達信公司 (TXT) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Textron first quarter earnings conference call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Doug Wilburne, Vice President Investor Relations.

Please go ahead, sir.

Before we begin I'd like to mention we'll 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, approximately flat with a year ago.

Income from continuing operations was $0.40 per share compared to earnings-per-share of $0.41 in the first quarter of 2012.

Manufacturing cash flow before pension contributions was a $425 million use of cash.

First quarter pension contributions were $140 million.

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

Manufacturing revenues were up slightly in the quarter, based on strong commercial demand at Bell, increased deliveries of Textron systems, and sales growth at E-Z-GO.

Unfortunately, demand for business jets was soft again this quarter.

We were hopeful that demand would recover as the impact of last year's election and fiscal uncertainties moved move behind us.

We also thought the recent strength in US equity markets would have supported improved business confidence and therefore business jet demand.

Sales dialogue and customer recruit was reasonably active during the quarter, however customers, especially in the light jet segment, who tend to be small business owners, continue to be defer purchase decisions reflecting continued concerns about their financial outlook.

As a result, we delivered 32 new jets in the quarter, down from 38 a year ago, resulting in a segment loss in the quarter of $8 million.

On the positive side, we continue to see good volume in the used market, leading to a significant increase in used jet sales, which resulted in higher overall Cessna revenue despite lower new deliveries.

Looking forward, given the lack of recovery in the business jet market, we are reducing our 2013 business jet delivery outlook and now expect that deliveries will be down this year compared to 2012.

This reflects our expectations for lower deliveries in the light category, partially offset by growth in the midsize category.

Accordingly, we are adjusting our production schedule and implementing other appropriate cost actions at Cessna.

In addition, we've initiated a salary workforce reduction program, the largest portion of which is a voluntary separation plan.

While we are taking these immediate actions, we believe it won't -- the global business market has significant long-term growth potential, and we remain committed to our new product plans, which include the introduction of the M2 and the new Sovereign and Citation Ten models later this year.

As well as the Latitude in 2015 and the Longitude in 2017.

Moving now to our finance segments, lullness in the business jet market resulted in only a few new loan originations during the quarter, however segment profit benefited from good performance in our captive portfolio and a number of small asset transactions in our non-captive business.

Shifting to industrial, we saw lower volumes in the quarter at Kautex as growth in North America was more than offset by weakness in both the European and Asian automotive markets.

Greenlee and Jacobsen were down slightly, reflecting weakness in European markets, while E-Z-GO saw good growth, reflecting the success of new product introductions.

Moving to systems, revenues were up, reflecting growth in our UAS and weapons and sensor product lines.

We continue to see operational improvement in our fee-for-service UAS programs, but as previously discussed, these were essentially breakeven programs for us at this time.

Finishing with Bell, operational results reflected good program execution in both military and commercial product lines.

We did experience a decline in after-market deliveries during the quarter.

This is a result of a conversion to a new ERP system.

I would note that the underlying after-market order flow actually remained quite strong.

The global commercial original equipment demand environment also remained, strong as we delivered 40 commercial helicopters in the first quarter versus 30 in last year's first quarter.

We also had a very good showing at this year's HELI-EXPO, announcing two new products, the Bell 412EPI and the Bell 407GT.

The new 412EPI includes a fully-integrated glass flight deck and a 1400-pound increase in maximum hot and high payload capacity.

These are significant enhancements to the value of what is already one of Bell's most versatile and reliable helicopters, and the customer response so far has been very positive.

Likewise, the new Bell 407GT, which is an armed version of the 407GX, incorporates an integrated glass cockpit and a fully-configurable weapons system.

We believe the GT will be an effective and affordable platform for foreign military and paramilitary applications.

We also featured our new Relentless 525 flight simulator at HAI, demonstrating the steady progress we're making toward a first flight next year.

Overall, we had a very successful show, capped by the signing of 50 new commercial orders, including an agreement with Air Medical Group to deliver 30 helicopters over the next several years.

During the quarter, the 429 model continued to add jurisdictions certifying a 500-pound increase in useful load.

The most recent came from Indonesia, an important and growing helicopter market, making it the 17th country to approve the increased maximum gross weight.

In the military business, we delivered nine V-22s and six H-1s in the quarter, consistent with our customers' quarterly delivery schedules, but down slightly compared to 10 V-22s and 7 H-1's in last year's first quarter.

We are on track to deliver 40 V-22s and 25 H-1s in total this year.

We also delivered our 100th H-1, marking an important milestone toward fulfilling the total programmer of record of 349 units.

We also delivered the first HMX V-22 unit, which will serve presidential and other special missions.

And finally, at last week's Army Aviation Association of America meeting in Fort Worth, we introduced the V-280 Valor as our entry into the Army's request for joint multi-role future vertical lift aircraft.

The Valor concept is a third-generation tilt rotor, featuring a fixed engine configuration with a target cruise speed of 280 knots and a combat range of up to 800 nautical miles.

We believe this platform will prove to be the highest-performance, most cost-effective solution to the Army's future mission requirements.

To wrap up, despite a challenging first quarter, most of our businesses are on track for a solid year, with the notable exception of Cessna, which necessitated a change in our operational plans and our overall outlook.

On this basis, we're reducing our guidance for earnings per share from continuing operations to a range of $1.90 to $2.10.

We are also lowering projected cash flow from continuing operations of the manufacturing group before pension contributions to about $400 million as a result of the lower expected Citation deliveries.

