達信公司 (TXT) 2015 Q2 法說會逐字稿

Welcome to the Textron second-quarter earnings call.

(Operator Instructions)

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

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

Thanks, Justin.

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 Relation's section of our website.

Texton's revenues in the quarter were $3.2 billion, down $258 million from last year's second quarter.

Income from continuing operations was $0.60 per share, up from $0.51 in the second quarter of 2014.

Textron Aviation operating results included a $6 million reduction to segment profit from fair value step-up adjustments to acquire Beechcraft inventories sold during the quarter.

Manufacturing cash flow, before pension contributions of $14 million, was $106 million compared to $270 million in last year's second quarter.

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

Thanks, Doug.

Good morning, everybody.

Revenues were up in Systems and Industrial, but down at Bell and Textron Aviation, which led to an overall 7.3% decrease in Manufacturing revenues in the quarter.

Manufacturing segment profit was approximately flat year-over-year, reflecting good margin results at Aviation, Bell and Industrial, despite the decline in revenue.

At Bell, the decline in revenues was primarily due to lower volume in our V-22 program, where we delivered 6 V-22's, down from 10 aircraft a year ago.

We also delivered 6 H-1 aircraft, down from 8 units in last year's second quarter, but still expect to deliver about 25 units for the full year.

On the commercial side, we delivered 39 aircraft, down from 46 a year ago.

During the quarter, consistent with our previous announcement, we took -- we reduced our commercial production levels and took cost action.

This should allow us to perform within our full-year segment margin guidance range, despite a lower production rate and lower expected delivery volumes.

Commercial helicopter markets remain challenging, primarily in the medium segment.

But Bell's win rate continues to improve; so we still expect that commercial deliveries will be up modestly for the year.

On the new product front, the 525 Relentless made its first flight on July 1, marking an important milestone in bringing this helicopter to market.

Customer anticipation in this new platform remains strong, as we received LOI's for an additional 30 525's during the quarter.

There have also been a number of recent positive Foreign Military developments with Bell.

In July, we received our first FMS order for V-22 in a contract with Japan, to deliver the first 5 of 17 expected total units.

These five units represent options exercised under the existing US multi-year contract and will be incremental to our V-22 delivery schedule in 2018.

We expect a follow-on order for the remaining 21 -- or 12 units, which will be part of a future contract with the US government.

Earlier this month, Bell was selected by Japan to team with Fuji Heavy Industries for Japan's UH-X program to replace its aging fleet of Hueys.

The program calls for delivery of 150 transport aircraft based on the militarized version of our 412EPI model, with scheduled deliveries of -- over from 20 years beginning in 2021.

This agreement is a very positive development for the supporting our 412 platform, well into the future.

So in summary, we believe the growth outlook at Bell over the years remains strong, driven by our expanded global sales efforts, continuing commercial product upgrades, new products on the way and Foreign Military Sales opportunities.

Moving to Systems.

As expected, margins were down in the quarter, primarily driven by a change in product mix.

At TMLS, we continued to make good progress on our Canadian TAPV program.

The final testing scheduled to begin next month; so we're still on track for initial deliveries in the fourth quarter.

At Unmanned Systems, our fee-for-service platforms are performing well.

We've been awarded additional customer Task Orders based on this positive performance.

At TRU Simulation + Training, we received certification and have begun customer pilot training in our new Tampa facility.

Looking forward at Systems, we expect an improvement in segment revenues and margins during the second half of the year, reflecting a pick-up in product delivery.

Moving to Industrial.

We achieved a 3.7% increase in revenues, after a 7.7% negative impact from foreign exchange, primarily reflecting increased volumes at Kautex, Specialized Vehicles and Jacobsen.

However, industrial profit was down, reflecting a decrease in our Tools & Test business, which experienced some market softness and delivery timing issues.

While foreign exchange had a particularly large impact on revenues at Kautex in the quarter, we had strong volumes in North America, Europe and Asia, reflecting continued growth in auto markets.

At Tools & Test, we recently expanded our international tool business through a purchase of our partner's interest in our Endura/Greenlee joint venture, a professional tool company based in China producing over 3,000 products.

At Specialized Vehicles, we're seeing very strong market performance of our new airport ground support equipment business, which was created through the acquisitions of TUG Technologies and Douglas Equipment businesses.

On the new product front at Jacobsen, we began initial deliveries of our new Truckster XD heavy-duty utility vehicle during the quarter.

Wrapping up with Textron Aviation, we delivered 36 jets and 30 King Airs compared to 36 jets and 34 King Airs last year.

