達信公司 (TXT) 2011 Q2 法說會逐字稿

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

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

Later we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr.

Doug Wilburne, Vice President of Investor Relations.

Please, go ahead.

Thank you, Ruth, and good morning, everyone.

Before we begin I'd like to mention 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 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 3 of the presentation.

Revenues in the quarter were $2.7 billion, up 0.7% from a year ago, which yielded earnings per share from continuing operations of $0.29 compared to income of $0.27 in the second quarter of 2010.

Last year's result included $0.02 of special charges.

Second-quarter manufacturing cash flow before pension contributions was $171 million compared to $186 million during last year's second quarter.

And with that I'll turn the call over to Scott.

Thanks, Doug, good morning, everybody.

I'll start by saying results in the second quarter improved over the first quarter including a return to operating profitability at Cessna, primarily reflecting an increase in aircraft deliveries and aftermarket volumes.

As you know, at the end of the May we hired Scott Ernest as the new CEO at Cessna.

I'm excited to have Scott on board, his strong leadership, his deep industry experience and focus on talent development should have a meaningful impact on growth and performance at Cessna going forward.

He's already implemented a regular integrated operations review cadence focused on improving accountability across functional coordination of the business.

On the market front we saw an increase in gross orders from both the first quarter and last year's second quarter.

Availability of used Citations also continue to improve, dropping to 13.7% of the installed fleet from 14% at the end of last quarter and a high in the cycle of 17.3%.

Aircraft usage was also up in the quarter with average daily utilization reaching 0.71 hours compared to 0.68 last quarter and a year ago.

The higher usage also helped drive an increase in our aftermarket revenues in the quarter.

Based on overall customer activity and the availability of US bonus depreciation tax treatment for orders placed by the end of the year, we're still planning for full-year jet deliveries to be slightly higher than last year.

Moving to Bell, performance was particularly strong with second-quarter margins of 13.8% reflecting solid execution, especially on our military program ramp ups.

We delivered nine V-22's and H-1's versus eight V-22's and three H-1's in the second quarter of 2010.

Looking to the future we've begun a number of preliminary discussions with potential foreign military customers for these two aircraft and we continue to discuss the next multi-year contract with our US DOD customer.

Our OH-58 Kiowa Warrior upgrade program is also progressing as we delivered the first A2D replacement cabin to the Army.

This is the first of 19 cabin conversions under contract and we're currently working with the Army on potential new cabins to replace those units in the fleet that have incurred wartime damage.

The Kiowa Warrior platform is important to the Army and we're making investments to modernize the design to meet the Army's future requirements.

In fact, last month our OH-58 Block II prototype demonstrator successfully proved hover out of ground effect, had maximum gross weight of 5,500 pounds and an attitude of 6,000 feet in a 95 degree environment, a critical milestone for this project.

On the commercial side of the business we delivered 22 commercial helicopters in the quarter, up from 21 a year ago and are working a significant number of active prospects around the world.

Customer interest was decidedly better at this year's Paris Air Show as we signed contracts for 18 aircraft.

We also displayed our new 407GX and 407-AH models at the show.

This marked the beginning of an international tour for GX and the AH, highlighting their capabilities to customers in Europe and the Middle East.

These helicopters received positive feedback and interest from customers worldwide.

On the aftermarket front Bell continues to expand its service footprint.

Last month we broke ground on a new joint Bell/Cessna service facility in Singapore which will support our growing base in Asia.

Expanding our service footprint enables us to continue to provide top rank service capabilities to our customers wherever they fly around the world.

Overall our commercial helicopter outlook is promising as we leverage our market leading customer support with our renewed commitment to new product development.

At Textron Systems revenues were down in the quarter primarily reflecting lower UAS deliveries and lower mission support volume.

Much of the lower UAS revenue was related to timing of programs throughout the year and we continue to expect full-year systems revenues of nearly $2 billion.

On the ASV front we were awarded an undefinitized contract for [up to] 440 units from the Afghan National Army.

The base contract calls for 240 ASVs.

The program also includes options for a number 200 vehicles as well as options for training and logistics support through 2014.

In total the contract and options are worth $525 million.

Moving to our finance segment, we reduced our operating loss to $33 million in the quarter, an improvement of $38 million from a year ago.

We liquidated $317 million of finance receivables during the quarter reducing our total portfolio to $3.8 billion with the non-captive portion decreasing to $1.7 billion.

Obviously the pace of liquidations is slowing a bit as our remaining non-captive portfolio becomes smaller and the mix of assets has longer durations.

Going forward we'll continue to actively liquidate the portfolio as quickly as possible balancing economics and risk mitigation.

Moving to industrial, revenues were up slightly, but volumes were approximately flat as we saw a modest automotive impact during the quarter due to events in Japan.

The higher revenues were primarily due to the impact of foreign exchange and operating performance was solid on the flat volume with margins of 7.6%.

To wrap up the quarter, we continue to make progress with downsizing our finance business.

We posted solid results in industrial and systems.

Bell's execution on the ramp up of V-22 and H-1 continues to be very favorable.

And at Cessna I believe we're taking the right actions to position this business for the future.

Across all of our businesses we're continuing to invest aggressively in new products and services and, as we look to the rest of the year, we expect commercial aircraft deliveries to be up significantly in the second half, similar to last year.

As a result we continue to expect slightly higher full-year deliveries versus 2010.

Overall we're on track for a full-year EPS outlook of $1 to $1.15 and cash flow before pension contributions of between $800 million and $850 million.

With that I'll turn the call over to Frank.

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $196 million, up $35 million from the second quarter of 2010.

Let's look at how each of the segments contributed to this improvement starting with Cessna.

