達信公司 (TXT) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Textron second quarter earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Eric Salander.

Please go ahead.

Thank Greg, and good morning, everyone.

Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today.

These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release.

On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer.

Our earnings call presentation can be found in the Investor Relations section of our website.

Textron's revenues in the quarter were $3.6 billion, up $93 million from last year's second quarter.

During this year's second quarter, we recorded $13 million of pretax special charges or $0.03 per share after tax.

Excluding these items, adjusted income from continuing operations was $0.60 per share, down $0.06 from last year's second quarter.

Manufacturing cash flow before pension contributions was $341 million compared to a use of cash of $26 million in last year's second quarter.

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

Thanks, Eric, and good morning, everybody.

A 2.6% increase in second quarter revenues reflected growth in Industrial and Bell.

We continued strong performance at Bell in the second quarter with a 13.6% operating margin.

Revenues were up on higher military volumes as we delivered 14 H-1s, up from 9 last year.

V-22 deliveries were down from 4 in the current quarter versus 6 last year and 21 commercial helicopters compared to 24 in last year's second quarter.

Commercial order flow continues to improve as we booked a number of significant orders in the quarter.

We signed an agreement with Shaanxi Helicopter Co.

in China for 100 Bell 407GXPs, with deliveries expected to begin this year.

We also received an FMS award for Bell -- for 4 412EP helicopters that we'll deliver in 2017.

Our Bell 505 Jet Ranger X achieved FAA certification in the quarter, marking a significant milestone for the aircraft, and we continue to see a strong conversion of letter of intent to orders.

On the development side, our 525 Relentless program resumed flight test activity earlier this month.

We remain committed to this development program and anticipate certification of the aircraft in late 2018.

Moving to Systems.

Revenues were down slightly as ramping up TAPV deliveries were more than offset by lower weapons and Unmanned Systems deliveries.

We also completed the final delivery in our Sensor Fuzed Weapon product line in the quarter.

We are continuing our development efforts in the area of lightweight precision guided munitions and successfully tested our Fury munition against moving targets from various unmanned aircraft systems, including our Shadow platform.

At the Paris Air Show, our Unmanned Systems business unveiled its next-generation platform, the NightWarden tactical unmanned aircraft system, with enhanced capabilities and runway independence.

Our Textron Airborne Solutions business, ATAC, was awarded a $45 million IDIQ contract modification in support of the Navy's contracted air services program.

We are continuing to see demand for government contracted air adversarial services and see this business as a growth opportunity.

Moving to Industrial.

We saw an 11% increase in the revenue, reflecting the impact of a full quarter of Arctic Cat.

We continue to make progress with the integration of Arctic Cat as we've begun consolidating operations and enhancing our dealer network.

Also during the quarter, the Textron off-road Stampede 4x4 was recognized as American Hunter's 2017 Vehicle of the Year.

On the new product front, our lithium-powered golf cart continues to gain momentum in the marketplace, with over 8,000 units delivered since its introduction earlier this year.

Moving to Textron Aviation.

Revenues were down $25 million.

We delivered 46 jets, up from 45 last year; 19 King Airs, down from 23; and 4 Beechcraft T-6 trainers compared to 11 last year.

We continue to see improving pricing in the market with higher overall pricing on new retail jet models year-to-date.

The Citation Longitude continues to make progress towards certification by year-end as the fourth Longitude was added to the flight test program.

This is the first aircraft with a fully outfitted interior, which will also be used for customer demonstration flights.

This aircraft was on display at EBACE, where we also announced our first European Longitude customer.

On the military side, we were awarded an FMS contract for the Argentine Air Force for 4 Beechcraft T-6 aircraft, along with related maintenance and pilot training.

Moving to Scorpion.

We continue to prepare the production aircraft along with our Beechcraft AT-6 for participation in the U.S. Air Force OA-X light attack experiment beginning in August at Holloman Air Force Base.

To sum up the quarter, we made significant progress on new products across our businesses and continued our efforts to integrate recent acquisitions, all of which position us well for future growth.

We also remain focused on inventory control and working capital management, which was evident by the continued improvement in our cash generation this year.

Moving to capital allocation.

We repurchased 7 million shares year-to-date, which is consistent with our strategy.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $295 million, down $33 million from the second quarter of 2016 and a $93 million increase in revenues.

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

At Textron Aviation, revenues were down $25 million from this period last year, primarily due to lower military and commercial turboprop volume, partially offset by higher jet volume.

Segment profit was $54 million, down from $81 million a year ago, primarily as a result of the lower volume and mix.

Backlog in the segment ended the quarter at $1 billion, approximately flat from the first quarter.

