達信公司 (TXT) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's conference is being recorded.

I'd now like to turn the conference over to Doug Wilburne, Vice President of Investor Relations.

Please go ahead.

Thank you, Gail.

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.

Textron's revenues in the quarter were $4.1 billion, up $590 million from last year's fourth quarter.

The Beechcraft acquisition completed at the end of the first quarter contributed $556 million to the increase.

Income from continuing operations was $0.76 per share, compared to $0.60 in the fourth quarter of 2013.

Textron Aviation operating results included an $8 million reduction to segment profit from fair value step-up adjustments to acquire Beechcraft inventories sold during the quarter.

Plus, there was an additional $13 million charge in the quarter related to Beechcraft restructuring costs, which were recorded on a separate line for acquisition and restructuring costs.

Together these items reduced EPS by about $0.05 per share.

Manufacturing cash flow before pension contributions was $449 million, compared to $774 million in last year's fourth quarter, bringing full-year cash in-flow to $753 million, compared to $256 million last year.

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

Thanks, Doug, and good morning, everybody.

Revenues were up 16.8% in the quarter, reflecting the success of our strategy of investing in new products and complementary acquisitions.

For example, at Industrial, we saw an 11.5% increase in revenues, reflected across all of our businesses, as well as the impact of TUG Technologies, Dixie Chopper and HD Electric acquisitions.

Most recently in our specialized vehicles group, we purchased Douglas Equipment, a European-based ground support business.

Douglas augments our largely North American TUG business with an international footprint and expands our product portfolio to better serve the aviation ground support market.

On the new product front, at tools and tests we introduced a number of new products during the quarter, including a new line of mini fiber tools for working on fiber-optic communications facilities and a new 6-ton pistol grip intelligent electric utility crimping tool.

At Caltex we continue to win significant new automotive systems contracts around the world, which we expect will support growth over the next several years.

Operating performance was also a bright spot for us at Industrial in the quarter, contributing to a full-year margin expansion of 40 basis points.

We expect continued margin expansion in 2015.

Moving to Systems, revenues were up in the quarter as we began deliveries of the TCDL Shadow V2 systems.

We also made good progress on our Canadian TAPV program, having incorporated necessary design changes, and have started initial reliability testing of the vehicle.

We believe we're on track to proceed to full program testing in the second quarter, with initial deliveries still planned for late this year.

At True Simulation and Training we signed a number of air transport simulator agreements in the quarter and announced plans for a new Cessna and Beechcraft aircraft maintenance training facility in Wichita.

In our Bell segment, revenues were down as we delivered 7 V-22s compared to 13 in last year's fourth quarter, reflecting the start of lower deliveries called for in the Multi-year II program.

We also delivered seven H1s, up one unit from last year's fourth quarter.

On the commercial side we delivered 57 aircraft, down from 75 a year ago.

Despite lower Bell volumes, fourth quarter margins were up 70 basis points from last year, reflecting good cost performance.

While we've seen a slowdown in the commercial helicopter market, our commercial win rate continues to improve around the world.

For example, we continued to expand our presence in China, as evidenced by our success at the Zhuhai, China Airshow in November, where we signed customer letters of intent for 61 new helicopters.

We continue to make progress on development of our 525 Relentless program, as we are well into our safety of flight testing on the aircraft's rotor system and gearboxes.

Results of those tests have been encouraging and we expect first flight later this spring.

Development of our 505 Jet Ranger X program is also proceeding well, as we conducted a successful first flight in November.

These two new platforms are expected to provide differentiated appeal to customers at both ends of our product spectrum and should create significant growth opportunities for years to come.

On the military side at Bell, the V-22 reached 250,000 flight hours during the quarter.

The aircraft is performing very well for our customers, achieving outstanding mission success in deployments throughout Afghanistan, the Persian Gulf, the Mediterranean, Africa and the Asia-Pacific region.

The Osprey continues to demonstrate a wide range of mission capabilities and is attracting attention from customers around the world.

Most recently, Japan has indicated that it has provided for the first 5 of its 17-unit requirement in their 2015 budget.

They are currently working with the US government to negotiate a contract and delivery plan for these aircraft.

Moving to Textron Aviation, in the quarter we delivered 55 jets, down from 62 last year.

For the full year we delivered 159 jets, up from last year's 139 jets.

We also delivered 41 King Airs in the quarter, bringing post-acquisition deliveries to 113.

