達信公司 (TXT) 2012 Q1 法說會逐字稿

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 your host, Vice President, Investor Relations, Mr.

Doug Wilburne.

Please go ahead.

Thanks, Greg, 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 starting with slide 3.

Revenues in the quarter were $2.9 billion, up 15.2% from a year ago.

On a GAAP basis, we recorded income from continuing operations of $0.41 per share which compares to earnings per share of $0.10 in the first quarter of 2011.

Moving to cash flow, first quarter Manufacturing cash flow before pension contributions was a $106 million use of cash.

First quarter pension contributions were $144 million.

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

Thanks, Doug.

Good morning, everybody.

I believe our first quarter financial results represent a very solid start to the year reflecting growth in our commercial aircraft and industrial end markets and continued operational execution improvements across all of our businesses.

We also secured a number of key program wins and made some important strategic moves in the quarter that should help provide growth in the long term.

Starting with Systems we won two important unmanned aerial systems fee-for-service contracts from the US DOD.

The business model for these fee-for-service programs is different and we will be investing CapEx in the platforms up front and in turn we will be receiving cash over time as we operate the assets to deliver services to our customer.

These two contracts are important for a number of reasons.

First, the addition of what we expect will be meaningful revenue streams over the next several years at Textron Systems.

And second both these awards are based on our Aerosonde unmanned aircraft which is a smaller air vehicle than our traditional Shadow models.

So we'll now have a second product platform deployed with the US military which should lead to future opportunities.

Finally these contracts provide an opportunity to demonstrate the attractiveness of fee-for-service UAS arrangements for additional US and foreign military applications.

Moving over to our Finance segment we continue to have success with our non-captive exit strategy as we liquidated $171 million in non-captive finance receivables during the quarter, including $67 million reduction in our golf portfolio.

This included the disposal of 13 golf course mortgages and one owned golf course at favorable prices.

Our non-captive portfolio now stands at $780 million.

We generated income in the quarter which reflected profitability in both captive and non-captive portfolios.

Shifting to Industrial, operating performance was solid with revenues up at each of the business units.

We did see some softness in European auto and tool markets as expected but this was more than offset by strength in North America.

Moving now to Cessna.

We delivered 38 jets in the quarter up from 31 last year and saw double digit growth in our after market business.

More importantly, we continue to see improvement in customer activity.

New orders were higher than last year's first, second and third quarters combined and our customer prospect list continues to improve.

We had several additional positive developments at Cessna in the quarter including an improvement in the range specification of the new station latitude from 2000 nautical miles to 2300 nautical miles, the first flight of the new TEN, the first flight of the M2, delivery of our 400th Mustang, and the announcement of new service capabilities in China.

Expanding our Chinese service capability is part of our accelerated China strategy for which we also announced a very important agreement with Avik to develop a Chinese general aviation business.

We expect that this agreement will lead to a number of business opportunities.

We expect to form a JV with Avik and the Chengdu municipal government which will focus initially on final assembly and completions of our Sovereign product line for our Chinese customers and will ultimately evolve to include a number of activities ultimately included in the development of a new aircraft.

We're obviously very excited about this opportunity and believe this positions Cessna very well to participate in what will be a significant growth market.

To wrap up, with Bell we delivered 10 V-22's, 7 H-1's and 30 commercial helicopters in the first quarter, versus 9 V-22's, 4 H-1's and 15 commercial units in last year's first quarter.

Solid execution on the ramp up in these deliveries allowed us to post another quarter of excellent financial performance.

The commercial demand environment at Bell continues to strengthen and based on order activity underway we still expect to see a significant increase in deliveries this year.

During the quarter we also expanded the addressable market at Bell with an important product announcement at Heli-Expo, the 525 Relentless.

This new 16 passenger super medium helicopter will offer best-in-class capabilities, including superior pay load, range, cabin and cargo volumes.

The 525 will have a fully integrated glass cockpit featuring the Garmin 5,000 integrated avionics suite, a per of GETC7 engines and a BAE fly-by-wire flight control system.

The Relentless will be especially well suited for deep-water offshore applications in oil and gas and will also serve as a great platform for search and rescue, emergency medical services and VIP and corporate missions.

The 525 is a strategic new product for Bell which we will expect will meaningfully contribute to future commercial growth.

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

We posted strong results at Bell and Industrial and much improved results at Cessna.

At Systems we had two important program wins and a challenging defense environment.