Moving to Bell.

Revenues were up $21 million due to higher H-1 program revenues, partially offset by lower V-22 revenues.

Segment profit increased $31 million from the second quarter of 2016, reflecting improved performance.

Backlog in the segment was $5.4 billion at the end of the quarter, down $234 million from the end of the first quarter.

At Textron Systems, revenues were down $10 million primarily due to lower volumes in our Weapons and Sensors and Unmanned Systems product lines, partially offset by higher volumes at Marine and Land Systems.

Segment profit was down $18 million due to lower volume and mix.

Backlog in this segment was $1.6 billion, down $170 million from the end of the first quarter.

Industrial revenues increased $109 million largely due to the impact of the Arctic Cat acquisition.

Segment profit was down $17 million due to an operating loss at Arctic Cat, which was consistent with our integration plan and unfavorable pricing and inflation.

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

Moving below segment profit.

Corporate expenses were $31 million, flat with last year.

Interest expense was $36 million, essentially flat with last year.

Our effective tax rate for the second quarter of 2017 was 28.8%.

During the quarter, we recorded pretax special charges of $13 million.

Through the second quarter of 2017, we've recognized pretax charges of $150 million under the restructuring plan that we announced last year.

During the quarter, we repurchased approximately 3 million shares, returning $143 million in cash to shareholders.

The work we've been doing over the past several years to strengthen our balance sheet and our businesses was recognized earlier this month by Moody's with a credit rating upgrade to Baa2.

To wrap up with guidance, we are reiterating our expected full year adjusted EPS from continuing operations of $2.40 to $2.60 per share exclusive of the Arctic Cat restructuring and deal costs and other ongoing restructuring efforts across the businesses.

We also continue to expect cash flow from continuing operations of the manufacturing group before pension contributions of $650 million to $750 million.

That concludes our prepared remarks.

So Greg, we can open the line for questions.

(Operator Instructions) Your first question comes from the line of Jason Gursky with Citi.

Scott, I was wondering if you could just talk about the demand environment on the biz jet side from a geographic perspective, kind of walk us around the world on what you're seeing this quarter and the visibility that you have here into the second half of the year.

Sure, Jason.

Look, I think on the business jet side, it's still very a North American-centric market.

It's really -- I haven't seen any particular dynamics changing over the course of the year, and that's how we would envision it playing out for the balance of 2017.

So still very North American driven.

Okay.

And any potential opening there in China?

It looks like the helicopter market is improving a bit for you and being driven by China.

Maybe some commentary on the regulatory environment and the demand environment for biz jets in China specifically.

Well, sure.

For sure, the helicopter market continues to be stronger in China.

The deal with the 100 407s is a great program for us.

We do see the helicopter market remaining strong.

Again, from a regulatory environment, these are -- helicopters largely operate at lower altitudes, and there's been a lot more reform around the airspace in those lower altitudes than up in the flight levels.

So in terms of the jet business, it's been still pretty weak, and I think part of it is -- the regulatory part of it has been the politics around business jets in China.

And we certainly would expect that, that will loosen up over time, but it remains pretty quiet.

Right, right.

Okay.

And then lastly, on the 525, there was a couple of quarters ago where you suggested that the sales force was shifting its focus and its efforts, moving away from the oil and gas market to other end markets.

Now that you've got the aircraft back in flight test, can you kind of update us on current thinking with regard to the sales of the 525 and where you expect the demand to be coming from and what the progress is looking like there?

Sure, Jason.

Look, this machine was designed as an aircraft that would be ideally suited to the oil and gas market.

We still think it's a great oil and gas machine.

Obviously, that market is in a very difficult spot right now.

As oil prices have come up a little bit, it's probably starting to get a little better.

We've seen some activity in the lighter end into that segment but still very, very weak.

And as you know, there's an awful lot of equipment out there sort of on the sideline, so that it's going to take some time from sort of the lag between oil and gas recovering and absorption of what's out there before you'll see a lot of new aircraft orders, I think.

But we continue to talk to those customers.

They still are very much in our focus.

There's still a lot of interest around the 525 for that market, but the timing is still to be determined.

In the meantime, we certainly are -- continue to look at the VVIP market, governments, troop transport and other sort of utility applications for an aircraft of that performance envelope.

So we're certainly not dropping our focus on the oil and gas customers.

It's -- but the timing will be an issue, so we still are working hard at those other markets.

Your next question comes from the line of Seth Seifman from JPMorgan.

I wonder if we could talk a little bit about the Industrial business, and it looks like we started off the year with expectations for organic growth maybe in a -- close to 5% range.

