達信公司 (TXT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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 our host, Doug Wilburne, Vice President of Investor Relations.

Please go ahead.

Thanks, Robert, and good morning everyone.

Before we begin, I'd like to mention that we will be discussing future estimates and expectations during our call today.

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

On the call today, we have Scott Donnelly, Textron's President and CEO, and Frank Connor, Textron's Chief Financial Officer.

We're originating our call from London today, as Scott and Frank are here meeting with customers and industry participants in conjunction with the Farnborough Air Show.

Our customary earnings call presentation can be found in the Investor Relations section of our website.

Moving now to second quarter results which appear on slide three of the presentation.

Revenues in the quarter were $2.7 billion, up 3.7% from a year ago, which yielded GAAP earnings per share from continuing operations of $0.27.

This compares to a $0.23 per share loss in last year's second quarter.

We incurred $0.02 per share in restructuring charges in the quarter, so second quarter EPS from continuing operations before special charges was $0.29 per share, compared to $0.08 a share a year ago.

Manufacturing operations generated $170 million in free cash flow during the quarter.

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

Thanks, Doug, and good morning everyone.

We're pleased we saw resumption of top line growth in the quarter, reflecting expansion of our defense businesses, and recovery in our early cycle margins.

While the pace of the recovery remains uncertain with the European sovereign debt concerns having negatively impacted business and consumer confidence during the quarter, we do believe the ability of our businesses to generate profits and cash in the cycle is apparent in our second quarter results.

Let's take a look at how that played out in our businesses, starting with industrial where revenues were up about 30%.

We continue to achieve good conversion on this revenue growth as we posted a segment margin of 7.7%.

This reflects the positive impact our cost reduction programs are having.

At the same time, we're also focusing on new product development to drive growth.

For example, during the quarter we introduced E-Z-GO's new low speed road vehicle the 2Five.

2Five is a zero emission electric vehicle that meets regulatory standards for use on 35 mile-an-hour and under public roads.

We believe the E-Z-GO brand will work well in this market.

Customer demand during the product's introduction launch has been positive.

With the public's attention on energy conservation, we believe this will be a good growth opportunity for us that leverages our current capabilities.

Moving to the finance segment, we had another good quarter of liquidations.

If you look at slide four in the presentation, you can see that we reduced managed receivables by $674 million, bringing our total reductions since the beginning of 2009 to $5.2 billion.

Distribution of finance was the largest area of reduction again at $203 million.

Also, $120 million in liquidations were generated from our time share business, which is also positive to continued success of our plan.

As we look at the rest of year we're increasing our total 2010 liquidation target from $1.8 billion to $2 billion, which will bring us to a two year reduction of nearly $6 billion.

Looking at slide five, cash conversion on finance asset liquidations came in at 87% for the quarter, bringing our year-to-date rate to 91%.

We now expect our full year cash conversion rate will trend into the mid to high 80s.

In terms of credit performance, we saw a reduction in 60 day delinquencies from $515 million to $385 million, and a reduction in non-accrual financed receivables from $1.03 billion, to $876 million.

Primarily through the resolution of several accounts for restructuring and repossession activities.

Charge-offs were $57 million, up from $31 million the first quarter, as previously reserved losses were realized.

Moving to Cessna, results were in line with our expectations as we delivered 43 jets -- 23 were light to mid-sized and 20 Mustangs.

As a result, Cessna returned to profitability and positive cash flow for the quarter.

Business jet usage continued to expand.

Average daily utilization increased to 0.68 hours from about 0.66 hours in the first quarter.

The FAA rolling three month averages for take off and landings were up in both April and May, and June data will probably be out shortly.

Correspondingly, Cessna aftermarket revenues were up nearly 20% in the quarter on a year-over-year basis.

On the used front, the number of previously owned Cessnas available for sale remained flat with last quarter at 15.1%, and used pricing remained relatively stable with the exception of some further weakness in older models and high usage aircraft.

On the order front, as expected, we had a number of cancellations, which included the cancellation of a large Mustang order from a European fleet operator.

