達信公司 (TXT) 2011 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 conference over to our host, Mr.

Doug Wilburne, Vice President of Investor Relations.

Please go ahead.

Thanks, Katie, and good morning, everyone.

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

These forward-looking statements are subject 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 Chairman and CEO, and Frank Connor, our Chief Financial Officer.

Our earnings call presentation can be found in the investor relations section of our website.

Moving now to first-quarter results, which appear on slide three of the presentation, revenues in the quarter were $2.5 billion, up 12.2% from a year ago, which yielded earnings per share from continuing operations of $0.10 compared to a loss of $0.01 in the first quarter of 2010.

Last year's result included $0.06 in special charges.

First-quarter manufacturing cash flow before pension contributions reflected a use of cash of $55 million compared to a use of cash of $134 million during last year's first quarter.

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

Thanks, Doug.

Good morning, everyone.

Let me start by saying that we had mixed results in the first quarter.

On the positive side, while our commercial aircraft deliveries at Bell and Cessna in the quarter were flat on a year-over-year basis, order and customer and inquiry activity was higher than it was a year ago.

Specifically at Cessna, gross orders improved from last year's first quarter, as did used aircraft sales.

In terms of leading indicators, availability of used Citations also continued to improve, dropping to 14% of the installed fleet from 14.5% at the end of the year and a high in the cycle of 17.3%.

Based on overall current customer activity, we still believe jet deliveries this year will be up slightly from 2010.

Inquiries are broad based geographically including the US, where the bonus tax depreciation incentive is still in effect.

This will likely drive Q4 sales in a similar fashion as we experienced last year.

Now let me address Cessna's financial performance.

Revenues were up $123 million, primarily due to higher mix of light and midsized jets and an increase in used jet in sales.

Despite the increase in revenue, Cessna posted a segment loss of $38 million.

While there are a number of items in the quarter which contributed to the magnitude of the loss, I would say that our underlying operational performance of Cessna was disappointing.

The production ramp on the new CGA-4 is going well technically but is above our production cost targets.

We have seen price stabilizing across most aircraft models but inflation did erode margins and even with low levels of production in the factory, I believe we can do better in terms of driving productivity.

We have taken a number of actions over the past couple of years at Cessna but clearly have more to do.

I assure you we are taking necessary actions to restore our profitability even as we increase investments in new products and service offerings.

Moving to Bell, execution in financial performance remains strong reflecting solid execution on our military program ramp ups.

We delivered nine V-22s and four H-1s versus four V-22s and three H-1s in the first quarter of 2010.

Both of these important programs are also performing well for our customers.

In February, the H-1 Zulu, which was approved for full rate production just last quarter achieved initial operating capability certification by the Department of Defense.

This designation represents an important operational achievement.

Also in February the V-22 achieved the 100,000 flight hour milestone.

The V-22 performance both in combat and humanitarian missions has been outstanding.

According to Navy Safety Center records, the MV-22 has the lowest Class A mishap rate of any rotorcraft in the Marine Corps during the last decade.

Also, Navy data shows that the Osprey already has the lowest cost per seat mile than a US Navy transport rotorcraft, so we are proud of the program and the capabilities it's providing to our customers.

On the commercial side of the business, we had an excellent show at Heli-Expo, where we introduced two new models.

We unveiled the 407GX, which is an upgraded version of the Bell407, equipped with the Garmin 1000 integrated flight deck, and we introduced the 407-AH, an economical but fully capable armed helicopter designed for paramilitary and foreign military applications.

Importantly, the overall tone of the show was decidedly better than last year as we signed a number of important customer contracts.

Finally, another important achievement by Bell in the quarter was being named the number one provider of rotorcraft product support for the 17th year in a row by Propeller Magazine.

This recognition is particularly important because after market support is a critical factor in new helicopter purchase decisions and therefore a significant competitive advantage for Bell.

At Textron Systems, revenues were down slightly in the quarter while we maintained double-digit margins.

Systems also received important recognition for excellent service support as our Shadow Tactical Unmanned Aircraft System program was named the best performance base logistics implementation by the Department of Defense.

And on the international front, we made our first UAS shipment to Sweden during the quarter.

At our finance segment, we had another excellent quarter of execution on our noncaptive exit strategy, reducing our amount of receivables portfolio by $485 million.

This now brings our total portfolio down to $4.1 billion with the noncaptive portion decreasing to $1.9 billion.

Within the noncaptive portfolio, Golf mortgage is down to about $820 million and timeshare dropped to about $620 million.

Moving to the industrial businesses, operating performance was solid again.

We achieved a 90 basis point improvement in margins as revenues were up at Kautex, Greenlee, and Jacobsen.

While the situation in Japan did not have a material impact on volumes in the first quarter, we have been notified by a number of our auto OEM customers they will be affected in the second quarter.

These customers are indicating that they expect second-quarter production slowdowns will be substantially made up in the second half of the year.

Therefore we do not expect these issues to materially affect our outlook for the full year.