And there's been some currency headwinds year-to-date but it seemed to be a little bit short of that so far.

So talk about the dynamics in the different business and what you expect in the second half.

So I think if you look at the constituent parts, obviously, automotive right now is more flattish.

So there's a little bit of difference region to region.

North American auto is down a bit.

So I think getting any kind of significant growth on the Kautex side right now is probably unlikely just given the nature of what's going on in the automotive segment.

The business is still performing well.

I think our execution in terms of manufacturing operations and key measures like scrap and operational efficiencies and uptime are all positive.

So we're seeing good performance from the business, but we're not going to see a lot of top line growth in the current automotive environment.

Around the vehicle side of the business, I think that for the most part, our order rates are good in the core of what we've had, both in golf and our ground support equipment businesses and the industrial Cushman product lines, so I don't think there's anything out of the ordinary there.

Obviously, most of the growth is driven by the Arctic Cat deal.

And our focus there continues to be, as we talked about, really moving a lot of the older inventory out of the channel.

That's gone very well, frankly, and really, at this point, focused on getting new products and getting those launched and getting the dealer channel set up to take on a lot of that new product.

And that will be our focus through the balance of the year.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Scott, just in the overall business jet market, you sort of started the strategy a couple of quarters ago to kind of incrementally hold the line on price.

And then, immediately post-election there, at least you were asked a lot about policy changes potentially improving demand.

So maybe you could just update us on both of those.

On the former, what's the market receptivity been?

And are your competitors doing the same?

And then, I guess, just with both, are either changing demand?

It kind of looks like they're not, but just wanted to get your feel on both of those items.

Noah, I think we are, as we've talked about, we're increasing our price that we're realizing out there in the marketplace.

We continue to do that, and we continue to do that in the second quarter.

So we're seeing improved pricing versus where we were last year when we said -- sort of said, "Hey guys, enough is enough.

We need to start getting some price back into the market." For sure, there's some mix out there of customers that are waiting to see some movement on the government side from a tax standpoint, which I think largely, people feel, would help to stimulate the economy and drive some GDP and improve their business outlook, which would give them more confidence to do capital expenditures on things across their whole business, including business jets.

So I think there's still a little bit of reservation around that.

Obviously, it's a relatively flattish market.

So I think we're being successful on the price front.

We're certainly willing to do that at the expense of some volume.

And there are certainly some customers that are holding out, and that's fine.

We're not going to give back on the pricing front.

I think it's moving in the right direction.

We need to continue to do more.

But I think, in general, Noah, the demand environment around the business jet side is relatively flat.

The part, frankly, that's the biggest drag for us right now around volume is really on the turboprops, and a lot of that, as you know, is more international business.

So between economies and exchange rates and all these kind of things, that has continued to put some pressure on both the Caravan and the King Air product lines, so both of those models are down on a year-over-year basis in terms of the volumes.

So we're going to -- look, that's just the nature of the international market, so I don't think we need to change our strategy.

We'll keep selling hard, but we would like to see those markets come around a little bit, obviously.

The other thing that's obviously a drag for us on the margin side is that we're down pretty significantly on a year-over-year basis on our T-6s, which is a great product line on the military side for us.

Hopefully, we'll see, I think -- well, we should see a little bit of an uptick here in the third and fourth quarter versus the first half of the year.

But it is certainly going to be down quite a bit on a '16 to '17 basis, and that was baked into our guidance obviously.

Okay.

So what was the Scorpion spend in the quarter relative to that full year $50 million?

Well, we don't break out specifically the spending on it.

I'd say it was -- we always said it would be considerably higher in the first half than the second half, and that will be true.

We've had a very high level of activity here in Q2 as we finished the first couple of production aircraft, we got them flying and are now in the process of doing ordinance work and as -- being prepared to have aircraft ready for the experimental flight test program on beginning of August.

And those aircraft are built, they're ready, so I would certainly expect that what we forecasted, to see a ramp down in Scorpion spending in the back half of the year, will be true.

So if I just kind of guess at a rough layout of that, it would look like you need to be -- well, I guess, on a reported basis, you need to be about a 9% aviation margin to get to the 7% that you -- start of the year targeting and maybe 9.5% to get to the 8% ex Scorpion.

Am I hearing you correctly that you're maybe looking at being a little bit light of that based on what's happened on the military and the prop side?

Yes.

I would say, right now, I would forecast that on being the lighter side, and again, primarily driven by the fact that we're -- I would expect we're going to be lighter on the turboprops, particularly the King Air and the Caravan, than we would have expected.

Again, we're not -- we got to see how the back half of the year plays out.

But certainly, we're going into the back half of the year with a lot more turboprop volume requirement than we would have had in our plan.

