達信公司 (TXT) 2015 Q4 法說會逐字稿

Ladies and gentlemen, I would like to thank you for standing by and welcome to the Textron fourth-quarter 2015 earnings teleconference call.

(Operator Instructions)

As a reminder today's call will be recorded.

I would now like to turn the conference over to our VP of Investor Relations, Mr. Doug Wilburne.

Please go ahead.

Thanks, Steve.

Good morning, everyone.

Before we begin I would 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 revenues in the quarter were $3.9 billion, down 4.2% from $4.1 billion in last year's fourth quarter.

Income from continuing operations was $0.81 per share, up 6.6% from $0.76 in the fourth quarter of 2014.

Manufacturing cash flow before pension contributions of $18 million was $534 million compared to $449 million in last year's fourth quarter.

For the full-year revenues were $13.4 billion, down 3.3% from a year ago.

Income from continuing operations was $2.50 per share, up 16.3 % from $2.15 last year.

Manufacturing cash flow before pension contributions of $68 million was $631 million.

With that I will turn the call over to Scott.

Thanks, Doug.

Good morning everyone.

Revenues were up in industrial but down at systems, Bell, and aviation, which led to an overall decrease of revenue in the quarter.

Despite the decline in revenues we had good execution with margin improvements at aviation, systems and industrial, and solid double-digit margins at Bell, with strong cash flow across all our business segments.

At Bell we shipped 56 commercial helicopters compared to 57 in last year's fourth quarter.

Commercial revenues were down, reflecting lower after-market volume and a change in the mix of aircraft delivered.

On the new product front, we're making good progress with our 525 Relentless program.

We now have two aircraft in the flight test program and are preparing to bring a third aircraft into testing this spring.

We successfully attained a top speed of 186 knots, validating the aircraft's maximum true air speed target.

Other ongoing testing includes continued signal and stability testing, as well as further development of the gross weight and center of gravity extremes.

Aircraft 1 will be heading north to gather initial cold weather data next month.

As the team continues to progress through the development phase of the test program, we are preparing to enter the certification test phase in the spring.

We also plan to fly the 525 to Heli-Expo in Louisville in March so that our customers can see the actual aircraft for the first time.

Overall the aircraft continues to perform very well, meeting or exceeding all of our initial performance expectations.

Customer demand remains strong as we currently have about 80 letters of intent from around the world.

We're targeting certification and first delivery of the 525 next year.

Our 505 Jet Ranger X program is also making good progress with three test aircraft now in operation.

We're targeting certification and entry into service later this year.

Our upgraded 407GXP model continues to generate great reception in the marketplace, with overall 407 deliveries up 13 units in 2015.

Earlier this month we made the first GXP delivery to Air Methods under the 10-year, 200-unit contract that we signed at last year's Heli-Expo show.

While we're having good success selling our lighter helicopters, the medium segment of the market continues to be challenged.

This is reflected in the low 412 volumes that we saw in 2015, and the outlook for medium helicopters remains soft as we look to 2016.

On the defense side, B22 deliveries were up in the quarter as we delivered eight B22s compared to seven a year ago.

H1 deliveries were also off as we delivered nine units compared to seven in last year's fourth quarter.

Moving to systems, lower year-over-year revenues in the quarter were primarily the result of initial TCDLv2 Shadow deliveries in last year's fourth quarter.

This year's fourth quarter revenues included delivery of 55 COMMANDO Select armored vehicles for the Afghan National Army, but did not include any Canadian TAPV deliveries as we are still conducting our internal testing.

Having now completed initial testing we begin the customer testing process this week.

We expect this process of final acceptance will take five to six months to complete.

At TRU in October we opened our first commercial aviation maintenance training facility in Wichita with initial portions covering mechanical and avionics maintenance for the King Air Baron and Bonanza products.

We also received FAA certification for both our Pro Line Fusion-equipped King Air 350 aircraft and its associated simulator.

We began pilot training the new simulator at our Tampa ProFlight Center, supporting initial aircraft deliveries in the quarter.

Moving to aviation, we delivered 60 jets and 33 King Airs compared to 55 jets and 41 King Airs last year.

For the full year we delivered 166 jets, up from last year's 159, including 16 Latitude deliveries.

During the quarter we delivered our 100th M2, marking the solid success this product has had on the marketplace during the two years it's been in service.

The most significant event during the quarter at aviation was the unveiling of our new Longitude and Hemisphere aircraft at NBAA in November.

Customer reaction to both of these models has been very positive and we believe they will generate substantial growth opportunities.

Longitude has superior operating performance compared to any aircraft in its class and should provide meaningful contributions to revenue and profits at aviation after its expected entry into service late next year.

Longer term the Hemisphere should prove to be a game changer as it will open up an entirely new market opportunity for us.

With the first flight targeted for 2019, we expect the Hemisphere will accelerate growth at aviation as we enter the next decade.

