And after a year of restructuring, our components group should start the slow recovery from the oil shock of the past couple of years.

Despite our optimism for the coming years, we're starting out FY17 with a cautious view of our markets. We're assuming most of our markets will be fairly stable, with the only real growth coming from our A350 program. We're also assuming a negative shift in the mix of programs in both our military and commercial aircraft businesses, as production rates on legacy programs such as the F-18, 777, and business jets slow, and new programs such as the F-35 and A350 ramp up. Our aircraft R&D will abate somewhat, but will still remain relatively high on our A350 and E2 programs. We will also have a higher tax rate than FY16. We continue to look for top line growth by remaining close to our key customers, and our internal focus remains cost-containment, portfolio refinements, and then investments in lean and innovation.

Let me finish my comments, as I did last year, by looking at our business to the lens of the end markets we serve. Those markets are defense, industrial, commercial, energy, space, and medical. Defense remains the cornerstone of our Company, led by the strength in our military aircraft business. Defense spending is in a cyclical trough, but we believe as global conflicts continue, we are ideally positioned to benefit from recovery. Over the last year, the F-35 program has gained momentum, and we won several development jobs in new platforms, which bodes well for the longer term. We have seen some of our legacy US programs slow, and we've been subject to sales volatility on our foreign military programs. On the other hand, our midsize business remains very strong, and we're seeing our ground vehicle business improve. Defense is a long-term play, and we remain focused on building a portfolio of platforms which will provide returns for decades to come.

Our industrial markets broadly follow the pace of global investments in capital goods. As that cycle has stagnated over the last few years, we've restructured our business, while investing in new products and technologies. Our areas of focus are next-generation military hydraulics, and very large brushless motors for use in a variety of specialized industrial applications.

Our commercial aircraft sales grew modestly in FY16, and are poised to accelerate again in FY17. Our primary focus is operational, as we look to close out several large development jobs, and continue our progress down the cost curve on the new production programs. FY16 was a year of steady progress, despite the elevated R&D spend. For FY17, we see further progress, and as the following years unfold, we will have the compounding benefits of reducing costs through our R&D expenses, and a growing aftermarket.

The energy markets remain very challenging, but our strategy is unchanged from a year ago. In the oil and gas business, our focus remains on cost reduction, while looking for selective growth opportunities. In the wind business, we're investing in new products to rebuild our market position. We believe we will start to see the impact of these new products by the end of FY17.

In our space business, FY16 was a very good year, despite slowing sales. We benefited from restructuring activities in the prior year, and the focus on our most profitable product lines. We continue to invest in new technology, such as green propellants, and position ourselves for the ground-based strategic deterrent program. This program, to replace the Minuteman missiles, has the potential to be $100 million-plus annual business for Moog, although full production is probably close to a decade away.

Finally, our medical devices segment performed particularly well in FY16, and we believe will improve further in 2017, as part of the components segment.

In summary, we continue to enjoy strong positions in a diversified portfolio of businesses. Like many companies, we are faced with a slow growth environment. We've responded to this environment with restructuring activities, ongoing portfolio adjustments, and continued investment for the long term.

Despite the market challenges, our fundamental strategy has not changed. We solve our customers' tough problems, and applications for performance really matters. We focus on niche markets, where we seek to be the dominant supplier. Our growth comes from expanding our range of high-performance components, while also increasing our scope to becomes a system supplier to our major customers. Long-term growth will continue to be a combination of organic and acquired. Our internal initiatives, to deliver on our goals, our talent development, lean, and innovation.

And finally, we're focused on deploying our capital to maximize shareholder returns over the long term. Looking to FY17 we anticipate sales of $2.44 billion, and earnings per share of $3.50, plus or minus $0.20. Similar to previous years, we anticipate a slow start to the year, with earnings per share in the first quarter of between $0.70 and $0.80.

Now let me pass you to Don, who will provide some color on our cash flow and balance sheet.

Thank you, John, and good morning everyone.

We finished the year with a solid $30 million of free cash flow in the fourth quarter, resulting in $149 million of free cash flow for the full fiscal year. Our conversion ratio for the year was a respectable 120%. This follows strong results, averaging more than 150% conversion over the previous three years, so we have had a good run. During the fourth quarter of this year, we were not in the market repurchasing any of our stock. With respect to our leverage, we were in our comfort zone of 2.2 or at 2.2 times, particularly as we look for acquisitive growth. We haven't had much to report regarding M&A in recent quarters, but we continue to look for strategic targets.