Margins in the Aviation segment improved significantly despite lower volumes, reflecting lower fare value step-up adjustments and the benefit of cost efficiencies derived from last year's Beechcraft acquisition.

Our strategy of investing in new products continues to pay off as we received FAA certification of the Latitude in June and should begin deliveries next month.

The Latitude entered service with a range of 2,850 nautical miles, up from its previously advertised range of 2,700 nautical miles, as well as best-in-class operating costs, which are up to 20% lower than competing aircraft.

We also firmed up NetJets' initial Latitude delivery schedule and will begin those deliveries in the first half of next year.

Our upgraded CJ3+ continues to do well.

We received certifications from Brazil and the EASA, which should open up new international opportunities for this model.

In May at EBACE, we announced that our King Air Turboprops will be equipped with the Rockwall Collins Pro Line Fusion avionics system and upgraded cabin features and have subsequently received FAA certification for the King Air 250.

We also announced at EBACE that Wheels Up would be exercising an option to purchase an additional 35 350i King Airs under our existing contract.

At last week's Oshkosh AirVenture show, we announced our plan to develop a new single-engine turboprop.

This plane is a clean-sheet design with a target range of more than 1,500 nautical miles, a speed of greater than 280 knots and best-in-class operating costs.

We're aiming at a segment of the market that we currently do not serve, so this product will nicely complement our existing Aviation product lineup.

Moving to the Scorpion program.

We had an active quarter demonstrating the aircraft's unique capabilities.

For example, instructors and student pilots from the US Air Force Test Pilot School conducted evaluation flights of the Scorpion during a four-day event in May, where the airplane demonstrated its cost effectiveness, availability and reliability.

In all, actually, the Scorpion made trips to South America for demo flights and then flew to Europe to participate in the Paris and RIAT air shows.

Between the air shows, the Scorpion also flew demonstrations for multiple European militaries, including the UK Royal Navy and Air Force.

To sum up the quarter, good margin results at Textron Aviation.

Bell and Industrial contributed overall -- solid overall financial performance despite a decrease in overall revenues.

We are confirming our full-year guidance for both earnings and cash flow, as we expect top line growth in each of our segments during the second half will drive strong earnings and cash flow.

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

Thank you, Scott.

Good morning, everyone.

Segment profit in the quarter was $306 million, up $2 million from the second quarter of 2014 on a $250 million decrease in revenues.

Let's review how each of the segments contributed starting with Textron Aviation.

Revenues were down $59 million from this period last year, primarily reflecting a change in the mix of jets delivered in the quarter.

Aviation had a profit of $88 million compared to $28 million a year ago.

This was driven by improved performance reflecting a $27 million lower fair value step-up adjustment and the benefit of the integrated cost structure of Beechcraft and Cessna.

Backlog in the segment ended the quarter at $1.4 billion, $145 million higher than at the end of the first quarter.

Moving to Bell, revenues were down $269 million, primarily reflecting lower aircraft deliveries and last year's $41 million impact from the settlement of the SDD phase of the ARH program.

Segment profit decreased $40 million from the second quarter of 2014, primarily reflecting the lower deliveries and a $16 million favorable impact in 2014 related to the ARH program, partially offset by favorable performance.

With respect to our cost actions, we incurred approximately $40 million in severance costs during the quarter.

The net impact on segment profit in the quarter was insignificant due to cost savings from headcount reductions and the impact of including the allowable portion of these costs in our render and cost rates for US government contracts.

Looking forward to the rest of the year, savings from the actions will help offset the P&L impact of lower production and deliveries, enabling us to maintain our original Bell margin guidance of 11% to 12%.

At Textron Systems, revenues were up $40 million, primarily due to higher Unmanned Systems and Marine and Land volumes, partially offset by lower Weapons and Sensor volumes.

Segment profit was down $13 million, reflecting an unfavorable product mix during the quarter.

Industrial revenues increased $33 million due to higher overall volumes, partially offset by a $69 million unfavorable impact from foreign exchange.

Segment profit decreased to $8 million reflecting lower performance, partially offset by the impact of the higher volumes.

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

Moving below the segment profit line, last year's second-quarter financials included an acquisition and a restructuring line reflecting $20 million in costs related to the Beechcraft acquisition.

Corporate expenses were $33 million and our tax rate was 29.9%.

Interest expense was $32 million, down $4 million from the last year.

During the second quarter of 2015, we repurchased approximately 1.9 million of our shares at an overall cost of about $87 million.

To wrap up with guidance, we are confirming expected full-year EPS from continuing operations of $2.30 to $2.50 per share and cash flow from continuing operations of the Manufacturing group before pension contributions of $550 million to $650 million.