On the business development front in industrial during the quarter, Greenlee purchased a 51% stake in Shanghai Endura Tools Company, a distributor of professional tools for the home centers, constructions, industrial manufacturing, and automotive channels with over 1000 distribution points in China.

This should allow us to accelerate our expansion of our tool business throughout China.

To wrap up the quarter, we are seeing signs of recovery in our commercial aircraft markets at both Bell and Cessna.

We posted strong results at Bell Industrial and Systems reflecting success from our operating execution across productivity efforts.

At Cessna, we will continue these efforts that are required to deliver superior financial results in the business and we had a good progress in our wind down strategy at finance.

Overall, we remain on track for a full-year EPS outlook between a $1.00 and $1.15 and cash flow before pension contributions of $800 million to $850 million.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $123 million, up $27 million from the first quarter of 2010.

This reflected an increase of $13 million across the manufacturing segments and a $14 million improvement in finance segment loss.

The finance segment improvement reflected lower loan loss provisions and lower operating expenses, partially offset by lower interest margin on the reduced portfolio of finance receivables and higher portfolio losses.

Looking at slide five, non-accrual finance receivables decreased from $850 million to $836 million, while 60-day plus delinquencies increased slightly to $418 million from $411 million.

Charge-offs in the first quarter were $16 million compared with $24 million in the fourth quarter of 2010.

At Cessna, revenues were up $123 million on new jet deliveries, as Scott mentioned.

We posted an operating loss of $38 million, which compared to a $24 million loss in last quarter's -- or last year's first quarter.

This decline reflected a number of items including lower deposit forfeiture income, higher engineering and development costs, and inflation, which more than offset profit contribution from the higher revenue.

At Bell, revenues were up $131 million and segment profit increased $17 million.

Segment profit increased as the impact from higher military production and deliveries more than offset increased research and development costs.

At Textron Systems, revenue was down $13 million primarily due to lower ASP aftermarket services.

Segment profit was down $2 million on the lower revenue.

At Industrial, revenues were up $78 million on higher volumes, generating an increase in segment profit of $12 million.

On the capital structure front, we ended the quarter with $4.7 billion in net debt, down $352 million from the end of the year, which you can see on slide six.

Last month we established a new Textron credit facility with a $1 billion undrawn line.

We also continued to pay down the TFC bank line, ending the quarter at $1.2 billion outstanding.

We expect to retire the balance of the TFC line well in advance of the April 2012 due date as proceeds from further liquidations at TFC, cash flow from manufacturing operations, and a quarter-end cash balance of $1 billion should be more than sufficient to do so.

That concludes our prepared remarks and we are ready to take questions.

(Operator Instructions).

Peter Skibitski, SunTrust.

Good morning, guys.

I was wondering if you could give us some more color on Cessna profitability.

Can you tell us how much forfeiture income you had this quarter versus the prior year quarter and maybe quantify how much R&D and inflation impacted?

Sure, we can give you a couple of the big categories, Peter.

Engineering was about $9 million higher in the quarter than it was a year ago.

Forfeiture deposits were lower by about $9 million than they were a year ago.

Used aircraft write-downs were about $3.5 million to $4 million worse than they were a year ago, so those are some of the items I kind of mentioned as --.

It is a bit of laundry list of things, but that's the bulk of it.

Sure.

You are still expecting profit at Cessna for the year, I think you guided to 1% to 3%?

Yes, we are.

Okay.

Will Q2 be profitable, do you expect?

Again, it ties into the number of deliveries but I think it will be somewhere in that breakeven area.

Okay, okay, then lastly, and I will move aside, the new union contract at Cessna looks pretty good on paper and you have the Mexico facility ramping up.

So it seems like your costs should be down materially I would say, but do you think the full effect of the union contract hasn't really come through yet or are the guys kind of struggling with implementing that?

Can you give us some color there?

I can give you some color there.

This is where I sort of refer to some things disappointing, Peter.

But the Mexico thing for instance I think is a significant play for us.

I think we have to recognize a lot of stuff is in the transitioning process.

Some parts are completely transitioned.

An awful lot of stuff is still in process and obviously in many cases, particularly these aircraft early on in the cycle are actually aircraft that have a lot of parts that were built in a higher cost labor place because we actually built ahead to then be able to transition the tooling to get it down to Mexico to make that transition happen.

So you are certainly not seeing the full effects of what we are trying to do in terms of transitioning some of that high labor content work down into Mexico.

In terms of the labor agreement, I think we will see -- obviously we will see benefit in terms of both productivity as well as having some relief here of not having escalating labor costs.

But again, I think you'll see more impact of that as we start to bring more people back in, as we start to increase production rates.

These aircraft obviously have been built still in pretty well the trough of where we are in terms of overall production rates.

Okay, okay, so we will see the Mexico impact maybe flow through in the second half of the year and --?

I would expect so, yes.

Okay, thanks very much.

Heidi Wood, Morgan Stanley.