Overall I think we're focused on continuing to prove our tactical execution, at the same time we're also investing in making strategic moves to grow our business over the long term.

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

Thank you, Scott.

And good morning, everyone.

Manufacturing segment profit in the quarter was $247 million, up $80 million from the first quarter of 2011 on a $342 million or 13.9% increase in Manufacturing revenues.

Let's looks at how each of the segments contributed starting with Cessna.

At Cessna revenues were up $113 million on a year over year basis as a result of a 23% increase in jet unit deliveries, and an 18% increase in after market revenues.

We narrowed our operating loss by $32 million from the first quarter of 2011 primarily on higher volume.

At Bell, revenues were up $245 million on increased V-22, H-1 and commercial deliveries.

Segment profit increased $54 million primarily reflecting higher volumes and the mix of commercial aircraft.

At Textron Systems revenues were down $68 million reflecting lower volumes.

Segment profit decreased $18 million primarily due to the lower volumes.

Industrial revenues increased $52 million reflecting higher volumes partially offset by a $12 million negative impact of foreign exchange.

Segment profits increased $12 million primarily due to the higher volumes.

Moving to Finance.

Segment profit was $12 million for the quarter.

Finance receivables ended the quarter down $267 million from the end of last year.

Credit performance improved during the quarter with non-accruals ending the quarter at $290 million, a decrease of $31 million from the prior quarter and 60 day delinquencies were $143 million, an improvement of $23 million from the fourth quarter.

Moving to corporate items, corporate expenses were $47 million, up from $39 million last year primarily due to the impact that our higher share price had on compensation expense.

Interest expense was down $3 million from a year ago.

To conclude we remain on track for our full year EPS outlook of $1.80 to $2 a share and cash flow from manufacturing operations before pension contributions of $700 million to $750 million.

That concludes our prepared remarks.

Greg, we can open the lines for questions.

Thank you.

Heidi Wood, Morgan Stanley.

Yes, good morning.

Can you talk us through the puts and takes on the Cessna reconciling the 18% increase in aftermarket with, which should reduce profits with what we saw and why you're so confident in achieving this for your goals for the year?

Well, I think, Heidi if you look at the conversion rates, obviously I think if you go back to the first quarter of last year, the first quarter this year, it's quite a bit higher than the 18% but I do think that if you look at over the course of the year, we still think that given what remains kind of a difficult pricing environment and relatively lower volumes.

And you kind of get into a laundry list of things we're moving around, I still think that over the course of the year that's about the leverage that we'll expect to see.

So we had a reasonable conversion versus the previous quarter but I think as you look through the year, I still feel pretty confident it's going to end up somewhere around that 18% or so.

Great and one last question.

Can you -- we want to dig into Bell margins a little bit more.

Talk a little bit about the sustainability of that and what sort of drove that nice margin performance.

Well, the Bell margins, as you know -- we've talked about the challenges this year of being around significant increases in commercial deliveries.

Obviously even within that there are some mix issues depending on the models, so I think for the quarter, obviously we saw solid growth in terms of the military side, certainly commercial was up from 15 to 30 helicopters.

But I think we're going to see even more significant unit growth over the course of the year on the commercial and most of those are going to be somewhat dilutive in terms of margin rates.

We also have increased R&D that's going up.

So again, I think the numbers that we've guided over the course of the year is certainly attainable.

The guys are doing a nice job in managing the ramp and controlling costs but we are going to see a much heavier mix through the balance of the course of the year on the, particularly on the lighter commercial helicopter volume.

Okay, great.

Thanks very much.

Carter Copeland, Barclays.

Just quickly on Systems.

I wondered if you might give us a little bit more color about the decliners there, you had mentioned your expectations for flat revenues although I recall in the last quarter there was some commentary about conversion of some opportunities on UAVs.

Any color you can provide us there on what you saw the decline in the quarter and what surprised you there?

Well, I don't know that anything surprised us a whole lot in the quarter.

Obviously the trend that we saw all through last year and that we still see into this year is just things moving relatively slowly in terms of getting contracts let, going through the whole proposal evaluation and award process.

We didn't have any surprises in the quarter where something that we thought was going to happen either didn't happen or volumes were issued at a lower rate and I still think that we're feeling like we're going to guide to a flat year.

Obviously what was important in the quarter is we came into the year needing to get a couple very important wins on the UAS business in particular and we won both of those.

Now those don't generate a lot of revenue in 2012.