On the other hand, gross orders increased for the first quarter.

And most of these orders were for light to mid-sized aircraft, so we actually had a positive order contribution backlog on a dollar basis.

While we were encouraged by demand trends in April and May, June did see a slowdown in market activity, following the European debt concerns, which we believe weakened business confidence around the globe.

As we discussed on our April call, we have already been experiencing softness in the Mustang orders.

As a result, we reduced our 2010 Mustang delivery outlook to about 70 units and adjusted our production plan accordingly.

With respect to the light to mid-sized market, we're still evaluating how the pace of economic recovery might impact demand for these models.

We're hopeful that Congress will pass a bonus depreciation bill and believe the continued positive earnings report and stabilization of the European credit market will contribute to an improved environment for business jet orders.

We will be watching the market closely over the next several months and will fine tune our delivery expectations and production plans for light to mids, based on how that market develops.

In any event, we continue to believe that the business jet demand will recover, as long as the global economy continues to expand and still believe that 2010 will be the trough year for citation deliveries.

As we move to Textron Systems, revenues were up nearly 12%, reflecting strong domestic and international demand for our products.

For example, on the international front, we completed delivery of a $57 million Sensor Fuzed weapon shipment to the United Arab Emirates in June.

Margins were also strong again, as we had good performance on our legacy US armored security vehicle and unmanned aircraft system contracts.

Backlog was up in the quarter, driven by new US ASV orders and an order for shadow systems from Sweden.

We expect that backlog will grow again in the third quarter based on anticipated domestic shadow orders, as well as the recently announced deal to supply shadow systems to Italy.

We also recently completed two small bolt on acquisitions in systems, which add nicely to our product and technical capabilities.

The most recent, Crane Wireless Monitoring Solutions, based in Texas will complement our intelligence, surveillance and reconnaissance products to better get our [war fighter storm] reliance on network sensors, as well as a host of future nonmilitary security applications.

And last month we added MillenWorks, which is an engineering company out of California, that augments our advanced powertrain suspension capabilities for combat and specialty vehicles.

Looking forward, we believe we are well positioned despite likely DoD spending constraints as our products are aligned with the prevailing nature of asymmetrical threats and developing international demand as well.

Wrapping up with Bell, we had a good quarter, both in terms of top line growth and operational execution.

On the military side, we delivered eight V-22s, and three H-1s.

The V-22 continues to perform well in theater.

We've begun discussions with the customer on the next multi-year contract, which would cover production beginning in 2014.

On the H-1, we're on track with production ramps to deliver 14 units during the second half of the year.

We also signed a contract for 27 additional units which begin delivery late next year.

The DoD has recently completed its operational evaluation of the attack version of the H-1 and we expect a full rate production decision this fall, so the outlook for the H-1 program remains very positive at this point.

Move to the commercial side of the business we delivered 21 helicopters, up from 15 in the first quarter.

On the marketing front, we had positive net orders in the quarter, contributing to an increase in Bell backlog.

We're also making good progress with our 429 program.

The initial delivery unit was placed into medevac service, it's performing superbly, and receiving accolades from the operator.

Certification of specific configurations is moving forward, and we're continuing to book 429 orders into our backlog.

We expect deliveries will resume this quarter with about 75 planned over the next year -- through the balance of this year and through 2011.

So the overall outlook at Bell this year and beyond is very good, both our commercial and military businesses.

As Doug mentioned earlier, we're in Farnborough, where Bell and Systems have had a terrific reception of their products.

In particular, the US Marine Corps has a US -- H-1 Yankee here that's been in combat in Afghanistan.

The crews that have been flying that aircraft have given great feedback to prospective customers.

Systems has Shadow and Aerosonde systems on display, and we've had a lot of international interest, I think, which bodes well on top of our recently announced wins in Sweden and Italy.

Cessna, while this is not typically a business jet show, is also seeing significant interest in terms of assets for both troop movement as well as ISR missions.