The $149 million of free cash flow for the year compares with a decrease in our net debt of $79 million. The difference relates primarily to the cash used to repurchase Company stock earlier in the year, as well as the December 2015 acquisition of 70% of Linear Mold. For the year, we've bought back 850,000 shares under our share repurchase program, at an average price of $46. We currently have 3.4 million shares remaining under our existing Board authorizations for share repurchases. Our projections for 2017 do not include the impact of any future share buyback activity.

Net working capital, excluding cash and debt as a percentage of sales, was up for the year to 29.3%, compared to 28.2% a year ago, on slightly lower sales. The timing of certain cash receipts and disbursements during last year's fourth quarter contributed in part to the increase year over year. Notwithstanding this year's slight uptick, we've seen a rather steady decline in this working capital metric since we've peaked at almost 38% of sales in 2009.

We continue to focus on improvements to managing our balance sheet, in order to bring our investment in working capital down. We're forecasting free cash flow for 2017 to be $130 million, reflecting a cash conversion ratio of just over 100%. Capital expenditures in the quarter were $25 million, and that includes $9 million of expenditures for the purchase of two facilities that had been released. Depreciation and amortization totaled $24 million for the fourth quarter. For all of 2016, CapEx was $67 million, while depreciation and amortization was $99 million. For 2017, we are forecasting CapEx of $80 million, which is a level more consistent with our typical run rate. D&A in 2017 will be about $96 million.

Cash contributions to our global retirement plans totaled only $7 million in the quarter, resulting in $95 million of contributions for the full year, as compared to $76 million for all of FY15, and for 2017, we're planning to make contributions in our global retirement plans totaling $91 million. Global retirement plan expense in 2016 was $65 million compared to $61 million in 2015, and in 2017, our expense for retirement plans is projected to be flat at $65 million.

Moving on to our tax rate. Our effective tax rate in the fourth quarter was 31.3% compared with last year's 33.3%. Let me make sure I said that right. 31%, 31.3% in the fourth quarter of 2016, compared with last year's fourth quarter at 33.3%, so down 200 basis points. Last year's rate included an unfavorable mix of taxable earnings relative to the full year's previously-forecasted results. And for all of 2016, the effective tax rate came in at 28.5% versus 28.3% in 2015.

Moving ahead to 2017, we're forecasting an effective tax rate of 31.5%, higher compared with 2016, due to lower R&D credits associated with the timing of when the US law changed in late 2015, which was our first quarter of 2016; and from the 2016 favorable impact of lower corporate rates in the UK, and that had an impact on our deferred tax liability that won't repeat again in 2017.

Moving to cash and liquidity, we were able to bring back $91 million of offshore cash to the US late in the fourth quarter, with no net tax impact. We used this repatriation of cash to pay down the outstandings on our revolver, and we remained hopeful, like other global US companies, that after presidential election, our political leaders will provide us with enough incentive to return the rest of our $300 million of offshore cash back to the States.

Our leverage ratio, net debt divided by EBITDA, decreased to 2.2 times, compared with 2.4 times a year ago. Net debt as a percentage of total cap was 41.0%, down from 43.5% last year. At quarter-end, we had $418 million of available unused borrowing capacity on our $1.1 billion revolver that terms out in 2021.

So with that, I will turn it back to John for any questions you may have. John?

You can open up the lines and take some questions.

(Operator Instructions)

Cai von Rumohr, Cowen and Company

Could you please review the $7 million of restructuring, just so I understand it. $4 million is in industrial. $1 million is in aircraft, and where is the rest of it?

There's about $2 million of it in corporate, that gets you to the $7 million.

Got it, okay. Walk me through. So you have this $2.2 million minority interest credit. That would suggest that Linear Mold basically lost $6.5 million to $7 million. So did it have an operating loss of about $2 million, in addition to the $4.8 million goodwill impairment?

Yes, it did.

Okay. Going forward, what are you doing to contain the loss of this business? What do you projecting for FY17?

It's a small acquisition, Cai, but the losses that we suffered in the year that we just went through, we are looking at how we structure the business to make sure that we don't continue to do that. Part of it, of course, was more of an investment in Additive Manufacturing than we had anticipated.

We learned a lot about the production side of Additive Manufacturing, that we didn't understand before. And to be honest, we thought the acquisition did, and they didn't understand it either.