We remain focused on continuing to improve our operational execution and cost productivity, while at the same time we are also committed to continue our investments in new products and sales capabilities to grow the business over the long-term.

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

Segment profit in the quarter was $235 million, down $24 million from the first quarter of 2012 on approximately flat revenues.

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

At Cessna, revenues were up $39 million from this period last year, primarily the result of $81 million increase in pre-owned aircraft sales.

We also had an $18 million, or about 9% increase in after-market revenues.

The segment had a loss of $8 million compared to a loss of $6 million a year ago.

This reflected lower new jet deliveries and pricing, including the impact of selling our five remaining legacy Sovereigns and higher pension costs partially offset by an improvement in mix.

Looking to the second quarter, keep in mind that there will be no new Sovereign or Ten deliveries, and we expect to record costs of about $25 million for the workforce actions that Scott discussed.

At Bell, revenues were down $45 million on decreased V-22 and H-1 deliveries, and lower commercial after-market sales, partially offset by increased commercial unit sales.

Segment profit decreased $16 million from the first quarter in 2012, primarily reflecting the lower overall volumes.

At Textron Systems, revenues were up $52 million, reflecting higher UAS and weapons volumes.

Segment profit increased $3 million.

Industrial revenues decreased $28 million, reflecting lower automotive volumes and a $4 million negative foreign exchange impact.

Segment profit decreased $16 million, mainly due to the lower volumes and unfavorable mix.

Moving to finance, revenues decreased $19 million from last year's first quarter, reflecting lower finance receivables while segment profit was up $7 million.

Credit performance remained relatively steady during the quarter, with non-accruals of $147 million and 60-day delinquencies of $80 million.

Lastly, moving to corporate items, corporate expenses were $55 million, and we remain on track for our full-year forecast of about $160 million.

Interest expense was $37 million, up $2 million from a year ago.

On the tax line, our rate reflected benefits primarily related to the impact of the re-enacted US R&D tax credit.

We are still on track for our original full-year tax guidance of 29%.

Moving to our consolidated cash flows, which is the last schedule attached to our press release, we ended the quarter with $791 million in consolidated cash, down $622 million from the end of the fourth quarter.

The draw-down in cash in the quarter reflected a net reduction in debt of $236 million, inventory increases primarily at Bell, $140 million in contributions to our pension plans, slower payments on military contracts, and seasonal incentive compensation payments.

During the second quarter, we will retire $215 million principle amount remaining on our convert at the Textron level, and we have $371 million scheduled debt repayments at TFC.

That concludes our prepared remarks, so Brad, we can open the lines for questions.

(Operator Instructions)

Robert Stallard, Royal Bank of Canada.

Scott, I was wondering if we could kick off with Cessna.

Last quarter, you commented there had been a pickup in used activity, and also used pricing.

Now it seems like used activity has continued in Q1, but I was wondering if you could clarify how the used pricing has progressed?

Rob, I'd say the pricing has been pretty flat.

The market is definitely continuing to be strong in terms of the number of transactions.

Obviously you see that in our numbers this quarter as we have sold a lot of aircraft.

I think the market -- the used market in total continues to move.

I think that's representative.

We've seen a little bit of a tick down again in terms of used available for sale, but I would say we still see it as pretty challenged in terms of the pricing that's out there in the used market.

And then secondly, on Cessna, you said it's going to be down this year in terms of new deliveries.

I was wondering if you could give us an idea of just about how much it's going to be down?

I will try.

We tried to stay away from the exact numbers on this call, but I think when you look at how we would guide, we're probably talking about a couple of hundred million dollars or so on the top line.

It's mostly in the light jet market, so I'd say from there you can probably make reasonable estimations in terms of the number of aircraft that we're talking about cutting back.

And that's really our revised forecast.

As much as we hate doing this -- and by the way, we're still out there selling hard, we're going to do everything we can do to sell aircraft.

We're pretty happy, I think, with the effectiveness of what our sales teams are doing.

I think our share feels good, but we just have to be open about the fact that that light market just hasn't recovered at this point, contrary to our expectations.

And so we're going to scale back some of the production and reduce the number of aircraft that are out there in that space, because I think it's -- the demand just isn't there.

I will leave it there and pass it on.

Carter Copeland, Barclays.

Just a quick question on the reduction in the cash flow guidance, which you said was attributable to the lower Citation deliveries.

Does that reflect a more sizable cut to your anticipated deliveries versus production?

How should we think about the mismatch there, and if that's really just inventory that will build up over the course of the year?

It just really is inventory.

The challenge, obviously, as we sit here in -- at this time of the year to make a substantive change to the production schedule on those aircraft.

An awful lot of that material is already in house.

Clearly one of the things that we'll do as we go through the production change is we'll build things out to logical points in their build cycle, so that those aircraft are at an appropriate stage of work in progress before we shut down various portions of the production line.

And that just means we're going to have inventory, clearly, that's going to roll over the end of the year as opposed to going out in sold aircraft.

Okay.

And I'm -- with respect to the Cessna margin in your previous guidance, it looks like the cost actions are worth about 1%.

But you've lowered the guidance by $0.20, so if it's all related to Cessna, it implies margins that are closer to breakeven.

Is that correct?

It's principally related -- almost all the $0.20 is related to Cessna, that's correct.

Okay.

All right.

Noah Poponak, Goldman Sachs.

Scott, I wondered if you could help me think about backlog.

I know we've asked this before, and the discussion is that it's just not as important right now, but -- and for Cessna specifically.