We also announced details of our new single-engine turboprop, including a new 1,300 shaft horsepower GE turbopropped engine.

We're developing this aircraft to be a class-leading product with a range of 1,500 nautical miles, speeds of over 280 knots, a larger cabin and reduced operating costs.

An important part of Textron Aviation and the Bell brand is our service footprint and after-market support capabilities.

In that regard, last week we acquired Able Engineering and Component Services, an Innovative low-cost repair and overhaul business operated in Mesa, Arizona.

Able provides component repairs, component exchanges and replacement parts, along with other support and service offerings for commercial rotocraft and fixed-wing aircraft customers.

This is a great extension to our after-market business.

Wrapping up the quarter with industrial, we achieved a 6.4% increase in revenues after a 5.8% negative impact from foreign exchange, reflecting strong organic growth in the quarter.

At Caltex we had solid growth with revenues up in Europe, North America and Asia.

Textron's specialized vehicles had sold growth across all business lines, reflecting our focus on new products and the successful recent acquisitions such as TUG and Douglas airport ground support equipment businesses.

To summarize the year, despite a decline in manufacturing revenues we were able to achieve a 60 basis point improvement in manufacturing margins.

We believe we entered the year with strong EPS and cash flow performance, especially given the challenges of a weaker than expected commercial helicopter market.

Throughout the year we took actions that should position our businesses for growth and profitability over the next several years.

At Textron Systems we advanced our ship-to-shore program with the first two units in production, with targeted deliveries in 2017 to DOD exercised options for another two ships out of a total expected program of 73 units.

At TRU we opened our Tampa pilot training center and Wichita training facility, received the King Air training certification, and announced three additional orders from Boeing for its new 737 MAX platform.

At industrial our top-line growth for the year reflected our continuing investment in new products, such as the Jacobsen Truckster HD, heavy-duty vehicle, the Cushman Hauler 4-by-4, and Greenlee's AIRSCOUT Wi-Fi test system.

Industrial growth also reflects the success of recent acquisitions which demonstrates our ability to leverage these businesses for growth and long-term shareholder value.

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

On the military front we made important progress with our V-280 tilt rotor program.

We provided hands-on demonstrations of the V-280 to potential domestic and foreign customers using a flight simulator developed by our teams at Bell and TRU.

Manufacturing and assembly operations of the first aircraft are well underway and we remain on track for first flight in 2017.

The militarized version, or Bell 412 model, was selected for Japan's UH-X program.

We'll be partnering with Fuji Heavy Industries to deliver 150 aircraft beginning in 2021.

We also signed contracts to deliver the first 3 of at least 12 planned H-1 helicopters for Pakistan, and the first 5 of 17 expected V-22s for Japan.

Looking forward we have a significant number of foreign opportunities for the H-1s that we are pursuing, and expect to secure additional orders this year.

Textron Aviation -- last year we began deliveries of our new Latitude, announced a new single-engine turboprop, two new business jets, and realized the full-year impact of operational benefits from our Beechcraft acquisition.

To finish with Textron's 2016 financial guidance, we are projecting revenues of about $14.3 billion as we expect solid growth at aviation, industrial, and systems, and approximately flat revenues at Bell.

We expect EPS from continuing operations will be in the range of $2.60 to $2.80, and manufacturing cash flow before pension contributions in the range of $600 million to $700 million.

With that I will turn the call over to Frank.

Thank you, Scott.

Good morning, everyone.

Segment profit in the quarter was $378 million, down $20 million from the fourth quarter of 2014, a $93 million decrease in revenue.

Let's review how each of the segments performed starting with Textron aviation.

Revenues were down $32 million from this period last year, reflecting lower King Air and pre-owned aircraft volumes, partially offset by higher jet volume.

Aviation had a profit of $138 million compared to $130 million a year ago.

This increase primarily reflected improved performance, which included lower amortization of $8 million related to fair value step-up adjustments, partially offset by the lower volumes.

Backlog in the segment ended the quarter at $1.1 billion, down $308 million from the end of the third quarter.

Moving to Bell, revenues were down $36 million, reflecting lower commercial after-market volume and a change in mix of commercial aircraft delivered in the quarter, partially offset by higher military deliveries.

Segment profit decreased $22 million from the fourth quarter of 2014, primarily reflecting an unfavorable impact from the change in mix of commercial aircraft delivered in the quarter and lower commercial after-market volume, partially offset by improved performance.

Backlog in the segment ended the quarter at $5.2 billion, up $76 million from the end of the third quarter.

At Textron systems revenues were down $158 million, primarily due to lower unmanned systems volume, partially offset by higher marine and land systems volume.

Segment profit was down $9 million, reflecting the impact of the lower volumes.

Industrial revenues increased $55 million due to higher overall volumes and the impact of acquisitions, partially offset by a $50 million unfavorable impact from foreign exchange.

