達信公司 (TXT) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Textron first quarter earnings conference 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 call over to Doug Wilburne, Vice President of Investor Relations.

Please go ahead.

Thanks, Nick.

Good morning, everyone.

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

Our discussion today will include remarks about future estimates and expectations.

These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

Before we begin, I would like to remind everyone that a package containing key data that we will be covering on our call today is available on the IR section of our website.

Moving now to our results for the first quarter, revenues were $3 billion, up 12.6%, earnings per share from continuing operations were $1.55 per share, up 30% from a year ago, and compared to our guidance of $1.15 to $1.25.

This result includes $25 million, or about $0.13 per share, in charges related to the ARH program recorded in the Bell segment.

Also in the Bell segment, we had a $0.15 per share benefit for Katrina cost recovery.

You may recall that the Katrina benefit was included in our first quarter guidance, but the ARH costs were not.

I also want to point out that we had a number of timing items that benefited the quarter worth about $0.19 per share.

On the cash front, manufacturing cash flow from continuing operations was $86 million, with free cash flow of $23 million.

Now, before I turn the call over to Lewis, I want to mention that during our prepared remarks, we will be covering as much information on the ARH program as we can.

However, as discussions with the customer are ongoing, we will not be able to respond to any questions on our ARH during our Q&A session that follows.

And we will appreciate your understanding in this regard.

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

Thank you, Doug, and good morning, everyone.

Strong organic revenue growth at our Bell Cessna and finance segments, coupled with improved operational performance across the enterprise, allowed us to significantly exceed our earnings forecast.

We foresee continued positive operating results through the rest of the year and accordingly, we have increased our 2007 earnings estimates substantially.

Our positive top line growth reflects robust end markets, plus our transformation focus on the customer and new product innovation.

This focus is also apparent in our industrial segment, which turned in 6% revenue growth led by strong double-digit expansion at Greenlee.

We are encouraged by our margin results at Kautex, where we continue to secure positive positions on new platforms, which will drive incremental revenues several years out.

Overall, on the execution front, we are pleased with the progress we are making at Industrial, operating improvements that reflect our enterprise management strategy, and initiatives like Textron's Six Sigma, and global supply chain integration.

At Textron Financial, revenues also exceeded our forecast in the quarter, but more importantly, we have added $500 million in managed receivables since year-end, continuing along our double-digit growth path.

Moving to Bell.

At Bell, our military and commercial markets are both entering what is forecasted to be a period of sustained growth through the end of the decade, and likely well beyond.

The key to success in this environment will be execution, and we have certainly turned up the dial in this regard, I can tell you.

Obviously improving the execution capabilities at Bell are going to take some time to fully take hold, but as an example of progress in the first quarter, Bell Helicopter is on-track to achieve its objective to reduce overhead spending through the year by 6%.

Now, let's discuss the Armed Reconnaissance Helicopter.

Last month, we received a series of communications from our customer asking for Bell's plan to actually maximize contract performance, while minimizing negative cost and schedule impacts.

These communications also indicated specific limitations of funding on the system's development and demonstration contract, but it did allow us to continue program development efforts at our own risk.

Our customer has indicated they will review our plan, and then decide whether or not to continue the program.

We remain committed to the ARH, and we believe that the customer will go forward with the program.

Based on this belief, we have continued development work, as well as efforts to secure long-lead materials for the anticipated production aircraft.

We are presently working with the customer regarding our plan, and expect they will reach a decision during the second quarter.

You see, we strongly believe that Bell ARH remains the very best value for the Army, and we believe we can deliver its capability to our soldiers faster than any other alternative.

Moving to the H-1 program, we continue to make progress there.

We delivered one Zulu and two Yankee helicopters during the quarter, and we recently had several successful program reviews with our customer.

The program's production line continues to stabilize, and we are proceeding down the learning curve.

An execution on our largest program, the V-22, continues forward as well.

Just last Friday, we received positive news for the program, when the Marines announced their plans to deploy the V-22 into Iraq in September of this year.

Recently, an advanced acquisition funding award worth $900 million was approved, which will help support the planned ramp from 11 new aircraft delivery this year, to 35 or more in 2011.

Okay.

Moving to Textron Systems.

Revenues were up significantly, reflecting in part an acceleration in ASV production.

We have increased production in anticipation of possible additional vehicle orders later this year.

As you know, our U.S.

military customer has an urgent need for thousands of armed armored vehicles known as the MRAP program.

We provide a prototype vehicle to the government at the end of March, and by the way the MRAP is very similar to our ASV, and we are working with our customer to determine if our offering can be adapted to meet their requirements.

We expect to learn where our vehicle fits into this increased demand requirement before the end of the second quarter.

On our new intelligent battlefield products, or IBS, we have also made a meaningful contribution to revenue growth here, too.

This includes components from both our core Textron Systems operation, and our new Overwatch acquisition.

These products have been selected as an important part of the Army's field strategy going forward.

In fact, you may have seen our IBS products recently featured on the Discovery Channel's 'Future Weapons' series.

So, systems is poised for continued strong growth as well.

Wrapping up with Cessna, operational results from the quarter were nothing short of superb, especially when you think about the capacity ramp and product development activities under way there.

This performance is the direct result of the continued application of our enterprise strategy across all areas of the business.