The Cessna backlog was actually more stable in the quarter than it's been in a while, and the implied dollar bookings and dollar book-to-bill was as high as it's been in awhile.

Can you talk about what the moving pieces were in that backlog?

And how it's possible that you were okay with production levels while backlog kept coming down, and now that it's finally seeing some stabilization, that's driving the production level decrease?

We've always -- first of all, if you look at backlog in the quarter, basically what it reflects is that we're taking orders and delivering in the same quarter.

So there's not a whole lot of stuff going in and out of backlog, right?

You take an order for an aircraft, and you deliver the aircraft.

So there's not a whole lot of change going on in the backlog.

But that's --

In terms of [renew], right?

And the degree to which that happened in the quarter was at least less than it's been over the past several quarters, right?

Yes.

That's been the mode that we've been in, right?

We have been, obviously, building to a forecast as opposed to building to backlog for the last several years.

Our initial intent as we went into this year is, given the dynamics that we thought in the marketplace, that we would start to see stronger demand than we saw in the second half of last year in terms of the lights.

And we're just not seeing that manifest, so at this point I think it's appropriate for us to say we're not seeing that volume, and we just don't see the number of customer discussions going on that we believe are going to come to closure that would justify continuing at that build rate.

Okay.

And I'm also wondering, is this very specifically Mustang?

Because when I look at the deliveries in the quarter, that was very light, whereas some of the bigger metal -- or a lot of the bigger metal is really kind of flat, or even up year-over-year.

But I know you don't make much money on those, and you're lowering the margin outlook, so that would imply it's not just Mustang.

I know you don't want to get specific on aircraft, but can you --?

That's okay.

When we talk about the light category, Noah, we're talking about Mustang through the CJ-4.

And part of the dynamic is, when you look at what's going on in the marketplace, there's obviously a tighter price in here as well, right?

So I think one of the things that we see as becoming more and more difficult and so more and more difficult here in first quarter, is that in order for transactions to happen, there are expectations of lower and lower price.

And I get to a point here where I'm -- we're not going to play that game anymore.

So we are going to take some of the capacity out of what's out there trying to transact, because we're not going to do deals at price levels that people seem to think the level has to be for them to make a transaction happen.

Have some of the aircraft beyond Mustang through CJ-4 been a little better than you expected, or no?

I don't know that better than we would have expected.

The XLSs have been doing well.

We did sell the last five Sovereigns that we had of the pre-block point change model.

That, of course, is never a particularly strong pricing environment, right, when you're trying to get that last -- they're a great aircraft, but it's -- people know they are buying the last of that model type.

So I think that the XLS activity was good, and obviously there's a lot of discussion going on around the block point change for the Sovereign, and some orders we're starting to take for that.

So again, we really do see the market behavior in that medium segment has been more consistent with our expectations, whereas the light side has been weaker.

And again, it just seems for transactions to happen is at a price point that I don't think we want to play.

Understood.

Okay.

Joe Nadol, JPMorgan.

Scott, on the -- on Cessna, just one more there.

What are your customers telling your sales force exactly as to why activity -- why does your sales team believe that activity did have a slower start to the year than you were expecting a couple months ago?

There's noise all over the place, right?

There's -- these are mostly small business guys, so their taxes have gone up, they read all the political nonsense, this corporate jet loopholes -- which by the way they may depreciation, which I'm not sure why that's a loophole since it's actually in the tax code and always has been.

You've got this new proposal in user fees, which I think is very unlikely that's actually going to go through, but again it gets thrown on table to whack everybody $100 for every flight on top of all their existing operating costs.

And people are still a little concerned about where the economy is.

And you also have the pressure that ties back commentary earlier on in the used aircraft pricing.

As long as used aircraft pricing is pretty tough, that means the collateral value of their current aircraft is not as strong as they'd like it to be, so when you look at all those moving pieces, it just leads guys to say, I'll wait a little while.

And -- or give me a lower price to help incent me to do it, and that's the part of the -- I think it's to say if that's really where the market is, then we'll back off on production and just accept that there's less demand out there in the marketplace.

Okay.

On the restructuring actions that you're taking, the $25 million, is that mostly labor, or do you have an opportunity to take out other fixed costs besides just labor?

Now that's -- the $25 million is virtually all related to severance of employee costs, and obviously as a result --

Salary.

Salary costs, and so as a result that will obviously accrete back over the balance of this year and into the beginning of next year in terms of lower payroll.

Okay.

And then --

There aren't any -- there's no write-offs of equipment or things like that.

There's -- it's just running it at a lower rate.

Right.

And then finally, on the sequester, could you help size -- it doesn't look like you saw much impact in the quarter, if any.

But could you help size, as we think about the Bell military after-market, what that business looks for you right now in terms of size and profitability, and what you think -- how you're looking at the rest of the year playing out?

And then there's any thoughts on systems all in the same lines?

So, you're right.

I think at this point we're seeing sequestration issues on the margins, if you will.

I would expect that in the after-market side of Bell, there will be some pressure in that area, and some of it's going to be OPTEMPO related, as things continue to wind down in some of the conflicts.

Although I don't see that as being a material number, or something that would give us any pause in terms of either our guidance this year or frankly, our own -- our internal thoughts in terms of our long-range plans.

So yes, some impact here or there but nothing material.

I think on the systems side, as we talked before, the issues that -- or the areas I worry about is that we could see a little bit of impact probably around some of our UAS business, and some of the programs associated with that, just because they are year-to-year funded.