The integration of Beechcraft continues to go extremely well, which is evident in our cross-productivity, as Textron Aviation achieved full-year margins of 5.1%, about 200 basis points higher than the midpoint of our initial guidance.

We've been actively working with our new Hawker customers this past year, ensuring that they understand our commitment to support their aircraft.

During the quarter we also made progress internationally, as we opened a new larger combined Hawker, Beechcraft and Cessna service center at our flagship European maintenance location at the Paris-Le Bourget Airport.

In addition, we delivered the first two XLS aircraft through our Chinese joint venture in Zhuhai.

Development of our new Latitude continues to go well, as we've now accumulated 500 test flights, generating 1,200 test hours.

Customer response to Latitude continues to be positive following its debut at NBAA.

Customers in North America are currently flying demo flights and they're impressed with the spacious stand-up cabin and 2,700 nautical mile range the Latitude offers.

We expect Latitude deliveries will begin in the second half of this year.

On the market front, new jet customer interest and inquiry activity has been noticeably better than a year ago.

We're also encouraged the availability of used aircraft continues to come down, which is resulting in used aircraft moving fairly quickly and a stabilization of residual values, especially for used aircraft with low hours.

On balance, we believe our best path forward at this point is to remain conservative with respect to increasing production and to continue on our path to new product developments.

To summarize, we believe we ended the year with strong EPS and cash flow performance.

And throughout the year we took action that should position our businesses for continued growth over the next several years.

Textron Systems began deliveries of the TCDL V2 system retrofit program and made good progress in getting the Canadian TAPV program back on track.

We advanced our Ship to Shore program and began initial production activity to support first delivery plan for 2017.

We also signed additional international contracts for Sensor Fuzed weapons that we expect will support production at current levels through 2016.

And we're gaining traction with some of our new product platforms, such as the unmanned naval mine detection system, for which we won an initial US Navy contract in October.

At Industrial, our double-digit top-line growth for the year reflects our continuing investment in new products, such as the new all-electric Bad Boy Recoil IS hunting vehicle at specialized vehicles, and the DataScout 10G ethernet network analyzer at tools and tests.

Industrial's growth was also the result of ongoing acquisitions, which demonstrates our ability to leverage these businesses for growth and long-term shareholder value.

At Bell we continued to improve our win rate in the commercial helicopter markets based on attractiveness of our new and upgraded products, our industry-leading after-market support and our expanding sales presence around the world.

We're also winning on the military side as, we were included among the finalists to proceed with our V-280 platform for the US DoD's Future Vertical Lift program.

We also made good progress with our cost structure, as we prepared for the ramp-down in military production of the V-22.

Looking at 2015, Bell top line will be down overall, but we expect commercial to grow based on what we were seeing in the customer pipeline and market opportunities for the year.

We expect Bell to return to overall top-line growth in 2016 and 2017, with the introduction of the new 505 and 525 models.

At Textron Aviation we brought the Hawker, Beechcraft and Cessna brands under one roof, allowing us to offer a much wider array of products and services to our customers, while significantly improving cost productivity.

Looking at 2015, we anticipate moderate growth driven by our new product strategy and the Beech acquisition.

To finish with Textron's 2015 financial guidance, we're projecting revenues of about $14.4 billion, with EPS from continuing operations in a range of $2.30 to $2.50.

Manufacturing cash flow before pension contributions is expected to be in the range of $550 million to $650 million.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $398 million, up $91 million from the fourth quarter of 2013 on a $590 million increase in revenues.

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

At Textron Aviation, revenues were up $597 million from this period last year, reflecting a $556 million impact from the Beechcraft acquisition, higher volumes and favorable mix.

The segment had a profit of $130 million compared to $33 million at the Cessna segment a year ago.

This reflected improved performance, including the impact of the Beechcraft acquisition and favorable volume, mix and pricing.

Backlog in the segment ended the quarter at $1.4 billion, approximately flat with the end of the third quarter.

Moving to Bell, revenues were down $304 million, reflecting lower V-22 and commercial deliveries.

Segment profit decreased $32 million from the fourth quarter in 2013, primarily reflecting the lower volumes, partially offset by favorable performance.

At Textron Systems, revenues were up $212 million, reflecting higher unmanned systems volumes and the impact of acquisitions, partially offset by lower Marine and Land System volumes.

Segment profit was up $10 million, reflecting the higher volumes.