As we said we'll spend most of the rest of the year building out the systems and getting those deployed per specific task orders with both the Navy and the Marines and SOCOM, but those things will all be out there and they've got between three and five years of pretty solid revenue generation beyond that.

So I think those were important wins, again not so much that they had a lot of impact or were forecast to have a lot of impact in 2012, but very important for us in the '13 to '15 or so timeframe.

Great and one quick follow-up for Frank.

The corporate expense, you noted the step up due to the higher stock price.

Relative to the amount, I think it was $145 million you talked about on the last call for corporate expense for the year, how much should we be assuming that steps up as a result of this?

Yes, it probably steps up about $10 million, if the share price stays in and around these levels.

Okay, great.

Thank you gentlemen.

Thank you.

Jason Gursky, Citigroup.

Good morning.

Thanks for taking the call.

I was wondering if you could talk a little bit about this DoD contract structure that you talked about on the UAS.

Is that something unique and how did this come about?

Well, I think this is a trend that you're going to see more of in this sort of a fee-for-service.

So particularly these UAV vehicles, how much ISR is required and where is it required, both by in this case the Navy and Marine Corps in one program and SOCOM being the other program.

Where instead of having the military tie up a certain number of systems they're looking for the industry to provide those systems and actually own and operate those systems and be able to deploy as required.

So I think it's trying to create, at least it's a tool they're looking at and a technique they're looking at I think to create a more dynamic, more capital efficient way of utilizing these kinds of assets.

So instead of tying it up within the forestructure in one particular location by having those resources and that capital owned by the industry, they can simply issue task orders and deploy them as required in a much more capital efficient structure.

I think that's the intent, so and of course, the difference for us is I think ultimately from a profitability standpoint, we'll do quite well on this.

But it does require that we have that capital because then we're the ones that can turn around and respond to what their needs are and allocate those same resources in different locations at different times over a period of three to five years.

Right.

Okay, that's helpful.

And then Frank, you've mentioned that the guidance holistically stays in place.

I'm wondering, given the results of this quarter, whether you wouldn't mind walking through the segment level guidance and maybe give us some puts and takes on what you're now expecting for the rest of the year.

Yes, well we're really the same in terms of that segment level guidance, as there are puts and takes in and around the ranges but generally within those ranges, we are still fine with that.

The one change to that being on the Finance segment.

Given the first quarter results, we had suggested Finance to be kind of breakeven-ish, we think that the captive business will be profitable as we had indicated in our outlook.

We think that non-captive, given the performance we're seeing right now, probably is more around breakeven.

So overall we think Finance will be positive for the year versus breakeven.

But otherwise, kind of we're in the same ranges on the segments.

Okay, thank you.

Jason, just to add to that, I think that when you think of the holistic picture there, Frank mentioned that corporate expense is going to be up a bit.

We're looking at a higher share count given the share price as well, so all in it still comes out into the same range as we're sitting here today.

Okay, that's great.

Thanks guys.

David Strauss, UBS.

Back to the margin question at Cessna.

You compared it to Q1 of last year but if you look at it compared to Q2 of last year where deliveries were pretty similar overall but your mix was actually a little bit better this year, in Q2 last year you were able to generate a profit.

Could you maybe just compare this quarter, the moving pieces this quarter versus Q2 of last year where the deliveries were pretty similar?

Yes, I think if you looked at the comparison and we've obviously done that, David, just to understand sort of the moving parts here, I mean you're right.

We had a few fewer Mustangs than we had back in that quarter.

There's some other, there are some other mix issues pushing around there in terms of just the mix of the different models of aircraft that worked against us a little bit, but look there's also some pricing that is still difficult in the marketplace out there.

I think ultimately you got to push to get that better but it has not been favorable over the past year.

So we took a bit of a hit on pricing.

And I think really one of the bigger issues here is at the volumes that we're running and the cost structure we have, the numbers are such that things that would normally be sort of lost in the noise around LIFO adjustments and accrual for some severances in our Citation, you get down to sort of a laundry list of numbers that are frankly all relatively small numbers but when you're talking about small numbers of absolute margin, they make a difference.

So I guess the bottom line is a little bit of unfavorable mix in the numbers of jet deliveries, continued pricing pressure and a bit of one-timers in there that normally I don't think would be something that would move the needle very much that in this environment is making a difference.

So R&D wasn't a major factor?

You know, it wasn't a huge factor.