At Cessna revenues were up $17 million on a year-over-year basis, primarily due to growth in our aftermarket business.

Jet deliveries at 38 units were down from 43 in last year's second quarter.

We posted an operating profit of $5 million which compared to $3 million last year.

The improvement reflected profit on higher aftermarket sales partially offset by higher engineering and development costs.

At Bell revenues were up $49 million on higher deliveries.

Segment profit increase $12 million reflecting improved performance on the higher volume.

At Textron Systems revenue was down $82 million reflecting the lower UAS and mission support volume in the quarter.

Segment profit was down $21 million on the lower revenues.

At Industrial revenues were up $58 million primarily due to the favorable impact of foreign exchange as volumes were essentially flat, as Scott mentioned.

We generated an increase in segment profit of $4 million on the higher revenues.

Finance segment revenues were down $23 million reflecting our ongoing liquidation activities.

Our operating loss improvement of $38 million reflected lower loan loss provisions and lower operating expenses partially offset by lower interest margin on the reduced portfolio of finance receivables.

Looking at slide 5, non-accrual finance receivables decreased from $836 million to $696 million and 60-day plus delinquencies decreased to $302 million from $418 million.

Charge-offs in the second quarter were $38 million compared with $16 million in the first quarter of 2011.

Moving below the segment level, corporate expenses were $23 million, up from $17 million last year, primarily due to the impact our share price had on compensation expense.

Interest expense was $38 million, up $4 million from last year, primarily the result of lower interest income from the TFC intercompany loan.

With respect to taxes, our tax rate of 31.9% is up from last year's rate of 18.2% primarily because last year's second quarter benefited from a number of discrete foreign tax items.

On the cash flow front we contributed $189 million into our pension plan during the quarter.

We also reduced our TFC bank line by $690 million, ending the quarter with a remaining balance of $500 million.

With our solid manufacturing cash flow and receivables liquidations we reduced our consolidated net debt by another $288 million ending the quarter at $4.4 billion of total debt which you can see on slide 6.

That concludes our prepared remarks and we're ready to take your questions.

Peter Skibitski, SunTrust.

Good morning, guys.

So I want to ask about Citation deliveries being down in the quarter year over year.

Would you say the market is weaker now than it was last year or do you think it's just a timing issue or would there be some other reason they'd be down?

No, I think the market, Pete, is modestly recovering.

I think our gross orders being improved both year over year and over the first quarter are good indications that it continues to improve.

We were stable, it's not rocketing back, but certainly the level of customer interest and the number of orders we're able to book has improved over both those periods and it feel like that will continue.

So in terms of actual numbers, I mean we're always going to -- as you know, our guidance for the year is to be slightly up, so we're going to see a little bit of above and beyond on a quarter-to-quarter basis here, but I don't think there's anything that is particularly concerning in that respect.

I think that's mostly just timing.

There has been a little bit of positive mix towards the larger aircraft than the smaller aircraft, which is helpful to us particularly from a margin perspective.

So I would say that the market is continuing to behave about as we expected for this year and with, generally speaking, modest improvement.

Yes, Pete, I'd just point out in the detail, if you look at it.

The Mustang is what really drove the decrease.

So in the larger cabin size in our market it's certainly stronger on a delivery basis as well.

Got you.

What's your guy's sense of when cancellations will have troughed?

You're obviously still getting some and I'm just wondering if we're at the bottom in that regard or what your perspective is on that.

Well, I guess my perspective is it is bottoming this year, right.

I mean I would expect we will still see some trickle of cancellations through the balance of this year and I think that's probably just about it.

Most of the range of a lot of the long-term order books that were out there are pretty well gone at this point.

Understood.

If I could just sneak in one last one.

Can you make some comments about CJ4 profitability?

You delivered the same this quarter as Q1.

Was the loss on those planes the same or have you been able to improve profitability on the CJ4 already.

Any comments there?

Well, the CJ4 was modestly improved from last quarter, we're coming down the learning curve in terms of our labor and so I think we're continuing to make progress there.

We have been working, as we mentioned before, with a number of our suppliers.

You know, these are things that turn overnight, but I would say that we've come to terms with a number of suppliers in terms of trying to get the costs in line and those -- that input stream, if you will, from those suppliers at a lower cost will sort of a feather in over the balance of the year.

But would you be willing to say when you think it could turn positive?

Well, I think we are positive in terms of what we generate in terms of contribution margin rate, but we'll see the number continue to improve through the course of the year.

Okay.

Thanks a lot, guys.

Noah Poponak, Goldman Sachs.

Good morning.

I'm going to try the Cessna demand question a different way.

Last year early in the year you guys made some encouraging comments and then we had European sovereign debt and a 15% pullback in the equity market and everything shut off.

We've all kind of been sitting at our desks getting a slew of less positive macro data.

It sounds like your tone, though, is not really changing in that you haven't felt the impact of that; you're still seeing things get better.

Is that the case?

And maybe if you can even talk to kind of quarter-to-date very recent activity just so we can get a sense of whether or not things are changing because it's very dynamic.

Well, I mean it is dynamic, Noah, and I wouldn't disagree with you.

I mean, I think if you looked at how we felt last year through about the first five months of the year where it was similar, right; it was modest improvement over 2009.

And you're absolutely right, I mean from sort of June through the September/October time frame the market just absolutely stopped.

And I think that was reflected in what our deliveries looked like in the third quarter last year; it was very, very tough to get any kind of momentum in the marketplace.

I would say where we sit this year -- the reason I say, look, it's modestly improved, right; it's not taking off, but I certainly have not seen any indication in the market in terms of customer discussions and level of activity that would indicate that things are going to be like they were last year in that -- sort of the June through September timeframe.