Industrial revenues increased $89 million due to higher overall volumes and the impact of acquisitions, partially offset by an unfavorable impact from foreign exchange.

Segment profit increased $13 million, reflecting favorable performance and the impact of higher volumes.

Finance segment revenues decreased $4 million and profit increased $3 million.

Non-accrual accounts ended the quarter at $81 million, down $21 million from the end of the third quarter, while 60-day delinquencies were $57 million, down $13 million in the quarter.

Moving below the segment profit line, corporate expenses were $58 million and our tax rate was 25.8%.

The fourth-quarter tax rate benefited from the US R&D tax credit law passed late in the quarter, as well as increased profits in international jurisdictions with lower tax rates.

Interest expense was $40 million, up from $27 million a year ago, primarily reflecting debt costs related to the Beechcraft acquisition financing.

During the quarter, we issued $350 million in notes at an effective rate of 3.9%, and implemented an early redemption of $350 million of existing 6.2% notes that were coming due in March of this year.

We also repurchased 545,000 of our shares at an overall cost of about $21 million.

For the full year, we repurchased about 8.9 million shares at an overall cost of about $340 million.

At the end of the year, with $3.1 billion in total Company net debt, with gross manufacturing debt of $2.8 billion, resulting in a year-end manufacturing debt to EBITDA multiple of about 2 times.

The work we've been doing over the past several years to strengthen our businesses and our balance sheet was recognized earlier this month by S&P with a credit rating upgrade to mid-BBB, which is consistent with our targeted rating.

Turning now to our 2015 guidance, beginning with our segments on slide 9, Textron Aviation, we're expecting about 9% revenue growth, bringing revenues to about $5 billion, reflecting our new product strategy and the additional 2.5 months of revenue from the Beechcraft acquisition.

Segment margins are expected to be in the range of 6.5% to 7.5%, about 200 basis points higher than 2014 at the midpoint.

This includes $13 million in remaining Beechcraft fair value step-up adjustments for 2015.

At Bell, we expect overall revenues of about $4 billion, reflecting an approximate $600 million decline in military revenues, partially offset by higher commercial revenues with expected margins in the range of 11% to 12%.

At Systems, we're estimating revenues of about $1.7 billion, approximately 5% higher than last year, primarily due to growth at Marine and Land and True Simulation and Training.

Segment margins are expected to be in the range of 8.5% to 9.5%.

At Industrial, we're expecting solid growth in each of our businesses, resulting in 8% segment revenue growth to about $3.6 billion, with estimated margins in the range of 8.5% to 9%.

At Finance, we are forecasting segment profit in the range of $10 million to $15 million.

Turning to slide 10, we are estimating 2015 pension cost will be about $150 million, up from $128 million for 2014.

This reflects a US planned discount rate of 4.25%, 75 basis points lower than last year, the new mortality tables and the impact of the Beechcraft acquisition.

However, we estimate that the P&L impact is relatively neutral on a year-over-year basis.

Turning to slide 11, R&D is expected to be approximately $600 million, up from $556 million in 2014, representing approximately 4.2% of sales.

We're estimating CapEx will be about $475 million, up from last year's capital expenditure of $429 million, reflecting our investment in new products and geographic expansion.

Moving below the segment line and looking at slide 12, we're projecting about $175 million for corporate expense.

2015 interest expense is estimated at $135 million, reflecting the favorable rate from our fourth-quarter refinancing activity and lower interest costs related to the Beechcraft acquisition financings.

We're assuming a tax rate of about 30%, and a flat share count of about 280 million shares, reflecting share repurchase to offset dilution.

That concludes our prepared remarks.

So operator, we can open the line for questions.

(Operator Instructions)

Our first question comes from Sam Pearlstein with Wells Fargo.

Please go ahead.

Good morning.

Good morning.

Good morning.

Can you talk about -- I guess oil prices is just something you talked about commercial helicopter growth.

First piece is, how is that affecting in Bell?

And then secondly, if you can talk a little bit about how that's impacting Caltex since I would presume you're going to get lower commodity cost, bust also have a little more FX situation there.

So Sam, in terms of the Bell, it's sort of at the margins.

As you know, we probably are less than 10% of our commercial helicopters in the oil and gas market.

Frankly, that's a number we'd like to see higher.

That's part of the rational for the investment in the 525, because I do think over time that will continue to be a large market segment that we would like to participate in a bigger way.

But at this point, it's a fairly small piece.