And I think it's quite conceivable that in some of those programs there could be a slowdown of deliveries on some of the upgrade programs or refurbishment programs.

There could be some things in some of our intelligent software-related businesses, where some of those agencies have taken a bit of a haircut on sequestration, and it wouldn't be surprising to see them scale back accordingly on some of their acquisitions of some of their intelligence software and upgrade products and things like that.

But again, I -- we don't have, at this point, any visibility whatsoever that would say that we have a major program that would be impacted by this, or cancellation, or anything of that nature.

So I really do think that at least this year, and what visibility we have in those programs as they going to be 2014 timeframe -- will there be some pressures?

I think everybody will have some pressures, but they are all sort of on the margins, not a significant or major program cancellation.

Okay.

Jason Gursky, Citigroup.

Jonathan Raviv in for Jason.

Quick question on V-22.

I was just wondering, given the recent budget -- I think the V-22 was in line, but going longer-term out to '15.

What are you thinking in terms of international orders and how that impacts expected volumes when the multi-year resets in 2015?

Okay.

So obviously the current multi-year is unaffected.

The next multi-year too, which had been negotiated, is now in the process.

Now if the government has authority to go ahead and enter into that contract that's working its way through the process and should be done here, I would guess, within the next 30 days or so, just as it goes through the normal congressional notification and there's just timelines associated with that.

But I think that will be signed here shortly.

In terms of foreign opportunities, there has been no change in that regard.

We have a couple customers that are already in, I would say, detailed discussions with respect to buying V-22s.

Those discussions continue to progress quite well.

I wouldn't expect to see any kind of a formal announcement until you get to the point where there's something that's going to be notified to Congress.

These will be FMS transactions, obviously, so they have to go through that process.

But in terms of anything that's going on from a budgetary standpoint, we haven't seen any impact to bringing those deals to conclusion.

And in terms of volume in 2015, what are the pluses and minuses in terms of where we might go to from 40 this year?

The 2015 number is unchanged and I wouldn't --

24.

Yes.

It's 24, and I wouldn't expect that, frankly, at this stage to be changed by one of these foreign military sales opportunities.

It's just we're getting too close to the timeline in terms of production volumes to make any kind of a material change to that.

I do think it's possible in one or maybe even both cases of the deals that are in the works that it's possible that our customer may allocate a couple of those aircraft to start the initial deliveries with a foreign customer, but it's too soon really to know.

But I think that I would not expect to see much change to that number of 24 in 2015, so in the FMS volumes, once we get under contract, would really be added onto the volumes in probably the '16, '17 timeframe.

Understood.

George Shapiro, Shapiro Research.

Scott, I wanted to pursue one more at Cessna.

When you announced on April 2 that you were going to have a reduction in indirect people at Cessna, you made the comment, production rates are unchanged.

And now two weeks later, they are coming down.

Just wondering if anything happened significantly in the last two weeks to have that change?

George, I would say that the conversations that Scott and I had, which frankly go back into March, around what was going on in the business, what we're looking at in terms of market recovery and such, said, look, we really probably need to take another look at the underlying cost in the business, okay?

Because even at that time, we were expecting 2012 -- '13 to be kind of flat to '12, okay?

So it's not like there was an expectation of a big recovery.

And we decided that we needed to take some costs out of the business to give ourselves some headroom.

We don't like coming into every quarter, and at that time trying to figure out, okay, are we going to make money or are we not going to make money?

We decided to do some resizing of the business to make sure that even in the event of 38 jets, we made sure that we had a profitable business.

And so the decision was taken at that time to do a voluntary reduction program.

We have an awful lot of stuff going on at Cessna, as you guys know, right?

We have a lot of new product programs, we have a lot of people working hard to do a lot of good things, and we are trying to balance getting some costs out of the business without, frankly, putting the business through a very traumatic time.

And we've already gone through an awful lot of layoffs and reductions at Cessna over the last years, so we concluded to do the voluntary program, and we put that into place, okay?

So when you talk about that April 2, that's when we actually announced it to employees and opened the window to the voluntary program.

What happened with respect to production programs, George, is that we got to the end of the quarter, and frankly, all the way coming up to the end of the quarter, we thought we had visibility to getting the 38 jets that we had in the plan.

And we just had too much activity, particularly in the light side of the business, with customers who were talking about doing a deal, talking about doing a deal, who, again, are looking for more price at the end to close those deals.

And as you can see, we end up at 32, not 38, so we're not going to do that.

And that's when we took the decision to say look, guys, this is -- we're trying to put -- we're trying to force transactions that just don't need to happen right now.

And that's when we undertook the decision to go in on the light segment and make a material change to our production plans.

And therefore, we need to tell you guys we made a material change to our production plans on the lights, and every have reset our sales targets and goals.

Again, as I said earlier, that doesn't mean we're not going to be out there selling.

We are continuing to grow our sales force, we're going to continue to do all of those things so we don't miss any deal, we maintain our share, we'll continue to do that.

But I think what we concluded by seeing the dynamic as we came into the end of the quarter is that the market really hasn't recovered, or frankly stayed as stable as we'd like it to see, and that we ought to react to that by taking down our production.

Okay.

And a couple more on -- gross book-to-bill, Scott, was that much different than slightly below 1 net book-to-bill?

Are we done with these older cancellations that we --?

There were only a couple of cancellations in there, so gross book-to-bill was actually just a bit above 1.

Okay.