Again you get into this saying, well look, our R&D absolute spending can go up, we also had some stuff that we wrote off in the quarter, if you went back to 2011, so at least in that kind of a causal, if you look between those two quarters, not a major factor.

Okay and as a follow-up moving to Bell on the commercial side.

429 deliveries were a lot lower than where I thought they would come in.

Talk about what's going on there and have you gotten the certification for the 500-mile range increase in the US yet?

So 429, there's no change in terms of our expectation in 429 deliveries this year.

There's a bit of timing in there just because of where they're laying in the year so you're right.

There's only a couple in the quarter but there's no fundamental change in what we are expecting in terms of 429.

That's part of the issue that's a pressure for us obviously in the next three quarters and we'll see significant increases in things like the 429 models.

The regulation, that's 500 pounds of capacity which has gotten through and been approved the Canadians.

It is in with the FAA right now.

I feel pretty good about it.

I think it's something that will happen in the fairly near term.

Great.

Thank you.

Sure.

Cai von Rumohr, Cowen & Co.

Yes, thank you very much.

So kind of moving back to Cessna.

Could you tell us where is the level of any abnormal pre-owned losses or forfeiture gains?

And maybe give us some color, the trend in demand and pricing as we went through the quarter.

Do we enter the second quarter with any appreciable change or is it kind of really the same throughout the quarter?

I think it's about the same throughout the quarter, Cai, in terms of the pricing environment.

In terms of the used market, I would say it continues for the most part to be pretty stable.

I mean we're talking about fairly small numbers in terms of things like write downs and forfeiture deposits.

These numbers have become sort of a couple million here, fairly inconsequential numbers so fairly significant.

I would say continued stability and when you look at our used available for sale of our in production models, they are getting lower and lower, right?

They're down in the 5%, 6%, 7% of the fleet kind of numbers, so that piece of the market in terms of competition for new orders, which is part of what makes the pricing tough; when you've got relatively new aircraft out there, does continue to get smaller but it's not gone.

Okay, and then to the first question the pre-owned losses or forfeiture gains, were they much of a factor?

Very low single digits and largely offset each other.

Okay, and then one of your competitors, Hawker has asked for, has a forbearance agreement with its lenders currently.

If Hawker were to go into bankruptcy, would you be interested pursuing any or all of that operation?

Yes, Cai, I would say that we keep an eye on that like most people and there are certainly some assets there that we think would be very interesting.

Okay, great.

Thank you very much.

Sure.

Julian Mitchell, Credit Suisse.

Thanks a lot.

Yes, so just firstly on Cessna, it sounded like on the volume outlook at least you were more positive in terms of order trends, what you've seen in Q1.

If you could talk a little bit about maybe anything by region what you're seeing?

And then also, the effect that that might have had on your sort of updated assumptions for things like R&D and CapEx.

I mean I think for overall Textron you talked three months ago about R&D up $110 million, CapEx up to about $450 million.

Have you sort of changed any of those outlooks given what's happening with demand in Cessna and in Bell commercial?

No, I think Julian, everything's very consistent with our plan.

Obviously, the new product programs at Cessna driven in large part right now with the M2 and the [TN] or in-flight test programs, the Latitude obviously is in its early stages of detail design, the 525 as we announced is also a program now that's in its early stages of detail design.

So the CapEx associated with those programs, again primarily around tooling which is really what's driving most of our CapEx budget there and the R&D numbers that we kind of guided to are all completely within what we expect them to be for the year.

So there's no change and again, in terms of the market, I think if you look at what's going on in the orders and level of customer activity at Cessna, it's where we expected it to be so I still feel pretty confident about what we are thinking in terms of the total volume of deliveries for the year and the same is true at Bell.

The market's been strong, the backlog is there, the level of activity and order rate is where we expected it so that we should ultimately have the commercial deliveries fall in line with our guidance.

I'd just add the only thing that on the CapEx side that puts a little pressure on our CapEx number to the upside are these wins at Systems.

And depending on the volume ultimately of the task orders that are let, the amount of equipment that we would look to field this year but we don't think that's a big number, but that kind of does have some impact on the CapEx number.

Right, those are revenue generating numbers as opposed to what we traditionally think of as CapEx which is traditionally around the tooling and our infrastructure.

Those are assets that would be required to go perform those contracts.

Sure, and then just a quick follow-up on Systems, and obviously you had -- in Q4 you had a charge around severance relating to the cost base and so on.

