達信公司 (TXT) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Textron's second-quarter earnings call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Vice President of Investor Relations, Doug Wilburne.

Please go ahead.

Good morning, everyone, and thanks for joining us so early on what we know is a very busy day for everyone.

Joining me here today are Lewis Campbell, Textron's Chief Executive Officer and Ted French, Textron's Chief Financial Officer.

Before we begin today's discussion let me remind you that we will be making forward-looking statements.

Any such forward-looking statements are subject to various risk factors which are detailed in our SEC filings.

And also in today's press release.

Moving now to our results for the second quarter.

Revenues were $2.8 billion, up $153 million from last year, representing an increase of 5.7%.

Earnings per share from continuing operations for the second quarter were $1.34 compared to $0.86 a year ago and our guidance of $1.15 to $1.25.

Let me mention that we delivered 76 jets in the quarter and three of those were expected to be delivered in the third quarter.

This represents about $0.005 per share of profit accelerated from the third quarter.

With that, I will turn the call over to Lewis.

Thank you, Doug, and good morning everyone.

Before I start my customary discussion of the quarter I would just let you know Ted and I just came back from the Farnborough Air Show, and I got to say it was really obvious and pervasive that customer excitement about our products, both aircraft and defense products by Textron Defense on display there were nothing short of spectacular.

This tells me the robust demand for our products is likely to continue, which should also translate in additional growth and revenues for years to come.

Lots of excitement there.

In the meantime we are pleased that we had another very strong quarter operationally and strategically, and the rest of it is shaping up to be better then expected.

In many ways our performance demonstrates continued progress with our transformation strategy.

For example, we saw another sequential improvement in margins at industrial, and we set a new record high quarterly margin at Cessna.

The transformation initiative such as the deployment of lean processes across the enterprise, establishment of shared service centers and consolidation of health care plans to name just a few, have been key drivers in our performance improvements.

Furthermore, we made substantial progress at Bell on our many growth platforms there, including continued recovery and performance and schedule with the H1 program.

In fact, based on our demonstrated progress and plans for continued improvement, the Department of Defense has just recently granted authority to proceed with Lot 3 production.

The H1 is an important growth program for Bell, and by the end of the decade we expect to be generating revenues of about $350 million per year, great program.

Of course as most of you know, the star of this year's Farnborough Air Show was the V-22, and we had the first-ever crossing of the Atlantic Ocean by an assault support helicopter.

Unlike conventional rotary wing aircraft which must be transported into overseas theaters, the V-22 can self deploy thousands of miles over water to get itself into the fight, eliminating the need and cost for amphibious or air transport.

That is just one of its many unique and valuable capabilities.

And we are executing ahead of plan for performance and schedule, thanks to the continued progress improvements driven primarily by our lean manufacturing discipline.

In fact, we now expected to produce an additional unit this year which brings us to deliveries of 17 versus 16 as planned for '06.

And of course, the V-22 represents a strong growth platform, in fact, we will reach $1 billion of revenues by 2010.

And considering the excitement level at Farnborough and future development of the tilt-rotor variants under consideration, there is additional opportunity well beyond that.

Another significant growth driver at Bell is the Army's armed reconnaissance helicopter or ARH.

This program will reach $450 million in annual sales by the end of the decade, and we believe this aircraft will also have significant additional demand from about the U.S. government and foreign entities.

In fact, in addition to the 366 original program units, the U.S.

Army has indicated they want an additional 120 aircraft for the National Guard deployment.

So things are very busy on the military side.

On the commercial side we are in the process of significantly expanding our production capacity and commercial demand continues to be very strong.

For example, we had $1 billion in preliminary orders for our new 429 and 417 models, which began shipping in 2007 and 2008, respectively.

As a reminder, that $1 billion is really not in our official backlog.

In the meantime, demand for our current helicopter products is also very strong.

So far this year we have delivered 66 units, and that is up about 25% from last year's 53 units.

And as a result our commercial backlog has also grown to $680 million, representing 249 orders, up from 575, so that is 680 this year year-to-date versus 575 at the end of last year, and the difference in orders is 249 year-to-date versus 193 when we ended the year.

So in total with significant demand from both military and commercial customers, Bell Helicopter revenues are expected to reach $4 billion by the end of the decade.

And you know we have an equally compelling growth story on the other side of the Bell segment, in our Textron Systems, Defense and Aerospace business.

During the quarter we delivered 128 ASVs, up from 82 units in the first quarter, and we are fully on track to deliver on our commitment of just over 450 units this year.

Demand in the ASV productline continues to develop.

Most recently, the Army requested an ASV equipped with a laser based artillery guiding system.

This program variant known a The Knight currently calls for about 380 units.

Actually during the quarter we delivered three prototypes of this vehicle, and we currently plan to deliver 10 per month beginning in January of next year.

While full funding for The Knight program has not been secured, the current DOD budget proposal provides funding for the first 88.

At about 600,000 a copy the total program potential is about $225 million.

Another line of products that will generate significant new revenues for Textron Systems derive from the U.S.

Army's current and emerging battlefield needs.

Most recently, we were awarded a three-year $115 million contract to design and develop what is known as the Intelligent Munition System, or IMS.

IMS is actually a network of sensors and munitions that provide situational awareness and terrain control of the battlefield.

We also previously won the development contract for the unattended ground sensors program or UGS for urban and tactical battlefield sensing.

The IMS and UGS represent two out of the three elements in the first spinout of the Army's future combat system.

This first future combat system spinout provides new technologies that can be deployed immediately using existing network capabilities.