To summarize, we think second quarter results demonstrate the earnings power of the Company and we will continue to focus on cost productivity and new product development.

The benefit of these efforts were evident in the industrial segment margins again this quarter.

Our systems business continues to execute very well, and we have a steady outlook for growth there, especially with international opportunities that are emerging.

Bell is successfully executing in the middle of a multi-year ramp in military platforms, and we're seeing increased activity in the commercial sector which with should lead to solid growth over the foreseeable future.

At Cessna, clearly the last two years have been difficult in the Business Jet market, and we continue to believe the cycle is going to follow its normal course, and in finance, we're confident that we can reach our new liquidation target of $2 billion.

The cash which we've been generating has allowed us to make substantial improvements in our capital structure.

With that, I'll turn it over to Frank to provide financial details of the quarter.

Thanks, Scott, and good morning everyone.

To pick up on Scott's comments on capital structure, as you can see on slide seven, in the quarter, we reduced our net debt to $6.1 billion from $6.8 billion at the end of the first quarter, and $7.4 billion at the end of last year.

We are now targeting to reduce our net debt to below $5.5 billion by the end of this year.

We also made a second $250 million repayment on the Textron bank line, bringing the total repayment to $500 million for the quarter.

You can now turn to slide eight, as we examine the major factors that drove $0.21 per share year-over-year increase in EPS before special items.

Inflation came in at a 2% rate, which reduced earnings by $0.12 per share in the quarter.

While positive pricing of 1.3% provided a $0.09 benefit.

A higher share count, taxes and other miscellaneous items cost $0.07 per share.

The combined impact of volume, mix, and M&A cost $0.04 per share.

Increased pension expense was $0.04.

TSC's reduced losses benefited the quarter by $0.07, and our restructuring and execution focus netted a cost performance benefit of $0.32 per share.

Now, let's look at the results for each of the segments, starting with Cessna.

Cessna revenues decreased $236 million, reflecting the delivery of 43 jets, compared with 84 jets in the corresponding period last year.

These decreases were partially offset by higher aftermarket and used aircraft volumes.

Segment profit decreased $45 million due to the lower volume and a reduction in deposit forfeiture income, partially offset by lower used aircraft write-downs, inventory reserves and selling and administrative expenses.

Cessna backlog at the end of the second quarter was $3.7 billion, down $400 million from the end of the first quarter.

Bell revenues increased $153 million in the second quarter, reflecting higher V-22 and H-1 deliveries and higher spares and support volume, partially offset by lower commercial aircraft volume.

Segment profit increased $36 million, due to improved performance, higher military volume, and commercial aircraft pricing in excess of inflation.

The improved performance reflects a $21 million operating profit contribution for the recognition of reimbursements for prior period H-1 and V-22 program costs, plus the non-recurrence of 2009 termination costs related to certain cancelled commercial models.

Bell backlog increased $200 million from the end of the first quarter, to $7.1 billion.

Moving to Textron Systems, revenues increased $57 million, primarily due to higher UAS volume.

Segment profit increased $15 million, due to the impact of higher volume and improved performance.

Systems backlog at the end of the second quarter was $1.6 billion, an increase of $200 million from the end of the first quarter.

At industrial, revenues increased $153 million, due to higher volumes, partially offset by an unfavorable foreign exchange impact.

Segment profit increased $39 million, due to higher volumes and improved cost performance, partially offset by inflation.

Looking to the rest of the year for industrial, we expect growth to slow somewhat, reflecting normal summer and year end holiday shutdowns in the automotive industry.

Moving to finance, revenues decreased $30 million, largely due to the non-recurrence of last year's gains on debt extinguishment, and lower average finance receivables, partially offset by reduced portfolio losses.

Finance segment loss improved $28 million, reflecting lower loan loss provisions, portfolio losses, and selling and administrative expenses, partially offset by the non-recurrence of gains on debt extinguishment and the impact of lower average financed receivables.

Now, moving to a few corporate items.

Corporate expenses were less than expected in the quarter, primarily on the compensation expense line, resulting from a lower prevailing stock price.