Segment profit increased $6 million primarily reflecting the impact of the higher volumes.

Finance segment revenues decreased $2 million and profit decreased $3 million.

Moving below the segment profit line, corporate expenses were $52 million and our tax rate in the quarter was 23.5%.

The fourth-quarter tax rate benefited from the US R&D tax legislation passed late in the quarter as well as some other discrete items.

Interest expense was $32 million down $8 million from last year, reflecting lower debt levels.

We repaid $100 million of the bank loan from the Beechcraft acquisition and repurchased approximately 208,000 shares in the quarter.

We ended the year with gross manufacturing debt of $2.7 billion resulting in year-end manufacturing debt to EBITDA multiple of about 1.8 times.

For the full year we repurchased approximately 5.2 million shares at an overall cost of about $219 million.

Turning now to our 2016 guidance, beginning with our segments on slide 9, at Textron Aviation we're expecting about 6% revenue growth, bringing revenues to about $5.1 billion, primarily reflecting a ramp up in Latitude deliveries.

Segment margins are expected to be in the range of 8.5% to 9%.

At Bell we expect overall revenues will be flattish at about $3.4 billion, reflecting lower V-22 revenues, offset by higher H-1 deliveries on the military side, and essentially flat revenues in our commercial business.

We are forecasting margins in the range of 10% to 11%.

At systems we are estimating 2016 revenues at about $1.9 billion, up 25% from last year, reflecting expected TAPV deliveries and good growth in most of our other systems businesses.

Segment margins are expected to be in the range of 10% to 10.5%.

At industrial we are expecting solid growth in each of our businesses, resulting in a projected 7% segment revenue growth, to about $3.8 billion, with estimated margins in the range of 9% to 9.5%.

At finance we are forecasting segment profit of about $15 million.

Turning to slide 10, based on US plan discount rate of 4.75% we are estimating 2016 pension costs will be about $85 million, down from $138 million last year.

Turning to slide 11, R&D is expected to be about $615 million, approximately flat with 2015.

We are estimating CapEx will be about $475 million, up from last year's expenditures of $420 million, reflecting our investments in new products and geographic expansion.

Moving below the segment line and looking at slide 12, we are projecting about $155 million for corporate expense.

Next year's interest expense is estimated at $133 million, reflecting higher rates on variable rate debt.

We're assuming a tax rate of about 31% as we had some items in 2015 that benefited our tax rate that we do not expect will recur in 2016, as well as an expected higher mix of US revenues in 2016 which are taxed at higher rates.

Our guidance assumes a flat share count of about 277 million shares, reflecting repurchases sufficient to offset dilution.

That concludes our prepared remarks, so, Steve, we can open the line for questions.

Seth Seifman, JPMorgan.

Thanks very much and good morning.

I wonder if you could touch a little bit more on the margin in aviation, flattish sequentially and fairly moderate growth planned for next year.

The sequential flatness from Q3 to Q4 is largely driven by the fact that we had a fair bit of expense in the fourth quarter between R&D and a lot of costs associated with the ramp-up of what we did for NBAA, which offset a fair bit of what we saw in some of the incremental volumes on a sequential basis.

Nothing more substantive than that.

In terms of next year, the volume leverage probably is not as high as you would expect.

I think that's largely driven by the fact that we're going to see probably some lower margin on a lot of our incremental sales, particularly that which is going into the fractional business.

So we have a fairly high number of deliveries next year that will go into NetJets.

You probably saw yesterday, they've announced the official launch of that product into their customer base.

And typically, sales into the fractional channel are at a lower margin than our typical retail sales.

Great.

And then maybe just as a quick follow up.

For Bell, I think you talked about commercial being flattish.

And military, it sounds like maybe flattish as well, with V-22 down and H-1 up.

I wonder if you could talk about the level of decline on V-22.

Is this the bottom?

And then what gives you confidence on being flat in commercial?

If you looked at the mix in the business as you go into next year, the military and commercial are both probably relatively flat.

We saw the big dropdown this year, obviously, with V-22 reductions earlier in the year.

It will continue to be down a little, V-22.

Probably up a little bit on the H-1 side of things.

So all in all, again, I would expect it to be relatively flattish.

And I think the same is true on the commercial side.

The big adjustment that we really made this year was a reduction in the medium-sized helicopters that you are going to see, probably about 12 412s.

And we expect that be flat on a year-over-year basis.

So I don't think there's going to be a big mix shift within the business as we look at flattish revenues.

I think it's going to be true on both the military and commercial side.

Seth, on the volumes of the V-22, it's consistent with the multi-year two, which called for 100 units over five years.

We've been delivering a little ahead of schedule.

There were a few options exercised.

So that's just consistent with that.

And then as we look forward to 2018 and the Japanese deliveries, we should see some recovery there.