And can you share what percentage of the deliveries for the rest of this year you might expect to come out of the current backlog versus how much yet you still need to get orders for?

No.

I don't think we'll share that.

(multiple speakers) We've got the new products --

The M2s and the Tens.

Obviously, the M2s, which are in the third and fourth quarter, the Tens that are in the fourth quarter, these are orders that are already booked, so they're -- certainly all the new models are coming out of backlog.

And we've begun to build some on the Sovereigns.

Okay.

And so we'll see no more Sovereign deliveries until the new ones, because you basically stopped production and you're done with the inventory, with the --?

Yes, that's correct, George.

We had five Sovereigns that were the last five of that model type.

All five of those aircraft sold in the first quarter.

And so you'll start to see deliveries of block point change Sovereigns in Q3.

Okay.

And one last one, if I might.

On industrial, that was weaker than I thought you mentioned, mixed.

Do I assume then that, relatively speaking, China was worse than Europe?

Because I thought you'd do better in China than you do in Europe?

It was.

And the specific issue in China is that our strongest segment of our business in China is our manufacturing that's in China for the Japanese OEMs.

And as we said at the end of last year, we saw dramatic softening in that business as a result of some of the friction here between China and Japan.

In essence, there was some boycotting of Japanese product, even though it's manufactured in China, and that continued into the first quarter.

Just to be clear, George, what our results in the fourth quarter at Kautex were not inconsistent with our expectations.

We expected -- we knew, based on what was happening late last year, George, that it was very likely that the friction with respect to Japan and China would continue and affect the sales of those models in China, and it has.

Right.

Okay.

Cai von Rumohr, Cowen and Company.

A couple more questions on Cessna.

Could you tell us, what was the size of the pre-owned loss in the first quarter?

Was R&D up?

And give us some color on the pattern of the P&L for the year.

Is the second quarter likely to be in the red as a result of the $25 million charge?

Yes.

I would absolutely say so, Cai.

And again, recognizing that $25 million is something which we'll accrete back over the balance of the year, but absolutely.

When we take the costs of making those severance payments in the second quarter, that will for sure push Cessna into the red.

On top of that, we have no Sovereign sales in the quarter because we don't have the new block point until the third quarter.

And yes, we've had some R&D and SG&A growth, again, it's putting more sales and resource out there on Cessna, which I think we need to continue to do.

Okay.

To the question of pre-owned losses, how large were those?

The used net of any forfeitures was mid-single digits, and there was a low single-digit headwind year-over-year.

Got it.

Update us -- I think you mentioned M2 in the third quarter.

At one point, I thought that was going to be in the fourth.

And --

Yes.

I think, Cai, you and I have communicated incorrectly multiple times on this.

And I'm not sure whether you started it or I started it, (laughter) but the M2 will start deliveries in the third quarter.

Okay.

The Sovereign is in early Q3, and when are we talking about the Ten?

The Ten -- by the way, we've back gone back to just calling it the Ten -- because, despite our best efforts, people just want to call it the Ten, so we've conceded that.

The Ten will be the fourth quarter.

Okay.

You have a strong profit, maybe you indicated, but the profit at TFC, how -- what was the reason there for that profit?

And the outlook for selling any additional mark-down assets?

There were a couple of relatively smaller transactions in the non-captive business, where we're still closing transactions, particularly in the Golf Mortgage portfolio, where we have been able to close those at better values than were on the book, and so those resulted in some gains.

In terms of the captive business, while there weren't a lot of originations in the quarter, the losses and provisioning and just general operation of the business was pretty solid.

Okay.

Normally, you had provided updated sales and profit guidance for the year.

Can you offer any of that?

You said Cessna is down a couple of hundred million in light bizjet sales, but any other color on any of these businesses?

The only changes that we see in terms of -- what led to our changing guidance, Cai, is, as I said, you're probably talking about a couple of hundred million dollars or so of revenue at Cessna which will translate to a very low single-digit margin.

And that really is the lion's share of the $0.20 reduction, so I think that math is easy to do.

We probably will have -- and the revised guidance does reflect about a $10 million improvement in the [knock] that we would expect out of the finance segment.

The rest of guidance in terms of revenue margin rates are unchanged.

So really the shortfall at Bell was related to the ERP issue, and you expect to catch that up over the remainder of the year?

Yes.

Absolutely.

The -- we were light on commercial spares, we shut the plant down for a week to make this transition, so that put some pressure on us, but I'd actually say that the change has gone fairly well considering these big changes, which usually don't go well.

But it's gone fairly well, but we got a little behind on a number of issues, just working our way through the bugs in the system that impacted spares, both military and commercial, but commercial probably most significantly.

The demand in terms of orders on the commercial spare side actually was strong.

And I would expect here over the next couple quarters, we will get those spares that are in arrears, if you will, delivered.

And on the last one, any change in the tax rate expectations?

You mentioned corporate expense is still the same.

Any other changes to the P&L we should be aware of?

No.

We don't expect, as Frank said, I think the over the year -- the total year tax rate should be in line with what we expected.

Obviously, this quarter, because of the full-year last year of R&D tax credit as well as this quarter of the 2013 year, just resulted in an unusually low number, but we would expect on target for the total year.

Peter Skibitski, Drexel Hamilton.

I guess no Cessna questions left at this point, but let me just ask another one on Bell.

Could you just remind us the expected year-over-year decline in margin rate at Bell?

Outside of this Q1 issue, what's driving the expected margin rate decline?

Sure.

It's mix largely driven by growth in commercial original equipment sales.