Most of our aircraft are in service in that market, are still flying to a lot of the Gulf of Mexico rigs and things like that.

So I think there's probably some softness in the exploration world.

But in terms of our customers operating the aircraft under contract to the existing operating rigs, we haven't seen really any material change in that.

In terms of what it means from a commodity cost standpoint, most of the contracts that we have in the automotive world, we largely pass through increases and decreases on commodities.

So I don't expect it to be a big swinger one way or the other.

Thanks.

And then just if I could follow up, Bell and aviation, if I look relative to what you said revenues would look like back in October versus what they were now, seemed like a shift.

Did any of that shift to 2015?

Or can you talk a little bit about what happened on the top line with those?

I think if you look at Bell, certainly the commercial market was softer than we expected earlier in the year, and so that accounts for the bulk of the lower revenues at Bell.

As I said earlier, I do expect to see some pick-up.

There's not specific things necessarily that carry over from quarter to quarter, but there certainly are a number of opportunities in the marketplace that we feel we're likely to win that would help us see a slight uptick in commercial activity in 2015 versus 2014.

And then on the Systems front, the big impact really for us on the year was the TAPV program which moved from 2014 to 2015.

So we'll start deliveries of those systems in the latter part of this year.

Thank you.

And we'll go to Robert Stallard with Royal Bank of Canada.

Please go ahead.

Thanks very much.

Good morning.

Good morning.

Scott, from what you said, it looks like the business jet environment has turned the corner.

Looking forward, how long will it probably require for you to see some decent order intake before you'd start contemplating rate increases?

You know, Rob, obviously this is something we kind of look at on a month-to-month basis.

At this point, clearly if the order rate did increase and things did get appreciably stronger, we could make some adjustments that would increase our production rates in the latter part of the year still at this point.

But that's really something we look at on an month-to-month basis, based on real realized orders.

So it's certainly better, as we said.

The amount of activity -- the first quarter is never, early in the year, necessarily a strong time in terms of orders.

But the reality is, a lot of the customer conversations and demos and activity that we saw in the latter part of last year that led to good orders, seems to be continuing into the first part of this year.

So we definitely feel good about where it is versus a year ago.

But we'll probably delay here in terms of making any commitments to increase any kind of production rates until we see more of those orders actually fall into the backlog.

Thanks.

And as a follow-up, one of your competitors decided to pause development of one of their models.

Do you see this as specific to the model they're working on?

Or reflective of the broader market?

Well, Rob, I think the fact that this is a very competitive segment of the market.

If you've got to make calls in terms of your prioritization, it doesn't surprise me that that's the one that you would prioritize out.

Great, thanks.

We'll go to Jason Gursky with Citi.

Please go ahead.

Good morning, everyone.

Good morning.

Scott, I was wondering if you could just talk about the portfolio, broadly speaking, and your view on the outlook for the need to add or subtract from the portfolio and your view on the acquisition outlook and pipeline going forward.

Sure.

Look, that's a very dynamic thing, right?

We keep an eye out across all of the businesses and look for opportunities that we think are deals that we can do, that we can make highly accretive and bring a lot of value and good leverage into the Company.

So clearly if you look back at 2014, the Beechcraft deal was obviously a sizable deal.

There's not a lot of those kind of deals that are out there, but that's one that we looked at and said we think we can acquire that and integrate it and make it be good for the customers and good for our shareholders.

And I think that worked.

Obviously in a smaller way, in terms of the magnitude of the size of the deals, over the last couple years the TUG Technologies of the world and the Sherman & Reillys and the acquisitions of our simulator businesses, I think these are deals that have been good deals.

They're performing at or above our expectations and I think are bringing good value to the overall Company.

So we'll keep an eye out on all fronts.

We don't feel like we're under any pressure to have to go do any deal.

Most of our focus, on a day-to-day basis with our businesses, is very organically focused and around developing new products.

But if something comes along looks like it makes sense, we'll always take a look.

Great, thanks.

We'll go to Cai von Rumohr with Cowen.

Please go ahead.

Yes, thanks so much.

You mentioned that you expect Latitude deliveries in the second half.

My recollection is you were expecting them before mid-year.

Has that slipped at all?

Maybe also give us an update on your larger plane, the Longitude.

Sure, Cai, I think we've talked certification -- it could happen here in the second quarter.

I think we're still on track for that.

The program's going very well.

There have been no issues, technical or otherwise.

The aircraft is flying great.