The V-22s were totally expected.

What we saw on the military side of the business in 2015 and what we expect in 2016 is entirely consistent with what we've always talked about.

The program is a record in terms of the units.

There are absolutely no surprises there.

The issue really was largely around the commercial side, and particularly on the medium segment.

And those are for us, Bell 412s.

That's typically a very international product.

And, as you can imagine, between the pressure around oil and other commodities, and just in general, international marketplace has been pretty soft.

And I think that's reflected overall in the Bell 412 margins.

So again, we expect that to be pretty flat as we go from 2015 to 2016.

Thank you.

Jason Gursky, Citi.

I just wanted to stick with Bell for just a moment here.

And, Scott, maybe have you talk a little bit about the margin outlook in a bit more detail, and talk a little bit about some of the puts and takes that are going on this year.

And then as a follow-up to that, just as we head into the LA Expo show in early March, maybe just talk a little bit about things you are going to be looking for into that show and the expectations around it.

Sure.

I think on the margin rate, what we've communicated to you, we've been trying to hold that business at the 11% or 12% rate.

I think as we manage through, knowing what was going to happen on the military programs, we adjusted our cost base to make sure that we could hit that target.

As you see in our segment level color at this point, we think we're probably 100 basis points lower than that.

And that's a reflection of the fact that we're seeing a significant reduction in what we would have expected in terms of the volume in the mid-sized market as we go forward.

Obviously, there will be some cost reductions that come associated with that as we lower the production rates -- and are lowering the production rates -- on the 412 side in particular.

But to try to take out more costs from that and sustain the investments that we need to make in the 505 and 525 and V-280, I think that's going to cost us about 100 basis points.

And that's why you see that reflection of the drop.

What we committed in terms of the margin and how we dealt with the fact that we were going to have this known ramp down on the military side, and then further reductions that we made this year on the commercial side, has sustained margins about where we want to be.

But I think at this point, given where we've taken the forecast on 412s, that's probably going to cost us about 100 basis points.

As we go into HELI-EXPO, it's going to be an interesting show to try to understand where customers are, what their expectations are going forward.

505 we continue to feel very good about.

The level of customer demand in that area is great.

407, as we said earlier, is very strong and delivering on some big programs with continued strong interest.

429s are flattish.

I think the question is really going to be with a lot of our international customers how they feel going forward.

And that will affect the 412, obviously, and give us a feel for where things are going in terms of the 525.

We are still a year and a half away or so of making first deliveries on that aircraft, so there's still a fair bit of time here to understand what that market dynamic is going to look like

Okay, that's great.

Thank you very much.

Sam Pearlstein, Wells Fargo.

Good morning.

Can you talk a little bit about the manufacturing cash flow outlook into 2016?

It just seems like you've got earnings up; pension looks flat.

I know CapEx is up, but depreciation is up about the same.

Can you just talk about what else might be going against you, why you are not seeing a bigger pick up on the cash flow line?

I think if you looked at going into late next year, Sam, we're going to have a lot of inventory that we are accumulating in the build of the first lots of the 525s and also the Longitudes.

We will probably start deliveries of both those aircraft -- obviously, not until 2017.

But we will have the priming the pump, if you will.

And those are two fairly high-dollar big programs that will drive our working capital late in 2016.

We also are planning for some higher cash tax caches in 2016.

Okay.

And then just in terms of the margin pickup at systems next year, is that all TAPV related?

Why is there such a big step up from 2015 to 2016?

TAPV is certainly a big part of it, to finally have that program going.

But we expect we're going to see solid performance.

If you looked at our UAS business has continued to perform well.

I think the momentum is very good there.

Similarly, in our precision munitions business -- good contracts, good backlog of healthy business.

So it's really across the whole segment.

And of course our simulation training business, which continues to perform and grow.

Really, it's not just one item.

TAPV is a big driver of the revenue increase in terms of finally delivering on that.

But in terms of overall margins, it's pretty solid performance across all of those business segments.

Thank you.

Robert Stallard, Royal Bank of Canada.

Thanks very much.

Good morning.

Scott, there have been some signs of weakness in large cabin business jet in recent months.

I was wondering if you could comment about what you are seeing in your market at the smaller and mid-sized end, and if anything's weakened there.

It really hasn't, Rob.

We've seen, not strong growth; but we've seen increased volumes in 2015.

We expect, again, to see some increased volumes as we go into 2016.

But, again, it's primarily driven by new product.

I would say most legacy models will be flattish.

But growth of new things, like Latitude coming out, is really what's driving the growth in the business.

I think we see the market as about where we expect it to be.

It's performing well, particularly in the US.

But it's pretty soft internationally.

So I think, at this point, products that have stronger dependency on international markets are tougher markets.

We have seen that certainly in the mid-sized helicopter market.

We have seen it a little bit on our King Air market because that is typically more international.