Okay.

So we expect to see a significant growth as we saw this quarter, with 40 commercial aircraft versus 30.

We expect to continue that sort of a trend through the balance of the year.

And as we also talked about in the past, we have pretty significant increases in R&D, largely attributable to the 525, also a fair bit attributable now as you see on the V-280 Valor for the future Army program.

And we've seen some increases, obviously, in SG&A as again we continue to expand and drive sales to keep growing in the commercial sector.

Okay, so no real change to military OE this year?

No.

As we've said before, there's always a pressure point on that as we renegotiate contracts around the next multi-year on V-22, which will really be a 2015 impact.

Every year we go through a renegotiation on rates on the H-1s, but at the same time, we're also trying to drive productivity and figure out how to recoup some of those costs.

So there's always some pressure on the military side, but really what's driving the margin here in 2013 is just disproportional growth on the commercial original equipment side combined in particular with the R&D growth for 525 and the V-280.

Got it.

Okay.

David Strauss, UBS.

On the delivery guidance at Cessna, are deliveries -- non-Mustang deliveries going to be actually lower year-over-year?

Or are we just -- most of the year-over-year decline is related to the Mustang?

No.

This includes Mustang but also the CJ2, 3 and 4.

Okay.

And then, Scott, I think, from what I've gathered, you've had some fairly high-level departures, sales force departures at Cessna.

Can you just talk about maybe what's going on there?

How you're restructuring the sales force at Cessna?

We've had a lot of changes in the sales force at Cessna over the last few years, and I would say probably the most challenging for some of our people has been the fact that we're adding a lot of salespeople.

So we've taken regions and we've broken them into considerably smaller regions, because we feel we need to do that to get better coverage.

I think most of our salespeople understand that, and they recognize that having a small region and getting better coverage will ultimately lead to more overall sales for the Company.

But obviously, it puts pressure on individual guys, because they don't have as big an area to work with.

And most of our folks have been good with that.

We've made it a good transition for them, and we've added some real talent in terms of the sales team and the number of people we have on the sales team.

But frankly, we've had some people that have a hard time getting their head around that, right?

They say, I used to have 10 states, now I only have 3 states, and that's hard for some of them to accept that.

And obviously, we try to work with them and say, guys, this is not about you.

It's not that you're not doing a good job.

It's that we've asked you to cover a sales territory that's just bigger than one human being can reasonably cover, and really talk to customers and know what's going on and find new opportunities.

And as I said, most have been great about that, and we've made the adjustments, and I think it's working, if you look at our share for what market is out there.

But in some cases, it's just too much for somebody to get their head around, and so be it.

Great.

Julian Mitchell, Credit Suisse.

Just on Cessna, I just wanted to follow-up on the delivery outlook commentary in that business.

Your deliveries were down double digits in Q1.

Revenues were up slightly, so I'm just looking at the rest of the nine months.

What kind of slope of year-on-year change in Cessna deliveries are you embedding?

Are you embedding the fact that the year-on-year trend should be fairly similar to what you had in Q1?

Or, with the new jets, with the easy comps you actually get a decent recovery in the second half?

I think given our revised guidance and expectations around the light segment of the market that you would expect to see -- given that we'll be down in total year-over-year, that we'll continue to see fewer jets sales per quarter.

Now, one thing to keep in mind is, I think it will be particularly low in the second quarter, because you don't have any Sovereigns in that quarter.

As you get to the third and fourth quarter, it's likely to be closer.

And keep in mind, there's always variability here from quarter to quarter, so this is all rough numbers for you.

But clearly, given the revised guidance in total for the year, you'll expect to see a smaller number of jet deliveries for the total year.

Sure.

But the guidance -- does it therefore embed, based on what you just said that in Q3 and Q4, it's down somewhat as well year-on-year?

I don't -- I have not -- we don't have quite that refined a process, but certainly it was down in the first quarter.

I would expect it to be down more so in the second quarter, particularly with the Sovereigns not being in there, and so third and fourth quarter will probably be close in terms of number of actual deliveries.

But it's just hard to estimate that at this point.

Sure.

Okay.

And the just on the capital allocation and so on, the manufacturing cash flow guidance has obviously been adjusted.

I just wonder what the updated thoughts were on things like the dividend outlook and so on, in light of the weak cash flow you had in Q1?

The dividend outlook, I think, remains -- our position is right now our capital requirements are to continue to pay down debt.

We did that in the first quarter.

We have some fairly significant pay-downs to happen here in the second quarter.

And we have not published or decided on any revised dividend strategy at this point.

Okay.

And then lastly, just thinking about the cost base for businesses beyond just Cessna, obviously the South Korean contract went somewhere else in the last day or two.

The industrial profits are down 20%.

It sounds like the trends in things like Bell and in industrial are in line with what you had thought at the end of January, but I wondered if there was any sense of preparation of plans for other segments in terms of cost reduction beyond just Cessna at this point?

I think if you look at all the businesses, at Bell in fact there are some cost reduction programs that are already underway in anticipation of some of the lower military volumes that we see as we go out into that '15 and on time frame.

This thing you mentioned with South Korea is certainly not something we had in our plans, either near or long-term.

That's very much -- the product that was ultimately selected there is already very, very embedded in the country and utilized there.

So it would have been a huge transition, frankly I think, to have gone a different direction than going with the Apache in South Korea, so that was never in our plans, so there's no action we would take as a result of that.

There are a number of other missed opportunities that are obviously in the works that we think will be things that we have a very real shot at winning on one front.