You know you've had a decent sort of revenue drop here but it sounds like the full year outlook is still for flattish.

How do you feel about the cost base in Systems when you're looking out this year or thereafter?

Do you think you've done enough on the costs for the time being given that Q1 was it sounds like as you expected?

I think again, it's pretty consistent with our expectations when we announced the restructuring and we looked at the cost, in particular for the most part employees affected by that, where we thought we needed resources and where we thought we needed to do restructuring given the current environment.

Really remains unchanged.

The reality is for some of these programs, particularly for these fee-for-service, we'll actually be adding resources to go execute those programs but those are different people in a different skill set than those who have been affected by the restructuring.

So again, Julian, I think pretty consistent with what our expectations were going into the year.

Okay, thanks.

George Shapiro, Shapiro Research.

At Bell, can you tell us what the commercial aftermarket and military aftermarket growth rates were?

Yes, we did see some growth there.

Those are not numbers that kind of we break out separately but we are seeing growth in those areas and on the commercial side.

It's at rates that are lower than what we've seen at Cessna but we are seeing growth.

Still double digit numbers or below that?

We don't break those numbers out separately.

Okay, and then one, Scott, maybe if you could give a little bit more color on the JV with AVIC, you were talking about potentially a larger cabin jet.

I mean is this something in the Columbus category or even bigger and could you give some specifics about timing and development?

Well, the timing, George, as you know the joint venture kind of goes through a few phases here.

We start out by putting a completion center capability in Chengdu so that we can deliver basically green aircraft out of Wichita and do all of our customizations, interior completions, paint, finish and all that for delivery into China out of our Chengdu operation.

Ultimately, we'll do some additional manufacturing work in the location and greater levels of assembly around the Sovereign and ultimately longer term around the Latitude.

The new development program which I think really ultimately will be sort of the highlight of this whole activity, is one where we really start the definition and kind of market research of what's the right product for the market as part of the formation of the JV.

So that's usually a year or two activity when we look at most of our aircraft to really decide what are the right specifications, how do you really do the concept work and define the right product.

Certainly our expectation is that this is going to be a larger, longer range aircraft than anything else that's in our portfolio and that's why this is something that makes an awful lot of sense both for us and for AVIC to invest in.

There is no comparative analysis I would say against something like a Columbus, it's not really working from the Columbus baseline.

It's really working from what's the right thing given this timing and our current position in the market, and frankly, other things that we've done in our portfolio, so I think any specific discussions or disclosures of technical specifications is probably a couple years downstream.

Okay, thanks very much.

Robert Stallard, Royal Bank of Canada.

Scott, I was wondering if you could comment on the market share situation, to follow-up from Cai's question whether the issues at Hawker have had any impact on your market share and also with regard to your comment on pricing.

Well, I think you've had historically four guys really working pretty hard at most of that market, five if you include some of the bits of Gulfstream and even Dassault to some degree at this point.

But I think if you look at the market right now and I'm sure you'll see this as it comes out through the industry data is that no doubt you're going to see loss of share in the jet business at Hawker-Beechcraft and I think that share is sort of disbursing itself between Cessna and Embraer and Learjet.

I think, understandably, it's pretty hard to have a serious discussion with a customer about buying a $10 million, $15 million, $20 million asset if there's uncertainty about who's going to be there to support that aircraft.

I don't think this is a secret.

Guys that are buying aircraft are -- buying the aircraft is just the beginning, right?

These are very long lived assets and the support and having the manufacturer behind it is an important part of a purchase decision and I think it's probably giving them a fair bit of difficulty right now given their financial situation.

So I can't tell you or wouldn't guess at this particular point where that share is going but I would suspect that it's moving amongst the other few big OEMs in those markets.

Okay, and then just to follow-up on the pricing issue, I was wondering what your assumptions are for pricing at Cessna through the rest of this year.

Are you assuming they stay pretty flat or that they improve?

I think it's going to, it will vary probably a little bit from model to model and region to region, but we would like to think that as we bring new orders in place at this stage of the game that we're going to try to figure out how to drive pricing back up.

But that's going to be a difficult flight on a deal-to-deal basis.

Okay, thanks very much.

Jeff Sprague, Vertical Research.

Just a couple of follow-ups, a lot of ground covered already.

First just back to actually the first question that Heidi asked.

Scott, I think she was talking about aftermarket but it sounded like you were kind of talking about contribution margins a little bit.

Can you just clarify your comments on what to expect for contribution margins on Cessna?