The customer activity, the rate of order booking is maintaining positive momentum at this point.

I mean if something as dramatic as what happened at a macroeconomic level that happened last year of course the industry would be affected by that.

But I don't think it's reached that point.

And in terms of what's happening so far in the quarter, Noah, as we prepared for this call we obviously made sure that whatever comments we're going to make are as up to date as possible.

So when we say that we continue to see deliveries up slightly from last year, that's based on the sentiment as it exists now.

Okay, great.

And then on the margins there, obviously that's dynamic as well with the changes you've made in that business.

We made a little money in the second quarter.

Can you maybe just help us with the progression there in the back half?

Well, no, what we had indicated for guidance was 1% to 3% margins for Cessna.

We said on the last call we thought we'd be probably leaning towards the lower end of that range.

And I think that's kind of still where we are, in the lower half of that range.

And kind of the progression will obviously depend on the delivery volume ramp that we expect to see.

But that's how the full year maps out.

Okay.

Thanks a lot.

Jeffrey Sprague, Vertical Research Pennsylvania.

Vertical Research Partners.

Good morning, everyone.

We know who you are, Jeff.

Scott, just one more question on Cessna and then I'll switch gears to something else.

Given what you just said about the tone of things, do you expect your back half to be a little more level loaded then and not have such a crush in Q4 to get to the number?

Yes, I do.

I mean, I think there's two things at play, Jeff.

One is we've been trying as hard as we can to try to -- to the extent we can move people that would rather be fourth quarter and third quarter just because operationally it puts an awful lot of pressure on the operation to try to deliver everything at the end of Q4.

And of course the other dynamic is I don't think we're going to have this dearth of orders and activity that we saw last year in sort of the late spring, beginning of summer which also obviously impacted the softness of last year's Q3.

So I won't tell you that I don't think it's still going to be Q4 will be the more heavily loaded, but that's typical of the business anyway.

But I do not think that Q3 will be as light as it was last year.

And I guess the second part to the same question, I mean, the backlog obviously going into the back half is a lot lower than it was in the back half of last year.

Is most of what you're expecting in the back half kind of in sight in the backlog or how much backfilling is there to be done?

Well, I would say it's either in the backlog or it's largely in customers that we have line of sight to the aircraft deliveries.

I just want to switch gears to Bell margins.

Certainly you've kind of continue to be at my expectations there.

Can you just give us a little more granularity on kind of, even if it's directionally not specifically, but kind of the margins on military programs that maybe the effect of aftermarket on what we're seeing in margins and where we should expect them to kind of -- what kind of trajectory we should expect from here?

Well, I think clearly our margin rates on the military programs have been improving and there's a real mix in there, Jeff, of programs that have had solid margins for some time.

And there's a couple programs in there that frankly have had some sort of negative margin, certainly very dilutive margins.

And those programs, as they improve and get back to where they should be, we reduce the amount of that dilution from a couple of those programs.

Our aftermarket business obviously is still very strong and a very profitable business.

And so when you look at all this stuff as we've made improvements from a couple of these programs that have had real challenges in the past in terms of their margin rate and get them to sort of more healthy what you would expect to be good margin rates, up in that sort of even military 9% to 10% or so kind of numbers, you lose the drag of that dilution and you get a lot more of -- I mean of obviously an overall stronger margin rate in the business.

And I think that's what we're seeing.

Now, as we go forward through the balance of the year I think we're going to see, fairly level in terms of our military deliveries, but we're going to see a significant increase in commercial deliveries through the back half of the year.

And again, those, generally speaking, tend to be dilutive to that 13% kind of margin rate in new equipment.

But that's more as the commercial market works, right, we get reasonable margins on most of those products, but they feed that aftermarket which has strong margins.

So I think that's the pressure point we're going to see.

We'll see a lot of 429 deliveries, a lot more of the light 407, 206 type deliveries in the second half and that's great, that builds our backlog.

They're good products, they're decent margin, but they're not 13% to 14% kind of margin products.

Great.

Thanks a lot.

I'll pass it on.

Cai von Rumohr, Cowen & Co.

Yes, thank you.

If I could shift back to Cessna a couple of questions.

Could you give us some color please, Scott, in terms of what you're seeing in pricing, the mix between US and foreign demand?

And lastly, what should we expect Scott Ernest to be doing differently at Cessna?

Well, I guess, Cai, I would say let's first talk about the pricing side of things.

So, pricing in the used market I would say was fairly stable.

There's a couple models that moved down again, but generally speaking most of the models, particularly most of the newer models we've seen stabilization and even some increases in pricing and I guess I would also comment much better volume.

I mean there's a lot more activity in the used market.

So I think that has gone through the trough and is starting to improve.

On the new aircraft front pricing is still difficult.

I mean, every deal is a very competitive deal, but we're hanging in there.

I don't think it's degrading a lot, but we saw a little bit of positive pricing and -- through the earlier part of the year.

But it's going to be tough pricing I think still for a while as the market is recovering.

If I looked at the market in terms of where it's coming from, the orders and the -- I'll talk to deliveries I guess probably is a better way to look at it through the first half is about 65-35 domestic versus international.

So I think this is going to fluctuate a little bit obviously over time, but it's -- I think long-term it's still going to hang around the 50-50 market over a period of time.

In terms of my expectations for Scott and what Scott's doing is, look, Scott is a pretty hands on guy, he loves the business, he's a guy that's tending to obviously spend virtually all of his time right now in Wichita, very inside focused on how do we look and measure and build the cadence around manufacturing, around sales, around service day in-day out kind of operations.

He's very much digging into that.