Over the next several years, we expect further operating performance expansion, as we continue to apply our transformation strategy to leverage revenue growth.

On the new product front, we placed our second Mustang aircraft into demo service last week, and we are on-track to deliver 40 Mustangs by the end of the year.

Perhaps the most exciting news coming out of Cessna is another particularly strong quarter of Citation orders, with 122 new orders taken.

And we are still seeing significant international orders, which gives us confidence in the sustainability of this cycle.

What is particularly reassuring about the order pattern is that we are filling slots in '09, 2010, and beyond.

As you know, 2007 is 100% booked, and we now have over 400 orders on hand for '08.

In summary, the first quarter was a great start to the year, with continuing momentum on both the top and bottom lines.

Looking toward the rest of the year, we still have lots of work to do on the many opportunities before us.

For example, expanding market acceptance of our new integrated fuel system at Kautex.

The ramp-up and productivity improvement of our commercial helicopter line, the ramp-up and productivity improvement on the H-1 line, as well as the [Oppelbow] kickoff.

Obtaining successful resolution on the ARH program, and not the least of which is ramping up the Mustang and completing Cessna's exciting year.

But we believe we have the resources, the resolve, and the leadership to accomplish each of these, and many other things I didn't mention.

Executing on these many opportunities should allow us to achieve our outlook of 7 to 10% annual revenue growth through at least the rest of the decade.

Coupled with our transformation strategy, we believe we will be able to convert this growth into expanding shareholder value year after year after year.

We will not waver from our focus on our vision and strategy, and I will predict that you will continue to benefit from that focus.

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

Thank you, Lewis.

Good morning, everyone.

Given than the Katrina reimbursement and ARH costs essentially offset each other, our ability to convert a 12.5% revenue increase into EPS growth of 30%, means that we are on the right track in a number of ways.

So let's start with a look at what drove this EPS increase.

30% converts to an improvement of $0.36 a share.

Higher pricing of about 2.7% added $0.37, while inflation of 2.3% cost us $0.26.

Performance was a positive $0.22 and includes both the Katrina recovery and ARH costs.

Volume in mix contributed $0.07, lower shares outstanding contributed $0.06, and Textron Financial was up $0.02.

The headwinds of Research & Development, Depreciation and pension expense that we talked about at our February meeting cost $0.06, and higher taxes also reduced earnings by $0.06.

As a reminder, there is a schedule of these amounts on our website in the package that Doug mentioned.

Now, let's review the details of the major drivers in each segment and I'll start with Cessna.

Cessna revenues were up 11.4%, or $99 million in the quarter, due to favorable Citation mix and pricing.

Profit increased $38 million, benefiting from the higher pricing and richer mix, partially offset by inflation and increased development expense.

Our revenues reflected delivery of 67 jets, 2 higher than our plan, reflecting earlier delivery of Sovereign aircraft.

Cessna's backlog reached another record level, growing to $9 billion, an increase of $500 million during the quarter.

Moving to Bell, segment revenues increased nearly 20%, or $156 million, and profit was up 22.

129 million of the revenue increase came on the U.S.

Government side of the ledger, reflecting higher volumes, the reimbursement for Hurricane Katrina, and the benefit of our IST and Overwatch acquisitions.

The components of volume were primarily higher sales of ASV, H-1 and IBS products, partially offset by lower aftermarket and airlock weapons system sales.

By the way, with supplemental U.S.

Government budget activity since our last call, we now have funding for about 530 ASV deliveries this year.

Commercial revenues were up 27 million, due to higher pricing and the benefit from acquisitions, partially offset by slightly reduced volume.

Fewer Huey II kits more than offset the increased helicopter deliveries resulting in lower commercial volume.

Profits in our U.S.

Government business increased $12 million, that increase was primarily due to favorable performance, partially offset by inflation.

The favorable performance reflected the Katrina reimbursement and lower H-1 expenses, partially offset by the cost recorded on the ARH program, and lower profit rates on the V-22.

Commercial profit increased $10 million on a year-over-year basis, due to higher pricing and favorable cost performance, partially offset by unfavorable product mix and inflation.

At the end of the first quarter, backlog at Bell was $2.9 billion, down slightly from the end of the year.

Now I want to take a minute to talk about the ARH.

The $25 million we expensed during the first quarter, was for costs generated in excess of current contract funding related to SDD and long lead procurement activities.

We expect to continue to expense development cost and supply our obligations, at least until discussions with the customer are resolved.

In terms of our second quarter forecast, we have included our best estimate of a potential range of these ongoing costs.

Looking forward, should the Army choose to continue with this program, production aircraft requirements could be modified.

We can't determine the financial impact of potential changes until discussions with our customer are resolved.

However, for our full-year forecast, we have reflected a range of possible outcomes relative to ARH resolution, as well as myriad other risks and opportunities in all of our other businesses.

There are potential outcomes relative to the ARH that could be outside of our projection on the high end or the low end, particularly as it relates to the second quarter.

Since I know that is a lot to digest, let me recap how we are handling the potential financial impacts in terms of the guidance that we are giving you today.

With respect to the second quarter, we have incorporated a range of cost for continued SDD work and additional long lead supplier obligations.

And for the full year, we reflected a range of outcomes that we believe would cover ultimate resolution of the program.