This is actually Kevin Boone calling in for Heidi.

I had a question on Bell, just given the flat results in the quarter.

What do you expect going through the year?

I think there was a relatively positive helicopter conference you had down in Orlando and would you see some of that carry through throughout the remainder of the year?

Yes, we absolutely do feel good about where we are on the Bell commercial side of things.

The flat deliveries in the quarter I think you would really look at this and say that the commercial market really started to move towards the latter part of next year.

We started to accumulate actually some backlog.

We feel good and continued to accumulate that as we went through the first quarter.

Heli-Expo obviously an important part of that and we do expect that we're going to continue to see a good ramp up in terms of commercial deliveries throughout the balance of the year.

So we will come out very confident we're going to end up with higher deliveries in 2011 than we had in 2010.

So I think the first quarter being flat just in terms of the numbers of aircraft is not something that is a worry to me or something that I would interpret in a very big way.

We're going to see continued growth in that commercial business as we ramp through the year.

How about on the aftermarket side?

What did you guys see in the quarter for the commercial side?

I'm not sure I have that number right in front of me, but flight hours have been strong, so I think -- I don't want to give you the wrong number here.

After market was up a bit.

So we continued to see some improvement in that area.

Great, thank you.

Cai von Rumohr, Cowen and Company.

Thank you so much.

Could you comment on where the cash conversion was of the liquidations at TFC?

In the quarter, it was about 92%, Cai.

And your expectation for the year?

Well, as we kind of keep saying, I know it hasn't happened yet, but we do expect as we get through some of these other assets it's going to get -- it's going to degrade over the year.

So -- but in the first quarter it was pretty strong.

We had a sale of a number of receivables in our amortizing pool in the resort side that went at a very high level, which helped to keep the number pretty high here in the first quarter.

And we will continue to see some of those sorts of transactions, but it's clearly going to trend down into the 80s, even the 70s I think over the course of the year, Cai.

Okay.

And could you give us some color on the impact that the CR has had and the tough budget environment we're in, kind of how you look both at systems and Bell on the military side?

Sure.

In terms of the CR, I would not say that we had any programs that were directly impacted necessarily by the CR, but I think what we've seen happening is a number of new program opportunities particularly in the systems business where we are going through the usual process where the government has issued RFIs and then they are issuing RFPs and going through that proposal evaluation process.

Whether it's directly because of the CR situation or just frankly a lot of things going on in the building with respect to working now on the 12 budgets and dealing with all of the churn that's going on, a number of those things have just been delayed.

I don't think those programs are going away, but some of them are clearly sliding to the right just in terms of the timelines that the government articulated with respect to those programs.

And you know that business, Cai.

It's not unusual for that to happen but I think it's being -- it's happening more driven by a lot of the churn around the CR and just the budget challenges they have in total.

So again from my perspective, no direct impact and the programs that we're following, that we're bidding on I don't believe are impacted in terms of will the program happen, but we're seeing some things slide to the right.

On the Bell side, we really haven't seen any impact to be honest with you.

Obviously the multi-year on V-22 has continued to move right along.

The H-1 funding has been solid and we are delivering at our forecasted production rate.

So on the Bell side, we really at a macro level haven't really seen any impact on the CRs at this point.

Thank you.

Robert Stallard, RBC.

Good morning.

Thanks very much.

Scott, I was wondering if you could start on Cessna.

The backlog was down again this quarter.

There's a lot of moving parts here, but what's your thought on when we might see the inflection point in the backlog?

Well, Robert, I think it's going to be to the latter part of this year.

We are, as I said, seeing -- we did see more gross orders, up a good bit in the first quarter.

It's coming -- the market is clearly coming back.

I would say it's coming back slower than we would like and I think a lot of the uncertainties out there with oil and economies and conflicts have slowed things a bit, but the encouraging part is that the orders are starting to flow and certainly the customer activity and discussions are happening.

It's just taking a while to bring things to total closure.

So that's why I say our color at least as we look at the year is that we still feel pretty good about the demand being where we expected it to be to meet our commitments in terms of the number of deliveries.

But realistically at this point, it's not like the thing is rushing back, so I would say that getting to a point where you start to build positive backlog versus the order rates that we see and obviously the aircraft that we are selling as we go through the year, I think it's going to be best case towards the latter part of the year before you would see any real change in backlog.

Secondly, at Textron Systems, you noted that ASV after market was down year-on-year in the quarter.

What is the trend like here?

Is this a one-off occurrence partly related to CR or something or are we starting to see this trending down going forward?

I think just part of that is timing.

I wouldn't read too much into that.

I think the opportunities that we are really looking at in terms of the ASV business over the next year, two years to three years almost is really becoming more a function of bringing in new contracts and foreign opportunities.

We still feel pretty good about that.

We did announce a deal here in the quarter.

We've seen some options exercised, so at least I think over the next couple of years that business is still in pretty solid shape.

Okay, thanks very much.

David Strauss, UBS.