We've been looking at the organization and what we think we need to do.

Organizationally he's put some people into some new jobs on his staff, particularly people focused around particular product lines like Citation jets, like our single engine business, like our special missing business, to try to drive more accountability, more sort of P&L responsibility across these product lines and that includes upstream marketing.

So product development, product strategy and really having people that own those individual product segments as opposed to running the business all as sort of one chunk.

And I think that's something we've needed, I think it's a great opportunity for some people and it has people coming into work every day that are very, very focused on those particular product segments.

And of course then continue to work through manufacturing and engineering on overall efficiencies and cost programs.

So he's a pretty hands-on guy.

He's a decisive guy, so you put dishes on the table and the team will make the calls they need to make.

And again, I think he's great with identifying talent and putting the right people in the right jobs and giving them the right opportunities and good things happen when that works.

Terrific.

And just one last one, shifting to TFC.

You've had very impressive improvement in non-performing asset and 60-day delinquency ratios sequentially.

Could you give us a little bit more color what's happening there?

What was the cash conversion in the quarter?

And are the prospects to maybe unload some bigger pieces of this improved given the improvement you had in some of those metrics?

So the cash conversion was around 80%, Cai, and that was -- and we've been telling folks, look, we expect to see some quarters where that number comes down like that at that number or even below that number.

In this case it was driven by one particular account we've had that's been a problem account for some time and it just went through a bankruptcy process.

So we took a charge-off for which we were reserved.

That also explains why the charge-off number was up a little bit in the quarter.

And of course takes that out of accrual, you know, out of non-accrual.

I think what you're going to see going forward, Cai, and it was typical of this quarter, is that the portfolio I would dare to say at this point has sort of stabilized, right.

So the problem accounts we've pretty well gone through and said, okay, look, these are the accounts that are non-accrual, these are the accounts that are problem accounts, we're working our way through those.

As we work our way through those the good news is what we're not seeing is a lot of new accounts move into those categories.

So I think that the performing parts of the portfolio have stabilized, so what you see now is things that are going to migrate their way through the non-accrual accounts, through the charge-offs for which they're reserved and see that happen without a lot of new stuff backfilling and coming back into those non-accrual accounts.

So that's sort of what's going on.

In terms of prospects for moving or selling significant parts of the assets, we did one earlier this year in the timeshare area.

I think it's possible we could do something in timeshare again.

We believe there's a fair bit of capital and liquidity that's come back into that market, a number of people that are very interested in that asset class.

To be honest with you, it's been a great asset class for us, it's just not something we want to do in the future so we do see some interest on that side.

On the golf side of things, you know we did sell a number of golf courses particularly in Canada to a company that wanted to get into that space.

But I'd say there's still not a lot of capital, not a lot of liquidity coming back into the golf side.

So I think that's -- if I looked at how the year would play off there's no guarantees and obviously we won't do a deal unless we think it's a smart deal.

But there's a probability we could do something on the timeshare side, but unlikely on the golf side, is the way I would handicap it.

Thank you very much.

Sure.

Heidi Wood, Morgan Stanley.

Yes, I guess I'll go back to the Cessna's; Cai touched on the TFC questions I had.

The cash conversion ratio is still pretty good for full year I'd say.

The -- can you tell us a little bit about the inventories that picked up?

And how much of that is finished goods and where do you stand on white tails?

So the inventory buildup, Heidi, I guess I don't really think of them so much as a white tail now or would say that I feel like we're going to have much in the way of white tails at the end of the year.

But obviously our ability to run the production lines is a lot more linear than our sales forecast.

So there's no question that as we work through the first couple quarters we've been building aircraft at a particular pace.

But as I said, I think we have pretty good visibility either through what is in the backlog or through the customer prospect list and the activity that we're working on that we have pretty good line of sight that those aircraft are -- that we are building the right amount of aircraft and we're building the right type of aircraft to meet the forecast for the total year.

But that does result in some inventory build during the course of the year just because of this disconnect between a fairly linear manufacturing flow and a nonlinear sales flow, which we can't line that up.

I mean there's no way we could run the production facility to meet the third- and fourth-quarter delivery demand only by building those things to have them in time for third and fourth quarter.

And that's true at Cessna and Bell (multiple speakers).

Yes, Bell (multiple speakers).

Yes.

Okay, okay, great.

And then you talked about growth in aftermarket in the quarter.

Can you tell us what does the run rate for aftermarket look like?

Is it going to be at Cessna about $600 million to $700 million?

That's about right, Heidi.

The second half we're expecting to be a little bit lighter than the first half just based on some timing.

You usually think of the aftermarket as a lot of parts and so forth, but there's also the aspect of refurbing planes and we had a couple of fairly large programs in the first half that actually completed in the second quarter.

Okay.

And then finally, just to back out so we can get a sense as to what new aircraft performance is looking like.

If we X out the aftermarket and if we were to normalize for the ramp in R&D, how much -- what would normalized margins look like year-over-year?

Well, first of all, these are normalized margins because this is how we're running the business.

But R&D was (multiple speakers).

I mean, but if we backed out the pickup in R&D and looked at pure new aircraft outside of parts and others, where would margins look like from there on a year-over-year basis?

Well, how about if we tackle it this way -- R&D it was up $14 million at Cessna in the quarter.

Great, thanks very much.

Julian Mitchell, Credit Suisse.

Thanks.

Yes, my question -- my first question was around the margins in Cessna.

I guess your second half -- your full-year guidance implies the midpoint of the Cessna margin range from the full year around about 30% incremental margins I think and that's obviously against a low teens incremental in Q2.

Can you just add a bit of color around what your expectations are on costs for the second half?