In summary, our forecasts contain our best estimates, given all the facts that we know today, and we have much higher confidence in our full-year range than we do in the second quarter, because we can't predict the timing of a final agreement.

Now moving to Industrial, revenues were up 6%, or $49 million, due to favorable foreign exchange, higher volume and pricing, partially offset by the divestiture of non-core product lines.

Segment profit increased 11 million, due to improved cost performance, higher pricing and volume, partially offset by inflation.

We continue to make positive operating strides in industrial, and while margins remain far shor of premiere, we are heading in the right direction.

Lastly, finance revenues increased $28 million, primarily due to higher financed receivables and a higher interest rate environment.

Finance segment profit increased $3 million as the benefits from higher financed receivables, higher securitization gains, and lower provision for loan losses, were partially offset by a residual value impairment charge, and lower pricing spreads during the quarter.

Portfolio quality continues to be excellent.

Nonperforming assets came in at 1.32%, and 60-day plus delinquencies were only 0.08%.

Moving on to the share repurchase program.

We bought about 1.8 million shares during the quarter at a cost of $164 million.

We have about 2.6 million shares remaining in our current authorization, and we will continue to opportunistically purchase shares, consistent with our capital structure target and the availability of cash.

Moving to taxes, our rate of 30.3% was slightly lower than our forecast, primarily due to the timing of a couple of events.

So our tax rate forecast for the full year remains unchanged at 31 to 32%.

Looking at cash, historically the first quarter is an investing period for us, and this year is no exception.

Specifically, we built inventory at Cessna for the ramp of the Mustang and other Citations, and at Bell for the V-22, H-1, and commercial helicopters.

We remain on-track to deliver our target of 500 to 550 million for the year.

Now for our earnings outlook.

For the full year, we are forecasting EPS from continuing operations in a range of $6.10 to $6.30.

That is up $0.20 from our previous estimate, and for the second quarter we are forecasting $1.35 to $1.45.

In closing, our solid first quarter financial performance has allowed us to make a significant increase in our outlook for the year, while that bodes well for '07 performance, it also fortifies our ability to continue to invest in new products, new markets, new processes and talent development.

These investments will translate into additional revenue growth and operational performance, which in turn should lead to continued expansion in shareholder value.

And with that, I would like to turn the call back over to Doug for additional outlook elements.

Thank you, Ted.

Let's start with the second quarter beginning with Bell.

We are forecasting segment revenue of about $825 million with a margin of about 6%, this reflects the additional ARH costs that Ted mentioned in the second quarter.

At Cessna we are expecting revenues of nearly $1.2 billion, with about 90 jet deliveries and margins between 15.5 to 16%.

Industrial revenues we are projecting to be about $850 million with margins of about 6%.

At Textron Financial, we are targeting revenues of approximately $205 million, and operating profits of about 58 million.

For the full year, I will only review where we have changes from our previous guidance.

We are now targeting full-year margins at the Bell segment of about 7.5%, down 50 basis points from our previous target.

At Cessna, we have increased revenues to about 4.9 billion, about 200 million higher than our previous forecast.

At Industrial, we have increased our revenue forecast by 100 million, to 3.3 billion.

And we have a slight reduction in our full-year share count outlook to approximately 127.5 million shares.

Now for those of you who may have joined us midstream, I would like to repeat a request we made at the beginning of our call, during the course of our prepared remarks, we covered all relevant information about the ARH program that we can speak to at this time.

Accordingly, we request that you not ask any questions relating to the program.

And again, we thank you for your understanding on this.

With that, Operator, we would now be delighted to take the first question.

Certainly.

Our first question will come from the line of Steve Tusa with JPMorgan.

Please go ahead.

Hi, good morning.

Steve.

Looking at the Bell commercial deliveries, they were a little bit light this quarter relative to your expectations.

Anything going on there?

No, not really.

Basically it's just kind of the flow of deliveries through the the year.

We are still on troke go up about 250 this year, and actually things are looking up relative to our ability to meet our production requirements.

So we made good progress this year.

And then as far as the cancellation of the 417, how are the negotiations going with the customers, and you kind of backfilling those orders with 407s, how are you kind of approaching that?

We have just started that, Steve.

We have provided communications and proposals to customers just recently, and I am not sure when the deadline is, but --

It's 45-days.

There is a 45-day window during which we will have those conversations.

So, the process has started.

We expect good results, but nothing to report as of yet.

And then lastly, you know, you talked about the $0.19 that I guess were kind of pull-forward items.

Can you just walk through some of that?

I am just having a hard time seeing why you guys are, you know, beating the Cessna revenue for example by 250 million, and really not changing the margin guidance for this year.

Well, a couple of things.

Let me start with the $0.19.

There are a number of factors, but the first one and largest one is Cessna mix.

We ended up a couple Mustangs short in the quarter of what our projection was, and 3 Sovereigns above what our projection was.

And that pulled about $0.08 into the quarter.

There is no change to our production schedule for the full year.

So it has no impact when the year is all sorted out.

But that put $0.08 into Q1.

We did pull incremental ASV volume into Q1 as part of a strategy to open up some capacity in case we can get some additional fill in volume later in the year.

That put $0.04 into the first quarter.

Now, there is an opportunity obviously that we fill that up.