That concludes our prepared remarks.

So operator, we can open the line for questions.

Myles Walton, Deutsche Bank.

I was wondering if you can kick off with the texture that you're seeing in the business jet market as it relates to demands.

I see a pretty good step-up in backlog here in the quarter.

If it's tied to the finalization of the NetJets schedule?

Or if you can just give a broader color picture of biz jet backdrop?

Well, certainly part of it is NetJets' miles, as we firmed up some of those schedules and delivery dates, we do move things into backlog.

But I would say in general, the North America market seems fairly strong.

If you look around the world at, I would say, Russia and China in the jet side are pretty weak; although from my perspective, those have been largely big iron markets.

So that hasn't had a huge impact on us.

Unfortunately things are still obviously very challenging in Latin America and Europe, both with respect to how those economies are doing as well as the very strong dollar.

So that's certainly keeping some pressure in those areas, which are historically good markets for the light and mid-size business jet.

So it's a bit mixed around the world.

I would say that North America is really what's keeping us fairly strong, with relative softness in Latin America and Europe.

Okay.

Then the after-market side, given the utilization seems reasonably tepid.

Is after-market slowing?

Is it stable?

Modestly growing?

It's been a little tepid.

I think we had a pretty strong first quarter, certainly, a weaker second quarter.

But I would still expect on a full-year basis, we're going to be in that kind of mid, low single-digit overall growth in terms of the after-market in the Aviation business.

Okay.

Thanks.

Sure.

Sam Pearlstein, Wells Fargo.

Frank, when you had gone through it, you talked about still comfortable at 11% to 12% for the Bell margins.

Just looking at the 7.6% margin here in Aviation in the second quarter, are you still comfortable now?

Does it now look like the high end or above the 6.5% to 7.5%?

I guess if not, I'm just trying to think about what would be the negative, if we look at the second half?

It's going to be volume dependent.

But as we said, earlier in the year, I think if we see the volumes that we've indicated, we should be at the upper end of that margin and have some opportunity there.

Because we are seeing good productivity across Textron Aviation.

Okay.

Then certainly a month or so ago, Sikorsky talked a lot about the oil and gas market's impact on the after-market impact in Bell.

Are you seeing anything from that front where it's noticeable in the Bell after-market?

Well, for sure.

I mean, the after-market, particularly in the oil and gas area is certainly softer.

Utilization rates are probably down somewhat in that area.

So -- but I would say, we have a fairly diverse installed base of aircraft operating in an awful lot of different industries.

So, I think net, all things together, we would still expect for us a fairly flat year in total after-market for the helicopter business.

Okay.

Thank you.

Sure.

Robert Stallard, Royal Bank of Canada.

Scott, on the biz jet metrics, another thing you've talked about in the past is pricing in the used market and also the inventory there.

I was wondering -- I know it's very short term, but how that's developed over the last three months?

Well, the inventory metrics certainly continues to be favorable.

We're down to -- both on a percent basis and an absolute number of aircraft out there that are available for sale, at levels really that go back into the mid-2000s kind of numbers.

So I think the metrics in terms of what's available out there is pretty favorable.

Pricing has certainly stabilized.

I mean, you still, on a year-over-year basis, see depreciation obviously of any given model year.

But the rate is kind of in historic norms, I guess I'd say at this point.

We've actually seen, again, some uptick on pricing on a model-by-model basis particularly as that inventory gets fairly tight.

So I think the used market is becoming certainly less of a competitor than what we've seen over the last few years.

So that's all, generally speaking, a pretty favorable trend that continues.

The second question, maybe a bigger picture.

There seems to be a pick-up in M&A across the sector, mostly with Sikorsky, also in automotive and some defense IT assets for sale.

I was wondering if this has had any impact on your view of the world and your desire to do deals going forward?

Not really.

Obviously, we keep an eye on all the segments we play in.

As assets come and go, we keep an eye on those things.

But, no, I don't think it's -- we certainly haven't seen anything that would alter our strategy or how we think about things.

We look at things that are in our spaces.

We continue to be out there looking at things that we think are nice bolt-ons, that will help strengthen our businesses.

Again, I think now we're in a period where an awful lot of assets are still pretty highly valued.

We're not going to overpay for anything, but we do continue to keep our eye out.

Okay.

That's great.

Thanks very much.

Sure.

Cai von Rumohr, Cowen and Company.

So, Scott, getting back to the Aviation book to bill of 1.2.

If we take out the NetJets orders, what would it have been?

Could you give us some color by products both between Cessna and Beech and specifically, the Latitude?