You mentioned that R&D was up $14 million in Q2, I think it was up $9 million in Q1.

And also in your Q1 discussion you talked about inflation cost headwinds in Cessna in Q1.

So should we assume that for the second half those cost headwinds are largely passing away and also the R&D ramp is less steep than it was in the first half and that's what drives a big pickup in incrementals in the second half?

Or is it just you're relying on volumes because deliveries were down in the first half and your full-year guidance obviously implies a decent pickup year on year in the second half?

Well, the R&D rate is not going to change a lot, right.

We have been ramping up the R&D rate and of course that will stick with us through the balance of the year.

I think if I try to understand your question clearly, the revenue, the volume is going to be significantly higher in the third and the fourth quarter.

So if you take sort of that midpoint around where the overall guidance number is and you look at where we are year-to-date, obviously -- particularly after coming out of a negative number in the first quarter, obviously that's all going to be made up.

But really what drives it is if you have higher aircraft delivery volumes through the third and fourth quarter, which overcomes the increased R&D and whatnot.

And as I said earlier, I think there are certainly cost actions that are kicking in in terms of low labor cost; we will see some benefit of some improved material pricing particularly around the CJ4 as we work through the higher volumes of the third and fourth quarter as well.

So, all that contributes basically to improve those overall margin rates in Q3 and Q4 so that net for the year you end up in that guidance range of the 1% to 3%.

But it's more -- it's mostly volume driven.

Got it, thanks.

And then secondly, just in terms of Bell commercial, you mentioned that the Paris air show -- that the tone was fairly upbeat and so on.

I mean how is that -- how have the orders on commercial trended I guess in the first six months versus your expectation?

I mean obviously commodity prices have been moving around, net-net as they move up that should be positive for your customers, but you've had some macro confusion.

So maybe is it sort of similar to Cessna where even despite all those macro changes the overall run rate year-to-date is kind of what you thought?

Yes, it's definitely what we thought and we've seen some backlog accretion here in the first [four] quarters on the commercial side and I expect we'll continue to see that through the balance of the year.

We always felt that it would be fairly back-end loaded in terms of commercial deliveries because we were still coming out of the -- sort of the challenges of 2010.

But I guess on balance I would say that the market and how the market is recovering and where the opportunities are pretty consistent with what our view was coming in to the year.

Great, thanks.

Oil and gas is still strong, EMS is still strong, Asia has been picking up, Indonesia, Middle East -- you know, the areas that we expected to be strong are in fact turning out to be pretty strong.

Okay, thank you.

David Strauss, UBS.

Good morning.

Scott, at Industrial, it held up pretty well despite what happened in Japan and what's coming through in terms of auto volumes.

Do you still expect to see some impact I guess at some point this year, maybe in Q3, from the slowdown in auto volumes?

You know, this is always a tough one to gauge, right, what happens at the OEM level.

But at least what we're still hearing from the OEMs is that they're still fairly bullish on how the balance of the year is going to go.

As you say, we had a little bit -- it was a little softer than we would have thought in the second quarter and that was primarily plant shutdowns or reduced shift rates, mostly in North America, of the Japanese suppliers for a lot of key components that were going back to Japan obviously.

But so far we're not seeing a lot of modification of forecasts coming out of the OEMs in terms of the automotive market.

And, David, we're pretty much on track with respect to our original guidance of around $2.7 billion for the industrial in total.

So as we said back on the last call, we thought we'd see a little bit of a shift out of the second quarter which we saw and we think we'll make that up by the end of the year.

Okay.

I guess that leads to my next question.

Can you kind of give a summary of where your guidance within the segments, corporate, TFC has changed since the beginning of the year?

I mean I know systems you're now talking $2 billion versus $2.2 billion.

And it looks like corporate and TFC might be running a little bit better, the share count looks like it might be lower given what happened in Q2.

Can you just maybe talk about where things have changed?

Well, I think in addition to what you said, the other aspects are that Cessna is still pretty much where we said, Bell will be a little bit better, you already said what systems.

So net-net we're kind of pretty close to where we started the year except for that shift between Cessna and Bell.

Okay.

And last one for me, Scott, back to Cessna.

The book to bill I think was a little bit better than most of us were expecting in the quarter.

Can you give a little bit of color in terms -- I know you're talking about regionally; can you talk about maybe by aircraft type, model type where you're seeing relative strength compared to -- comparatively?

And then I think you talked about on the last call the book to bill getting to one times by -- I think you said towards -- at the end of the year.

Does that still hold?

I think on the book to bill, David, it's still the best guess I have.

I mean I think we always felt we would probably struggle to get to a one-to-one through the course of this year.

I mean obviously I think as we go into the end of the year, if it's anything like last year in terms of just the customer demand behavior around both the end of this year as well as orders for next year and bonus depreciation playing into all that, I think that is probably where we'll see that one-to-one or greater kind of a number.

So in that respect, I mean it's still a yes obviously, but it seems to be playing out about the way that we thought.

In terms of aircraft mix, we kind of expected and, again, what we've seen is a bias towards the larger Citation jet, so XLS's and the CJ's and sovereign, more slanted away from the Mustang.

So Mustangs are doing okay, but we expected compared to the last couple of years that we would start to see a move towards the larger aircraft and that is what we're seeing.

Okay, great, thanks.

Steve Tusa, JPMorgan.

Hi, good morning.

Just wanted to clarify a comment you made on the backlog.

Obviously there's timing differences as to when you're going to deliver something.

So is the backlog actually in a worse position this year relative to where you were last year for current year deliveries?

You know, Steve, I have not looked at that, so I couldn't tell you one way or the other whether our percentage going into the second half is appreciably different.