But our current guidance and forecast just assumes that the full year is what we have been funded to, which is about 530 units right now, and we just delivered more of them in the first quarter.

We also had a little slower ramp-up on our headwinds of IR&D, depreciation and pension, than what we had in our guidance and was predominantly just IR&D ramp-up at a little bit slower rate but we still expect the same full-year results.

And that was about $0.04.

And on the tax side, we had two discrete state tax events.

One was a job credit in one of our businesses where we have been growing, another was the settlement of the prior-year audit.

Both of those were considered in our full-year guidance, but because they are discrete tax events, you book them in the quarter that they occur, and that was about $0.03, so you add all that together there is about $0.19 of benefit in the quarter, that we don't expect to have an impact on the full year.

To your other question, Cessna revenues, we did take the guidance up a couple hundred million dollars.

There is a lot of noise in there.

There is really no change in the core delivery or the mix of deliveries for the year of Citations, which obviously is the most important profit driver.

The biggest increase in revenue is an agreement we made with one of our large fleet operators, to market a larger number of used aircraft than what we had previously planned.

Those run through our numbers as revenue with no margin on them.

Now given how strong the used market is, that may actually not happen.

But that is what is in this latest forecast is a higher level there, and a little bit higher revenues out of Citation shares, as well.

So really, some revenues that don't necessarily generate any bottom line impact.

Got you.

That is a lot of BlueBirds.

Can I add one thing back again, if you will?

When I mentioned 250, I misdescribed that number.

I know we are not planning to do 250 this year.

We have 250, probably more than that now, orders on the books.

And we are going to deliver 180 [approx] this year.

So I mistakenly said 250 this year, I would love to do that many, but that's not our plan.

Commercial helicopters he's talking about.

Commercial helicopters.

And the other point here, it's really unusual to have this much backlog on commercial helicopters, which is really a good sign for us.

It means our products are worth waiting for.

So I just didn't want to confuse the number 250 this year as the bill number.

It's actually 180.

Sorry, one last quick one, Lewis.

Any progress on the kind of the portfolio review in Industrial?

Well, you know, I have the same statement this quarter that I made previous quarters.

And that is, we really continue to stay focused on our intrinsic value approach, which really values each year's full plan versus the prior year's full 5-year plan, if you will.

And we expect to see improvement in intrinsic value, which could be, should be equivalent of between 10 and 15%.

For those businesses that aren't achieving that, you know, they are under the gun to come up with a way to do it.

And if they don't come up with a way to do it, eventually they just can't be part of our portfolio, it is just as simple as that.

We don't have anything to announce at this time, obviously.

Thank you.

Our next question will come from the line of Jeffrey Sprague with Citigroup, please go ahead.

Hey, Jeffrey.

Thanks.

Good morning, everyone.

Let me just try to slip one little ARH in here, sorry I am breaking the rules, but just on the notion of what you did incur in Q1, is any of that potentially reimbursable as you settle through this, or is that really water under the bridge completely at this point?

I am going to jump in here and, we are not going to answer the question, because as we are under negotiations and discussions with our customer, it just wouldn't be in the best interest of the shareholder, or help with that process to discuss any of the specifics.

So it is a little frustrating to us, because we do kind of pride ourselves on our transparency.

But it really not in anybody's best interest right now to discuss anything further.

Okay, fair enough.

We will let it go at that.

The 400 units at Cessna for '08 does include Mustangs in the order book for '08, correct?

That's correct.

About 100.

Okay.

So, and then can you just, Ted I think you mentioned international.

But could you give us a little more color on the complexion of the order number in the quarter?

That's obviously a huge number coming off an NBAA-driven Q4 performance.

Any color on what airplanes or what regions, anything really stand out about that?

It is a nice mix in the quarter that kind of continues the trend.

It is about 50/50, domestic orders versus international orders.

And deliveries were a little bit more skewed domestic.

We did about 42% international deliveries, but the second quarter international deliveries will be the majority.

We will pass the 50% mark for international.

So it's kind of been holding in there at a nice 50/50 blend for quite a few quarters now.

Okay.

And then it was just unclear to me on your comment about MRAP, you guys really haven't taken any risk per se, you are not producing above what you've got budgeted, you have just pulled it forward, and you've created kind of a hole in your production capacity later in the year, that hopefully additional volume steps into.

That is correct.

That's right.

The MRAP is a mine resistant attack, what's the p stand for, protection.

And that vehicle is several suppliers are quoting on it, if you recall.

And since we have a good base vehicle to start with, it has to be modified and then the question is, does the government like the modifications based on testing?

And we are just in the middle of testing now.

The risk, Jeff, is that if MRAP wasn't out there as a possibility, and we produced more smoothly across the four quarters, we would probably do it at a slightly lower cost.

But what we are doing is both creating the capacity and demonstrating the capability.

So we are demonstrating to our customer the ability to ramp to a much higher level, and we have bun running well above expected level here through the first quarter.

So yes, there is a modest amount of cost but it's not a material amount.

And then just on Cessna and this used aircraft issue, are you completely protected on the other side of the equation if something goes afoul on the used aircraft side?

Yes.