We're working our way through the test programs.

The search schedule seems to be going very well.

But getting all the T's crossed and the I's dotted, and when that happens in the quarter I think at this point, we'd say that means that likely if you get a second-quarter cert, you're probably going to have third-quarter deliveries.

If things go really well, could we pull an aircraft or two end of the quarter?

That's, I guess, possible.

At this point, our experience on getting through the final cert, just getting through the paperwork process, is not always easy.

So, we'll keep working her hard.

But the program is in great shape.

It's going as we expected and we're really pleased with it.

In terms of Longitude, that program is ramping up pretty significantly.

Teams are actively working.

We think we know what the configuration of the aircraft is based on a lot of work with customers and where we are.

So you'll see that really started ramping up in the latter part of last year and through all this year.

Okay.

And could you give us any more color on new products in the aviation sector?

Like when is Longitude going to come?

And do you have any other introductions we might see in the next year?

Nothing that we're prepared to announce at this time.

I do think, Cai, that you will see a debut of the Longitude sometime in the not-too-distant future.

Got it, okay.

Thank you very much.

Go to Noah Poponak with Goldman Sachs.

Please go ahead.

Hi, good morning, everyone.

Good morning.

Going back to the topic of the pulse you're keeping on Cessna production and the overall health of the business jet market, can you update us on whether or not lead times have extended for your customers since your October update?

Or how far sold out you are?

And then what that number needs to be?

I think in the past you've said you wouldn't let a customer wait nine months.

Just trying to see how close we are to getting to that point.

Well, Noah, it's a tough question to ask.

It really does vary model by model.

We have some where, again, we had customers that some would have liked probably a fourth-quarter delivery that have moved out into the first part of this year because we did get to that sold-out point on some of those aircraft.

Generally speaking, as I've said, we'd like to be in that six to nine month.

Clearly that's not where the business is right now.

Some models are selling fairly strong into future quarters, and others you still have availability that's within a quarter.

Obviously when you talk about new products like a Latitude, there's order book on that.

That's gated obviously by getting through certification and first delivery.

Okay.

I'd still, as I said, I'd love to see every model sitting in that six-month or so timeframe, and they're not.

But I think the momentum in that direction certainly has improved over the past six months.

I know it's a pretty short period of time, but it sounds like that hasn't really extended from your third-quarter update.

It has on a couple models.

There's still some models that are available for sale within a quarter.

And do you have a projection for how many Latitudes you'll deliver this year?

We don't.

Okay.

And can I ask you that same question on Bell commercial units?

We're not putting a specific number out on the Bell commercial units, Noah, but I would say it would be up modestly from the deliveries in 2014.

Okay.

Pretty much across the product line in terms of different models.

Okay.

And has anything improved there from an end-market perspective?

Or did you just get a little bit easier comparison?

Has anything changed there?

No, I think it's a market that, honestly, we don't really know what has driven lot of the slowdown.

But people have been a little slower to commit capital, but the deals are still being talked about.

So it's not like we had back in the business jet days where things really just came to an absolute screeching halt.

So while we're certainly disappointed with the rate of order intake and sales in 2014, opportunities are out there and discussions are happening.

I think there's still deals that are going to be done.

And a lot of those, I think for whatever reasons, appear to have been delayed from 2014.

I certainly don't think all of them are going to come through, but our expectation certainly is there will be more order activity in 2015 than we saw in 2014.

Okay, thanks very much.

We'll did to Sheila Kahyaoglu with Jefferies.

Please go ahead.

Hi, good morning.

Thanks.

In terms of Textron Aviation margins into 2015, given your underlying margin rate was about 8% in the second half, how do we think about mix and price and R&D heading into next year?

I think, Sheila, we think about price next year as probably being very slightly improved from 2014.

Mix will probably be fairly similar.

We already shifted in 2014 to a higher ASP, larger aircraft, which we saw versus 2013.

In terms of margin, I think we're expecting, obviously, to see good conversion on leverage.

Don't forget, we have almost a full first quarter of the Beech acquisition, which was not in 2014.

So there's almost a quarter's worth of the Beech acquisition that doesn't bring with it that increased leverage in terms of volume.

But if you back that out, overall I think we feel pretty good about where the margins are going.

And we'll probably see mid-20%s conversion on the stuff that's really true volume growth in 2015 versus 2014.

Got it.

And then on cash flow, looking into 2015 again, what are the working capital assumptions on that $550 million to $650 million guidance?