Longer-term these products will be further developed to be integrated and fully functional for the future combat system on the table right now.

Another important new product that we're ramping up for the Army is a Controlled Network Munition System called the Spider.

Last quarter we signed an LRIP contract for the Spider along with our production partners.

And assuming these three programs IMS, UGS and Spider all receive full rate production funding they will generate about $200 million in annual revenue by 2012.

And yesterday we announced the acquisition of Innovative Survivability Technologies to augment both our precision engagement capabilities and military vehicle technologies.

This move, while small, is part of our portfolio of management strategy, adding assets where we can leverage our capabilities and create value.

So summarizing the Bell segment, we have excellent growth prospects for the rest of the decade with good visibility.

Furthermore this growth by and large is resistant to short-term changes in the global economic environment.

The market environment at Cessna also remains very strong with continued solid bookings in spite of the lack of near-term availability.

For 2006 we plan to deliver about 300 jets and we expect new orders will exceed deliveries at a level consistent with last year's order rate of about 329.

Year-to-date we've received 165 orders with 54 taken in the second quarter.

Given this continued vitality in the market we've established our preliminary 2007 production plan at 370 jets, which includes approximately 40 of the first Mustangs going into production and you know that is our new entry-level jet, so that is 370 for next year, 40 of which are Mustangs.

Even at this higher production level we're about 90% sold out for next year with only 35 available slots.

As we see it demand will continue at this pace for the foreseeable future, and we're expecting a significant increase in deliveries in 2008, as well.

Clearly our strategy of investing in new products, coupled with strong market demand is driving long term revenue growth at both Cessna and Bell.

In fact, through the first six months of the year we've increased total backlog at Cessna and Bell combined of more than $1 billion.

Our transformation focus on customer intimacy is showing up at industrial as well.

For example, early this month Kautex won a very important platform and took it away from a competitor to begin supplying a Volkswagen façade fuel system beginning in mid 2008.

We also celebrated the official opening of our third Kautex plant in China; located in the southern part of the country, this plant will initially supply fuel systems to Nissan.

Finally, the growth theme was apparent at Textron Financial as well as we grew the receivables portfolio over 10% so far this year.

In addition, at the very end of the quarter we acquired $160 million dealership inventory financing business from Electrolux and added this company to our high-performance distribution finance operation.

Before I turn the call over to Ted, I will end with a final comment or two on our transformation strategy.

I can assure you that we remain committed as ever to this journey.

We continue to invest in enterprise wide systems and world-class processes with the real laser focus on talent development, our customers, new products and growth.

We are also making steady progress with the portfolio portion of our strategy.

Certainly our June announcement of an agreement to sell Fastening Systems to Platinum Equity was a major step.

This transaction is on track to close later this quarter, and we continue to seek and acquire assets that will complement our existing businesses.

In closing our first-half results and progress validate our transformation strategy once again.

Our growing backlog at Bell and Cessna, recent program wins at Textron Systems, our continued investment in new products at all of our businesses and quality growth at TFC give us confidence in our long-term outlook of 9% to 11% annual organic revenue growth.

This strong top-line growth coupled with continued long-term margin expansion should result in even higher EPS growth and higher ROIC expansion, which in turn should lead to significant growth in shareholder value.

Ted.

Thank you, Lewis.

Good morning, everyone.

Let me start off with our usual analysis of our results for the quarter.

EPS from continuing operations was $1.34, an increase of $0.48 from a year ago. $0.18 of that improvement was from business fundamentals, while $0.30 reflects last year's impairment charge we recorded against the Collins & Aikman preferred shares.

Examining the business fundamentals, pricing was a positive $0.33 or 2.6% increase, while inflation was a negative -$0.38 reflecting an inflation rate of about 3.4%.

Performance was a positive $0.26, driven primarily by cost reductions, including Textron Six Sigma benefits.

The reduction of shares from our buyback program contributed $0.06, and Textron Financial was a positive $0.06, and volume and mix, finally, provided a positive $0.04.

On the other side increased R&D reduced earnings by about $0.16, and higher pension cost was about $0.03.

So let me recap those for you starting with the positives.

The investment impairment in '05 was worth $0.30.

Pricing $0.33, cost performance $0.26, lower share count $0.06, Textron Financial, $0.06 and volume and mix, $0.04.

The negative items, inflation was $0.38, R&D was $0.16 and pension expense was $0.03.

Now let's move on to our business segments, and I will start with Bell.

Bell segment revenue increased $19 million, reflecting higher revenue in our commercial business, which was partially offset by lower revenue in the U.S. government business.

U.S. government revenues were down $13 million due to lower volume from the V-22 program which was partially offset by increased deliveries of ASVs, higher parts and service revenues and the ramp up of the ARH program.

Commercial revenues increased $32 million due to higher civil product and service volumes and higher pricing, partially offset by lower international military volume and lower used aircraft sales.

Segment profit was down $18 million, reflecting decreases in both the U.S. government and commercial businesses.

Profit in the U.S. government business was down $5 million due to lower V-22 program shipments and unreimbursed launch costs for the ARH program, partially offset by the impact of the higher ASV shipments.

Commercial profit decreased in spite of higher overall commercial volumes due to investments in production ramp up activities, SAP and lean projects, lower codevelopment income from our risk sharing partners and increased commissions and other sales activities.

Bell Helicopter's backlog was $3.3 billion at the end of the quarter compared with $2.8 billion at the end of last year.

Cessna segment revenues increased $95 million while segment profit increased $32 million.

Cessna revenues increased due to favorable pricing and higher business jet volume.