No, Cai, we're not going to start giving any kind of breakout on a model by model in terms of backlog.

As I said, in terms of color, I will say that there -- obviously, we did book some of the NetJets deals because they've now been firmed up and have delivery dates.

I would say Latitude, we continue to be very pleased with the market receptivity.

There's a lot of activity going on.

There's a pretty extensive list of customers that have been looking at the aircraft, taking demo flights in the aircraft.

We expect that will convert into ongoing backlog as we go forward.

So we feel great about the aircraft, it gets great feedback from customers.

I think the model will do very well.

Thank you.

Then switching to Bell, that was an extraordinarily large severance charge of $40 million.

Frank, how much of that $40 million was absorbed as an allowable expense in the quarter?

Cai, again, we're not going to get into the details of how that all flows through.

Again, a meaningful portion of it does flow through our rates, just given the mix of our business at Bell and the nature of those costs.

Again, as we said, when you look at the costs that were absorbed in the quarter relative to the savings generated and other impacts, it did not have a meaningful impact.

Obviously, on a go-forward basis, we will then kind of need to -- those costs will flow through our cost structure, but obviously, we'll benefit from the savings associated with the cost reduction activities as well.

But you did almost --

It all gets very complicated in terms of how that all rolls through.

Okay.

Thank you.

Pete Skibitski, Drexel Hamilton.

Scott, how should we think about the lack of an authorization at the XM Bank potentially impacting you in the second half of the year?

Or in 2016?

Is there any impact there at all?

None.

None at all?

Okay.

No.

Then I just wanted to ask -- go ahead.

No, I'm sorry, Pete.

We don't have any XM facilities or sell stuff under XM financing at this stage, so --

Okay.

Then just to confirm some of the things I think has been out there in the press, 525, we shouldn't factor in first deliveries until 2017, is that fair?

That's correct, yes.

Okay.

Thanks very much.

Sure.

George Shapiro, Shapiro Research.

Inventories were up $200 million in the quarter and $500 million year to date.

Is that reflecting buildup for deliveries of Latitude?

A higher production rate in the second half of the year?

Or what actually is contributing to it?

Well, there's two big impacts there, George.

Certainly one is the Latitude buildup.

So those deliveries will start next month and through the balance of the year.

But, obviously we've had a lot of work in progress and stuff progressing here into finished goods on the Latitude program.

Then the other, of course, is at Bell.

So we have slowed down the production rates.

But clearly in the latter part of last year coming into this year, just given the cycle time of production, a lot of those helicopters have already been built.

So we had significant inventory build at Bell, which also should bleed off through the balance of the year.

Okay.

Then my other question, if you could talk, Scott, in the increase in the backlog, if you could break -- was it all jets, props or did military have a part?

If you could kind of just -- at least give some color as to where the increase came from?

No.

We're not going to break down independently, George.

We don't want to tell you -- when we have a big military deal, obviously we announce that.

We'll talk about that.

There weren't any big announcements in the quarter, obviously.

But we're not -- so we'll provide that level of color when there's a big military deal or something of that nature, but there were no such activities in this particular quarter.

Okay.

Thanks very much.

Sure.

Jason Gursky, Citi.

Scott and Frank, I was just wondering if you could comment on the back half of the year, with regard to your guidance?

Where these opportunities and risks might lie in your ability to hit your guidance rates?

Sure, Jason.

Obviously, we have a lot that's going to happen here in the second half of the year.

Aviation has its normal cycle, which tends to be stronger in the back half of the year, particularly in the fourth quarter than it is in the first half of the year.

We clearly think we're positioned to execute on that.

Obviously, that requires the market to still be supporting ongoing orders.

But we think we have pretty good line of sight into the amount of activity that's going on.

But as Frank alluded to earlier, there's still a lot of aircraft to sell, but feeling pretty good about where we are.

Similarly at Bell, obviously, the military side is well understood, but there still are a certain level of order of activity that has to happen to support our view of the second half at Bell.

Systems is primarily just executing on the programs that we have.

Again, a clear line of sight in terms of what those deliveries need to be.

Our Canadian TAPV program, obviously, is very important to us.

I think the testing program has gone very well so far.

But we have to enter into the formal customer test here in the next month or so and successfully complete that so that we can begin the initial deliveries on that program.

But if we successfully work our way through the testing, then we should be able to meet those milestones.

So I think again, there's still a fair bit of selling to be done in both the fixed wing aviation and the helicopter business to make it happen.

But we think we'll be able to get there.

In terms of upside, as again, frank alluded earlier, the Aviation business is executing extraordinarily well in both new product programs as well as manufacturing production efficiencies.