And what are you assuming happens to inventories at Bell and Cessna?

Then just a quick follow-up on the capital allocation question asked before.

I think you had a small bolt-on in the interiors, for an interiors business, in aviation last week.

Can you maybe talk about how you're thinking about for 2015, the allocation of buybacks versus additional deals?

Sure.

In terms of Bell, we're certainly going to see some pressure around buildup of 505 and 525 as we get into the latter part of the year.

So that will pressure somewhat some of our working capital, specifically at Bell.

In terms of the bolt-on deal, it was a UTX business that's been doing all the interiors for our aircraft for some time.

It's basically almost entirely our shop.

Really, they did a little bit of work for Bombardier, but most of the work was for Cessna.

And we felt we could drive better productivity and better integration, frankly, with our manufacturing lines if it was something that we picked up.

It's an asset that they were interested in disposing of, so I think we came to good terms that were good for both Companies.

It gives us a little more control over what's a very important part of the customer experience, in terms of the interiors of the aircraft.

So it's a relatively small deal, but I think a good deal for us both financially, as well as just making it better integrated with our overall manufacturing operations for our aircraft.

In terms of the capital allocation, Sheila, we'll continue to focus on committing, as a minimum, stock buyback to prevent the dilution of employee programs.

So we're committed to do that.

As you know, we'll always keep an eye out for acquisition activity.

From a stock buyback standpoint, if we think there's opportunistic points in time through the course of the year to do additional buybacks, then we'll certainly do that if we think it makes sense.

Great, thanks.

Julian Mitchell with Credit Suisse.

Please go ahead.

Thank you.

Just a question on the balance sheet and the target leverage.

I think, Frank, you'd said that the rating you now have from the agencies is what you're looking for.

Where do you feel the optimal leverage is?

And circling back to Scott, when you talk about you're looking opportunistically on buyback or M&A, again, what size of capacity do you think you have over the balance of this year to use that leverage?

So from a leverage standpoint, as I indicated, we're around the area that we're comfortable at.

We think about it as 2 to 2.5 times debt to EBITDA against manufacturing debt levels.

And that's where we've gotten to.

So we may pay down a little bit more of the debt associated with the Beechcraft acquisition here, but we feel pretty comfortable with our overall debt levels.

I think in terms of acquisition capacity, it really obviously depends on the transaction.

I think we demonstrated that we had capacity with the Beechcraft acquisition, obviously.

To do something that was meaningful for the corporation, to do it with all debt, and bring it in, drive the synergies out of it and deleverage relatively quickly some of that debt through our performance.

So it will be very deal-specific.

We don't feel like we are constrained relative to the types of things that we think about as being potentially available out there in the marketplace.

And we would obviously finance anything appropriately to maintain the type of leverage levels that we're talking about and targeted rating categories.

Thanks.

And then for Scott on Bell, the guidance for 2015.

I think your guidance implies at the midpoint a mid-, high-20s decremental margin.

Maybe give a little bit of color on how the fixed cost base at Bell, where you are on the reductions there.

And also, what the impact of the ERP roll-out is on the margins in 2015 and maybe further out, please.

So I think if you look at the cost activities, we've taken some pretty major restructurings over the last year and a half or so, to align the business with where we expect to be, particularly driven by the known volume around V-22.

I think we're largely there.

We're always going to continue to look at cost and further cost reduction programs.

So I think in terms of what we set out to do, knowing what was going on with V-22, we're there.

Now obviously, we're going to continue to watch the commercial market and any further softness or impact or not meeting expectations around commercial, would lead us have to do more around cost reduction.

So I think we've demonstrated that we can do what we need to do to structure the cost of the business appropriately.

And if volume further adjusts, then we'll further adjust costs.

And on the ERP, what the effect on margins year on year is this year.

So the ERP, the impact at this point, is probably largely behind us.

We did have a headwind obviously in 2014 as a result of a lot of the inventory that was built and cost that was inventoried through that process.

So at this stage of the game most of that is largely unwound.

The system is working.

It continues to improve.

It was a painful process, but I think we ended up in a better place.

So at this point, from an accounting standpoint, most of those headwinds associated with that really played itself out through 2014.

So that helps us a bit as we head into 2015.

Great, thank you very much.

Our next question comes from Joe Nadol with JPMorgan.

Please go ahead.

Thanks, good morning.

Starting on Bell, the margin was quite strong in the quarter.