I don't think it's significantly different.

I mean just from day-to-day operations when we talk about the stuff, it's not -- it doesn't strike me as being very different.

Right, because some of the stuff is for '12 and '13 and maybe a little bit beyond.

And then just -- I think everybody's got kind of a different methodology for doing this and you've got obviously moving parts around aftermarket, etc., and the revenue base.

But we're coming up with something around 20 net orders from a unit perspective this quarter.

Can you just give us any kind of color around that?

It would be very helpful for everybody I think.

We have not been giving specific order numbers, so I don't think I want to go there.

We just haven't been giving that number, Steve.

Is there any point in time where you're going to start giving that?

Maybe when the backlog kind of fills up?

I know it's obviously a very important number to I think most investors and it would just be helpful for us to be able to gauge how this thing is going.

Well, look, I mean obviously the backlog number will be out there and we'll continue to provide that.

My issue is that giving specific backlog and order numbers is also more helpful to my competitors and I just don't think it's a number we want to put out there.

Right.

Okay.

And then just as far as the progression through the rest of the year.

Are you expecting anything at NBAA?

I mean, I know the helicopter show was pretty good for you guys, you know, a nice milepost in kind of the recovery.

Anything at NBAA and that you'd expect to be positive?

Well, we expect obviously that we'll have a good show.

We have some things that we'll be talking about at the show in terms of some new product.

And in terms of the market, obviously it's very hard to call.

I mean obviously at Paris we felt good about where the market is on the commercial helicopter side.

As we continue this modest recovery on the light midsize, I mean I would hope that we're picking up some momentum as you get out there into that kind of October timeframe.

But we certainly will be talking about some new stuff and things that we think are good for the business and hopefully it will be a great show.

Okay and then just a final question on Industrial.

I know you don't like to talk about portfolio moves that much, but clearly the business has kind of come back off of the bottom.

You have a little bit of profitability there.

There is quite a bit of private equity money that's floating around.

How -- is there any kind of active ongoing portfolio review?

And I guess if you don't want to answer it that way, is there any intention to add to that business and build that business?

And then one final follow-up after that.

Steve, right now our focus really in that business is run the businesses, I mean at 7-plus-percent op margin obviously it's generating a fair bit of margin for us, it's generating a lot of cash for us and those businesses are a great part of our portfolio.

As I said before, does it mean everything will be there forever?

No.

Does it mean you'll never add to it?

No.

I mean, I think that's not something that we spend a lot of time right now with frankly.

We're really much more focused on running them and that's how we've got them to where they are.

And I think they've become profitable businesses and valuable businesses as a result.

And then one final question.

What's the strategy on the big slug of debt that's coming due over the next couple of years?

I mean any intention to kind of take care of that in the near term given obviously a pretty volatile -- or the potential for increasingly volatile credit markets out there?

Well, you know, our focus here for this past year really has been to try to be as aggressive as we can in paying down the bank line, so we've been doing that.

We have a new line in place with good tenor to it, so we've kind of worked that part of the capital structure and feel pretty good about that.

In terms of those future debt payments, I mean they are of a magnitude and a duration at this point that, obviously, we feel very comfortable in our ability to pay that down as it comes due.

Yes, Steve, when you look at the progress we've made on TFC bank loan, we're down now at only $500 million.

We expect to pay that off during the remainder of the year.

That will essentially take care of all of the 2012 maturities between liquidations and cash flow.

When you then look at 2013, we can take care of 2013 with the liquidations and the cash flows from the business during that intervening period of time.

Great, thank you.

Jason Gursky, Citi.

Good morning, everyone.

Just a quick question on foreign military sales and things that are going on at Bell.

Can you give us a little bit of color as to how things are going to shape up with regard to the V-22 in particular and where you think that product is going to sell best, and what types of things we as analysts ought to be looking out for in tracking foreign military sales at some of your helicopter platforms?

Sure.

So if you talk V-22 firstly, there are a number of customers that have made inquiries and have expressed interest over time in that platform.

Historically, Jason, there hasn't been a whole lot done with it because, frankly, we don't even have production capacity to handle more than we are doing with the Marine Corps and the Air Force until you are out in kind of that 2015, '16 sort of a timeframe anyway.

So, obviously, those discussions have become more real here over the last six months, I would say, even or so.

I want to be careful because there are some that are not public.

One that is public because I know the Israeli Air Force has talked about it is they have expressed an interest, and the Marine Corps actually has hosted them a couple times.

They have flown the aircraft; they have been in the simulators.

I think they have been very impressed with the aircraft and its capabilities.

So that is one that is sort of in the first stages of putting together a potential FMS program around there.

There is a couple other customers also who have inquired who are not quite that far down the path.

And again, they are not public so I won't talk about them specifically.

But I don't think -- the V-22, you know, we are not talking about hundreds of countries that are going to buy these things.

I think it's 10, 12 countries that are going to buy these things.

But the interest is certainly there in a number of these places and, as I said, the initial ones are starting to actually progress.

On the H-1, which is another opportunity obviously and I would say a much broader opportunity, a lot more countries that would look at H-1's both for the utility and the attack version.

There are already some [LORs] that have been submitted to the US expressing interest in these aircraft.

So there is activity going on and formal early stages of working quotations and working the government-to-government side of this thing.

So again, early on, but also one where we have not had (inaudible) capacity to serve beyond the Marine Corps requirements.

But as we see that requirement and that opportunity coming up in the 2015-plus kind of timeframe, we're now working those opportunities.

Okay, great.

And then just one Cessna question.

Somebody tried to ask this question a bit earlier and I'm going to maybe do it in a different way.