Were you trying to get at that?

Yes, I think if you look at, well we're not going to, I don't think we've ever talked about contribution margins on aftermarket or whatever.

I guess maybe I misunderstood it.

I think if you look at our guidance for the year at Cessna, you get incremental margins on the additional volume year-over-year of around 18% or so.

Now in the first quarter, those incremental margins were considerably higher than that versus the first quarter of 2011 but I don't think that the incremental margins that we saw year-over-year in the first quarter are going to sustain that high.

I think we ultimately will be around where we guided which is about an 18% incremental margin on that additional volume.

Okay, just wanted to clarify that because that was the same number as the aftermarket growth and it just sounded like there was some apples and oranges in there.

And it could be, Jeff.

I'm sorry about that.

No problem.

And Frank, can you just give us a little more color on how to think about cash flow?

You have this big use and other assets and liabilities in the quarter and some working capital pressure beyond that.

What's going on there and how does that play over the balance of the year?

There's not anything unusual in the first quarter.

First quarter is always a significantly negative cash quarter for us.

There was some inventory build.

There's receivables build, there was some timing in terms of payments from customers and things like that particularly on the military side, that can tend to be lumpy, so it was negative.

It was a little worse than the prior year.

If you go back two years it was kind of pretty much in line with what we did in the 2010 first quarter and consistent with generally how we had planned the thing, and again, we believe for the year we'll be in the $700 million to $750 million cash flow range just as we had talked about in our guidance.

And then just on Cessna orders, Scott, I think you said Q1 was better than the first three quarters of last year?

But maybe that's a little bit of kind of the small numbers on small numbers we've been talking about, but can you give us some sense on where the book-to-bill was and how you expect book-to-bill to play out into the second quarter?

Well, I think you're right.

It's growth over a small number but it is growth so we feel pretty good about that.

I think on a book-to-bill basis you're like 0.75 right?

If you looked at just to break out the first quarter numbers, but again I think that what we've guided, our expectation in terms of what we saw in the order flow in the first quarter, what the customer prospects looks like, that we still feel pretty confident that we're going to see the order flow through the course of the year that we need to get to the year.

Okay, great.

Thank you.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Was hoping to go back to the China JV for a second and Scott if you could talk about some of the co-production platforms that you'd think about moving over there and whether and how much that would help demand towards the end of this year if not into 2013.

I think by the time -- we're doing the finalization right now of the Ts and Cs of getting the joint venture itself formed.

We do have to go through the Chinese business license process which can take a number of months, so we're trying to work towards a target where all these things will be lined up and ready to go at the end of the year.

Obviously we're already working on putting together the requirements in terms of what we have to do for a facility from a completion center capability in Chengdu so that as soon as we get all of the licenses in place we're ready to get all that stuff rolling and capitalize the business.

But I don't think you're going to see any kind of impact really in 2012.

I think maybe to late 2013, you'll start to see some flow in local deliveries.

Now, we already have Chinese deliveries, and will continue to have Chinese deliveries anyway but at a relatively small number through '12 and '13.

But I think this really is something that will start to have an impact in '13 and become more material in '14 and on.

Okay, and as you look into '13, Embraer coming out with the Legacy 500 what kind of demand impact do you think, or erosion potential impact that will have on your higher end of your line up, Sovereign in particular?

That's kind of a difficult question to answer right now.

I mean obviously there's things that we have going on.

Latitude is a good example where you look at customers that are looking for the larger cabin and that really addresses, more specifically, the 450 and I think gives us a much better aircraft, much better performance in that space.

And obviously there's some other things that we have going on that would I think address well what will happen in the space that represents the 500 which is obviously a bigger, considerably larger aircraft than Sovereign.

At a considerably higher price point than Sovereign.

Okay, fair enough.

Thanks.

Steve Levenson, Stifel Nicolaus.

On Textron Systems you talked about the fee-for-service business for the UAS.

Can you discuss what the margins are relative to an outright sale and where you think the additional opportunities might come from?

Well, I think you wouldn't expect in a government environment to be able to negotiate a very different profit margin on what's expected versus what you would do if you were just selling these assets.

I would say that the upside to this thing is that if the utilization ends up being higher and we are good at utilizing the capital behind these things and the demand is greater, that represents upside to us.

So I think on an apples-to-apples basis, you would expect pretty similar levels of profitability for the base case and if we're able to more effectively utilize the capital and there's a demand that allows us to do that, then I would say we would have upside.