Since our not fun time post 9/11, you will remember, we have very much changed the policies there, so that we're taking these on short windows, with mark-to-market type contracts, so that we have, I won't say there's zero risk, but we are down to days or weeks of risk between acceptance of a price and ultimately moving the product in the marketplace, versus our issue last time, where some cases we had agreed to a trade-in value a couple of years.

A year before 9/11 for a unit that we got after 9/11, and that's what caused those issues.

So I think we are as well protected as we can be.

Hey, Jeff.

I give you one other piece of logic to stick in your belt?

And that is, you know, we said last year, '06 prices for used strengthened.

There is 11% out there in the used world of ours.

So that number is down where it should be.

And a lot of those are pretty old, and we have talked about that before.

But my point is, our products are so highly sought after, that customers are willing to place orders for, as we said, we are filling '09, '10 and beyond.

That means many times have to take an alternative solution, which is a used, so they get into a used, let's say Sovereign until they can get a new one.

And that is holding prices up nicely.

So that is kind of the logic of what is going on.

It would be very unusual if you see used prices go down.

I don't know what would cause that.

I agree.

Can you give us the sense in the quarter what used prices were up on a year-over-year basis, and what your new prices are running up on a year-over-year basis?

I cannot.

I don't have that data.

I think they are about flat year-over-year because they went up in '06.

New, on a delivered basis is probably in the 4% range.

But I don't know what used would have been trading for in the quarter, I just don't have it.

Somebody at Cessna knows that, but I don't have it.

Great.

I will pass it on.

Thanks a lot.

Yes.

We will take questions now from the line of Nicole Parent, Credit Suisse, your line is open.

Good morning, Nicole.

I guess first, I hopped on late so I apologize if you touched on it.

Big picture, could you just elaborate now that Dick has been in at Bell, kind of organizationally what else has changed since he has taken over?

Would you repeat that just one more time?

Sure, big picture just on Bell with the management changes.

You have had some time under your belt.

What else has changed within the organization?

I can't give you too much, I don't think.

There is not much to say.

I would say what we have done is just, we have had a new set of eyes take a look at everything down there with very good background as I explained when we put Dick down there.

And we have added a few our people down to strengthen the organization.

And we are working real hard on the things we know how to fix, and as we said, the early results, if you just take a look at that one thing, which was the overhead on-track to deliver overhead reduction of about 6%, which is a pretty good sized number.

That is the first good thing we have seen and, of course, if you didn't get on the call to listen to the progress on H-1, we delivered 3 of those, and the V-22 is looking well.

We are going down the learning curve on that.

So we have made good progress in a fairly short amount of time.

But there is more progress that has to be made.

This fight is not over yet.

It's only been 100 days.

But, Nicole, I assume you are going to go over to the Paris Air Show, and we will give you a chance to ask Dick that very question in June.

Okay.

Great.

I guess just a follow-up on Cessna.

With the large cabin concept mock-ups out there, and you are out soliciting customer feedback, given the length of the certification process, do you think it's reasonable were this program to go ahead, that you could see delivery prior to 2012?

No.

No, you couldn't.

And I guess just one again conceptually I know you haven't really talked about specific numbers, but the number that has been bantered out there is $500 million in additional R&D.

Would it be a level load in the R&D, or do you think you would front load it, just to be able to get the plane out as quickly as possible?

No.

First of all, that number is not going to settle down.

We are still working hard on this, and studying all of the business cases to determine whether it makes sense to go forward.

We will probably be into the first quarter of next year, before we finally make that decision, and how much it is is going to depend on how we use partner suppliers, et cetera.

There are several different models.

So that number might move around.

But I think the answer is, it would probably be a ramp-up in the first year we decided to go forward.

And then a fairly level spin for the next few years after that.

Great, that is helpful.

And then just one last one on industrial.

Given the strength that you showed in Q1, Q2 guidance and margin seems a little bit light, and I am just wondering if there's any seasonality factors we should be aware of, or if you are just being conservative?

Well, I think we are being down the middle with what our expectations are for the businesses.

We just had a phenomenal first quarter where all the stars aligned, and we had a variety of kind of everything went right and nothing went wrong, and we haven't seen that in a long time.

So our full year, there were certain costs and I won't get into the specifics, but there were certain types of expenses that came in very, very low in the quarter that are discrete items that is can happen in one quarter, but when we look across a longer period of time, we don't expect that will continue to happen quarter after quarter.

So it's our best judgment right now, we would all be thrilled if we could see the first quarter's level of operating performance continue.

But we have to see that for more than one quarter before we would get committed to it.

We would be thrilled, too.

Thank you.

Nicole, I just want to make one more comment on the widebody.

Obviously, we're are in an interesting situation, where we've been public about going out and trying to get some market information and feedback to the idea.

But we are really very far from a decision on that.

And I know a lot of people are kind of expecting that we will know by NBAA this year, and that won't be the case.

The earliest that we would make a decision is some time the end of this year, early next year.

So we are giving this thing very careful study.

I guess, why, what is the rationale for not introducing it before NBAA?

We won't be finished with our analysis by then.

This is not a sure thing.

We are going to analyze the market, analyze the various engineering options, analyze the various partnership arrangements and supply chain arrangements and build a business case.

And until we have a business case that we are committed to, we are not going to rush to do anything.

Great.

Thank you!

Next we will go to the line of Shannon O'Callaghan with Lehman Brothers.