But the business jet market itself, which is stronger and a little more US-centric at this point, is doing fine.

Okay.

And then maybe switching gears.

Looking at the defense side of your business, we got a decent FY16 budget go through in December.

It's early days, but how do you think that will flow through for Textron?

I think it's good.

Obviously our key programs, like V-22 and H-1, came through the process exactly where we would have expected them to be.

The UAS business, and we just got another order on the continuation of V-2 programs.

We're not really in a situation right now where there's a lot of big new start programs.

But certainly all of our existing and important programs, be it in the aviation world, the ship-to-shore connector or the UAS programs, are all funded and in good shape.

Great, thanks so much.

Cai von Rumohr, Cowen and Company.

Yes, thank you very much.

Did I hear you say there's another five to six months of customer testing for the TAPV?

Maybe give us an update of your schedule there.

Sure, Cai.

What happened is, when we talked in the fourth quarter about our expectation, we thought we could get some of the deliveries starting late next year as we had finalized our initial testing.

We had a couple failures.

It was a very small number.

But we and the customer determined that because it was steering related, it could present a safety problem.

So we decided we really needed to resolve this thing.

We did that.

We have completed all of our internal testing.

It looks great, but it does completely reset the clock on the customer test as well.

We have now started that.

The vehicles are actually under test, as we speak.

It's going well, but it did reset the whole clock.

So unfortunately, what was a fairly minor change and minor fix does reset the clock.

And that means we're probably looking at something where deliveries will probably start in the second half of this year.

Now, we've built many, many of the vehicles.

So there are a lot of vehicles sitting there.

They've been modified.

It's a minor change.

So I think once deliveries start, we will do very well.

But it does reset the clock on the test.

Okay, thank you.

To be clear, it's not just testing.

There is the testing process and then the acceptance process.

That's why it takes a little bit longer than what you might expect.

Got it.

Aviation, you had a 0.7 book to bill, particularly weak.

Maybe give us some color on why was it so weak.

And color on demand, maybe by product, with specific reference maybe to the King Airs.

Cai, I don't know that it was terribly different than what we've been seeing cyclically with a lot of deliveries in Q4 on Jets.

If you recall last year fourth quarter, we didn't have as much a drop off.

But that was also, there was a pretty significant military order that was in there, which we talked about.

I don't think the color of the market and, frankly, the position that we have today in terms of backlog, is very different than what we've seen, frankly, for the last five or six years.

So in terms of what we need to do in sales and orders and conversion to sales as we go into 2016 is not really different than where we've been.

So I think we feel pretty good about where we are.

King Airs -- we are a little bit softer in the quarter, frankly, than I would have liked.

They were up very modestly on the total year.

But there's a lot of interest; there's a lot of customer discussions.

Remember, we did transition from the old cockpit to the new Column Fusion cockpit on that line of product here in the fourth quarter.

So that also creates a little bit of a gap.

So I think as we have now gone through that production transition to the new model, we should be in pretty good shape for 2016.

And last one.

You are looking for flat R&D year over year.

Could you give us a little bit of color in terms of which of your businesses the R&D might be trending up and where it might be flat to down?

It's not really a material change on a year-over-year basis, Cai.

Obviously we've ramped down now on Latitude.

But we are ramping up, clearly, on Longitude and some work going on into the Hemispheres and the turboprops.

Bell 505 should wrap up this year, but we're full into 525 and getting ready for first flight on the 280.

So the number is relatively flat.

And I'd have to say, if you look across all of our different segments, the R&D spending is about the same from 2015 into 2016.

Thank you very much.

Julian Mitchell, Credit Suisse.

Thank you.

Yes, good morning.

Just a question on Bell, firstly.

If you could just quantify how much the commercial aftermarket sales were down in Q4, and how that pace has changed versus, say, six months ago, and how you see that playing out this year.

I don't know if we gave the exact number, but it's down slightly on a run rate basis.

And I think, frankly, it reflects the fact that we are seeing utilization across most of the platforms down in low, mid-single digits.

And the aftermarket tends to follow that pretty well.

Understood.

And then in terms of the margins for 2016 at Bell, should we think about it as you have a lot of pressure, particularly up-front, in the first half just as the cost base right-sizes for the level of commercial aftermarket, and then it's a better second half?

Or do you think it's a fairly level-loaded year on margins?

I think it's going to depend on how the 412s deliver more than anything else.

It's really dependent on mix and deliveries.

It's not a question of we get to a different type of cost structure just because of the way things are accounted for in our military programs and our inventory.

So it's really a function, as Scott said, of, at this point, the lower production activities, and the impact quarter to quarter will be dependent on delivery activity.

To help clarify that, last year's deliveries were units that had been produced at a higher rate.

And next year, as it flows through the inventory, it shows up next year.

Without the higher revenues on the commercial side to offset that, it puts pressure on the margins.