Our tax rate in the quarter was also lower, primarily related to a number of discrete items associated with our international operations, which benefited the quarter by about $0.03.

For the rest of the year, we anticipate that our tax rate will return to about 30%.

Now let's talk about special charges for the year, looking at slide nine.

First, we're increasing our restructuring cost estimate from $30 million to $45 million, or about $0.10 on an aftertax per share basis.

Most of this increase is for additional restructuring at Cessna.

And the second change results from the continuing wind down of our TFC Canadian operations, where we anticipate taking a non-cash aftertax charge of about $78 million, or about $0.26 per share.

Now, this charge eliminates the balance of a cumulative currency translation account, and will be triggered when the Canadian operations is considered to be substantially liquidated, which we expect to occur during the second half of the year.

It's important to note that the equity in TFC and Textron has already been reduced by this amount through previous other comprehensive income adjustments.

So there is no further equity impact from this charge.

So let's now turn our attention to our 2010 outlook, and we're now looking at slide ten.

As demonstrated in our second quarter results, we are more than making up for the weaker current performance at Cessna, with stronger performance from the rest of our businesses.

On that basis, we are increasing our 2010 outlook for EPS from continuing operations before special charges to $0.55 to $0.65 a share.

We are maintaining our free cash flow from manufacturing operations outlook of $500 million to $550 million, although the probability is that we will likely trend towards the lower end of that range given the lower expected delivery outlook at Cessna.

That concludes our prepared remarks for today.

Operator, we're now ready to take questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Cai von Rumohr from Cowen & Company.

Please go ahead.

Yes, thank you.

Great quarter, guys.

Thanks, Cai.

Could you give us a little more granularity at Cessna if we take out the used aircraft and the forfeiture gains, what the results would have looked like and some color on the pattern of R&D over the balance of the year at Cessna?

I would say generally, Cai, we're almost at a wash here in terms of forfeiture gains and used write-offs and again the used write-offs were focused on the other high time, high cycle aircraft that we still have in inventory, so pretty close to a net wash.

In terms of your question on R&D, that cycle, we will see increasing levels of R&D as we work our way through the balance of the year.

Okay.

And is your full year delivery forecast, if we take out the Mustang, are the Citation delivery estimates intact?

The point we have right now on the light to mid-size, we're not formally adjusting one way or the other where we are on that thing.

As I said in my prepared notes, the market I would say through the first half of the year has trended like we thought in terms of our expectations in orders.

We did have a little concern here in the latter part of the quarter just because as things got rattled around a little bit with the Greek thing going on and whatnot, we saw some people tentatively back off.

I don't think they're customers that are leaving necessarily, but people are taking a bit of a pause, if you will, to understand what's going on with the recovery.

Obviously we don't know if that's a 30 day issue or a quarter or two, so that's one where we're just going to watch it, and obviously if we see any significant changes to our plan, we'll adjust production accordingly and obviously we'll have a lot better insight to advise on future calls.

Okay.

Thank you.

And the last one, you had a lot of changes relative to I think what people were looking for.

Can you give us just some color on the trends we should expect by each of your major businesses for the full year?

I would say that if you walk through each of the segments, industrial, I would expect to stay relatively strong.

Historically, you usually see some softening just because the volume is usually softer in the second half of the year than the first half of the year in the automotive industry.

And obviously with Kautex being a big part of that, we would expect to see probably a modest decline through the course of the year, again, driven primarily just by auto doing its normal cycle.

I think that Bell and systems are going to continue to perform strong through the balance of the year.

I don't think you're going to see 13% margin rates obviously.

The REA helped in the quarter for Bell, and we had some pretty strong deliveries here on some international programs like the SMW in the UAE in the second quarter, but I would expect those businesses will still be strong performers through the whole balance of the year and going forward.

Cessna, despite some uncertainty around the order front, certainly our expectation that we will see incremental improvements as we go through each quarter in terms of our margin rates.

So I think that's a reasonable expectation.