Okay, thank you and the other opportunities are?

Just higher levels of utilization, additional task orders--

Not necessarily from other customers though?

It can also be other customers, right.

These assets are spoken for on sort of a task order basis and so it certainly can give us the opportunity.

Again, depending on what the demand is on these particular contracts, can you also utilize those assets on other contracts over time which could be with other customers as well.

Okay and again I'm sorry, domestics such as Customs and Border Patrol?

Or more likely a European customer, for example?

All of the above.

I think this is, we're sort of at an interesting point right now.

This is sort of the beginning of this kind of a concept so that's what I said when I think it could lead to other opportunities, I think about all of those kinds of applications.

There's stuff within sort of civil applications like Border Patrols, monitoring of emergency areas or disaster areas, there's a lot of foreign military applications so obviously we'll be taking this model and trying to utilize it on a pretty broad range of applications.

Thanks for the detail.

Ron Epstein, Bank of America.

Just got a couple questions for you.

Maybe just a quick accounting one.

When you look at Textron Financial, what provisions were taken during the quarter?

$4 million, Ron.

Okay, $4 million?

Yes.

That's great, thank you.

And then switching gears to the Chinese JV, how do you think about protecting intellectual property when you go into something like that?

Well I think it's pretty easy for us, Ron.

People talk a lot about intellectual property protection and I think if you're a consumer goods kind of guy you probably rightfully should worry about that a lot.

On the other hand, I think as you get into some more sophisticated technology, there are sort of natural protections.

I think when you look at China in particular, I think it bears some understanding that Chinese are also very brand conscious, right?

So if you look at -- I think what we're doing is much more akin to what's happening in the automotive market than a lot of other industries where the western companies that went in and set up joint ventures with the government and did local manufacturing and really had a footprint in the country are the ones that not only enjoyed the growth of that market and helped make the market, but are still the brands and the products that dominate that market today.

You go to China and whether Shanghai, Beijing or smaller cities, it's VWs, and Audis and Buicks, these are the guys that were the first movers and they still have very powerful brand presence.

People make a lot about the knock off car companies, the reality is they haven't done all that well.

You don't see very many of those.

I think when you look at our business in the aviation space, it's even further sort of down that continuum, if you will, in that if you're in the country and you're finishing or doing a final assembly on Sovereigns, you are not going to see a company down the street all of a sudden pop out with a Sovereign look alike.

You can't, aviation is a global industry.

You have to have certifications.

You have to have the FAA and the CAC, so if anybody is going to try to take our intellectual property and do a knock off of our products, that's going to be a very, very, very public thing.

You're not going to all of a sudden see these things on the market for sale.

It's years and years of development, a very, very difficult certification process, so I frankly think that people are, in our case, in our industry, our kind of product, this is not an issue to worry about.

And frankly, I think you're much, much better off being in the market and participating in the market than thinking you can avoid that market and somehow not worry about IP by taking that strategy.

You're more susceptible to having intellectual property issues if you aren't there and participating in the market.

Interesting.

Yes, I guess what the counterargument would be is what happened to some of rail companies over there, correct?

I'm sorry, to who?

Like Siemens and some of the other companies when they were doing high speed rail?

Yes, And I've heard of some of that, but again, when you think about all of the certification requirements and again people buy aircraft and fly them around the world.

There's not a local market or a specific local project.

It really has to be a global product.

Yes.

And then maybe just one last question for one of you guys.

There's been a lot of discussion on the call both from you guys and from other analysts about pricing.

Doesn't it imply if pricing is still so soft that there's just too much supply on the market that either on the used end or on the new end, that there's just too much supply and that's why we are not seeing pricing get better?

That really the only way we'll see pricing get better is we just need less supply somehow?

Well, there's absolutely no question there's a supply and demand issue going on here and part of that supply includes those used aircraft.

And so I think if you look at sort of competition in the marketplace, that's exactly the dynamic that you have going on so everybody -- I don't think anybody wants to short the market, right, as things start to come back, so everybody is doing what we're doing.

They're trying to understand where you think the market is going and you're trying to build to a forecast because you can't do it month to month.

You've got fairly long lead assets here, but I think what we'd love pricing to get better tomorrow.

I would love pricing to be better yesterday but I think we are where we are in the cycle.

I think the used, as it starts to wind down and particularly on the stuff that's still in production kind of aircraft, will help get that supply and demand back into balance.