It's going to vary principally as a function of 412 deliveries.

The military margin rates are pretty consistent through the years.

And the deliveries are pretty consistent through the years.

So it's going to largely come down to the medium-sized, particularly 412, deliveries as we work our way through the year.

Very helpful.

And then last quick one.

Just asset prices, your own as well, have come in in the past few months.

Any change in your view on the relative merits or appeal of buyback versus M&A when you think about capital deployment this year?

I think our strategy's really the same.

We will always keep an eye out for some M&A activity.

I think Able is a great example.

This is a business that's a very healthy business.

It helps to augment what we bring to customers in terms of our aftermarket capability.

So those are deals we do.

They are not huge deals.

But that's the kind of deal we would do in terms of the market on the stock buyback.

As you know, we're still committed to at least offset dilution; and opportunistically, we will do more than.

Great, thank you.

Noah Poponak, Goldman Sachs.

Good morning, everyone.

Scott, just conceptually, how long can you run a business with $5 billion in revenue but only $1 billion in backlog, that question pertaining to aviation?

I get it's become more of a turn business than a backlog business.

I get there are components of that revenue number that don't have backlog.

But it seems like it's just a risky thing to do where if you keep this neutral-ish environment, you are fine.

But if you were to have a more sinister backdrop, you would have to maybe cut things more sharply than you would if you were already reset to where backlog is.

The market is what it is, I guess.

We have been doing this for a long time, right?

We are coming in with around this kind of backlog, and our team is selling aircraft.

So I think that we are in a position here where, even in a pretty flat market, we've been able to continue to eke out some growth on the top line in terms of -- forget the deal -- just organically, in terms of we sold more King Airs this year than we sold last year.

We sold more Jets Air this year than we sold year.

And we continue to expand the margin rate.

Look, if someone would give me another $1 billion or so of backlog, we would take it.

But the fact of the matter is, that's not where the market has been.

And it's been this way for, we were talking this morning, it's been at least six years where we've been operating in this mode.

And that's just the nature of this industry right now.

It's not a big announce a plane and get billions of dollars of backlog.

You go out and sell them pretty much one plane at a time.

And that's working for us.

So our revenue keeps going up and our margins keep expanding, and that's what we're going to keep doing.

It makes sense.

The question was just more around risk mitigation of, that's been working.

But if you had a tougher global macro environment, that $1.1 billion could move sub $1 billion pretty quickly.

And then you are staring at a more difficult situation, I guess.

I don't know.

I appreciate the question; I understand.

As I said, if I could wave a magic wand and make it a different market environment, I would certainly do that.

But where we spend most of our discretionary money is in new products, and the new products have been working.

If I was to go and say -- all right, what if we took a different approach?

What if we hunker down and ride this thing out?

What if we didn't do the Sovereign Plus or the Latitude or the M2?

Boy, I think without all that new product investment, it would be tough to sustain a business that can grow revenues and expand margins.

Yes, I am definitely not advocating for that.

My question is more, should production be much lower on the legacy products?

We have taken those numbers down quite a bit over the years.

And I think right now, you are not seeing big overbuilds of stuff.

We are not pumping out white tails.

We are matched pretty well.

Our production today, over the last few years, frankly, has been running to demand.

We are not generating big surpluses of aircraft.

We just don't do that.

Makes sense.

On the Latitude, on the new product topic, when you had us all at Wichita, you could see in the facility some tail numbers.

And you could see some tail numbers in the 30s.

So, if I assumed that you made it to cumulative delivery number 30, call it, the middle of this year, that would get you somewhere in the vicinity of 30 Latitude deliveries for the year.

Is that in the ballpark?

Yes.

Okay.

So we should think about production, excluding that, roughly flat, and then roughly that number for the Latitude?

That's correct.

Okay.

Thank you.

George Shapiro, Shapiro Research.

Yes, Scott, I just want to pursue a little bit more -- and I know you have touched on it, but I wanted to touch on it a little more.

The aviation guide for margin in 2016, effectively you are assuming the margin's really flat with 2015 because you don't have any of the step-up in 2016 that you had in 2015.

I know you commented that a lot of it is because of deliveries to fractionals.

But still, to go from the high incrementals you have been running to a relatively minimal incremental of maybe 9%, at least in your guidance, seems pretty darn big shift.

So I was just wondering if you could comment a little bit more on it.

George, I think you are accurate in terms of your assessment of how we get there.

It's certainly on the lower end of the conversion than we would normally like to see.

But, again, a big piece of it is expectations on lower margin in terms of the fractional, which is a big part of our growth, frankly.

So if you look at that year-over-year incremental -- and Noah was just walking through the map as well, reading serial numbers of aircraft.

But a lot of our incremental as we go from 2015 to 2016 is Latitudes.

And a big chunk of that is going into the fractional market.