Simple example I give you is it turns out they have to qualify each part on each machine, the machines are not the same. So we've learned a ton through that, and that's been part of that significant operating loss, or investment as I might call it, in that learning. So when we look out into 2017, the focus is on making sure that we structure that business so that we're not losing money on it, and that's what were actually working our way through at the moment.

Part of it is, there's been a significant opportunity for sales ramp-up, and as you watch that opportunity push to the right, you're trying to pick the right time to decide -- okay, I now need to restructure and assume that sales ramp isn't going to happen, or do I continue for another couple of quarters, in anticipation of that sales ramp up? So I've got the costs ahead of the sales ramp up. And we're working our way through that, but the intent is to make sure that we don't lose the same or make the same investment in 2017 that we made in 2016.

Got it. Turning to military aircraft, F-35. You've only projected its volume, up $5 million to $95 million. How come not more? And you cited it among the negative mix factors. I thought that production should be solidly profitable and increasingly so, as you move through.

Two answers to that question. One is, the sales ramp up Cai, there's two elements. There's the volume, and of course as you move down the pricing, down the production curve, there is a pricing adjustment as well. So you've got to put the two of those together, and then you have to put them into context where we are in LRIP 8, 9, 10, versus where Lockheed would be.

So it's not in any way out of line with what our customer is doing or what our customer is projecting. It's a timing issue, a pricing issue, and a volume issue, and you put them all together, and that is the number that you and up coming up with. Plus it's a mixture, it's a mix of A's, B's and C's.

So that's the answer to why is it not up more? And yes, in terms of -- yes. We're far enough down, it is a profitable program, but if I compare it with some of the much, much, much more mature programs, V-22, F-18, F-15, foreign military stuff, which is where we are seeing the lack of business, then it is not as profitable as the stuff that we have much further down the learning curve.

Okay thank you. And just one last one. The F-35, did you get caught in the cross hairs of the unilateral imposition of LRIP 9 UCA on Lockheed Martin?

No. We had already negotiated with Lockheed on LRIP 9 and 10. I think they did that with their suppliers in advance of when they went to the government.

Thank you very much.

(Operator Instructions)

Robert Spingarn, Credit Suisse

Following the answer to F-35, but more across the business, I was going to ask you, with the exception of the A350, you are flattish pretty much elsewhere. How much of that is volume versus price?

Let me see if I understand your question, Rob. Are you talking within aircraft, or are you talking with the military aircraft?

It was a broad-based question, John, but I guess you're right. We should narrow it down a little bit.

But what I'm generally getting at is, as you said on F-35, as you get into higher production numbers in a lot of businesses, certainly true in the aircraft side, pricing comes down. Plus we also have this supply chain pressure that we've seen from the commercial OEMs. And so I'm wondering if in some of these flattish line items that we see, for example on your slide 2 of the supplemental data, where the FY17 sales are flat, do we have some situations here where volumes are up, but pricing is down, or the reverse?

Is not a simple answer, so let me -- because it's not uniform. So typically what will happen is, so for instance, V-22 volumes are down. Black Hawk volumes are down. F-18 volumes are down.

Typically, though, as you move down in volumes, typically you get a little bit of a price adjustment upwards in military programs, just because lower volumes, you're trying to absorb more costs. So ironically, typically pricing goes up as volume comes down on standard military programs. But not enough to compensate and keep in the top line.

There is, as I mentioned in the text, part of what you are seeing is military OEM, there's about $25 million in 2017 of additional cost-plus development work, that you can assume is a breakeven because it's great. It's already been paid for, but it's not going to be margin contributing, and that's replacing dropped lower sales on a variety of foreign programs that we've enjoyed sales on. They go through cycles, example is the T-50 so you have that shift out. That's a margin impact. It's a lower volume on some foreign programs, and some margin impact because it's production jobs versus cost-plus development work.

So, and on the commercial side, pricing is not adjusting on the major new programs. The pricing at the moment is stable on the major new programs, so you're seeing volumes increase. And what happens then is you start to come down the cost curve, particularly on the new one like the A350. 87 is still coming down the cost curve, but obviously that's further on in terms of its production rates.

So I don't have, and then business jets are just down a bit. There is volume lost in the business jet. Typically there again, pricing will not change significantly. So I don't know if that helps, Rob, so it's a mixed bag of all of the above.

Okay. Let's look at Boeing OEM for a minute here. So that's flat. And just focusing on volumes, is that simply some of the effect of 787 having matured at 12, and then have you baked any continued downside on 777 into that number, or is that a following year event? How do we think about the moving pieces at Boeing? And then of course with the MAX, for the 737 rising.