Segment profit increased due to the higher pricing, the impact to higher volume, improved manufacturing performance and favorable warranty performance as we continue to drive improved reliability in the fleet.

These increases were partially offset by inflation and increased investment in new product development, SAP and lean projects.

Cessna's backlog ended the quarter at $6.8 billion compared to $6.3 billion at the end of last year.

We also have $528 million in open orders from Citation shares which, as you know, are not included in our official backlog.

Industrial segment revenues decreased $6 million in the second quarter due to the divestiture of noncore product lines, which was partially offset by higher pricing.

Segment profits decreased $4 million mainly due to the divested product lines and inflation, which were partially offset by improved cost performance and higher pricing.

Finance segment revenues increased $45 million due to a higher interest rate environment and higher average finance receivables.

The segment's profit increased $12 million primarily due to the growth in core receivables and a lower loan loss provision, reflecting sustained improvements in portfolio quality and credit performance.

On the credit performance front nonperforming assets were 1.38% of the portfolio and sixty-day delinquencies remained essentially unchanged at 0.7%, both tremendous numbers.

Now let's turn our attention to cash.

Year-to-date manufacturing cash flow from continuing ops was $326 million.

CapEx was $129 million, and free cash flow came in at $195 million.

As we previously indicated, the Fastening Systems transaction will generate about $670 million in cash during the year.

And so far this year we have invested over $600 million for the repurchase of about 7 million of our shares.

Now let's shift to our new outlook.

We are projecting full-year earnings per share from continuing operations will be in the range of $5.10 to $5.30.

That is up 15% from our previous performance, reflecting stronger performance at Cessna and Textron Financial and to a lesser extent industrial and taxes.

And for the third quarter we expect EPS will be between $1.15 and $1.25.

We remain on track to deliver full year manufacturing cash flow from continuing operations of about $1 billion and free cash flow in the range of $550 million to $600 million.

So overall we've had a solid first six months, and we are entering the second half of the year with positive momentum and strong end markets.

We continue to focus on our execution at Bell and managing growth in all of our businesses.

We remain confident that our transformation strategy will allow us to leverage this growth to improve profitability, cash flow and shareholder value.

And now I would like to turn the call back to Doug, and Doug will take us through some additional details relative to our outlook.

Thank you, Ted.

First at the Bell segment we expect third-quarter revenues of about $775 million, margins there will be about 9%, and for the full year at Bell as Lewis mentioned we will be delivering an additional V-22, however, we continue to expect revenues of about $3.3 billion.

And that would be with margins of about 9%.

Total revenue is not changing as we anticipate delivering fewer commercial units while delivering slightly higher parts to meet aftermarket demand there.

And that 9% at 3.3 billion by the way should keep us pretty close to our former [not]target there of about $300 million.

At Cessna we are projecting third-quarter revenues of about $1 billion with 70 to 75 jet deliveries, and margins of about 15%.

For the full year then we expect a margin of about 14.5%.

At Industrial, as a reminder, the third quarter is typically affected by customer summer shutdowns.

So we are projecting third-quarter industrial revenues will be about $750 million with margins up about 50 to 60 basis points from a year ago to around 3.5%.

At our Finance segment we are projecting third-quarter revenues of about $210 million and segment profit between $45 and $50 million.

On the tax line we're still looking at a full year rate between 29 and 30%.

However, we now expect to be closer to the bottom of the range due to a onetime benefit in the third quarter related to a change in functional currency in Canada for one of our businesses.

Therefore we are anticipating a third-quarter tax rate in the range of 28% to 29%.

That concludes our prepared remarks, so operator we are now ready to take questions.

(OPERATOR INSTRUCTIONS) Stephen Tusa, JPMorgan.

Just a question given that your visibility on 2006 is pretty good right now.

Can you maybe just talk quantitatively, qualitatively about 2007 outlook perhaps?

Be happy to.

It is a little early, obviously, so I can't give you any specific numbers.

We are just about to launch into some of our more formal planning, but I can talk you through each of the segments.

I think the bottom line is we expect a very strong 2007 at Cessna next year with the preliminary production level that we've set of 370 jets.

We are looking at about a 15% increase in revenues, and we expect about a 50 basis point improvement in margins year-over-year at Cessna.

At Bell segment we expect to have a more modest growth in revenues next year, about 3%, and keep in mind that there is a major ramp up for deliveries of V-22, H1 and ARH don't happen till late in the quarter, and in fact '07 will be a little bit of a dip year for V-22s.

We will go from 17 this year to 13 next year, maybe 14.

We will have even more modest growth in profits as we are going to continue to be making some major investments to prepare for this coming growth at Bell.

In industrial we expect top-line to grow modestly, sort of in line with the Bell level, and we believe that we can continue to improve margins there as we make further progress with our transformation initiatives.

And finally, at TFC, assuming that the credit environment remains stable, and it certainly looks that way, we should see very solid growth in operating income as we continue to grow that portfolio.

Okay, great.

And then just secondly there has been a lot of buzz around the Embraer numbers that came out the other day.

Can you just maybe talk about the competitive environment in business jets?

And then maybe talk about how the end market trends are shaping up over the next couple quarters with regards to the orderbook?

We have known they were going to introduce these aircraft.

They don't appear to be I would say revolutionary.

They are more like the products we are used to competing against.

To give you some interesting facts, when we introduced the XL we had more orders than any of these two when they introduced or when they were introduced and have taken the first book of orders.

And then the Mustang now has 243 orders when it was booked, and that is more than the phenom 100 and 300 put together.