Please go ahead.

Good morning, guys.

Hey, Shannon.

You know, just a couple of margin questions, I guess.

You know, at Bell, I know we can't talk to ARH, but if you exclude the charges there and the Katrina benefit, it looks like you had about a 9.4% margin.

That is pretty good.

You mentioned some lower H-1 costs.

Are the, excluding sort of the those items, are margins tracking about where you thought, or are is that better than you expected?

First quarter came in slightly better than we expected because of good performance on overheads and other costs.

But not enough to create a big trend off of what we were previously expecting on a full-year basis.

On a segment basis, Shannon, if you parse it between systems and Bell, the outperformance was a lot related to the additional ASVs that we shipped in the quarter.

Okay.

But things are definitely improving at Bell Helicopter as well.

I mean, you know, so at Bell, you mentioned some lower H-1 costs, and you mentioned the units you did get out.

How would you characterize how that is tracking now relative to obviously last quarter, we are still dealing with charges, so you have managed to get a few units out.

How are you feeling about H-1?

We feel much better than we did.

But we still have more to do.

And I am not being funny with you here, Shannon.

I am trying to be straight up with you.

This is a, it is a complicated program.

And I think we finally got the design buttoned up which took us a while.

And we have some other things we are doing to take costs out, like build new cabins as opposed to use remanufactured cabins.

And as they flow into the line, more cost comes out.

And then we have just the normal learning curve of building one after the other after the other, and the production folks get better at doing that.

So I feel a lot better than I did.

We are now back on an improvement track, which is what we should have been on a quarter ago at least.

And so I feel pretty good about it now.

But we still have more work to do.

So just stay tuned.

I think we understand what this thing is going to look like now going forward.

Okay, thanks.

That's a big program for us.

We intend to be right on top of this one.

And then just the last one, Ted you talked a little bit about the mix benefiting Cessna.

I mean, you know, the margin came in 200 basis points higher than what you guys had sort of pointed to.

Was it all mix?

I mean, still seems like a pretty strong margin for the quarter.

Yes, we had a number of things in the first quarter that we had, we are still ramping up the R&D spending, so it will jump up quite a bit in the second quarter from where it was in the first quarter.

We had a very low level of single engine deliveries in the first quarter, that will jump up quite a bit through balance of the year.

There were a number of things that were helpful to the margin.

Don't want to take anything away from the fact that it was a superb performance by the Cessna team, but it was stronger than average, at least what we see right now.

Okay.

Thanks a lot, guys.

Next we will go to the line of Ron Epstein with Merrill Lynch.

Your line is open.

Good morning, guys.

Can you just review, I got a little confused on the call here.

You got 530 funded ASVs for the year, is that right?

That's correct.

And are you planning to deliver that many, or is the plan to deliver 430, if you could just walk through maybe what the monthly rate is, how many are actually funded, that sort of stuff?

530 is the funded amount and that is now in our latest, this recent guidance our forecast for deliveries for the year.

And we are running at, how many units we do in Q1?

168.

168 in Q1 so we're running at north of the, north of an annualized rate as I mentioned earlier.

So we are building capacity to be able to add something additional on later in the year if we are fortunate enough to get that call from our customer.

But that is what is in there right now, 530.

I don't have the quarter by quarter, but you can assume it stays kind of at that rate in through the second quarter, and then it starts to taper off if we don't get additional orders.

And that 168 is exclusive of the 4 MRAP prototypes that we delivered as well.

You have got two things going on.

You have got the fact that over there in combat, we are almost at a 95% readiness, which is a really strong number for anything that's on wheels or in the air.

So that means when they get ready to get in one, 94% of the time it's ready to go.

And then secondly, they need more of them.

So assuming the supplemental comes in, which probably will come in mid-year, that would fuel more ASVs, and then if MRAP comes in on top of that, it's a pretty interesting upside potential.

Okay.

So in the supplemental, how many do you guys think you could potentially --?

How many could be funded in the supplemental?

Yes.

I don't have that number.

I don't know.

It's hundreds.

I think the options are for another 1,400 and something, but that's not all the supplementals.

Maybe half of that is in supplemental, and the other half of that may come in the budget next year.

I got you.

And then in we dig down a little bit more on the Bell segment, how much of the Bell segment was actually helicopters versus systems versus Lycoming?

Systems segment, with the breakdown in revenues in the quarter?

Yes.

I will go over that with you on a separate call.

We just don't have the data right in front of us here.

Okay, that's great.

And then I think that is it for now.

Thanks.

Okay, great.

Thanks, Ron.

Next we'll go to the line of David Bleustein with UBS, please go ahead.

Good morning.

Hi, David.

A couple of questions, the systems question I had as well.

It would be interesting to get on a more regular basis the systems revenue and the systems margin number.

Lewis, you mentioned 400 orders for 2008.

Which jets do you still have open production slots for?

That is a tricky question.

Let me see if I can answer it the right way.

Probably none.

We don't know yet.

Here's why.

We have open slots but we also have customers negotiating for almost every open slot.

So we don't book an order number until you get it completed.

And we have money in our bank.

So, we are not very worried about '08 either, actually.

Okay.

Maybe a different way to phrase the same question.

How many of those open slots are still being negotiated so they are temporarily closed?