For the second half of this year how much of your outlook for deliveries is dependent upon what I would describe as turns business or orders that you expect to both get and fulfill during the second half of the year?

Yes, and we don't publish what our current number of aircraft orders and sales are.

So we usually talk coming into the year how much sold out in the past.

We're trying to get away from that, Jason, because it doesn't help us in the marketplace to say how many available slots we have.

But suffice to say, obviously there are some available slots.

But at this point the color I would give you on that is that when we look at what we think our total year deliveries will be, consistent with the guidance that we've provided, that we think we have pretty good line of sight of those aircraft sales because they're either, A, in the backlog or, B, we are in discussions with customers that we believe will close on deals to sell that number of aircraft.

Okay, perfect.

And then one last quick question.

Can you just describe the focus of the R&D that you're doing there at Cessna?

Is it towards the larger aircraft at this point?

It really is a mix across the whole product line.

So obviously we have already announced the new 10, which is our largest aircraft.

We have a number of programs that are going on.

As I kind of said, we'll announce at least one of those at the NBAA coming up in October.

But the investment is pretty broad across all the various platforms.

Some of those are upgrade programs like it is to the 10, and ultimately some will be brand-new aircraft.

But the one thing I would say, it's not a Columbus class aircraft, okay.

So I mean the realm here of what we're doing and where we're investing really runs from our -- sort of that CJ size aircraft up through -- right through the 10.

Perfect, thank you.

Rob Stallard, RBC.

Good morning.

Scott, just a bit of clarification on TFC.

You said things are relatively stable here.

If we look at the income statement and what the TFC cost is going to be going forward, can we expect it to be say maybe gradually trending down from what you booked this quarter going forward?

In terms of -- I'm sorry, Rob, on cost?

Yes, if you look on the income statement, what you've got there is your operating cost effectively in the finance division flowing through the income statement (inaudible) in this quarter.

Would you expect that level of loss to be gradually trending down from here through '11 into 2012?

Well, let me put it this way.

I think kind of -- we've given the guidance of around a $140 million loss for the year and there will be variability quarter to quarter on that.

But kind of that's the number four 2011.

That obviously reflects both operating cost of the business as well as kind of losses on liquidations.

We expect, as we've said, that to trend down as the portfolio gets smaller and trend down meaningfully.

But we will, we believe, continue to see losses into the 2012, and possibly beyond, timeframe depending on what that portfolio activity looks like.

Okay.

But I think, Rob, I mean from a cost -- I was trying to be careful with the cost -- costs have been coming down from an operating cost standpoint and will continue to do that.

Obviously as we reduce the number of assets we have the cost base to serve those has been coming down with it.

I mean just -- and probably -- don't necessarily look at it like you would conventional metrics around return on asset and cost percent assets and things like that.

But obviously it's coming down.

And as Frank said, we are going to continue to liquidate this portfolio and we would expect to continue to see loss as you continue to see that liquidation.

So we know we're going to have more liquidations as we go into 2012 and there's going to be loss associated with that.

I would certainly expect that the magnitude won't be as great, but again, there's some volatility.

I mean if you had an opportunity to sell a good chunk of a portfolio or something you would take the associated loss at that time.

So --.

Yes, absolutely.

And then secondly, on the V-22, you mentioned that you're discussing the multi-year situation with the US government.

I was wondering if you're seeing as these discussions progress slightly more onerous terms coming through in terms of maybe the price per unit, but also just the general risk sharing contractual terms that the government is now looking to get from defense contractors?

Well, I would say the primary discussion point and the primary objective of the government with respect to the multi-year is achieving a certain savings percentage as compared to if they were to procure on a year-by-year basis.

And so that's really where most of the discussion and most of the strategy with both ourselves as well as our customer is how to make sure that in terms of unit volumes and times and whatnot that if we're going to do a multi-year we're able to figure out a way to achieve the cost threshold.

So it's not a price discussion or a sharing discussion so much, it's really around how do we get that savings as compared to if they procure it on an annualized basis.

Okay, thank you very much.

Myles Walton, Deutsche Bank.

Great, thanks.

Scott, as you move into the back half of the year you're really looking at setting the production rates up for 2012 more than anything else.

And I'm just kind of curious what your attitude is on the risk you're willing to take with respect to not losing share and gaining share versus obviously some conservatism with respect to the balance sheet.

And kind of where do you think the backlog needs to be at year-end to sustain this level of production you have in 2011?

Well, I mean, first of all, you're absolutely right.

I mean we already are looking at what do production rates look like in the next year.

I mean because the cycle time of these products from supplier procurement all the way through final assembly and test dictates if we start paying attention to that right now.

So our view -- obviously we're not in a position yet to try to guide publicly on next year, but suffice to say that we continue to expect to see some modest improvement in the market and that's how we think about it when we think about our production rates.

And just as we've done in 2010 and have now done in 2011, we will have to make some estimates in terms of what we expect that demand to look like.

And as a result we'll set those production forecasts, and yes, we will take some risk.

But we'll take pretty thoughtful risk which is the same thing we did in '9 and '10 and those have played out to be about right.

So we will take some risk in terms of the balance sheet and some inventory because we know we're not going to have a backlog in 2012 where we are (inaudible) spoken for.

We know the demand is going to be there through the course of the year and, just as we have the last couple years, we'll work as good -- as hard as we can to try to make sure we're accurate in terms of anticipating what's going on in the marketplace.

And do you see any movement with respect to the tax, accelerated depreciation coming into play with this debt ceiling in terms of how it would impact orders for this year, either pull forward it from 2012 into 2011 or otherwise?

I don't think so.