I think if we can deliver on the volumes that are in the plan, that's probably where we can have some upside to our guidance.

That's great.

Then going back to Cai's question on book to bill at Aviation, would it have been above 1 without the NetJets order?

Can you just -- on the NetJets just describe to us over what period of time those orders will be fulfilled?

Predominantly, we firmed up what's going to happen in 2016 and some in the early part of 2017.

So, as we've said, we're going to put those into backlog as we get a, obviously deposits as well as firm commitment dates.

Look, I'm sorry, guys, but we're not going to provide any breakout or breakdown on a model by model -- in the backlog in any of the businesses.

It's not just something that's normally done.

Okay.

Thanks.

Sure.

Noah Poponak, Goldman Sachs.

Scott, are there any legacy Cessna jets, so not the Latitude, that are now sold out more than six months down the road?

No.

I don't think we want to get into our -- again, model by model sales forecasting.

So, I don't think we'll -- I don't think we'll provide any guidance.

Or perhaps could you just touch on whether or not lead times on average in legacy aircraft have extended?

Or if it's roughly the same as where it was last time you updated us?

It's roughly where it's been, Noah.

There hasn't been any dramatic change on the legacy aircraft front.

How far out we are does vary model by model, as we've said in the past.

But I wouldn't get into specifics on a model by model basis for sure.

Then just going back to the Aviation segment margin, I guess I'm wondering why you -- or how you won't end the year much higher than the current range.

You're basically in the range in the first half.

You're typically much better in the second than the first half.

It looks like you had almost a 30% sequential incremental margin there, if I strip out the inventory step-up.

Perhaps you could maybe touch on the driver of that performance?

But then if I just use 20% in the third and fourth quarter, I can get almost a full 200 basis points ahead of the mid-point of the guidance range there.

So is there a missing new component in the back half?

Well, I don't think there's a big missing piece here, Myles, in terms of your analysis.

I think that if we can drive the volume in the second half of the year that we'll see stronger margins.

That's why I commented earlier with -- on one of the other questions, I think that we can exceed our guidance range on the Aviation side.

But again, that is predicated on seeing the continued strength in the market, particularly in North America that we've seen to help drive that volume.

We're always going to have a little bit of a mix here with the military side versus the commercial side.

Military deliveries on -- we're continuing to perform under our JPATS contract.

So those will result in lower incremental margins.

I mean, that's relatively lower margin mix as we go forward compared to the increments on the commercial side.

But, again, I think the bigger issue here will be, can we drive the volume in the second half of the year?

Okay.

Thanks very much.

Sure.

Julian Mitchell, Credit Suisse.

Just a question on the capital allocation.

You bought back some stock in Q2, hadn't bought back any in Q1, so I'm thinking about a placeholder for this year, obviously absent any major M&A moves, should we assume a sort of $300 million to $400 million level like you spent last year, is a good sort of placeholder?

Yes.

Again, our capital allocation has not changed.

So as we've said, we are going to buy back stock at least to offset the dilution associated with our share repurchase programs.

I've indicated we will pay down a little bit of the bank debt associated with the Beechcraft acquisition this year.

But a number in that range assuming that there are not other applications of capital, is not an unreasonable range.

Thank you.

Then my second question, just around the Bell commercial helicopter delivery outlook, was there any kind of change in tempo as you went through Q2 in terms of customer appetite for deliveries?

Should we expect the delivery schedule in the second half to be fairly even?

Or is it very kind of Q4-loaded on the commercial Bell?

Thank you.

It's probably going to be more Q4-loaded as it typically is, Julian.

I think the appetite -- a lot of our customers particularly both oil and gas directly as well as a lot of the petro dollar-based economies seem to be getting their head around a stabilized lower dollar per barrel of oil.

So I think we're going through a normal cycle here.

Things shut off pretty hard over the last 18 months.

I would expect to see some recovery as we go forward.

But it's going to be modest.

At least there's a fair bit of customer activity, discussions going on.

But it's going to be a while probably for those things to come to fruition.

But in terms of our particular guidance, we always end up with a higher mix, particularly in the 412s that are in the fourth quarter of the year versus the third quarter.

Great.

Thank you.

Sure.

David Strauss, UBS.

Scott, on the Latitude and thinking about the ramp-up there.

Obviously, on the M2, you had a pretty good aggressive ramp-up.

CJ-4, a pretty aggressive ramp-up.

Are we looking at a similar kind of ramp-up on the Latitude as those two aircraft?

Yes, we are.

I think from a production standpoint, it ramps fairly quickly.

Obviously, we'll have our initial deliveries here in the third quarter.