Our numbers have the 87 up about $10 million, and the other Boeing down about $10 million. 87 production rates and it's 777 on the downside, so it's pretty much that's it. $10 million more of 87, $10 million less of 777, and the rest of the book more or less stable.

Should Boeing cut 777 further, down to let's say 3.5 a month for FY18? Would you see any effect of that? Is there any sensitivity in your guidance to something like that at the tail end of your 2017?

It would have to be pretty dramatic. Because we do long-term contracting on it, Rob, because it's cost based inputs, because of the long cycle in terms of the production rates, it's not as if you suddenly see in one quarter this dramatic drop-off. But having said that, if Boeing drops down to 40 or 50 a year, then it will have an impact on us. Probably more in 2018 of course, is where you'd see it feed through, but if they drop it sooner rather than later maybe in the back end of 2017, we would also see an impact, Robert.

Okay. All right. That's very helpful.

And we try not to get ahead of what our customers do, partially because your whole supply chain is built around the forecasts that they provide us with, so we try to make sure that we're working through that.

Okay. Just switching to the commercial aftermarket. You've got that coming down next year, I think you've talked about a little earlier. Again, is that largely provisioning, or you just see continued weakness on spares?

It's 87 provisioning is essentially the shift.

And so how do you feel about spares? We've talked about this in the past. Do you feel like that's picking up a little bit with the capacity growth?

Let me just check, Rob. I'm thinking when you say spares, that's synonymous with what we would call initial provisioning. Is that fair?

No. I mean replacement parts, ongoing spare activity. Not provisioning, but just the normal wear and tear spares.

Unfortunately Rob our stuff never wears out. So there's repairs, but there's not -- there's initial provisioning because airlines put some stuff into stock in order to allow them turn stuff around, but our actuation outlives the airplane.

How about the repair side?

The repair side is holding fairly steady, as I say. It's the initial provisioning on the 87, which is natural. It was very high for the first few years, and then it starts to slow down as the fleets -- the folks who buy into the airplane, they buy the initial provisioning because they get the first one, but they probably buy enough for the fleet of 10 or 15 aircraft that they have, and then that slows.

So that's the change. It's about an $8 million change in our total commercial aftermarket that we're estimating for FY17 from FY16, and essentially it's about $8 million of lower 787 IP is what we anticipate.

Is there any offset there from 350?

Not much. That may be conservative. I don't know. We're anticipating the 350 would be up marginally but not much. Less than $1 million. So maybe that's a little bit conservative.

We think the 87 initial provisioning was particularly heavy, given some of the initial operational challenges that were with the airplane. And the A350, we're just not anticipating that. Maybe we get a nice surprise, but right now we're not anticipating real growth in that provisioning for the A350 next year. In 2014 there was none of it. 2015 was about $7 million, last year was about $11 million, and we think it will be about the same in 2017.

You talked to this a little bit earlier. Could we just review the R&D profile over the next few years as it starts to lighten up?

I said we would see R&D in 2017, we're projecting R&D coming down in the aircraft business by $10 million. For the Corporation in total, you come down about $7 million, and that's because there's a little bit of a pickup in some of the other businesses, just nothing out of the ordinary, just a small bit of a pickup.

And then what we've said over the years, and I would stick with this, because I don't want to project 2018 and 2019 prematurely, but aircraft in that 5% of sales range is what we think it's a long-term sustainable level, and right now in 2017, it's in that 7.5%, a little over 7.5%. So there's still a good 250 to 300 basis points of R&D abatement that we should see over the following years.

Okay. And then last question. Thank you for that. And I might have missed it if you said it, but SG&A for next year?

I'm going to turn to my friend Don here.

Our SG&A in our model, let's make sure we're talking apples to apples here. SG&A in our model is going to turn out to be about $315 million or so, and that's exclusive of some corporate expenses. So we might want do that off-line Rob, just so we're not giving you a bad number. But we're about flat. Our modeling says our SG&A with corporate expenses is going to be up $5 million to $10 million on a $350 million number, something like that.

Okay. One more. There is no buyback contemplated in the guidance, right?

No. We never project buyback in our guidance, Rob.

Right. Just wanted to make sure. Thank you.

(Operator Instructions)

There appear to be no more questions at this time.

Thank you very much. Indeed, thank you Evan, thank you to our listeners. We look forward to reporting the first quarter of FY17 in about 90 days time. Thank you.

That does conclude today's presentation. Thank you for your participation. You may disconnect.