Anyway, we have cost take-out plans, and programs are already underway at Bell to size that business consistent with the military ramp down, somewhat obviously offset by the fact that we have a growing commercial business.

In the industrial businesses we're always looking very hard at the cost of that.

We did have a much lower margin rate than we would like to have had on a normal basis in the quarter, although we expected that, given the dynamics, what was going on particularly with automotive business in Europe and even more so in Asia.

But again, consistent with our plans, so I don't think -- there's not a need or a plan at this point that we would announce any kind of major restructuring in any of those areas.

I think we're just going through some unusual market dynamics, and we'll work our way through that.

And then just lastly, on Bell, the margins there.

You mentioned the specific issues around commercial after-market and so on.

Is the assumption that those are now finished, and so Q2 you should see a decent margin ramp off the Q1 margin level that you saw?

Or are they going to be similar?

The issue with respect to the systems transition in the first quarter was around commercial, and to some degree military spares, and certainly over the next couple of quarters those things will catch up.

There will continue, however, to be pressure on Bell in terms of margins, and that's driven by the fact that I think we'll continue to see growth in the commercial original equipment market.

And we will continue to have the same pressures that we saw in this quarter in terms of increased R&D spending associated with our new product programs.

So I don't think -- there's nothing that happened in the first quarter or any dynamics or changes that we see that are inconsistent with the guidance that we provided for Bell Helicopter for the year.

Got it.

Ron Epstein, Bank of America.

Scott, not to beat a dead horse, but back to Cessna.

What indicators would you need to see to -- you take the cost out of business, do the voluntary stuff, to start going the other way, what would give you the confidence to say, actually, things are getting better?

What would you need to see?

More customers signing the bottom line on a deal.

Right.

And you're -- the whole --

I don't mean to be trite, Ron, you know this is a tough situation, right?

But this is -- I want to be very clear, this is just our view of the market.

And as we went through the quarter, despite -- Ron, you've been in this game a long time as well, right?

You look at what's going on with used aircraft sales, you look at used available for sale, you look -- all of the corporate profits, you look at all of the -- what would be the leading indicators, and all those leading indicators would tell you this market's turning.

And yet we didn't see it turning.

And so I think that we have to face the facts and say, guys, it hasn't turned yet.

Now, I don't know, three months, six months, it's -- we can't guess.

The good news for us, if you want to look at it as good news, is we have the inventory.

So the material's there.

If in the next three months or six months or nine months, we start to see more demand, where those customers, particularly in that light side of the market are saying, okay, it's time for me to trade my aircraft.

And again, most of these guys now have had aircraft much longer than they usually have aircraft, but once we start to see that, we have the ability to react to that.

We have material in-house, we have the ability to do final assembly, we can put these things together, we can sell these aircraft.

So we won't change our strategy in terms of increasing our sales resource out there, so we're talking to these customers, we know what's going on, we know where they're at.

The only difference here is we are not going to try to go force deals.

We're going to let the market recover and want the deals to take place.

That makes sense.

Just another quick question.

So in the quarter, cash flow, you talked about it a little bit, I just want to see if I really understand what's going on.

So inventory went up, so a lot of the cash that was used at the quarter was just inventory at Cessna.

Is that right?

Actually, some at Cessna, really the big inventory build in the quarter was at Bell.

And that's really because of the original equipment -- obviously, we had a fair number of dollars here of spare parts that didn't get shipped, okay?

So there's a chunk of it that's just stuff that's sitting there that, as we put the new system in, just getting stuff shipped, built, and moved is an issue.

So that stuff's sitting inventory which should have translated into revenue, and that will happen here over the next couple of quarters.

But also the fact that we are ramping the number of commercial helicopters, and again, the market on the commercial side I think is strong.

I think we're going to continue to see good order and sales flow through the balance of the year.

And we had what is an unusually high amount of inventory build going into Bell, but it's mostly driven by -- again, some of it is sales that should have happened on the spare parts, but a fair chunk of it is just stuff that's now going to work in process that we'll sell out through commercial helicopters in the balance of the year.

Okay.

And maybe one more if I can, maybe a much bigger picture question.

And I'm not asking you for guidance for future years, because I know you can't do that.

But when you think about your plan for the Company, what if the bids that stay slow for a while, longer than anybody hopes, and you do get into an environment where V-22 numbers start coming down, right?

Because next multi-year is smaller, right?

Probably the same thing happens to H-1.

What do you do then?

How do you think about growing the business in that backdrop?

Obviously that's a challenge, right?

And I think if you look at Bell, '13 is quite solid '14 is quite solid.

It's really when you get into 2015 that we have this transition where you see the V-22 numbers coming down.

There's not a big transition to H-1 at that point, but part of it obviously is Bell on its own.

What are we doing in terms of driving growth on the commercial side?

The 525 program really kicks in, I think, and we'll start to see revenue generation and margin in the '16, '17 timeframe.

So I think Bell on its own can continue to be a Company, a business, that grows, but there's no question that '15 will be a challenging year for them, because you're really transitioning out of the V-22 volumes and you're not yet into the 525 volumes.

Now obviously, we're working hard on 412s, and you're looking at the 407s, a lot of the things we just announced is designed to drive commercial helicopter growth even before we get to the 525.

But there's no question that 2015 is a bit of a swing year in there for Bell.

On the Cessna front, I think we're in the fifth year -- it seems about 20, but it's -- I think we're in the fifth year of no growth in the business jet business.