And finance, there's no change to our previous guidance.

I think we'll end up seeing a loss that is consistent with what we've guided you through the total year.

Thank you very much.

Thank you.

And next we'll go to the line of Noah Poponak from Goldman Sachs.

Please go ahead.

Hi, good morning.

Good morning.

Good morning.

Can you just give us the actual unit numbers in terms of what the gross orders were and what the cancellations were by Mustang and by the rest of the business?

We haven't been putting those numbers out.

Again, I think those are pretty commercially sensitive.

I think what I communicated to you guys for instance on Mustang, we're giving you the numbers and the production rate.

That's where we are.

There's no issue of doing that.

I would say the bulk of the orders in the quarter were light to mid-sized, which I think is a positive sign.

Right now we think at least in this market environment, that the Mustang really probably is a 70, 75 unit per year a run rate, so that's what we would expect to see orders and whatnot that supports that, and again, the light to mid-sized, we'll see how that plays out through the balance of the year.

Positive so far, but a little bit of uncertainty just by the fact we've seen a little bit of a slowdown in business confidence towards tend of the first half.

Can you talk a little bit more about who's buying aircraft today, what customer it is?

Well, mostly as we've seen the light the to mid, you're talking about a fair number of Sovereigns and XLSs.

These are small businesses.

There's been order activity, it's been probably stronger in the US than anywhere.

One of the things that have concerned us is European currency weakened against the dollar.

That slowed down Europe as a region but I would say it's generally been small to mid-sized business, probably strongest in the US, still some reasonable strength in Latin America and some in Asia.

Okay.

And just one more.

On the 429 at Bell, when was first delivery and it sounded like you reiterated this 25 in 2010, 50 in 2011, is that correct?

At one point you were talking about 300 letters of intent and I think the story was the downturn came right as you would normally start assigning serial numbers there so you held off and there's been some movement in the backlog.

Could you update us on where you are in that process and how strong the backlog is today.

Absolutely.

You're absolutely right.

The 300 letter of intent that was out there is -- was unfortunate when the 429 came to the market in a pretty tough spot, in terms of the commercial helicopter market.

The conversion rate on that 300 in the current backlog has been very low.

On the other hand, I would say over the last quarter or so, we have been moving 429s into backlog as configurations have identified.

I would say that I feel probably better about the level of customer activity and the number of discussions that are going on and the number of orders that we're starting to create the 429, than I did from the beginning of the year.

So I think we're really starting to feel some pretty strong momentum and that's really a function of getting these aircraft out in, getting it into service, people starting to get some feedback on how it's performing with the actual aircraft.

So I feel probably better about the 429 right now than I have over the past year.

So I think we're working our way through that cycle, but also having aircraft out there and really being able to go out and start marketing and selling hard, it's doing very well.

The 75 through the balance of 2011, I still feel very good about.

We are, I would say moving and not getting there as quick as I would like this year in terms of getting specific interiors defined and the associated certifications that have to happen with those.

So it's always been back end loaded.

It's still very back end loaded, in terms of 429 shipments.

Most of that, frankly, though is on us to get the configurations defined and get the certifications completed.

So right now I'm hopeful, we're getting close to the 25 this year.

But any that don't obviously I think would go out in the early part of 2011.

So I'd say the bottom line in terms of the 429, yes, it was unfortunate but the thing finally actually came into production and launch at a pretty difficult time in the cycle but the demand as we see it right now is strong and increasing and I feel good about getting up to the production rate and delivery that we talked about.

Thanks a lot.

Thank you.

Next we'll go to the line of Jeff Sprague from Vertical Research Partners.

Please go ahead.

Thank you.

Good morning everyone.

Just a couple quick ones.

First, just thinking about adjusting the Cessna production potentially, sounds like you're on the cusp of trying to make a decision there.

Just want to get a sense of if that's where the cash caution is?

We've got earnings going up and maybe cash trending down.

I would think the supply chain is probably geared up to that original production forecast.