Scott, just to follow up on that in terms of Cessna, could you give some color in terms of what you are seeing maybe by geography or product line?

I have certainly heard that the domestic market seems to be picking up a bit.

Are you seeing corporates come back to the market and look at potentially looking at refreshing their fleet after having put it off for a couple of years at this point?

We are.

As I said, the geography of this thing is pretty broad.

We see a lot of activity in Asia and Latin America.

Europe actually quite a number of inquiries and the US does seem to be coming back as well.

One of the things that we are struggling a bit with is in the US obviously the bonus depreciation is helping to incent some people back into the market and I think those deals are going to happen.

One of the challenges we have is trying to get them not to all want to happen in the fourth quarter and in fact, we're already having conversations with customers that basically says look, guys, we can't deliver all the aircraft in November-December.

We are sort of filling up those slots.

So we've got to start getting people to take earlier deliveries just because we will run out of capacity to physically do the delivery process towards the end of the year.

So yes, I think the geography is very broad based.

It's not just one region of the world.

We're seeing (inaudible) folks and I think a lot of it is folks are getting to a point where they say, look normally, we would've done our refreshes and our upgrades two years ago, a year ago, and it's time to get on with it.

And then on the used aircraft side, could you give a little bit of color what's going on there, where you are in terms of used aircraft inventories relative to where you were last year?

Is some of this being driven by you at all by you giving used aircraft or trade-in kind of guarantees and taking a hit on that?

Just some color there.

well, in terms the trade-ins, there still are some trade-ins happening, but certainly any time that we would look at a trade in with respect to sort of reference to an over trade, if we're going to give somebody a trade that's more than the aircraft is worth, that hits our P&L right away because we mark these things as you know every quarter to what the actual asset value is.

So we generally don't do that.

To the extent we do it, it is totally transparent because you see that hit the P&L immediately.

In terms of dynamics in the used aircraft market, we feel pretty good about where it's going and we sold two used aircraft I think in the first quarter of '10.

We sold 11 in the first quarter of '11.

So the used market has clearly come back to life.

You see that reflected in the number of aircraft available for sale.

So that has certainly been a very positive trend.

And as you look at where we were in terms of the number of units, our inventory actually went down a little bit sequentially from the end of the year to where we are now because we were able to sell 11 aircraft in the quarter.

Okay, thanks a lot.

I'll get back in the queue.

Carter Copeland, Barclays Capital.

Good morning.

This is [Mayer] in for Carter.

Scott, you talked about the guidance, overall topline guidance.

I was just wondering were there any changes within the segment that's (inaudible)?

Either revenues or margins?

No, we really don't see anything materially different as you look across the segments.

We expect kind of the question around Cessna, given the loss in the first quarter, but we still think we will get that back into the range that we guided to.

Okay and on industrials, margins in the quarter were pretty good.

You've been trending recently above what you were doing through the 2000s.

How much better do you think you can do in terms of industrial margins looking forward?

Well, the industrial margins I think we're pretty pleased with where they are.

I think when you look at the mix of businesses, there's still opportunities for improvement.

On the other hand, I always kind of caution a little bit, remember the automotive market tends to be very strong in the first half of the year and tends to soften just in terms of the volume and the build and the number of manufacturing days.

I mean, we are obviously on the Caltex side very tied to what is going on with the auto OEMs so the first quarter is usually the strongest for them.

I'm expecting the second quarter to be a little weaker just given that we're expecting some OEM softness with the Japan impact.

But again then hopefully picking some of that back up in third and fourth quarter.

So I don't think that the margin rate you see is not what I would extrapolate for the full year.

Auto will be just seasonally -- I mean I'd don't think you will have a different characteristic if you look at historically how we've done in terms of the industrial business and volume and margin through the course of the year.

I was just thinking a bit longer term because I think back in the 2000s, the margins were about 10%.

It was high single digits, mid single digits through most of the last decade and I was just wondering whether or not we can see those sort of 10% sort of come back.

Mayer, the composition of our industrial business back in 2000 is much different than it is now, not to mention that the characteristics of the auto component business are also different.

But I think that as we've said before, we can trend to the high single digits in this business and that's going to generate 20% type returns on capital.

Great, thank you.

Jason Gursky, Citigroup.

It's actually John Raviv in for Jason.

Just a quick question.

You mentioned some of the delays you're seeing on systems within the DoD.

I was wondering if you had any specific examples of what programs you're seeing delayed and if you expect that process to improve or if it still seems kind of slow?

Well, I think when you look at some of the larger programs, we are going to be bidding on a ship to shore connector, which is a big program in our marine and land systems business.

That's a pretty sizable program.

It has gone through the RFI.

So it's kind of waiting now for the formal [RFP] to come out.

So I'd say that is one that has been sort of just delayed and hung up I think primarily driven by pretty senior people in the Pentagon being pretty busy running around working on these other budget issues.

Again, I think it is a program that is from a budget perspective every indication we get is it's in good shape.