It's better than it's been for a couple of years.

Is that some of the ERP wearing off?

I would have thought that the mix in Q4 with V-22 coming down would've hurt you a little bit.

But just looking sequentially, you had a good quarter.

It did, Joe.

Clearly the cost reduction activity is working.

We did start to see less of the drag, I suppose, of the ERP activity.

Keep in mind, we did have somewhat higher deliveries of V-22 than we expect to see on a quarter-by-quarter basis going forward, because you still had a little bit left of the original Multi-year and then the last deliveries under the Multi-year II.

In general, I think what you saw was just strong performance by the business, largely driven by the cost activities that they've taken over the last couple years.

Okay.

And then on the commercial front, just to push on that one more time, because it does seem at odds in terms of the outlook for growth.

Odds with what we've seen from you guys this year, what we've been hearing from you and also some of your competitors.

Is this fleet bids that are out in the marketplace that give you some confidence?

Is it one-off or twosies and threesies kind of small business orders?

Is it US?

Is it international?

Where are you seeing a pickup in activity?

It's sort of all of the above, Joe.

Obviously the fleet deals can move the needle on these things when you get a quantity buy.

But it really is across the board.

There's cases of two or three 412s here, two or three 412s there, which are meaningful opportunities for us.

Finally, on the aviation margin front, a real bounce-back year obviously.

You talked about some of the -- we know some of the positives coming into 2015.

You obviously beat your guidance in 2014 by a pretty significant amount.

If I were to pose it this way, what's going to prevent you from beating it by a couple hundred basis points again in 2015?

What were the pressures you're seeing?

What would you say?

Largely the reason we had such an outperform versus our guidance this year was that a lot of the synergies that we expected to get in the Beechcraft deal happened.

And they happened quicker than we would have had in our plans.

So we realized an awful lot of that into this year.

There's clearly some knock-on benefit of that as we go into 2015.

As we've said, there's other projects and programs this coming year, although we tend to put the cost and the benefit wash in 2015.

But I think the team just -- they beat because they got to the synergy levels, to that run rate faster than was in the plan.

Okay, all right.

Thank you.

We'll move on to Myles Walton with Deutsche Bank.

Please go ahead.

Thanks, good morning.

I was wondering with respect to R&D in the slides you point out, this might be more of a correction for Beechcraft, the $556 million full-year R&D.

And I think if you go back to last year, you expected it to be about $490 million.

Is the delta there Beechcraft or is it broader than that?

No, it's largely driven by the -- the original guidance didn't have the Beechcraft deal in there, so it's large driven by Beechcraft incrementals.

Okay.

And the other clarification, I guess to Joe's question maybe, on when you close out the Multi-year on V-22 in the quarter, did you have a significant positive EAC that helped the margins at Bell?

We did have an EAC that reflected part of the wind-down of the Multi-year.

But it put you back on trend of the last couple quarters?

I think if you look at the total EAC adjustments in the quarter, and obviously you'll see this data for the total business, it wasn't inconsistent, really, with a typical quarter for us.

And then the last one, within Cessna, the mature programs versus new programs, XLS.

Is that softness there mostly attributable to the coming of the Latitude?

What are you broadly seeing between mature and new programs in 2015 in terms of delivery mix?

I would say fairly balanced.

Obviously the Latitude will give us a little bit of an uptick on the new product front.

XLS is not particularly soft.

I think that's a market.

If you look at those two aircraft you've got a significant range difference with the Latitude at 2,700, versus an XLS at around I want to say 2,000 to 2,100.

I'll just go off memory here.

And clearly a very different price point.

So it's cabin size, range, all those things that generally drive differentiation between aircraft.

There's a pretty big spread between an XLS and a Latitude in terms of its performance and cabin size and as a result, correlation in price.

So we really don't see the Latitude as eating into much of the XLS market segment.

All right, thanks.

Sure.

Our next question is from George Shapiro with Shapiro Research.

Please go ahead.

Yes.

I wonder if you might break out -- you said the book-to-bill at aviation was about 1. Scott, I was wondering if you could break out what it would have been if we took out the defense piece of Beech as well as the turbo prop, so we just looked at the jet business.

George, all the backlog will be reported just as a single number.

But to your point, there's going to be volatility, obviously, from quarter to quarter, depending on what's going on in the market.

And we had T6 orders in the quarter, for instance, with Mexico, which you saw.