Give us a little sense of how you manage that and what the working capital ramifications might be if you do turn down the production forecast this year.

Sure, Jeff.

You're absolutely right.

The pressure point that would push us to be in the low range in terms of our cash expectations would predominantly be driven by working capital at Cessna.

These are pretty long cycle manufacturing operations, an awful lot of material is already in house, aircraft that are under way, and we understand that.

So we'll, as we see how these orders are playing out, we can obviously make adjustments in terms of what aircraft we build out and what aircraft we don't build out but regardless of that we'll still have some trapped inventory in there that will put pressure on the cash from a working capital standpoint.

And, that's offset by the fact that in the other businesses, we're generating higher than was in the plan and good working capital management, for the rest of the businesses.

But that would be the pressure point for us, is that we do need to turn down the rate of production we certainly will do that, but given the long cycle nature of these things, which is why you have to have them in the pipeline anyway, which would create some pressure on Cessna.

On the flip side of that, Scott, if you get the multi-year on the Zulu or further negotiation on the next tranche of V-22, does that drive some cash progress payments or deposits or anything that's favorable in the back half of the year?

Not really, Jeff.

We have not on those programs had to go out with a lot of long lead material or stuff where we would take it at risk and then catch up, so having the offset on those is great.

Obviously the discussions we're talking about V-22 multi-year, that's out to 2014, so we haven't even begun to expend any cash on that program.

Is there anything else in the pipeline on favorable adjustments like maybe even on the ARH, I think there was some dispute on whether or not some of that would come back to you.

Is there on any of these programs, V-22, H-1, ARH, anything else in the pipeline that comes back as a favorable adjustment to you that you can see?

Well, we have some reserves up on things like ARH, but I don't think those are in a situation where they're going to be settled any time in the real near future.

I think it's fair to characterize their outlook includes any of those miscellaneous types of things as a matter of course, Jeff.

Okay.

And then finally, can you just give us a thought on how the CJ4 ramps from here?

I see you've got the first three out the door in the quarter.

That will continue on that trajectory, Jeff.

So there's really been no change at all in the CJ4.

We'll probably end up being about 15 this year which is what we were anticipating.

Thank you very much.

Thank you.

We have a question now from the line of Steve Tusa from JPMorgan.

Hi, good morning.

Just on Bell, I'm curious, the $21 million you said was a combination of the two items.

Could you just tell us what the reimbursement number was this quarter?

I'm sorry, the --

None of that cash was in this quarter.

It flows second half.

The settlement in terms of the revenue and the knob impact of that REA is in Q2 but the cash won't issue until later this year.

I'm curious about the knob impact.

That happened in the first -- in the second quarter.

Right.

How much was that?

$21 million.

Okay.

Got you.

I thought that was the combination of the two items, the absence of the --

Oh, no.

Okay.

Great.

$21 million.

Just on the commercial side at Bell, I think your previous target was 150 commercial deliveries.

You've delivered I think 40 or something year-to-date.

How do you think about that production target out in the back half of the year?

That's still the target we have, Steve.

I feel pretty good about it.

It obviously varies by model.

I think when you look at 412s, I think the 429s we're going to be pretty close to where we wanted to be.

There's still some softness or variability a little bit on the 407s and 206s.

From a knob perspective and the bulk of the cash is tied up in those larger aircrafts so I think we're in pretty reasonable shape as we head through the balance of the year on the commercial front.

One more question on the 429.

You're talking about 75 now for the next couple of years.

We're hearing numbers from the press that you guys have about 20 of those orders right now and that's what gives you confidence about delivering this year.

Is that around the right number as far as firm orders for that aircraft?

We haven't had that number out there.

But I actually think it's a bigger number than that.

Again, a lot of this, Steve, we don't put them into the backlog until we have definitized contract and have all the interior configuration and all that stuff done, so that creates a bit of a lag.

I think in terms of what I see in the marketplace right now, both what's in the hard backlog, what's under negotiation, what we're specifying and working with customers on, I feel very good about that 75 number.