I think that's just the reality of where we are.

A big piece in the year over year is going to be fractional deliveries which are at lower margin rates.

It's still good business for us, but at lower margin rates.

But one of the things that I came away with from the investor conference in Wichita was the costs that you are taking out on the Latitude versus the Sovereign.

My expectation was that the Latitude margin would start out no worse than some of the average mature programs that you have.

I guess that's not correct, or maybe it's just overwhelmed by the fractional ownership.

Yes, it's the pricing on the fractionals as opposed to the cost basis.

I think where we wanted to be on the cost, we feel pretty good about where we are on the cost on the Latitudes.

You are always going to have a little bit of inefficiencies in the ramp of a new one, but it's not a material issue for us.

It's doing really well.

The cost is in a good place.

It's really a question of pricing on fractionals.

Okay.

And then just one other one.

You commented, I think to Cai's question earlier, about the book to bill being low this quarter.

But when I went back and looked at the book to bill in the fourth quarter of last year, it was actually around 1 versus the 0.7-plus that we saw this quarter.

So is there any added color you could provide on that?

Sure, George.

If you go to back to fourth quarter last year, we did talk about the fact that we had a pretty significant international military order.

And those are lumpier than the normal flow.

That contributed a pretty good backlog into Q4 next year.

So if you took that out, the dynamic we've typically seen in Q4s, because it's such a high-delivery quarter, has been that we see a much lower book to bill in Q4s, at least we have in recent times.

So I don't think this year, if you were to back out the military deal in the fourth quarter, it doesn't look very different on a year-over-year basis.

Okay, thanks very much.

Sheila Kahyaoglu, Jefferies

Hello, good morning.

Thanks for taking my question.

Just to harp on the aviation margin one last time, is there any way you could size the fractional impact?

Is it over 100 basis points?

Is it closer to 200 to 300?

And then could you remind us again what the NetJets order is?

Is it still 25 firm and the option for 100?

It was 25 firm -- I thought it was actually 150 option.

It's 125 option, so it's 150 total.

Right.

Anyway, yes, I think it's a few hundred basis points -- 200 to 300 basis points, Sheila, when you think about the margin impact of sales into fractionals versus retail sales.

Okay.

And that's on the unit deliveries rather than the total EBIT?

Correct.

And then R&D within the segment in aviation is pretty much flat, which is impressive considering you have a new program launch.

Would you say SG&A should be up year over year?

Yes, it'll be up but not a lot.

Yes, not a lot.

The R&D is relatively, as I said -- if you look segment to segment it's relatively the same as you go from 2015 to 2016.

So not a headwind for sure.

Okay.

And then just one on systems -- is it a second-half weighted revenue cadence, given that you have ship-to-shore impact, I would think, in the second half of the year?

Yes, particularly driven by TAPV, Sheila.

The ship to shore, the development program is relatively flat through the quarters.

But the TAPV will certainly be a very heavy Q3, Q4.

Thank you.

Jonny Wright, Nomura.

Hello.

Just one question on industrials -- expecting pretty decent growth again this year.

Just wondering what are you anticipating from auto markets in 2016?

And is there anything else you want to call out that's been embedded in the guide there?

The auto markets continue to be pretty healthy.

As I mentioned in the prepared comments, we saw growth again this year in all three regions -- in North America, Europe and Asia.

All the forecasting -- we drive our guidance, obviously, and our model based on what's out there in terms of what all the OEMs are saying.

And right now they are all forecasting growth again in 2016.

So we expect obviously to grow with that.

We have had some nice wins on new models, which is helping to drive our growth.

Our growth has been in excess of what overall markets have done on the auto side.

And I expect that will be true again in 2016.

Okay, great.

That's all I had.

Thank you.

Jeffrey Sprague, Vertical Research.

Hello, this is John Walsh on the line for Jeff.

Good morning.

A lot of ground covered.

I just had one quick question on pricing.

I totally understand what's going with the fractional business.

Could you just comment on like-for-like pricing -- what you saw in the quarter and what you are expecting in the guidance?

It's been pretty flat, John.

Some models are up a little bit, some are flat.

But all in all, it's not materially different.

It's a fairly stable price environment.

Okay, great.

Thank you very much.

Pete Skibitski, Drexel Hamilton.

Thanks.

Just a couple quick ones on aviation.

Scott, aviation aftermarket last year and this year, is it similar to the Bell commercial aftermarket trends?

And then I was just wondering if you could talk about aviation Citation pre-owned pricing and activity-wise.

On the aftermarket, on a comparable basis we were pretty flat.

We had some changes in how we recognized revenue in terms of some engine programs, which I think we've talked about before, which doesn't affect our profitability but just the revenues.

We are not basically in between the customer and the engine side.

So all in all, I think it's relatively flat and we'd expect, frankly, on a comparable basis, a slight uptick in aftermarket in 2016 from 2015.