But, again, it'll be heavier into the fourth quarter as that production ramp goes.

But the production facility's capabilities, tooling, everything is in place to meet what we believe is the expected demand.

I think we're going to be in pretty good shape on it.

Our cost is where we expect it to be, so its margin rates should be consistent with what we see in our mid-size gen market today.

The NetJets order, is that still 25 firm?

Or have they exercised any of their options?

I'm sorry, David, I don't recall the exact numbers.

I thought the firm was a bigger number than that.

But anyway, this is all the delivery commitments that we've put -- moved into backlog, obviously are under that initial firm order contract.

Okay.

Last one, Frank, the inventory step-up related to Beech, is that now all behind us?

Yes.

There's a couple million dollars left, but it's essentially done.

Great.

Thank you.

Sheila Kahyaoglu, Jefferies.

You provided some very helpful color in terms of geographic color on business jets.

Can you maybe provide an update on what you're seeing buying behavior patterns from different end market customers?

So, Sheila, yes, I have to say that most of the -- I mean, if you look at our product mix and when you think about M2s up through really the XLS space, we still continue to see the strength of that market around small, mid-size businesses, a lot of family-owned stuff, a lot of owner/operators, individuals of that sort.

I'd say that particularly, as we look at the Latitude -- Latitude, when we look at that list of prospective customers, clearly as they go into the fractional market, that's a pretty diverse group of everything from high net individuals to corporates.

But the Latitude whole aircraft sales are very heavily biased towards corporate buyers.

So these are corporate flight departments, the attractiveness of that aircraft, the cabin size, the range, the performance, while there's some high net worth and some smaller businesses, it is dominated by more corporate interest.

Then just one more on Bell.

In terms of the restructuring, do you have an update on what the cost savings is for this year?

Maybe what it looks like for next year?

I don't -- I'm not sure we would really break out specific numbers, Sheila.

Obviously, the costs were which we all incurred here in the second quarter.

As Frank said, the nature of program accounting and the way that impacts the rates and flows through production, we kind of expect it to net out to not much of an impact here this year.

What it means in terms of next year, obviously, we have savings associated with those actions, but by design that was intended to offset the fact that we expect to have lower production volumes as we go into next year.

So from a margin rate perspective, we're not obviously going to guide to that yet.

That's something we'll have to talk about for 2016.

It'll largely be dependent on what we think will happen in terms of volume at Bell for 2015 -- or 2016, I'm sorry, as to whether that's a tailwind or not.

Got it.

Thanks.

Ron Epstein, Bank of America.

Just a -- trying to not beat a dead horse here, but maybe get at it at a different angle.

You guys said in the North American markets, it's good activity; it feels good.

Can you give any more color around that?

Like what that means?

How much tire kicking is going on?

How tire kicking is converting into orders?

That kind of thing?

Is there any way you can give us a better feel for, like, what good means?

Well, I think it is good if we can take more orders than we sell, right?

So I mean, I think the backlog change is something that I think is good for us, regardless of where the end market is.

But most of the color that we're trying to provide here is, I think we look at the world right now as kind of an 80% North American market and a 20% international market.

That really is driven by the fact that the dollar is very strong.

Latin American economies are very challenged.

Europe is probably going sideways, but the strong US dollar makes big ticket capital items pretty expensive.

So, I mean, that's just kind of the way that I would look around the world.

We feel pretty good about what's going on in North America.

There's deals that are converting from opportunities into hard orders and sales are happening.

So we still need that to continue through the balance of the year to get where we want to be, but when we look at the conversion of that activity into actual order book and we look at the level of activity that's going on in terms of prospect lists, we feel pretty good about it.

Okay.

Great.

Then maybe just one quick follow-on.

You mentioned that you had a good productive quarter with Scorpion, you brought it to South America.

How much closer are we to actually nailing down a deal on the Scorpion?

We have a number that are in the works.

So one of the challenges, or just the normal part of a process on any kind of a military customer deal is, you also have to get to the final aircraft configuration.

So while we've been thrilled with the performance of the aircraft and all the work that we've done, we have a couple things that we're doing to the aircraft.

We'll have a conforming version of the aircraft that's appropriate to go into certification testing in the first half of next year.

That's really the aircraft that customers will look at to make that final buying decision.

So there's a number of interests.

There's a lot of demo flights coming on.

There's places we've taken the aircraft.

There's customers that have come to Wichita to fly the aircraft and look at the aircraft.

So there's a bunch of activity out there.

But we need to get this thing to its final production configuration and get into [SIR] tests, which is in the first half of next year.

Okay.

So -- not to put you on the spot, but I will.