One more question.

You guys got a pretty decent amount of price this quarter.

The only place you really mentioned it was in Bell.

Where are you guys getting that price?

Because your commercial deliveries are obviously down, and I can't imagine on the OE side there's a ton of pricing power right now.

Is that mostly in the aftermarket or is that a function of mix?

I don't know.

If you could just explain where the $34 million, $35 million of price is coming from.

We got some at Bell.

Year-over-year, on a quarter basis, we got some at Cessna as well in different pieces of the Cessna business.

And is that on the OE side of Cessna?

Yes.

Is that a function of the backlog, a trailing -- how do we think about price going forward at Cessna?

I think as we said at Cessna, we're not operating, expecting that we're going to get price in the current environment or the near future environment, so I wouldn't expect to continue to see a lot of price benefit but just year-over-year on the comparative basis we did.

Okay.

Great.

Thanks a lot.

Thank you.

And we have a question now from the line of George Shapiro from Access 342.

Please go ahead.

I had a question on Cessna.

You mentioned that forfeitures net of write-downs was about zero this quarter.

Now, that compares to $15 million of net positive in the first quarter?

Yes, that sounds -- I know those forfeiture number was 15 in the first quarter, I think the -- yes, we were about flat on used in the first quarter, right.

Okay.

And then second, at Bell, if you take out the $21 million, you still had about a 10.5% margin.

Is that sustainable or is the comment about commercial pricing being above the inflation this quarter, is that only a quarterly thing?

Well, the Bell margin when you back out the REA -- what's that?

Was about 11%.

There was a revenue impact as well to that REA piece.

On an adjusted basis for the REA was 11%.

That's higher, at the high end or higher than what we've guided to generally in Bell.

We had very good performance during the quarter at Bell.

Is that also related to the fact that in subsequent quarters you don't expect to get a benefit from commercial aircraft pricing in excess of inflation?

George, the real driver on the second half, we'll probably run a little bit less than 10% at Bell in the second half, and the primary driver there is the ramp in the H-1 which is below average margins.

There's going to be some mix shift, yes.

Okay.

And then one last one.

Industrial, was the mix, the percentage of business from auto this quarter pretty similar to what it was in the first quarter?

Yes, pretty similar.

Okay.

Very good.

Thanks.

George, by the way, welcome to Textron coverage.

Good to have you on.

Thank you very much.

Thank you.

And we have a follow-up question from the line of Noah Poponak from Goldman Sachs.

Please go ahead.

Hi, thanks.

I just wanted to follow up on this industrial margin performance.

You potentially have some favorable mix here, and the revenue recovery has been very strong, so we're printing these really nice margins relative to history, but we're doing it on revenue numbers that are substantially lower than where revenue once was in the middle of the last cycle.

The question is, how sustainable are these and is this the new norm and the new starting point, and how much higher do you think they can ultimately go as revenue continues to recover?

I would say that we did have strong mix in terms of the growth on the auto side of the segment where I think we've done a lot of restructuring and we have gotten strong leverage.

I think the answer is, is that sustainable?

Yes, it's sustainable, but I do think we will see some degradation in volume in the second half of the year.

Auto always go through a bit of these cycles but we are seeing and I think we will continue to expect to see higher margin rates on similar volumes as we've had in the past.

I do think we'll continue to see this expansion in terms of the margin rates across that entire segment.

Okay.

Thanks.

Okay, ladies and gentlemen, I believe we have no further questions in queue.

We thank you for joining us today and have a good day.

Ladies and gentlemen, that does conclude the conference for today.

There will be a digitized replay of this call beginning today at 10 AM Eastern time until October 20th at midnight.

You can access the AT&T replay service by dialing 1-800-475-6701, or 320-365-3844, access code 138124.

Once again, to listen to a replay of this conference call, you can dial 1-800-475-6701 or 320-365-3844, the access code is 138124.

That does conclude our conference for today.

Thank you for your participation and thank you for using AT&T Executive Teleconference Service.

You may now disconnect.