TXT
#<UNK>, I think you are accurate in terms of your assessment of how we get there.
It's certainly on the lower end of the conversion than we would normally like to see.
But, again, a big piece of it is expectations on lower margin in terms of the fractional, which is a big part of our growth, frankly.
So if you look at that year-over-year incremental ---+ and <UNK> was just walking through the map as well, reading serial numbers of aircraft.
But a lot of our incremental as we go from 2015 to 2016 is Latitudes.
And a big chunk of that is going into the fractional market.
I think that's just the reality of where we are.
A big piece in the year over year is going to be fractional deliveries which are at lower margin rates.
It's still good business for us, but at lower margin rates.
Yes, it's the pricing on the fractionals as opposed to the cost basis.
I think where we wanted to be on the cost, we feel pretty good about where we are on the cost on the Latitudes.
You are always going to have a little bit of inefficiencies in the ramp of a new one, but it's not a material issue for us.
It's doing really well.
The cost is in a good place.
It's really a question of pricing on fractionals.
Sure, <UNK>.
If you go to back to fourth quarter last year, we did talk about the fact that we had a pretty significant international military order.
And those are lumpier than the normal flow.
That contributed a pretty good backlog into Q4 next year.
So if you took that out, the dynamic we've typically seen in Q4s, because it's such a high-delivery quarter, has been that we see a much lower book to bill in Q4s, at least we have in recent times.
So I don't think this year, if you were to back out the military deal in the fourth quarter, it doesn't look very different on a year-over-year basis.
It was 25 firm ---+ I thought it was actually 150 option.
It's 125 option, so it's 150 total.
Right.
Anyway, yes, I think it's a few hundred basis points ---+ 200 to 300 basis points, <UNK>, when you think about the margin impact of sales into fractionals versus retail sales.
Correct.
Yes, it'll be up but not a lot.
Yes, not a lot.
The R&D is relatively, as I said ---+ if you look segment to segment it's relatively the same as you go from 2015 to 2016.
So not a headwind for sure.
Yes, particularly driven by TAPV, <UNK>.
The ship to shore, the development program is relatively flat through the quarters.
But the TAPV will certainly be a very heavy Q3, Q4.
The auto markets continue to be pretty healthy.
As I mentioned in the prepared comments, we saw growth again this year in all three regions ---+ in North America, Europe and Asia.
All the forecasting ---+ we drive our guidance, obviously, and our model based on what's out there in terms of what all the OEMs are saying.
And right now they are all forecasting growth again in 2016.
So we expect obviously to grow with that.
We have had some nice wins on new models, which is helping to drive our growth.
Our growth has been in excess of what overall markets have done on the auto side.
And I expect that will be true again in 2016.
It's been pretty flat, <UNK>.
Some models are up a little bit, some are flat.
But all in all, it's not materially different.
It's a fairly stable price environment.
On the aftermarket, on a comparable basis we were pretty flat.
We had some changes in how we recognized revenue in terms of some engine programs, which I think we've talked about before, which doesn't affect our profitability but just the revenues.
We are not basically in between the customer and the engine side.
So all in all, I think it's relatively flat and we'd expect, frankly, on a comparable basis, a slight uptick in aftermarket in 2016 from 2015.
And similarly on the used aircraft pricing, it's been fairly stable.
From a balance sheet standpoint, we will probably refi what we have coming due this coming year.
We're pretty comfortable now with our debt levels that the balance sheet has.
We have had good flexibility over the past couple years, we think, from an M&A standpoint.
So I don't think there's a real change in the M&A aperture.
We feel like we have been able to do the things we wanted to do.
And we will be able to continue to do that.
But we will stop paying down debt at these levels.
Our debt levels are getting to about where they should be from a ratio standpoint.
But I would add the same color <UNK> did.
We will do deals that we think make sense.
We haven't felt in any way constrained.
Clearly, we have access to the market if we need to do that if the right deal came along.
But we are not going to do deals that we don't think make sense.
And we are certainly not going to run around and try to find stuff or force stuff that we don't think fits in the business very well just to deploy that way.
I think our M&A strategy is one where, if we see opportunities ---+ it's a great fit, we think we can get great leverage, it supports the balance of our business ---+we will do them.
Again, I don't think our cash, the balance sheet thing, is particularly excessive yet.
It's not like we are worried about accumulating too much cash.
We will continue to be pretty aggressive at looking for opportunities across all our business on the acquisition side.
And, as I said, we will also be opportunistic around the share buyback in terms of deploying that capital if we think it makes sense based on where the shares are trading.
I think when we look at the Hemisphere and how we size the Hemisphere, our intent is to be just below where that market is.
Because, you are right.
I think the 450, 550, the Global 7000 ---+ there's 7X, 8X ---+ it's not our intent to be competing with that guy.
So if somebody is looking at a G450, the Hemisphere is designed to be slotted one tier below that echelon of aircraft.
We think that's the market where there hasn't been a lot of reinvestment by a lot of the big iron guys, which is why we're going there ---+ not with the intent of going up and joining in that area.
Because I think you're right; I think it's a well-served market.
In terms of current pricing, I have no idea.
That market cycles just like the light mid-sized cycle.
So where pricing and demand is right now is a function of the market.
But the intent that we have with Hemisphere is it slots just below, before you get into those big iron guys.
No.
No, we haven't.
It's been pretty solid.
The Scorpion ---+ I think the good news is that one of the most critical issues for that program was always determining a path to certification.
I think the good news is, through a lot of work last year, the Air Force has now opened up the ability to go through an air-worthiness process with the Air Force.
They have initiated that program.
Obviously, we fully expect to participate in that.
We have the first aircraft that will be the conforming test articles in production as we speak.
And are working with the Air Force to get under contract to have them conduct and ultimately provide air-worthiness certification for the aircraft.
So that's a big step forward for us.
I think eventually there could be.
Obviously, there's a lot going on budget-wise in the US Government.
But we've always thought that, while this is certainly intended more as an international product for a lot of countries that can't afford to fly the F-22s and the F-35s of the world, we certainly think the capability of the aircraft might be one that at that price point and that capability could be attractive for a lot of missions that could include the US.
Thank you, ladies and gentlemen.