Do you think we could see one before the end of the year?

Or is that a long shot?

No, I don't think before the end of the year.

Okay.

So maybe next year.

All right.

That's cool.

Thank you so much.

Sure.

Jeff Sprague, Vertical Research.

Just a couple quick ones, Scott, just thinking about the Latitude launch, obviously, the mission and price and range and everything on the Sovereign XLS are different, et cetera, but can you see some cannibalization around the edge as you launch that?

How would you characterize it?

Do you think of Latitude being 80% incremental to your volume or some other number?

I guess, regardless of whether or not you think there's any cannibalization as it launches, is the launch mix negative to you once you get the initial units out the door?

Jeff, so I think 80/20 might be the right number.

I mean, we always have customers that are looking at more than one model and trying to decide how to match their mission, be it range, payload, et cetera, in how they decide which of our products.

I would say that there's a pretty significant price difference between an XLS+ and a Latitude.

So I won't say there's zero in there.

But when people are looking at those two aircraft, it is a pretty significant price difference.

It's a big range difference.

It's a big cabin difference.

So I think those two are very different aircraft.

I think we do have some customers that will look at a Latitude and a Sovereign.

In that case, they kind of have to make the decision based on a Sovereign has some additional range and some additional seating capacity.

That's really what then drives that decision between a Sovereign versus a Latitude.

From our perspective, from a production manufacturing operation, it really is kind of a wash.

So we're able to work with a customer and say which aircraft best fits what you need and they pick the aircraft that makes sense.

There's no reason for us to have a reason to bias it one way or the other.

Great.

Thanks.

Just back on M&A, somebody asked earlier, but does -- it certainly sound or looked like you were deep in the hunt on Sikorsky.

Should we think of that as just being, obviously an iconic asset that may be for sale once every 70 years and of course, you're going to have to look at something like that?

Or are you actually more actively looking at things and cultivating it as opposed to maybe just waiting for things to come across the transom?

Well, I guess I won't comment -- I can't -- shouldn't probably comment too much on the Sikorsky deal.

There's certainly been plenty of media coverage on that.

The media is the media.

So I think what we would say is, we always keep an eye out for assets that are in our spaces.

We are always looking and thinking about things that would make sense for us or would not make sense for us.

That's the path we'll stay on.

Great.

Thank you.

Seth Seifman, JPMorgan.

Just wanted to ask about the exposure to China at Kautex?

If you see any slowing there?

Or are concerned about any slowing?

We really haven't.

Obviously, Kautex has a number of plants in Guangdong, China in the automotive segment.

So if there was any kind of material change in auto demand that would have an impact on us.

But again, Kautex is, again, a big auto business.

We've got plants all over the world.

It's not unusual for us to go through cycles where one region is doing better than the other.

So, certainly there's some exposure there to the Chinese automotive market, but not something I would be losing a whole lot of sleep over, I guess at this point.

Great.

Thanks.

Then just a follow-up, I guess, looking in Industrial, it seems like you're very much on track to meet the guidance for the year.

As you look to the second half, what are the key trends in each of the three areas that get you there?

Well, I think in the Industrial segment, again, we generally saw pretty broad growth in all the businesses.

The only business that was a little soft for us was the Tools & Test business, that had to do with a couple of industries that were -- couple industries that were a little softer in the quarter than we would have expected, some deals that we thought would close but didn't close, some of which actually have now closed, as we've moved into the third quarter.

So I would say those are mostly just timing related.

We have obviously seen some softness in the energy markets, so we had an awful lot of strength over the last couple years in the Marcellus and in the Bakken and places like that, which are -- have clearly slowed down.

So while there's some macro impact, we'd still seeing ongoing softness.

There were some other areas that I would say were more timing related.

We would expect to still be clearly on track to hit our guidance surrounding the Industrial segment.

Great.

Thank you very much.

Johnny Wright, Nomura.

So on Systems, I know you talked much about the margin there.

Can you just flesh out the mix impact you saw in 2Q?

How you see that rolling over the second half of the year?

Well I guess, two of the main things is that clearly the vehicle deliveries are very back-end loaded because of the process of going through all of our testing and completing that program and starting deliveries to our -- on our TAPV program, which will be a Q4 event.

Otherwise, we've had no deliveries on that program, as we wait to get through the test program.

So that's been an overall drag.

The other is that we have had an awful lot of investment here in the first half of the year around our simulation business.

We've opened a brand new training center.

We've done a lot of simulator design development, production work for our own use including things like the V-280 to demonstrate the performance and capability of that product for use in customer sales and marketing efforts.

We need that business to swing to a more profitable phase here in the back half of the year.