It is a necessary program.

It is going to happen.

It's just going through some delays, so that's probably the biggest.

There are some recap programs on Humvees in both the Marine Corps and the Army, which similarly I think are just sort of delayed in terms of getting around to getting the process moving.

Do you guys plan on bidding on the Humvee recap?

We do.

All right, thanks.

George Schapiro, Access 342.

Good morning.

I wanted to pursue a little bit more the CJ4.

Are you not on the learning curve that you want to be on?

Are you just seeing higher inflation affecting costs or is the pricing still reflecting the early orders that you have?

So just trying to get a little more color as to what's actually going on there.

George, it's really more of a cost issue than anything.

I think when we laid out the program, the CJ3 was, as you would imagine, was a product that was used to do most of the [shared] cost analysis based on that because it's sort of a delta from that.

And the reality is the costs for most of the key components have come in at a higher level than we would have forecast based on our modeling of what it should cost, based on where we were with the CJ3.

So I don't think this is -- it's not as simple as simply hey guys after we get a few more aircraft going through here the labor hours will go.

It really is a lot of that product is purchased material costs that's just coming in too high and the solution is not complicated either.

It's just sort of blocking and tackling and going back through all those key components of the cost, a lot of which is purchased and sitting down with those suppliers and saying look, this cost is out of line compared to what we buy from you on other programs and hammering our way through that.

So it's not particularly complicated or a lot of science involved here.

It's just going back and really kind of realizing where we are on the cost of that program.

It is not where we need to be and hammering away at it one day at a time.

Okay, yes, because you kind of adjust for all the numbers that you said.

The incremental margins are pretty low for the business and it seems like it's got to be related to that CJ4.

Well, there's no doubt, George.

The first quarter 2010 we had none and I think we had eight in the first quarter this year.

So -- and you're talking about sort of an $8 million, $9 million airplane, so there's a fair bit of revenue in there that does not have the gross margins that we're accustomed to having in the light and midsize jet market.

Okay.

Frank, you had mentioned that the aftermarket was up at Cessna.

Could you just be a little more specific as to how much?

And how about same with Dell, the aftermarket?

Yes, we said the aftermarket, the commercial aftermarket at Bell was what I said was up a bit kind of single-digit, lower single-digit type numbers and Cessna was a bit stronger than that on the revenue side in the aftermarket.

Okay.

Thanks a lot, guys.

Jeff Sprague, Vertical Research.

Thank you.

Good morning, everyone.

Just for starters, can you give us some idea of how much of the Cessna backlog is deliverable in '12 and beyond?

I don't think we publish that, Jeff.

Okay, feel free to say it on the call, though.

I guess that's a no.

I guess second question, Scott, is just a little bit more of kind of the body language on how customers are behaving.

You know, you're talking about inquiries picking up and you mentioned a little bit maybe a fire drill again in Q4.

Q4 last year seems unusual, right?

It was 44% of your deliveries were in Q4.

It's always your biggest quarter, but that was kind of way out of bounds relative to what's normal.

That seemed like kind of a rush to get bonus depreciation before it went away.

I don't think anybody is going to think it's going to be extended again for '12.

So I'm not sure why we would have that fire drill at the end of Q4 again.

Is it just the timing of people's cash flows that they want to delay that delivery as long as possible or is there something else going on there?

I think it is mostly just people saying, look, I want to make sure I get it done this year to take advantage of it and obviously some customers want to take aircraft now, they want to do it, but for those that were thinking maybe I can wait till later on it, they want -- they are incented to try to get it done this year.

I think what was particularly strange about our profile last year, Jeff, was as you recall, we had a very light third quarter and then a very heavy fourth quarter, and so what we are already trying to work on is saying, guys, we just don't want to go through that again.

So we are working with customers to say, look guys, we just can't do a fourth-quarter delivery.

We need to move some of these back into the third quarter and not end up with that very difficult hockey stick at the end of the year.

So I think fourth quarter will be a heavy quarter, which is good, but I do think the issue that really if I look at last year, we were just too light in the third quarter.

We need to move some of that volume back and get some of that delivery done and the reality is the order flow and the level of customer activity is considerably stronger than it was in this time last year.

You remember last year we got into this time of year and basically conversation stopped based on the euro crisis and the sovereign debt and all that sort of stuff.

We haven't seen that this year.

Even though there are some challenges out there, the conversations are happening.

So I would expect we will bring a lot more deals to closure earlier on in the year than we did last year where the market at Cessna and the business jet light and mid really kind of went quiet for six months before it started to pick up again in really the October kind of time frame.

Those conversations are happening now, so I would expect from a timing perspective we won't -- we are obviously not planning on seeing that period of no activity and therefore very light deliveries in the third quarter of the year.

And then just finally from me, you are not going to pre-announce new products on this call, but can you give us a sense of the magnitude of the R&D increase in the quarter and how that might play out over the balance of the year?