But we also had T6L in the quarter.

We're not going to break that number out.

It's just going to be a single backlog number for the aviation segment.

Okay.

And then if I looked at the incremental margin, tried to make some estimates for what it would be just at Cessna by itself, Scott, it's probably around 50%.

And if I look at your guidance for 2015, between the high and the low, the incremental range is from 21% to 33%.

So to your point the midpoint's in the mid 20%s.

Can you walk through the drivers for the 21% to 33% next year and what doesn't recur in this quarter with what looks like 50%?

I recognize part of it is I'm taking out Beech and Beech is in your numbers for next year.

Yes, George.

I want to make sure I follow along.

So when we look at leverage on a incremental, which is how we generally look at it, we've been sitting in that -- actually it was pretty high from Q2 to Q3.

It was lower Q3 to Q4.

We always have again, that volatility.

We have more cost around SG&A in Q4 with the NBAAs.

And again, a lot of ramp on the R&D side, particularly on Longitude, obviously continue the flight testing on Latitude.

We try to look at this on a total year-over-year basis.

If you look at our guidance for next year and you back out the incrementals of the first quarter of Beechcraft, which is additive I would I say, as opposed to leveraged.

We still think, as we've always said, that we're going to probably sit somewhere in that mid-20%s of leverage on the volume.

And it's pretty much across the whole product line.

It's not particularly mix-sensitive.

Our gross margins are pretty good across the whole line of product.

So I think the midpoint of where we are looks at about a 25% leverage on that incremental volume on a year-over-year basis.

Okay, thanks very much.

Okay.

Go to Ron Epstein with Bank of America.

Please go ahead.

Good morning, guys.

Maybe changing gears just a little bit.

Scott, there's been a bunch of press lately -- not a bunch -- but some press lately about potential Scorpion deals with the UAE, maybe even Nigeria.

I was wondering if you can give us any color, broadly speaking, on what's going on with that program and international interest.

There's still significant international interest.

We have conversations ongoing with several customers.

There's starting to be some reasonable RFI and RFP formal activity of countries that are looking at replacing the exact kinds of aircraft that we anticipated this aircraft would address, in terms of the market.

So we feel pretty good about that.

Part of the uptick obviously, in R&D, as we go in to 2015, is that we've had a very successful series of flight test programs through 2014, some good customer demos and the debut of the aircraft at Farnborough and RIAT.

We certainly expect that stuff to continue in 2015 and we'll be at a point now where we expect to be responding formally to some customers' RFPs.

We are proceeding with the manufacture of the first conforming aircraft so that we're ready to enter into certification testing.

That's why you see a little bit -- part of the increase in R&D from the overall Company standpoint, reflects our commitment to move forward on the program.

Okay, great.

Then just one more broad one on the biz jet market.

Given some of the troubles that your competitor to the north has had, you've seen the Lear 85 get paused, whatever that means.

So that's, I guess, out of the market for a while.

Have you seen much irrational competition, given that there's some discussion that Bombardier needs to generate cash?

Well, you know, look, our sales force will always tell you it's always the other guy that's being irrational, of course.

This is just the nature of selling.

We think we've seen some tough pricing in some places.

But frankly, over the last year or so I would say, there's been stabilization.

Each of the products that's out there in the marketplace has achieved a price point.

As I said, I think that's been pretty stable over the last year or so.

We'd like to see it higher, obviously, but it's a competitive marketplace.

Okay, great.

Thank you.

And our final question will come from Pete Skibitski with Drexel Hamilton.

Please go ahead.

Good morning, guys.

Scott, I want to follow up on the Citation XLS again one more time.

Deliveries were down pretty sharply this year, especially in the fourth quarter.

Did that surprise you, I guess, is my question.

And just directionally into 2015, are we a at a new lower level now?

Or maybe is China going to help pick that up?

Well, we saw the first couple of XLSs into China, obviously.

I do think overall our year in 2014 was skewed towards the new products, like the new Sovereign+ being out there, the X+ being out there.

And so I think that had clearly some influence on the market.

But I would expect XLS+, again, the demand we see, it should be pretty stable.

Okay.

And then just the last one, can you give a sense of what Cessna after-market grew in 2014?

And 2015 expectations?

I expect our after-market businesses are growing around mid single-digits and I would expect that that's where they'll continue to be.

Okay, thank you.

Sure.

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Gail, if you'll share the replay information, we'd appreciate that.

Good day.

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