And similarly on the used aircraft pricing, it's been fairly stable.

Great, thank you.

Myles Walton, Deutsche Bank.

Thanks, good morning.

Maybe, Frank, a quick question on the balance sheet; and maybe, Scott, on capital deployment.

Is the idea to refi the notes coming due, or repay and start to reduce debt further?

It seems like you're getting to a point where maybe the debt load is at a point where you're comfortable.

So, Scott, is that M&A aperture actually increasing as there is more excess free cash flow there?

Thanks.

From a balance sheet standpoint, we will probably refi what we have coming due this coming year.

We're pretty comfortable now with our debt levels that the balance sheet has.

We have had good flexibility over the past couple years, we think, from an M&A standpoint.

So I don't think there's a real change in the M&A aperture.

We feel like we have been able to do the things we wanted to do.

And we will be able to continue to do that.

But we will stop paying down debt at these levels.

Our debt levels are getting to about where they should be from a ratio standpoint.

But I would add the same color Frank did.

We will do deals that we think make sense.

We haven't felt in any way constrained.

Clearly, we have access to the market if we need to do that if the right deal came along.

But we are not going to do deals that we don't think make sense.

And we are certainly not going to run around and try to find stuff or force stuff that we don't think fits in the business very well just to deploy that way.

I think our M&A strategy is one where, if we see opportunities -- it's a great fit, we think we can get great leverage, it supports the balance of our business --we will do them.

I see that, but if you are starting to generate excess cash that is not going back to paying down debt is all I'm getting at.

So if you think about the $600 million to $700 million pre pension, you get $100 million to repo and another sub $100 million to dividends.

And so you are starting to have excess cash.

I'm just curious if, A, the aperture can get better; or, B, you want to be more opportunistic, maybe on the industrial side as the rest of the world de-rates in that sector.

Again, I don't think our cash, the balance sheet thing, is particularly excessive yet.

It's not like we are worried about accumulating too much cash.

We will continue to be pretty aggressive at looking for opportunities across all our business on the acquisition side.

And, as I said, we will also be opportunistic around the share buyback in terms of deploying that capital if we think it makes sense based on where the shares are trading.

Sounds good, thanks.

Ron Epstein, Bank of America.

Good morning.

A couple big-picture questions for you.

On the Hemisphere, when you think about it, I know it's still early days, but with Gulfstream G450s coming off the line -- and my understanding is that they are selling for not too much over $30 million -- isn't that a really difficult place to try to put a new product?

With Gulfstream there, with the Bombardier there, with Dassault there, it seems pretty crowded.

I think when we look at the Hemisphere and how we size the Hemisphere, our intent is to be just below where that market is.

Because, you are right.

I think the 450, 550, the Global 7000 -- there's 7X, 8X -- it's not our intent to be competing with that guy.

So if somebody is looking at a G450, the Hemisphere is designed to be slotted one tier below that echelon of aircraft.

We think that's the market where there hasn't been a lot of reinvestment by a lot of the big iron guys, which is why we're going there -- not with the intent of going up and joining in that area.

Because I think you're right; I think it's a well-served market.

In terms of current pricing, I have no idea.

That market cycles just like the light mid-sized cycle.

So where pricing and demand is right now is a function of the market.

But the intent that we have with Hemisphere is it slots just below, before you get into those big iron guys.

Okay.

And then totally changing gears here, just real quick, a little bit out of my immediate comfort zone.

But at Caltex, have you seen any weakness in the SAR yet for auto?

No.

No, we haven't.

It's been pretty solid.

Okay, that's good to know.

And then, finally, I can't not get on the phone with you and not ask you about the Scorpion.

Any update there?

The Scorpion -- I think the good news is that one of the most critical issues for that program was always determining a path to certification.

I think the good news is, through a lot of work last year, the Air Force has now opened up the ability to go through an air-worthiness process with the Air Force.

They have initiated that program.

Obviously, we fully expect to participate in that.

We have the first aircraft that will be the conforming test articles in production as we speak.

And are working with the Air Force to get under contract to have them conduct and ultimately provide air-worthiness certification for the aircraft.

So that's a big step forward for us.

That's great.

Is your sense -- is there any opportunity for it maybe in the Air National Guard, anything like that?

I think eventually there could be.

Obviously, there's a lot going on budget-wise in the US Government.

But we've always thought that, while this is certainly intended more as an international product for a lot of countries that can't afford to fly the F-22s and the F-35s of the world, we certainly think the capability of the aircraft might be one that at that price point and that capability could be attractive for a lot of missions that could include the US.

Great, cool.

Thanks.

Thank you, ladies and gentlemen.

There are no further questions in queue at this time.

Ladies and gentlemen, that does conclude our conference call for today.

On behalf of today's panel, I would like to thank you for your participation in today's conference call.

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