And there was a little bit of rumbling out there that some of these orders may be going into a taxi fleet, which is expected.

As I said before, they haven't really done plans like this in their prior history, so there will be some learning there as we would expect.

We're not sitting on our hands either, and I'm not going to tip our hand on what we plan to do on new products right now, but we've got some pretty -- in fact we've got some very exciting plans that we are rolling out and we've got the money to do it, too.

So there will be another competitor, but you know if you look back over the last 10 years we've had competitors come on that were going to be real strong and sometimes they win and sometimes they don't.

We haven't missed a new model introduction, meaning we've designed a product, put it into service and kept selling it for years and years since 1972, so we got a pretty good track record, and I think that will continue.

It is not overly concerning to us.

(technical difficulty) end markets continue to look very good.

It is really, I guess we don't think about it as much, but flying commercially still isn't very much fun, and the jet car guys still are expanding their markets, and the market just continues to expand, and we haven't seen our first replacement cycle yet either so I for one think it is a great time to be in the Cessna business.

And one last question just around the Cessna margin.

What did you say the third quarter was going to be, and then the annual number?

The third-quarter margin is around 15%, and that would bring the full year in at around 14.5%.

So that implies a -- is that a flat to down fourth quarter on the margin side?

These are all within rounding errors, I would say.

Nothing is going on (multiple speakers)

Just a normal ebb and flow of business.

Okay.

Thanks a lot.

Jeff Sprague, Citigroup.

A couple questions around Bell, I guess.

Can you elaborate a little bit on the commercial outlook so you kind of brought down your commercial delivery outlook a little bit then when we look at the modestly of kind of that preliminary plan on '07, it doesn't sound like there is a big commercial turn going on there.

The backlog has been building.

Just a little color.

We are going to be a few units less than what we thought originally.

We've said that we would be somewhere in the 180 to 190 range.

It looks like we will be close to the bottom of that range or maybe even potentially slip a little bit below the 180.

We have a lot of demand for aftermarket parts and some growing pains ramping up.

So we think we will be a little bit lower on the ship deliveries, a little bit higher on the spare part deliveries this year, and then next year we expect to see continued growth on the commercial side of the business, the real dip there is going to be V-22.

Commercial should be strong throughout the rest of the decade really because the 429 begins to sell into commerce, and of course that is not in backlog.

And then the 417 begins to sell and to come up in commerce, 429 is '07, that is all plus to current business flow, and 417s all plus to current business blow so.

Really 170 to 180 this year, you are probably up in the what, 240, 250 range next year, is that --?

I think we said we would be north of 200 next year for sure.

You almost can't help but do that.

We haven't finalized that number yet.

No, you know what we are adding capacity at Mirabel, and what we are doing here is -- only reason we are off slightly, we could have delivered the ships, but the only reason we are off slightly is if you think about Bell for a minute, one of our strengths is we produce some of the components that we would consider to be our technological advantage.

Our composite technology is really strong, and our transmission machining and blade production is very high-tech.

And as we got into pushing harder on the H1 and going ahead going to work on the V-22 because the government is really anxious to get that in the theater.

We had to make some choices in our component manufacturing supply and that is why we are kind of in the low end of our prior range.

There is no market weakness there.

I can tell you that.

Would that imply that CapEx at Bell does not peak in '06?

I thought it might but it sounds like it still has some pretty heavy CapEx in '07.

I think it's going to be flattish in '07.

I would say '06 and '07 combined are kind of the peak.

They will start coming back down in '8 but '07 will be similar to '06.

Jeff, the game we're playing here is we are trying to -- and you would want us to do this -- we are trying to run our facilities at the max capacity that they can run even if we have to run over time because as we push and lean further and further into the factories it eliminates the need for facilities.

So you don't want to go out and buy a new machine when in essence the lean guys and the couple of [kizon] projects and six months later you don't need the new machine.

So we are sparingly investing in facilities where we need to, but we are trying our best to pull that CapEx down until the lean guys get a chance to get into the individual departments.

And we're doing that assessment, too.

Sounds good.

And just one last thing on Bell and I will pass it on.

So Lot 3 on H1, what is your early read on profitability of that lot?

Kind of 4%, 5%.

Great.

Thanks a lot, guys.

By the way, Jeff, I know you hear me probably, that contract has been approved to or that program has been approved to go under contract, but I think that contract has not been literally been signed yet, it would be momentarily, I believe that is right.

That's correct.

Thanks a lot.

We will get that done.

Shannon O'Callaghan, Lehman Brothers.

Just on the Cessna margins in the quarter can you go into that a little bit more?

You guys came in a lot stronger than you initially guided to.

Can you just talk about what contributed there?

We had no one thing in particular.

Obviously we delivered a few more jets than we originally anticipated.

We've had continued strong performance on the warranty side at Cessna.

It is a combination of both better product reliability, driving gross costs down and a really good job the guys at Cessna been doing on getting vendor recovery against warranty costs.

So there was probably a slightly, I would call it abnormally low warranty expense maybe during the quarter, but we will see.

The trend has been tracking very favorably there, and might continue.

Shannon, we also had lower than expected used aircraft revenues in the quarter as we came in.

We thought we were going to have to take a few more in on trades and they got sold out of our -- not without coming into our balance sheet, so that also was a third (multiple speakers).

Remember that balances Cessna's margins around because we pass used aircraft through, and we have sales of those in every quarter but they bounce up and down and essentially they are pass-throughs that basically break even.

So they have the possibility of driving the margin a few points one way or the other.