That way you know our production number.

We can't do that yet.

I wasn't born yesterday.

Nice try, David.

Okay.

Next question.

All we told you we ever told you that, we told you 335-plus, I think.

335-plus of legacy, plus 100 Mustangs, which is up 60.

We're not taking production down in '08, I can tell you that.

That you can write in your book.

But we're not ready to put a number out yet.

Got you.

It's an unbelievable setup going on right now.

Terrific.

Next question.

Maybe an ARH coming, maybe not.

Are there any gains that you expect to hit in the second, third, and fourth quarter that we should know about?

Any what?

Gains.

Any one-off asset sales, tax things, Ted, anything coming down the pike that might be there to offset it?

No, nothing like a Katrina recovery, you mean, or something of that nature?

Right.

No.

There's always a bunch of--, and you don't know when they're going to resolve.

So we're not saying that it won't be any, but we are not counting on any.

We have a long list of risks and opportunities that we manage every single quarter, and every single year for our businesses.

So there is an asset sale for a 5 or $6 million gain here or there, in lots of our business numbers through the course of a year.

But there is nothing like a $28 million Katrina recovery.

All right.

And then probably my last one is there a quarter where Cessna's margins are down as the Mustang becomes a significantly larger year-over-year piece of the mix?

Well, it progressively has some impact.

If you just go to the second quarter, there will be some impact, because we have 10 Mustangs and half a dozen Encore pluses that are both ramping up.

So you got 16 units in the quarter that are going to be lower margin.

We also have a doubling of used aircraft in the second quarter, and higher R&D, higher depreciation expense, and higher international delivery.

So there are a bunch of things that are going to press on second quarter margins at Cessna.

But I think it is going to be a modest impact, and we have got a lot of other very, very strong performance going on there.

So I think we will see fairly stable margins as we go forward.

Especially when you think about the size of the revenue.

It's small.

You're doing 10 to 15 a quarter, and 10 is about equivalent to about a 10, so it's really not going to sway the numbers in a big, meaningful way.

But they will come in with lower margins--

10 to 15 Mustangs.

Just two more.

Is there any margin differential we should think about between your shipping a Cessna into the United States versus shipping one to Europe?

Yes.

We are right now we are using agent structure in Europe.

So gross margins on international aircraft are at lower profit margins, on an incremental basis, it is a meaningful number.

It is in the 6% or 7% range.

On a longer-term basis, it is smaller than that because those agents provide lots of fixed cost infrastructure that we don't have to put in place, given the volume that we have over there.

But on, in one quarter, if we had a big jump up in international shipments, you would definitely see a smaller margin, and that is a second quarter phenomena.

We sold 42% of the deliveries in Q1 were international, 52% of the deliveries in Q2 are going to be international.

Fair enough.

As your volumes overseas become larger and larger, when does it make sense to invest to put in that fixed cost infrastructure to eliminate the agents, or reduce their influence?

The answer is, we are studying that all the time.

It's a one by one.

When it makes sense we will look at other alternatives.

At this point, we still think this is the best structure.

And in the meantime, our agents serve us very will and are very valued members of the team.

They do a great job.

Understood.

Thanks a bunch.

Yes.

Thank you.

We will move onto the line of Cai von Rumohr with Cowen & Company.

Please go ahead.

Good morning, Cai.

Yes.

Thank you, great quarter!

Thank you.

You said 90 Citations in the second quarter.

Are you including in that number the 10 Mustangs?

Yes.

Okay.

Great.

And getting back to the LCC, your R&D, I think you have said at Cessna is in the area of approximately 5.5 to 6%.

Is that more or less the number?

That is right.

So really, we are talking, 250 to 300 million.

And the LCC, I think people estimate or you have said 400 to 500 million.

So the first year spend in '07 if you make the decision there is 275.

As we think of next year, as you think of next year, is the intention to absorb that number more or less in the 5.5 to 6%, or should we think of that as incremental to the 5.5% to 6%?

Well, we haven't gone through our planning process yet to determine what that would be.

I think we have tried to make it clear to everyone that if we decide to go forward, there could be some incremental costs here, but we are not ready to get more specific than that.

But certainly, you spend a lot of money anyway.

And the revenues look pretty good next year.

So I would assume some of it would be absorbed, I mean, without getting into specifics.

Is that a fair assumption?

Well, ideally, yes.

But we are just not there yet.

I don't know how to answer that question accurately.

Let me use an example to tell you why this is not as easy as you would think.

Just think about this for a second now.

We are not really just planning for one single model large cabin concept.

You really think about a family if you are going to be putting that kind of money into a brand-new wing/platform/engine combination, avionics, et cetera.

Here are the facts.

In January, we delivered our 1,000th Citation jet, which was conceived to be a family, but was launched as a single CJ, had no 1, 2, or 3 after it, in 1992.

So see, when you can perceive and really think through and do the market research to say yes, I can do a CJ, a little one, and I can put an extension in the fuselage to go to the CJ1, and then I can up CJ2 and go to the CJ2+, and then do a CJ3, and basically with a large family of common parts, we will have delivered 1,000.

So the trick here is to understand what other variance are out there for speed, range, size, et cetera, that could come off of this as a family.

And it's a full-time study.

It is not an easy one to do.

It is not just one model.