Yes, the R&D increase in the quarter was about $9 million and I would expect to see those kinds of impacts in every quarter throughout the balance of the year.

Thank you very much.

Julian Mitchell, Credit Suisse.

Yes, thanks.

My first question was just about the inflation cost headwind.

You mentioned that it hurt Cessna's margins in Q1.

Can you talk a little bit about how that splits out maybe between materials and labor and how you see those moving -- you talked about labor earlier.

But maybe on any kind of non-labor inflation what your sort of core expectations are in your guidance for the balance of the year?

I would say material labor is probably in the 50-50 kind of range.

It's a number on the order of around $6 million total, so it's not an overwhelming number, but those are roughly, Julian, where the numbers are.

When you think about the delta of sort of the input costs and the output price on deliveries, how do you see that moving for the balance of this year versus what you had in Q1?

Well, I think we have seen some price stabilization as I said in most models as we have come into to the year.

I think we will see some modest positive pricing through the balance of the year and we had some allowance programs and discount programs that were done in the latter part of the year which have stopped and are stopping.

So I think we will actually probably yield a little bit better pricing through the balance of this year.

On the input cost side, we obviously had some come through on the material side.

Some of the things we are obviously doing around CJ4 and other programs is going back to a lot of that supply base on the material side and trying to drive some productivity there and push back some of that inflation.

And as you can imagine, the conversations with our suppliers is that we haven't seen pricing power over the last couple of years in the industry.

There's no reason why we think you should be seeing some pricing power with us.

But obviously that's a negotiation that goes on supplier by supplier and sometimes part by part.

Okay, thanks.

Then just to follow-up on TFC, what sort of provision expectations have you got for this year?

How has that changed I guess in the last few months?

In terms of --?

What kind of provisions, Julian?

Well, I mean Q1 they were --

You mean the $12 million in provisions for losses?

Yes.

The thing that you have to be careful about on financing, we still expect kind of the same loss range that we had talked about of $140 million-ish is depending on how things get liquidated, it can either end up in provision or end up in a portfolio loss -- or charge-offs.

So those numbers really kind of move around depending on how things end up being liquidated.

So you kind of have to focus on kind of the total numbers.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Scott, maybe within the 1% to 3% margin range for Cessna, are we -- given the 1Q results and CJ4 and inflation you're seeing, are we squarely at the low end?

I'm just trying to reconcile if 2Q is breakeven.

Kind of the implied back-end for the mid or the high-end seems like a little bit of a stretch unless Mexico productivity comes through or you get better pricing.

I'm just curious what you're seeing within that range.

Well, I don't think there's any question that considering the level of loss in the first quarter that it's more likely to head towards the 1% than the 3% at this point.

But we are still very early on in the year, and I think there's still a lot to be understood in terms of the dynamics of the recovery and how much pricing power is out there and things of that.

So it's probably a little early in the year to try to go on record and narrow the guidance range, if you will, but between 1% and 3% I would guess at this point.

Then your assumption -- you're suggesting that the pickup in demand would be coming in the back-half of the year and backlog book-to-bill potentially turning above 1 towards the end of the year.

Is that in any way predicated on new aircraft products in the market spurring some more pickup?

No, I think that's just going to be sort of the flow of the year and predicated really on just our expectations in terms of the recovery kind of building momentum as you go through the end of the year.

It's really not built around any new product launch that's going to generate a big future year's backlog, if you will.

Okay, so it would be book-to-bill above 1 on the current big book of business that you are doing.

That's where we would like to be.

Okay, great.

Thanks a lot.

Steve Tusa, JPMorgan.

Good morning.

Just first quickly on Bell, the V-22 is obviously up very nicely, and I'm not sure what the price is on that.

We have it around $40 million for you guys, kind of on a book basis per aircraft; is that right?

That's not correct, Steve.

It's lower than that, but always remember that we are generating revenues outside of the OE delivery as well.

Right, so I mean, I'm just curious why weren't Bell revenues a little bit better with the big ramp in V-22s?

Is there something in Bell that was down materially?

Was it mix in the commercial aircraft?

I'm just curious.

There was lower spare and support on the military side in the first quarter, Steve.

Okay, just on Cessna, as far as the inquiries are concerned, are you -- has the dynamic changed a bit with Embraer where these inquiries -- you're seeing people come but it's a much more of a -- relative to the previous cycle it's much more of a I guess competition heavy discussion where previously you had a customer base that was I don't know 80% of your sales went to your existing customer base or whatever.

I think there was a number you put out there.

How has that changed now with Embraer kind of in the mix here?

Also just what was the realized price in the quarter at Cessna?

So in terms of the color of the discussions, Steve, I don't see any different dynamic when we are running -- working with a customer that's in the space of a certain size of aircraft.

Generally speaking these are all competitive transactions.

If it's a CJ4 discussion, you have a customer that's also looking at a PML 300.

If it's a sovereign discussion, it's somebody that looking at a Hawker.

So I mean, it's really I don't think there's been any real change in the dynamic in the marketplace.