I guess given the delivery outlook and what you've done with lean out in Wichita it seems there would be some potential upside to that '07 look that you gave.

We've got a lot going on at Cessna, and you know it is one of the issues that we deal with there, as we ramp up volume a lot we are having to hire a lot of new people, do a lot of training, work a lot of overtime and at the same time we are continuing to make significant investments in new products, ramp up R&D spending for our future growth and we're putting a ton of money into SAP and right now lean is an expense, in a number of the businesses across Textron.

We expect that to be an expense with a tremendous return but in the short term, that is something we are spending money on.

Let me follow-up on that because you asked a question in terms of margins next year but this plan on making investments and things like SAP and lean, this is a very long-term strategy.

When people ask us what do we think about Embraer having 235 orders in backlog to get out our global competitiveness in a strategic way we are making those investments now.

And they will [mute] our margins a bit in the short run but it is what we need to do to be competitive in the long run globally.

Okay.

Let me add one more thing there.

I think the take away that is probably the way I think about it okay, is the top-line growth story is knockout good.

I mean it is as good as we've had since I've been here, and that is going to continue well into the future as we indicated.

And so you've got the top-line growth strong and we ended last year a little bit over 13% margins, and based on what Ted gave your earlier about '07, that would be a 15% number approximately springing off of this year at 14.5% approximately.

You know you're going to see that margin continue to grow; what rate we haven't said yet.

But the Cessna story is as strong as it has ever been.

Just on the Mustang guidance, anything I should read into that?

Is this just fine-tuning?

You started these round numbers of 50 for '07.

Then we were talking 45 to 50 and now 40.

What drove that?

The guys are working on trying to create an optimized loss profile.

So it obviously had nothing to do with demand, right.

We have all the demand out there and lots of backlog, and what Jack and his team are working on is can we figure out a better way, and this is as high a volume new launches we've typically ever have, can we figure out a way to not incur so much of the learning curve costs that we normally incur with that product startup by maybe doing it a little bit slower?

And that is really what it's all about and frankly, there they are still working through exactly how to optimize that.

Okay, and just last one, Bell revenues came in a lot higher than you thought, margins a little lower than you thought in the quarter; and you mentioned a couple of things.

But what were the main variables relative to your initial expectation?

On the profit side we had some issues relative to the ARH launch that had to do with the fact we had to deliver as part of the development contract four prototype commercially birds.

And because some issues at Mirabel we chose to build those off-line at a different facility and at a much higher cost.

That is probably the single biggest driver of the profitability in the quarter.

But although we were very close to -- in face we actually ended up a couple million dollars higher than our guidance would have implied on non profitability.

But revenues was kind of all over the place.

I don't think it was any one thing in particular.

It was basically just timing.

Thanks a lot, guys.

Great quarter.

Nicole Parent, Credit Suisse.

I guess could we get a little bit more color when we think about Cessna and the backlog declining sequentially Q2 versus Q1 and how we should think about that backlog for the remainder of the year?

My first thing I would say don't worry a bit about it.

Because we're going to take in more orders than we are going to deliver this year, so that is still a good sign.

And demand is still very strong.

I think because we are so sold out we can only -- you can only buy two of our models next year, everything else is booked.

And you can only buy those two models in the third and the fourth quarter of next year so I think this notion of quarterly book-to-bill is not a very useful way to look at Cessna's business.

We are sold out to a very high level in '07.

We've got solid backlog as we go out into future years.

I think when this year is all said and done we will have, as Lewis said, more orders than we have deliveries.

But given the fact that we don't have a lot of near-term slots we need something to stimulate orders like some new product announcements that might happen later on in this year, and that is going to be the nature of things.

People are just not going to continue to put orders on for planes they can't get until 2008 and 2009 until we get a little closer in.

Understood.

Can you give us along the lines of new product announcements, within the quarter R&D I think you said was $0.16.

Could you give us a breakout by subsegment?

I don't know if I -- I might be able to find that but it will take me a minute.

Then I can ask one other one, could you give us a little bit more color within finance and where you saw the most strength by subsegment, and should we continue to see that play out through the rest of the year in terms of subsegment drivers?

No, we had great growth really across all the businesses; distribution, finance, continues to lead the way but we had the single best origination quarter in our aircraft finance business in the history of the business.

So pretty strong across all -- it is also a very competitive market out there.

There is a lot of competition, but our team has gotten really refocused on as we've said over the last two or three years, on the six businesses that we believe are fundamental and core to us, and that has paid off strongly.

And losses are way down and performance of portfolio has just been tremendous from a quality standpoint.

And I guess just one last one.

As you think Lewis, about the challenges that the company faces in terms of managing the demand trends within Cessna and also just the ramp up of investment, could you just talk a little bit about the things that you're focusing most of your time on?

You mean me personally?

Yes.

Well, I spend a lot of time obviously where the biggest risk is or where the biggest opportunity is.

That's where you expect me to spend time, and at Cessna basically I am focused on a couple things.

One, I think Jack Pelton and his team are really locked down tight on all the aspects of transformation, and if they don't transform we can't be where we want to be.

So they will probably emerge this year as the leading lean implementing unit in the company, and Jack and I have spent a lot of time on new products.

A lot of time.

Because what we've learned since I came here in '92 is if you are not introducing new products with the regular pacing cadence and upgrading the products you have with a regular pace and cadence you are going to slip behind.

So when the competitor looks at us and says we are going to match the CJ3, let's say, because we think that is a product we can beat, by the time they get a product out there we've already morphed it into something different than they thought they were going to have to sell against.