We still have to believe this thing -- it is a real market.

It's a place that at some point needs to get back to growth.

And I think every market forecast would tell you that.

So does that not happen?

We thought surely that happens in ' 13.

If it doesn't happen by '15, I think again, that's way too far out for me to figure that out.

Obviously, with the block point stuff coming in here at the end of the year, we think we've done some revamps to the product line that will help us.

Also, by the way, when you get out to 2015, you've got the Latitude coming in, which is a fantastic new product.

And this is an industry where new products do tend to drive growth, so I think we'll see that.

So I think, as you say, it's too early certainly for us to even think about any kind of guidance in that range, but there are things that we're doing to try to drive growth through that 2015 around not just hoping the market does things, but also trying to do things in terms of new product.

That's probably all I can say about it at this point.

Yes.

Great.

Myles Walton, Deutsche Bank.

Just a clarification first, the couple hundred million, that's relatively isolated to the light market, sounds like, which just back of the envelope would look like a pretty significant 25% to 30% reduction year-on-year in your light market deliveries.

Is that about what you're looking at?

Ex-M2.

Yes.

That's probably about right.

Correct.

Ex-M2.

So at a high level, Scott, I'm sure you're getting tired of transition years at Cessna, so I'm curious.

Is this new look at production a different approach, a way to purposefully undershoot the demand curve, maybe claw back some pricing?

And is the market now rational enough without Hawker out there that you could do that, and this is actually maybe a positive?

Well, I am a believer in supply/demand.

And I think we are at a point here where we're going to try to have to rationalize that and make a better estimate of trying to match supply and demand.

I would say there's no question in my mind that, as we looked at the first quarter, our expectations for demand were nowhere near as strong as we thought they would be, and we had too much supply.

And when you have that situation, I don't think that's particularly healthy from a pricing perspective, so there's no question that this is an effort on our part to do a better job of matching up supply and demand.

My question is more about, are you trying to purposefully undershoot demand so that you can effectively take some medicine now, allow the absorption to happen, and then have a better profile going forward hopefully as the market rationalizes?

I think we're trying to match it.

If we go under it a little bit, I'm not sure that's all bad.

Okay.

All right.

That's it.

Jeff Sprague, Vertical Research.

Just a couple quick follow-ups to all this.

One of my questions is analogous to the prior question.

If we look at three years here in a row of 180 units plus or minus, and now we're going down, to what extent do you think the market actually was not allowed to clear over this timeframe?

Through the actions of yourself and others, on creative trade-ins and other things, can you actually -- I'm sure you understand the gist of the question, can you judge really the magnitude?

Or if that is in fact an issue, and there is a period of further burning off, maybe the overproduction, although it seems crazy to think 180 was overproduction, but burning off the overproduction of the last few years?

Jeff, obviously it's very hard to gauge that.

I don't think there's any question that the market was quite soft -- as you say, it's hard to believe that 180 is too much, right, from our standpoint.

And keep in mind, people don't -- you don't twist somebody's arm to buy a jet, right?

This is a significant capital outlay, so it's not like you force somebody to do it.

But I do think that, as a result of trying to sell aircraft, when you do have a little too much supply, you're going to do things from a pricing standpoint that probably you should not do.

And I think if you look at shares and whatnot have largely held steady through these phases.

And I think we're just at a point right now where, from my view, clearly we were going to have too much supply and that was going to create a lot of downward pressure on pricing in an industry that's already been a tough spot on pricing.

So to some degree say, okay guys, look, we just don't have this lined up right this year and we're going to make an adjustment.

So look, I don't want to be in a situation necessarily where if you have a customer that really wants to buy an aircraft that we don't have an aircraft available.

But on the other hand, I think we have to balance that with not having to go out and try to incent deals to happen that would not otherwise happen.

So it's very -- there's no facts in this, right, Jeff?

I do think we -- supply/demand is a very real thing, and I would probably say yes, there has been too much supply, not enormously too much supply probably, as these transactions happen.

But it looked to me like we're in a situation here where if we maintain the rates we have, we clearly are going to have too much supply.

Is the overhang from plunging Hawker used aircraft prices a big part of what's going on with your outlook for the year?

Or is that more just a headwind than issue around the edges?

I think the challenge for customers -- guys that are operating Hawker aircraft -- obviously at some point, these guys are going to trade those aircraft in and buy new aircraft, just like any model of aircraft.

There's nothing specific or unique going on there, but there's no question that, as I said earlier, if you look at what's happened to the residual values of some of those aircraft, that is creating a challenge for some of those customers.

Because that spread between what they can get for that used aircraft and what a new replacement is is greater, so I think that what we've seen in terms of those residual values is going to be, frankly, a long-term challenge for a lot of those customers, because their collateral is just worth less.

They are still going to want to upgrade, they are still going to do that over time, but it is going to put some financial pressure on them.

Right.

And then finally, just on FMS for V-22, obviously on the second model year, the margins to US DoD come down.

Should we assume FMS margins come down similar -- or obviously you haven't had an FMS sale yet.

But will FMS margins be similar to the new lower DoD margins, or will they be somewhere in between the new margins and maybe where you're running today?

Jeff, obviously, not having done one yet, we don't know for sure.

But my expectations is that these FMS deals would effectively looks like options exercised on top of the multi-year, so you would expect price and margin to be consistent with the current sales under the multi-year two program.

Okay.

All right.

All right, ladies and gentlemen, that brings us to a wrap on the hour.

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