We've always had -- when you're talking about a CJ4, there's (inaudible) in there and there's Hawkers in there, so I don't know that it's very different in that regard.

I would say what's different this year is we actually see deals come all the way to closure, which is encouraging.

And I think we're winning our fair share of that stuff, so we feel pretty good about that in a competitive environment.

And I would say I think in the first quarter Cessna realized price was probably pretty flat, not really not a lot one way or the other.

And you expect -- the backlog have more negative price in it or is this -- or we kind at trough-y levels from a price perspective?

I think we are at pretty trough-y levels.

I think as we look at some of the deliveries that are going to be happening over the balance of the year, the price of the backlog looks a little bit better, but obviously there's still slots to fill too.

Okay, great.

thanks a lot.

Ron Epstein, Bank of America.

Good morning.

Kind of back to Cessna again, sorry about kind of beating this horse.

But when you look at the demand, where you say you are seeing kind of more tire kicking from customers, can you speak to what part of the world is it coming from?

Is it generally North America or is it Europe, Latin America?

Can you speak to that?

Ron, it really is pretty balanced.

We have a number of deals that are going down in Indonesia.

We have a number of transactions in Latin America, Eastern Europe.

We actually have a number of deals that are in the works right now in France and Germany.

And the US market, as I said, is also coming back.

So it really is pretty broad-based.

I would say the UK right now is still very quiet if I had to pick a country where there's really not much going on.

But as I said, other Western European and Eastern European countries are there.

A little bit of activity in the Middle East, but it really is pretty broad based.

On that point -- this is kind of the next question.

On the Middle East, given what has happened there, have you seen -- what do I want to say -- a slowdown or activity there kind of go on ice a little bit because of the instability in the region?

You know, I probably think like every place there is a little bit of a slowdown and reluctance in some of these things but I'd have to say that Yemen and Libya were not big markets for Cessna.

They actually are markets for Bell and so we've seen probably a little slowdown maybe in some foreign military opportunities in some of those places, but not of material impact at this point.

Okay, then one more back on Cessna.

When you look at the Cessna product offering and where you are having customer conversations, is it at the lower end of the product line, kind of the mid to high?

I guess what I'm asking is how are the XLS and the Sovereign doing?

XLS and Sovereign are doing well.

Actually there's probably as much or more demand there than even in the, say, the Mustang side.

Okay, great.

Thank you very much.

Steve Levenson, Stifel Nicolaus.

Thanks.

Good morning, everybody.

On the new multiyear agreement you are negotiating for V-22, do you see any impact in terms of quantity or timing based on the budget situation?

I guess I would have to say I don't think so.

The negotiations are underway or discussions I should say are underway.

We understand what we need to do from a pricing standpoint to get authorization for another multiyear.

I think that we feel pretty confident that we will get there.

The rates that have always been envisioned in that second multiyear are lower than the rates that we have today on the first multiyear, but again, that's something that we have always understood and you're talking out in 2015, 2016 kind of timeframe, so there's actually a lot of discussion with our customer and other prospective customers on what we do in terms of that rate.

In other words, there's room to be able to build some aircraft for customers other than our current customers and there's a number of opportunities for potential fits for that aircraft and other applications and we are pursuing those.

So in terms of just strictly speaking in the multiyear with the Marine Corp, I'd say we're making good progress.

I think we will get there.

It will be slightly lower production rates than what we have today, but we have a number of opportunities to fill that up to continue to be able to run at the capacity that we have.

Okay, thanks.

In terms of the other customers you mentioned, are those other US customers or foreign customers?

It is a mix actually.

There are a number of other applications within the US DoD and there are expressions of interest on behalf of some foreign militaries for fleets of the V-22s.

Okay, thanks.

Just going back to Cessna, there was the recent Shanghai show.

Do you have any commentary from what's going on in China?

I'm not sure I have anything in particular.

We still expect that market to continue to open up.

We had some good deliveries there last year.

We still certainly see this as a market that's going to be emerging for both Cessna and Bell.

As I said, we have had pretty good luck selling into there over the last year or so and we are also making some investments in the country in terms of expanding our service footprint to make sure that we have more presence within China not only to sell but also to support our aircraft as that fleet grows.

So we are over there and we are working pretty hard.

Great.

Thanks very much.

Brian Jacoby, Goldman Sachs.

Good morning.

Thanks for taking my question.

The question is around Textron Finance just with liquidations, do you expect liquidations to actually cover the total bank debt reduction for this year or do you expect to have to perhaps dividend money from the parent?

Based on your guidance, it looks like the answer is no.

It looks likes meaning you won't have to dividend money and that you are expecting liquidations to cover the entire sum.

Is that the right way to think about it?

No.

Certainly liquidations will cover a very meaningful piece of the bank debt pay down, but as we've said, we are effectively also continuing to in part finance TFC through intercompany lending from the parent.

And so we will continue to see the intercompany loan, which was about almost $400 million at the end of the first quarter.