I spend a lot of time at Cessna, and I mentioned the air show.

We had a tremendous air show in every sense of the word.

I spend a lot of time -- Ted and I both did with the [combinance] system coming out of the Marine Corps, Assistant Secretary of the Navy watched the first flight of the V-22 from our chalet.

We've had some really interesting conversations about how to move our programs forward in order to get them into combat sooner.

So ASV I have not had to spend much time there.

Dick and his team have done just a yeoman's job of getting that back up to speed and we're at the rate we wanted to be at, so we will deliver this year as we had planned.

And the government is really happy with us there.

And then we also are spending time on margins at Industrial because we've said we had to see that start to improve, and it has, and it will continue.

We've had two turns at the bat here and we are getting better and better and we will be better this quarter versus last year's quarter.

And we should see that trend continue so that leverage should be good, and then Ted had his arms around TFC.

I spend a little time with Jay and his team, and they are really solid.

And Ted said it but it kind of just got said and dropped.

Four or five years ago we realized we were involved in too darn many areas of the commercial finance business, and so we had to run off and get out of a lot of different segments which we did without incurring any significant losses.

And now we are focused on the businesses we know best, and they are really driving some strong profit and also great underwriting.

As he said our credit quality has never been better.

So overall I am very pleased with the Company and the people that are working hard to make products for our customers.

And Nicole, I do not have the year-over-year R&D by business unit but if you give Doug a call later he'll give that to you.

Perfect.

Thank you.

I wanted to add one point back on your original question about the demand situation at Cessna, and that is that when Lewis mentioned that we are going to have a similar number of orders this year versus last year, even though the availability keeps moving further to the right, coming into the year our expectation for orders was less than 300, and as we've experienced quarter by quarter the activity out there and it just remains so robust, we've upped our outlook on that.

So I would say everything is a green light as green as green can get in the business jet world for us right now.

Great.

Thanks, Doug.

Tony Boase, A. G. Edwards.

Maybe just following on the demand picture here, there is probably certainly some feeling out there that higher interest rates, slowdown in the economy, how do you think about that?

You're experiencing pretty strong demand now but I mean things can change a bit, certainly higher oil doesn't necessarily stop somebody from buying a business jet.

If you can't afford the gas you can't afford the jet, but at some macrolevel does that concern you at all?

Our biggest driver out there is corporate profitability.

And right now we continue to see strong growth in corporate profitability, and frankly corporate balance sheets that are so strong that small changes interest rates, while they certainly have an impact on the consumer side of the market are less likely at least in the short-term to have an impact on the corporate side.

As long as we continue to see that growth in corporate profitability it has typically been an advanced sign of about two years or 8 quarters of what business jet demand is going to look like.

So we saw strong growth last year.

Right now it looks like we are heading to another year of strong growth that would sustain us out for the '07 '08 timeframe at least, and that is kind of how long our visibility is around corporate profitability.

And then we are continuing to see a growth in demand internationally.

So all of our metrics historically on kind of macroeconomic drivers for the business have been around North American corporate profitability because it has been a heavily North American market.

But we are starting to see growing deliveries and particularly growing orders in the international arena.

So it is hard to say -- we don't have a crystal ball that goes more than 8 quarters out but right now it looks pretty darn good.

And just on the international comment, could you talk a little bit about where the strength internationally is coming from?

It is my understanding that maybe the emerging markets may not be a great growth driver for you guys just because of issues, for example in China where the air space is restricted.

It depends on the market.

A lot of the growth we are seeing right now is in Eastern Europe and the Middle East.

And some parts of Asia.

It is true that certain markets like China have restricted air space, but we started selling product in there but frankly right now we're selling product into the training universities.

We've sold them a bundle, single engines to be used as trainers.

We sold have a dozen Citation jets in there last year, as well.

They have a tremendous demand right now to train new pilots for commercial aerospace.

But I think it will open up eventually.

India is a little more open than China.

There are a lot of differences of opinion around our company as to when China might become an attractive market.

But right now Latin America is strong, Western Europe is strong but the newer areas, Eastern Europe, Russia, Middle East and Southeast Asia are doing very well.

And then just I wonder if I can get a little more color on the warranty benefit this quarter.

What does warranty typically run you as I guess a percentage of sales, and what happened this quarter?

I don't know if I can do that in a percent of sales this quarter.

Or even just if there is some typical absolute number that you're running every quarter.

I think we -- it varies by model, so I don't know what a consolidated number is but we typically put up 4, 5%, somewhere in the 4's.

But I think again that varies by model so I am not sure that's a good average at the initial time we sell an aircraft.

And then as that aircraft comes off warranty or as we get a few years of experience on it, we are constantly adjusting those rates based on actual experience.

But I think the number was $8 or $9 million better in the quarter than we typically run.

And how long does the warranty last on a plane?

Typically five years, so it is an estimating process, and it is a constant reestimating process.

But one of the big drivers has been, it has been both gross coming down and it has been that Cessna has been very good of late in going out to suppliers and saying if the issue was your issue, you pay.

And so supplier recoveries have been a big driver of the improvement over the last year or so.

And then just lastly, Doug mentioned something about pull in this quarter.

Would you mind going over that comment again, Doug?

About three of the jets that had been planned for the third quarter we actually got them out the door in the second quarter; was worth about $0.05.

So if you're doing linear math on our projections for full year EPS we just want you to be aware of that $0.05 pull forward, we're still at 300 for the year.

Okay.

Thanks very much.

Jack Kelly, Goldman Sachs.

Lewis, you had mentioned 370 deliveries for Cessna next year.