But you still have at least three, really four, competitors out there that are all trying to make sure that they keep their position in the market, so as demand comes back and it is getting stronger, you'll start to see that switch just like it has in every time you go through these cycles.

Great.

Well thank you.

Sure.

Steve Tusa, JP Morgan.

Have any M2 or Latitude orders in the quarter?

Yes.

Any numbers?

No.

Okay.

Sorry, Steve.

That's okay.

But Steve, just to put some color, they are not overwhelming numbers, okay?

All right.

We are in a position here still in the market where people aren't -- you don't see lots of people line up that want to place orders for aircraft that aren't going to deliver until 2015.

Right.

So yes, there are some.

There are certainly people that want to be sort of first in line for the aircraft and love the airplane and want to do that.

Obviously we have more entry level buyers and some current Mustang guys who are already thinking about their step up and looking at M2 and saying that's where I want to go.

Some of them have gotten to the point where they are putting money down saying yes, I want one of the first units.

But there's not a panic yet in the market of people saying, gee if I don't put an order in here real quick I won't be able to get an airplane.

Right, and then you guys aren't going to give kind of your kind of sold out position for next year?

No.

That we're definitely not going to do.

Okay.

That's it.

Thanks a lot.

Sure.

Sam Pearlstein, Wells Fargo.

Good morning.

Since there are no questions on Industrial, just I was wondering if you could talk a little bit about that.

Just given the growth you've seen in the first quarter if you're going to have flattish sales, is there any part of that that you're expecting or worried about weakening as we go through the year?

The part I still worry the most about is around the automotive build.

I think the first quarter is always strong in the automotive industry.

I mean it's just the way that cycle tends to work and it was pretty strong.

It was a little softer in Europe which is what we expected but also considerably stronger in North America, actually even a little bit stronger than we would have expected.

Asia was stronger but not as strong probably as we would have liked, so I would say in terms of how the quarter went we're happy with what we saw in terms of volume and the health in the industry.

But I'd say we remain still a little concerned about what's going on in the -- what will happen over the course of the year particularly in the European automotive market and we have a significant share over there, right?

It's about 40% of our automotive business.

And then just on that topic, is Kautex, do they use this nylon that seems, was in the paper today about shortages in their fuel systems and how does that play out?

Well, so they do.

All of the major suppliers of full-molded tanks use I think it's PA12 is what you're referring to, so there was an explosion at a plant in Germany that manufactures that material system.

It's too early to say exactly what's going to happen.

I mean it certainly has the potential to have an impact.

They represent a significant source of supply for that particular material so all I can tell you is there's active discussions underway with our customers about material systems, alternate material systems -- sort of how to manage and sort of bridge our way through that given what has been sort of a key supplier that has had a real problem and that's not unique to us by the way.

That's a material that feeds into everybody that makes this kind of a tank.

Okay, thank you very much.

Sure.

David Strauss, UBS.

As a follow-up, I think at Cessna I don't think you've talked about regionally.

Could you comment, Scott, specifically on North America what you're seeing?

And is North America, if you look specifically at the North America book-to-bill, is that above the Cessna average?

So I'm sorry, I haven't done a book-to-bill on a per region basis but I would say that the US continues to be healthy.

But I would say as we've gone into the year, we've seen some strengthening internationally as well.

So we're looking at an order book that comes about, I mean I think over the course of the year what we certainly see indicative in the first quarter that's going to look more like 60% international kind of a number as opposed to last year which was more like a 30% and 70% US.

Thanks.

George Shapiro, Shapiro Research.

Yes, just following up on David's question.

Scott, how about demand wise, you're seeing more for your bigger planes versus the smaller ones?

George, the mix continues to be in terms of the order rates favorable so we're seeing sort of stronger demand in the CJ4 and up than say the Mustangs.

Okay.

And again that's kind of consistent with what we saw in the latter part of last year and what our forecast is based around for this year.

And then did you give or will you give how much R&D change from last year at Cessna?

Not on a by business basis, George.

But in terms of how you guys think about it, the only thing I would say is that we've talked about increased dollars still putting some pressure probably this year around the percent of sales but our expectation is that even though we'll continue to increase the dollars going forward that we would start to lose that headwind in terms of percent of sales on R&D.

Okay, thanks very much.

It appears now that we've exhausted all the questions and follow-ups.

So thank you, ladies and gentlemen for joining us and we'll talk with you soon.

Bye-bye.

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