So that's been dragging somewhat in our Systems segment margins as well.

But the bottom line is, we have a lot more product delivery here in the back half of the year, particularly in the fourth quarter than we've had in the first half, which is what we expected, frankly.

Sure.

Then you brought up the V-280, does Lockheed's acquisition of Sikorsky have any impact on that program, given they're going to be on both sides of the competition now?

How do you think about that conflict?

Well, it certainly doesn't have an immediate impact.

We've had Lockheed as our -- as one of our teammates on that program.

They're doing all the cockpit and missions systems for the aircraft.

They've done a great job for us in terms of performing on that design development activity.

We expect that it will stay that way to support heading towards first flight here in 2017.

The program is going great.

So there's no reason from our perspective to see any change in that program on FBO at this time.

All right, guys.

Thank you.

Justin Bergner, Gabelli & Co.

My first question relates to the pace of corporate expenses.

They were down nicely in the first half of the year, $75 million versus $81 million.

Could you maybe talk about some of the puts and takes there?

How we should think about corporate expenses on a quarterly or annual run rate basis going forward?

Yes.

There's always some volatility in the corporate expense line around both timing of spend and just on the accounting for incentive based compensation that is impacted by the share price.

So we do get quarterly volatility.

Obviously, we're watching our overall controllable expenses very carefully, but there's no change in our expectations around full-year corporate expense coming in around the $170 million, $175 million level.

Okay.

Thank you.

One more if I may.

With respect to Lockheed Martin's pending acquisition of Sikorsky, it might be helpful if you're able to comment a bit about some of the opportunities and risks associated with having Sikorsky owned by a new company being Lockheed Martin versus United Technologies?

I don't think it changes our perspective of Sikorsky, whether their parent company is UTX or their parent company is Lockheed Martin.

The dynamic in terms of the competition in the market place for us is largely unchanged.

Okay.

The future vertical lift program dynamics, will that get sorted out in due time?

Yes.

I think so.

Look, as I said earlier, Lockheed has been a great teammate for us on the V-280 program.

We're all very focused on getting that aircraft to first flight and executing our commitments with our customer around that program.

The dynamics of where that program goes from there is very much to be determined and really not so much having to do with where the Sikorsky ownership is or where Lockheed is, but where does the customer go from there?

There's still that program will have to go through this initial demonstrator phase.

Then the program will morph as all programs do in terms of how it goes into the next step.

So I don't think at this point that's driven one way or the other by where Sikorsky or Lockheed are, but where does the customer want to go?

At least, what's critical to us is, where we are today and how we execute and complete the tech demonstrator phase program and importantly getting into first flight in 2017 is unchanged by who that particular division is owned by and where Sikorsky is.

Great.

Thank you for taking my questions.

Sure.

Steve Levenson, Stifel.

On the V-22's for Japan, can you tell us please, since that's an option exercise, does the pricing change at all?

Or is it the same as the ones within the multi-year agreement now?

The program when the multi-year two contract was negotiated, the provisions for options were laid into that contract.

So everything in terms of how it's priced was already all negotiated up front with the customer.

Okay.

Thank you.

On the single-engine turboprop, can you give us an idea how big you think the market is?

Will it change the research and development spending expectations?

Well, from an R&D perspective, it's baked into our long-range plan in terms of the Aviation business in total.

In terms of the size of that market segment, I'm sorry, I don't have all those charts in front of me at the moment, but, I mean, you're really talking about the market today, which is largely dominated by the TBM and PC-12 product lines.

Okay.

Thanks very much.

Sure.

George Shapiro, Shapiro Research.

In the Systems margin, Frank, I mean, that was the weakest margin in about three years.

So were there any charges in there?

Or was it really just all the performance mix?

No, it was really, as Scott had indicated earlier, George, it was really all kind of performance mix, a low-volume quarter and some pretty significant spend at TRU; whereas, we said, there's been a lot of focus on both standing up the training operations as well as other internal investment essentially that doesn't get revenue recognition.

So as we produce simulators for ourselves, as we support the V-280 program from TRU, things like that, we incur costs and effort, but don't have -- don't see revenue and profit flow from that.

So that's why we had the impact that we had.

Again, in terms of full year, things are back-end loaded.

We do expect a recovery in margins and to be kind of in line with the guidance that we've given for a full year on Systems.

Okay.

One other on it.

Pre-owned, how did that compare year over year and sequentially in the quarter?

It had an insignificant impact on a year-over-year basis, George.

Very close to zero.

Okay.

Thanks very much.

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

Thank you for joining us.

We'll talk to you next quarter.

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