So that would -- the 40 Mustangs, that would be implying 330 kind of traditional jets.

And where are we in terms of orders versus that number, Lewis?

You had mentioned 90% and I think you or Ted had mentioned only two models left for '07 so I was a little confused with the 90%.

It is simple math.

That 90% is everything, and obviously all the Mustangs are sold, so we have 35 open slots.

That's a good way to look at it.

You get that, Jack?

Yes, so on the 330 for next year (multiple speakers) you have how many orders?

First let's go 370 and then minus the orders we got on Mustang so those are filled up; now we down to 330, and of that we have --.

300 firm.

300 firm.

So we have --

30 slots left.

30 slots left (multiple speakers) to sell.

So it means you picked up about 25 orders in this most recent quarter for traditional jets for '07?

We could probably tell you that exactly if we --

It was 275 at the end of the (multiple speakers) --

That's right.

Yes, that's correct.

Okay, good.

And then Lewis you also mentioned the outlook for '08 was looking good.

Any preliminary kind of numbers you can give us in terms of orders for the traditional jets for '08?

You've already given us the Mustang --

No.

I would rather not do that now but I would have to say when I made that statement that is just not Mustang increases because we know what that is.

I think the rest of the line will grow, too.

We've got to sell into that.

The thing about this is the salesmen get commissions when they sell, so they're going to be selling pretty darn hard into '08 because that is where they can rack up some big numbers.

We expect growth across the productline in '08 but we are not ready to --.

It is early, frankly, for us to even be giving you an '07 number.

It definitely is, so you think that 330 is an up number but you just don't want to quantify it?

Yes.

Then secondly with regard to the V-22, Lewis you had mentioned the $1 billion number by 2010.

In terms of FMS sales, there are non included in there and it sounded like maybe a little more optimistic about that coming off the air show.

Can you give us any color on that?

By '10 there is zero.

There is no FMS sales -- let's just do the V-22 here because it is a good story.

There is no guarantee of what I'm going to say comes true, okay, but as soon as the V-22 gets into the battlefield my guess would be that there is going to be a lot of pressure on us to produce more units.

And interestingly, as I said, we are literally one full unit ahead of the original, original, original V-22 schedule.

So we are really lined up to deliver on our expectations.

And if the government wants us to build more we have the capability to ramp up probably over eighteen month timeframe to go to higher volumes.

By 2010 we should be producing 24 and I think 2011 the number shows 35 or 6.

But once we get into the theater that could change because to give you an example, the Assistant Commandant of the Marine Corps made a speech at Farnborough and he made this statement, "if you're in a location with your troops quartered in location A and you got an excursion where you need to put a full battalion -- I guess he referred to as a battalion -- into a location 70 miles away, the conventional helicopters you would have to have 12, and it would take you two hours to move 160 troops 70 miles.

And of course since you're in a helicopter you would be in harm's way most of the way."

A V-22 you would need 6 instead of 12, and it would take you instead of two hours, 20 minutes.

And you would be in harm's way as you were flying up to high altitude 25,000, 24,000 and then flying back into the location, you would be in harm's way about seven minutes.

So when you think about that dynamic and how evasive the people are that we are fighting, this quick delivery of troops and material to the spot they are needed is going to be -- is unparalleled.

So wrap all that up, I think but you cannot guarantee it, you can't take this to the bank, but I really do think we will get a lot of pressure to increase deliveries to our own inventory.

I believe that our other branches of the department, of the Defense Department, will want helicopters, and we did give demos to certain foreign countries to my knowledge for the first time at the air show where we let them fly in and get full product briefings where before we hadn't really done that.

So that means they will want to try to get orders in, and we've had some initial discussion with quite a few countries, and that probably doesn't start to flow until after 2010 unless I am not thinking about something but probably that would be what would happen.

And then if you want to really blow your mind, we really don't have that many helicopters on order when you think about how many could be ordered.

We could be looking at 1000 of those ships eventually, and there is about 500 total orders.

So it is a great story, and the government is also looking at other tilt-rotor configurations like a quad tilt-rotor to do big, big lifts of people, machines and equipment.

So the billion could be low because of domestic demand as well as --.

Sure.

Now if the government cuts their budgets and all of a sudden they say that is tough luck but we don't have enough money to spend on the military side, then maybe they order less.

There is no guarantee here;

I want to stress that, but everything right now is looking very bullish.

On the ASV, you had mentioned The Knight program with the new armament there.

Does that add to potential production in '07 and maybe if you can give us a number there versus maybe the 450 you expect this year?

Jack, for right now we are kind of planning on a flat year for next year; it is a funding issue with U.S. government and has not been resolved yet so we can't give you a definitive answer on that.

It could be additive if it gets funded.

Our guess is that it gets funded in a mix with the regular ASVs so it is approximately flat.

Again that contributes to the relatively small increase in revenues at the Bell segment then for next year.

And given the Katrina impact on the ASV numbers in terms of margins, where do you see yourself at a run rate in terms of margins for ASVs in the second half of '06?

In the 9 to 10% range.

And just finally on the ARH unreimbursed, of course, were they unexpected and can you give us some color maybe looking out at the next quarter or two?

They were unexpected when we originally signed the contract, and they were a little higher than we had expected even as we went into the quarter.

We just -- we had the requirement they are not LRIP units.

They are actually just commercial units that had to be delivered for various testing and development as a part of the STD contract, and we ended up actually truly building them off-line instead of building them at Mirabel because we're in the process of going through the line reconfiguration from the 407 to the 417 in Mirabel, and there was a lot of demand up there.