You know, we have not heard any discussions with respect to bonus depreciation and any different handling than what has been out there.

The talk that you hear around changes in -- tax-related changes for business aircraft, as near as we can tell, I mean all the discussion is around changing the depreciation schedule to a seven-year schedule from a five-year schedule.

But that wouldn't kick in until you go back to the normal depreciation schedule.

So in other words, it does not appear that there's any change -- none that we're aware of with respect to the bonus depreciation schemes.

It would just be a going-forward basis that when you go back to normal depreciation it's a seven- versus a five-year plan.

At least that, we believe, is the proposal that's on the table.

And last one for me on systems.

Would you expect the back half of the year to have a pickup in bookings, putting your book to bill above one to hopefully support that business, revenue level flat to next year at a minimum?

At systems I would expect that.

The only caveat I would put around that is one of the things that's been a pressure point for us this year is as we went through all the CR's and a lot of the budget uncertainty some of these programs were pushed to the right.

Most of those programs or several of those programs that are important to us should close and be decided by the end of the year and therefore you would have that in your book.

But given all the uncertainty and churn in Washington, some of that could slide to the right.

But the key opportunities that we've been working on should get into the book by the end of the year.

Okay, thanks.

Steve Levenson, Stifel.

Thanks, good morning, everybody.

On the assumption that you get some foreign military orders, could those be shipped concurrently with deliveries to US customers or would they have to wait in line?

You know, a lot of that depends on what's going on with the budgets.

But I would say that generally speaking when you get out into that '15 to '16 timeframe the Marine Corps in particular, which is our customer on the H-1 and the majority of our customer on the V-22, has been very supportive of these activities.

They know it's good for them as well because it keeps higher levels of production in the factories.

And I think -- I mean, I won't speak for the Marine Corps, but I think they're amenable to feathering in some foreign military sales opportunities if that will help to capture some opportunities and add some additional volume to the overall program.

Great, thanks.

And just going back to Cessna, you've been talking a bit about mix shifting to the larger planes.

Is that something you think will be evident the second half or is that going to be something that's next year and beyond?

No, I think that will be something we'll continue to see in the third and fourth quarter this year as well.

Particularly relative to Mustang volumes as it relates to mid-life.

Yes, yes.

Got it, thanks.

And just a question about that problem account in TFC, was that a golf account or another category?

It was a timeshare account.

Timeshare, okay.

Great, thanks very much.

Sure.

George Shapiro, Access 342.

Yes, good morning.

Can you tell us what forfeiture income net of write downs was at Cessna in the second quarter and how that compares to last year?

Yes, it was about $2 million and it was roughly similar to last year's level, but a little over $2 million.

Okay.

And then any way to quantify the impact of Japanese auto production on Kautex in the second quarter and how it might recover as we go into the subsequent quarters?

You know, George, we've tried to do that.

I mean in some respects it's not that hard because you can look at a particular plant and we know they went from five-day to two-day shifts for a certain period of time.

But what they were forecasting versus what they did, there's some murkiness around it.

But let's say that globally for us it might have been somewhere in the order of $15 million or $20 million worth of physical volume.

Okay.

It's not a huge number.

Not a huge number.

And then, Scott, if you looked at Cessna orders in June and the early part of July versus April and May, did you see any improvement?

George, I don't know if I even have that in front of me.

June was strong.

Yes, generally the pace of order activity, although volatility month to month has kind of improved generally as we've moved through the year.

You know, George, the seasonality within a quarter, you'll always have stronger end of the quarter just human nature kind of a thing.

So I wouldn't necessarily draw anything from that other than, unlike last year, the crickets didn't come out and have silence.

So we're encouraged by what we saw in June.

And I was meaning, Doug, obviously after the normal seasonality you might expect with the stronger -- normally a stronger June.

But you're saying it's hard to separate it out.

It's lack of bad news as much as anything.

So there was no bad news in June, which is good news.

You always have some lumpiness, George.

I tend to look at it on more of a quarter basis.

We see the number every month, but I think of it more on a quarterly basis.

And certainly there's been no tonal change, right, I mean when I talk to Scott and I talk to Mark and the sales guys, nobody is coming in and saying, oh my gosh, either nothing is happening or all of a sudden everybody wants to buy.

I mean it's been pretty steady.

Okay.

And then a quick one probably for Frank.

The sale of the commercial tilt rotor to Augusta, any financial impact from that (technical difficulty) quarter?

Not in the quarter.

No, no, because it won't close until later in the year.

And then will there be a financial impact then?

Well, there will be some impact on an ongoing basis as a result of kind of various elements of the agreement.

We will continue to support them in their development on a go-forward basis.

And so we'll have some engineering activities and support activity and things like that.

But there will not be any type of large one-time impact at the time of the close.

Okay, thanks very much.

All right, operator, we have time for -- actually we don't have time for one more call, but I know we have one more in queue.

So we'll go ahead and take that and then we'll conclude the call.

Ron Epstein, Bank of America-Merrill Lynch.

Good morning, guys.

Just quickly on Cessna, one thing we didn't really talk about was how is international demand?

What are you seeing there?

Actually it's been reasonably strong.

The Southeast Asia, Indonesia -- these areas have been good for us on both some interest on Citation jet as well as Caravan has been good.

The Eastern European, Latin American markets are still strong, so it's been fairly balanced, I would say, Ron.

I mean it's not one particular region.

But I'd say the level of interest in the market is kind of sort of modestly recovering we're seeing on a pretty broad basis.

Okay, no problem.

All right, ladies and gentlemen, that concludes our call.

Thank you very much for joining us and the few folks that were still in queue for follow-up calls, we'll get to one-on-one then.

Thank you very much.

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