That will continue to build throughout the year as well as we pay off that bank loan.

Okay, so it's not the guidance around the capital contributions of 190 and dividends of 210, we should think of those loans going forward just completely separate?

It's going to be a loan item number that you will get back in, what, 2012, 2013?

That then pays down as we continue to reduce the size of the portfolio.

It's just more efficient for us kind of to be effectively financing at the parent level, if you will, than having TFC go out and try and access capital on its own for this interim period of time because we have this kind of just timing differential between how things are liquidating relative to some of that bank debt pay down.

But we will not need additional capital into TFC.

It will separate the cash discussion from your basic premise, which is correct.

We will not need to make a capital contribution.

Okay, then more of a housekeeping item.

What exactly is the short-term debt increase at the parent company?

We've begun to access the commercial paper market as we've continued to reduce debt and stabilize the balance sheet, we wanted to just get back into that market to kind of have the ability to help us deal with just short-term working capital swings.

So obviously our first quarter as we said is typically a user of cash on the manufacturing side.

It just helps even out those working capital swings.

Okay, with that I guess, if that is something that down the road you're going to hopefully continue to be able to use, any dialogue with the rating agencies in terms of maybe improving the ratings just given where you are from a ratings perspective?

I would imagine CPs is an area where you have access but as an A2/P2 it's kind of tough.

Or actually, are you an A2/P2 at this point?

Yes, yes.

We have seen good receptivity there.

We're not looking to kind of build that program in a very substantial way.

Again it's going to be relatively modest and just help us with working capital swings.

As you might imagine, we have regular dialogue with the rating agencies.

We think we have made very good progress on kind of our debt reduction and improvement in our financial ratios and the rating agencies will move at whatever pace they decide to move at.

But I think they are encouraged by the progress that we have made and we continue to believe we will make further progress.

Okay, great.

Thank you.

And I'm sorry, it's A3/P3.

Right, and if we got upgraded back to where we were, we would go back into --

A2/P2.

Just to give you a sense, again, we're talking a couple hundred million dollars in the CP market just to reestablish ourselves.

We are not -- we don't have an intention of going back to using the CP as a primary funding vehicle like we were doing in the financial service days.

This will be purely the way companies like ours would normally use the CP market for working capital and the dollars we are talking about are easily supported by the size of that market for an A2/P2 issuer.

A follow-up from Peter Skibitski, SunTrust.

Guys, the systems margin in the first quarter was really good especially compared to your guidance.

Can you remind me what's going to happen the rest of the year that's going to make that trend down?

Or maybe like to adjust that?

I think that the systems business is going to be a little lumpy as we go through the year with programs and deliveries particularly some blocks of -- out of a couple of our more profitable segments, so I would not use that margin rate this year to say hey, that's a total upward revision to that guidance or sustain that.

It's going to be -- that number is going to move around.

I think we'll stay a good double-digit business but it's going to move around over the course of the year from quarter to quarter.

Is centrifuge weapons, is that the big mover there?

Centrifuge weapons is one of the ones that moves it around.

We will have some quarters this year where we have some and we are going to have some quarters where we don't have any.

So that will be one of the contributors as we go.

It was not a big contributor in the first quarter.

Okay, and then just a couple housekeeping.

Are you expecting a 31% tax rate still?

Yes.

And still 55 to 60 429 deliveries for the year?

Yes.

Okay, great.

Thanks, guys.

Cai von Rumohr, Cowen and Company.

Yes, given your sales looked a little light in systems and you've had the budget delays, can you still get to $2.2 billion for the year or near that?

I would -- of all the segments I look at, that is one that I worry about just because we are seeing some push outs on some of these programs.

So we feel pretty good where our margin rates are, but if there's one that's going to be -- one we will watch closely just in terms of softness at the top line, it's going to be systems.

Again, it really is just some of these programs that are pushing out where we would have expected some of them to get under contract that I'm not sure we will get under contract by the end of this year.

Okay, and then I think you said a near breakeven at Cessna in the second quarter and for the full year you could still do near $3 billion and 1% to 3% margins.

Did I hear that correctly?

That is correct.

But that really implies quite a hockey stick in the third and the fourth quarter.

If we take the midpoint, that would really imply margins about 5% in the third and the fourth quarter.

Is there anything happening beyond somewhat greater volume?

I mean, R&D mitigates or anything else?

No.

It's really more driven by just volume and performance through the balance of the year.

But you're right, this is going to be a hockey stick and obviously, as I said, one of the things we've got to do is try to figure out how to make it not be a predominantly fourth quarter hockey stick and try to drive as much back into the third quarter as we can.

What does that say about 2012, if anything for Cessna?

I haven't spent a lot of time on 2012 just yet, to be perfectly honest with you.

But I mean as we watch the order backlog build over the course of the year, obviously we'll get a lot more insight into that.

So there's no question a lot of customers we are talking to are looking at orders that are in all likelihood going to be 2012 deliveries.

Thank you very much.

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