Okay, excellent.

Good answer.

ASVs, you are running well above the rate kind of you have the 530 for.

What is the timing?

Do you need to have a supplemental passed by midyear?

If you go with that rate and the supplemental is late, and they haven't decided on MRAP.

Is there a real risk that the third quarter is down?

Or do you just continue building at the higher rate, and then have a bigger cliff, depending on the timing?

It is not a risk.

It is in our plan and in our forecast that the third and fourth quarter will be down.

We are not putting any of that volume in our plan.

We are just building the capability.

So we have a plan right now that says if we don't get any incremental volume, we will ramp down.

I guess the question is, when do you need the supplemental to be past the kind of, and if it's past, in June, do you just deliver right away in the third quarter?

Or is that the way you expect it to work?

We have tried to build in the maximum operational flexibility possible, to be able to react to that kind of timing.

And we could choose to produce at our own risk, based on what we might be seeing going on.

So we will play it real-time.

And how big, I mean, given that MRAP has very large potential, do you have any kind of metrics you can put on approximately how big you think your share could be, or any thoughts at all?

It is way too early to say.

The customer is out trying to solve a problem, and they are making decisions every day depending on what's going on in the marketplace to figure out how to solve their problems.

So it's too early to say what it could mean.

And to be clear, our share could be zero.

I mean, we are not through to process.

Absolutely.

We don't want to be leaving the impression with people that we have a lot of confidence.

I mean, it could come out either way.

Yes.

We have confidence but you just have to guard it is all you have to say.

Got it.

Thank you very much.

Great quarter.

Thank you.

Okay.

Next we'll move to the line of Jack Kelly with Goldman Sachs, please go ahead.

Good morning.

Hey, Jack.

Lewis, on the H-1, when do you think it might be become profitable or breakeven, and maybe if you give us a lot number and an approximate time on that?

Ted might do it because he has got the data in front of him.

I have got it right here.

You know, we are obviously at roughly breakeven.

This year we'll actually make a little bit of money on some of the parts, pieces of the business, but not on the core program.

And then we are looking at getting up in kind of mid-single digit margins in '08 and '09.

Okay.

And can you just remind us again what the revenues might be next year on that?

$268 million.

Approximately.

Approximately.

Terrific.

Just final question on the ASV, assuming you get the additional volume that you might be able to get, I guess based on the timing numbers that you gave us, Ted, that might be another $0.04 to earnings this year.

And the way I got there is, you said pulled in additional ASV production the first quarter, it helped you by $0.04, assuming you fill that production, those production slots in the third or fourth quarter, it sounds like that is the upside to the guidance.

That is right.

Okay, great.

And just finally on Cessna, on the profits on used aircraft, can you give us a number for this last year, and maybe what it could be this year, even though some of it's a pass-through, I guess.

But just your typical, it has kind of faded so much we don't ask about it anymore.

But if you had it for last year and what it might be this year, on your own fleet.

Last year, you ask used for Cessna?

Used for Cessna, correct.

It was about 150 last year, and we're looking at something around 200 or so this year.

Those are the revs though, right?

Those are the revs.

No, the profits?

Immaterial.

So no major swing.

No.

Basically, zero.

It does have an impact on Cessna's margins.

But they are essentially just passed through.

Passed through revenues.

Got it.

And just last question, Ted.

You've talked about the spread between the pricing pickup and the cost hit, and the last two quarters, the spread has been $0.11 positive.

I know that is a function of a lot of things.

As you look forward over the next couple of quarters, do you see that spread remaining approximately the same?

I don't have that in front of me, but I think the answer is yes.

We expect a continuing positive spread, whether it's 11 or not, I don't have the detail for the third and fourth quarter, or second through fourth in front of me.

Kind of like the ASV.

We are talking about price.

Overall pricing for are the company, overall costs, increases for the company.

We are clearly going to have a continuation and a solid year as we start to, particularly deliver aircraft that we priced in a more robust environment.

Right.

So the bias seems to be that maybe the spread could widen, if anything?

I don't know if it's going to widen, but I think it's going to continue.

Good.

All right, thanks.

Operator, I think we have time for one more call.

Very good.

Our last set of questions will come from Rob Stallard, Banc of America.

Please go ahead.

Good morning.

Just a cup fl of quick questions, first of all on the V-22, you mentioned in the quarter that margins were down slightly.

How do you see the margin tracking through the rest of this year and into 2008?

It's a mix by contract.

So we're, '08 is technically it's slightly up, but I would call it almost immaterial.

So pretty much flat '08 versus '07.

And then picking up about 100 basis points in '09.

Right, okay.

And then just finally you mentioned that aftermarket at Bell was slightly down in the quarter as well.

What do you think is driving that?

And do you see that improving with supplemental revenues later this year?

I think it was a tough comp more than anything else from last year.

And delivery, and ability to get product out, and the product being pulled between production contracts versus spares contracts is more the factor than anything in the market.

Yes.

It is not a demand question.

Good backlog there, it will continue to be good backlog because they are wearing parts out pretty quick.

So that is just almost timing, really.

Right, okay.

Thank you.

Yes.

Okay, operator.

That concludes our call.

Thanks to everybody for joining us, and we will talk to you next quarter.

Take care, everybody.

Thank you.

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