So we truly kind of handmade these ships.

But you know, Jack, that ARH ramp up is pretty strong.

We will get assuming the LRIPs keep flowing and we hit our numbers and timing, you get somewhere between 70, 90 units by -- I think its 2010.

So it is a pretty quick build up for a new ship.

So you think the unreimbursed, of course, to the extent you can forecast are pretty much behind you?

For that contract those ships are far along, and we've expensed it.

Got it.

Thank you.

Cai Von Rumohr, Cowen.

Thank you very much.

If I take your guidance for this year on Cessna looks like an incremental margin of around 23%, and you're talking about all these expenses for lean or higher manufacturing for ramp up in efficiencies.

Next year the rate of unit growth is not quite as big, and if I assume that Mustangs at breakeven, it looks like your guidance works out to only 18 to 19% incremental margin.

Is that disappointing?

Shouldn't that have a lot more upside?

No, that is not disappointing at all to us.

It will be all-time spectacular record performance for Cessna, so we are not disappointed with it and given what we are investing in and what we think we are doing to sustain the growth rates of the business going forward.

That has been about over the last three or four years as we've ramped up, we have averaged about 30% gross, high 20s gross conversion but high teens net conversion with our investments.

So, no, we're pretty darn pleased with it.

You know the other aspect of that is it goes back to product development and engineering expense, and we are also running I think this is true, at darn near record engineering expense because we are trying to continue to freshen our products and develop new ones.

So if you want another full percent of margins you just take a percent out of engineering spend and you go from 15 to 16 like click.

We can do that in a second.

And a couple of our competitors have done that a time or two and they regret it today.

So we have a commitment to grow shareholder value on a sustainable basis in a significant way.

I guess make me rephrase the question.

Lean you mentioned is an expense this year.

When does lean convert into being a net plus?

Is that next year?

And should we expect R&D to sales as a percent -- R&D as a percent of sales to move up in 2007?

The first question on lean is it will begin contributing net in '07 and then much more significantly in '08.

And I can't speak to --.

That varies by business, though, all across Textron lean is (multiple speakers)

Just R&D --

He was doing Cessna, I think.

Weren't you doing Cessna, Cai?

Cessna, correct.

And I don't know, in memory the -- of course we haven't finalized those seven '08s yet because that is still a discussion we have with us.

Gross R&D spending is going up significantly as a percent of sales.

I suspect it is going up incrementally.

Okay.

Just keep in mind as Ted said early on, we are just beginning the process of doing a detailed bottoms up forecast for next year.

This is a toss down so --

We're not giving your guidance for '07 right now; we are just giving you our thoughts.

Okay.

Share buyback, it looks like you bought about 4 million shares in the quarter.

Cash was good.

4.5.

Excuse me?

4.5.

Okay, okay.

What is your thought on share buyback as a cash redeployment initiative and kind of how do you trade that off versus M&A?

Well, we trade it off until we find good M&A worth doing.

That has kind of been the same philosophy we have gone by from the start.

We are looking to increase dividends on a more regular basis going forward, and we are out all the time looking for acquisitions that will add incremental shareholder value and intrinsic value to our business.

And when we can't find them we buy stock back and that has been the strategy and we have a targeted debt to capital and we're kind of close to that right now although we will get another slug of cash in with Fastening Systems in the third quarter.

That will to some extent we've kind of deployed some Fastening Systems cash in advance because we thought the stock price was attractive.

So the strategy hasn't changed, and we said all along that we will execute it very technically.

We are going to target a debt to capital over a period of time, and depending upon what acquisition opportunities we see or don't see, we will turn share buyback generally up and down, and then we will execute it tactically depending on what happens with stock price.

We thought we had a pretty attractive window there for a little while in the second quarter, and we jumped on it.

And you began the quarter at 129.7 shares.

What was the share count at the end of the quarter if we take into account issuance?

Hang on one second.

I'll tell you what, we will look that up and give that to you momentarily.

We are coming up close to the end of the hour here, and we know people have a lot of calls, and I know there is a number of people still in queue, but we will take one more call and then conclude.

Well call us and we will give you that when it is --

I will have it before we are done here, (multiple speakers) average there, he wants final.

We will take our final caller now.

David Bleustein, UBS.

Two quick ones.

First, Ted, how much did the lower loan loss provision add at Textron Financial?

If you look at our P&L you will see year-over-year, Dave, that we are about $2 million good news year-over-year but the way we do causal analysis because of the growth, we should have put up even more because the portfolio grew in size.

So I would say the real answer to that from a causal analysis standpoint is about 5.

And of the 12 think of it as 7 came from growth, 5 came from portfolio performance.

And then Cessna used jets, what do you see in the used equipment marketplace?

We are down to still at about 12%.

I think that is where we ended last quarter, and we continue to see more than 80% of the 12% that is available for sale are greater than ten-year-old product.

To the extent that you can for the product that is newer, what are you seeing in terms of pricing on a year-over-year basis or however you measure it?

Well, we had a very strong quarter in the second quarter on a year-over-year basis, but I wouldn't -- it almost fell right at 5%.

But I would say that was a little bit abnormal.

You're talking about a handful of units versus a year ago's handful of units.

But I think somewhere around 4 is more realistic.

Terrific.

Thanks a bunch.

You have any closing comments?

Actually, Cai, I'm going to have to get back with you on that number.

I don't have the actual ending share count.

So I'll call you back with that.

So that would conclude our call, and thanks to everybody for joining us this morning.

Thank you all for getting up so early.

Appreciate it.

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