Your next question comes from the line of Sam Pearlstein from Wells Fargo.

I was wondering if you could go back on Bell.

You called out the continuing strengthening on the commercial side.

Can you just talk a little bit more about what's giving you that confidence?

Just because I'm looking -- we certainly see the weakness in oil and gas and oil and gas prices.

Is it simply the China order?

Just trying to put a little bit more around that, please.

No, Sam, I think it's much broader than that.

I mean, obviously, the China order was great for the 407, but we have seen strengthening just on normal sort of one-off order flow on 407.

We see continued strength in our 429 product line.

And again, these are not fleet deals, just good flow of activity and orders closing on the 429 program as well as 412.

So the 412 order book continues to strengthen.

There's still a couple of deals out there that need to close through the balance of the year that we would expect to have happen that are sort of in negotiation.

But it's really -- and 505, obviously, is we're sort of in an "as fast as we can make them, we'll ship them" scenario, but that's not a whole lot of dollars per aircraft obviously.

But I would say that when you look at our portfolio, the 505, 407, 429, 412, it's -- the order book has strengthened across all those models and a broad range of applications: everything from military application to VVIP, EMS, search and rescue.

It's pretty strong across the board.

And is the backlog decline sequentially, then, all on the military side?

Yes.

And that's mostly normal for us, Sam, right?

I mean when we -- remember that we don't put the V-22s on the multiyear in until that year's funding is appropriated, so we usually have this sort of cyclical backlog that happens, largely driven by that.

Okay.

And then also on Bell, just the strong margin this quarter, can you talk a little bit about what the EACs were versus just a richer mix just in terms of the moving pieces to get that margin?

Well, the EACs are reported sort of company-wide, so I don't think we'll go into -- in a lot of detail there.

But we had positive performance, and -- but it's not a huge swing on a year-over-year basis in terms of the numbers.

It's just our -- kind of the team continues to have good solid performance.

Obviously, getting some additional volume on the H-1s in the quarter was helpful.

But the guys are doing a good job controlling cost and executing well and getting product delivered.

And I'm sorry, one last question.

The Canadian TAPV -- I know it's non-Bell, but just the Canadian TAPV, any change in kind of your outlook after taking that adjustment back in the first quarter?

Not really, Sam.

I mean, look, it continues to be a challenging program.

The good news is our deliveries in the quarter were kind of doubled from where they were in the first quarter.

We continue to have our sights on sort of finishing the majority of that program this year with, obviously, a little bit going into the second half of next year.

But it's still a challenging program, but we're getting it behind us.

Your next question comes from the line of Pete Skibitski from Drexel Hamilton.

Scott, I wonder if you could further on Arctic Cat integration in terms of how that's going and kind of give us a time line for returning to profit there.

And one variable that goes along with that, that I'm not sure about, I was wondering if there's kind of long-term purchase intangibles that you have that's going to be kind of a drag on the GAAP profit for a while.

So Pete, I think the integration so far is going well.

I think we're through that first critical few months, so we're getting the team through all the organizational changes and all the things that sort of go with a major acquisition.

Everybody, I think, at this point is focused on their primary jobs and getting the work done.

Job one, as we talked about, was running programs to try to clear out a lot of the aged inventory that was out there in the channel.

And we went at that pretty hard and I think we've seen a lot of success in doing that, and creating room for floor plan for these guys as we bring out and start to launch new product.

We'll have a lot of the integration and the launch -- a lot of new products here as we get into the latter part of August into September.

On the dirt side, I think snow product launches which happened right before we completed the acquisition have gone well, so snow bookings have been good.

And the dirt process is one where we're integrating across so that we really look like the same company across everything from the ATV through all the side-by-sides and up through the high-performance products.

So I think we're in fairly good shape.

We did what we needed to do around organization.

We've made all of our announcements in terms of what we're doing in terms of operational restructuring and aligning our production facilities, obviously.

And as Frank said, part of our plan here -- it is losing money right now, which was part of our plan.

We are running at low manufacturing rates, which, again, is consistent with our strategy to sort of bleed down a lot of that inventory that's out there and then start the reloading process with new product here as we get into the latter part of the year.

So everything that we said we were going to go do is what we're in the process of doing, and I think we're fine.

There's nothing -- on the intangibles...

There's some drag associated with intangible amortization in the numbers for Arctic Cat that we gave, which was kind of the $0.10 dilution for this year, as Scott said, given the lower volumes and then accretive into '18 includes all of the M&A accounting for it.

Yes.

So I think the guidance that we gave around our anticipated dilution this year is going to be about what we thought it was, and it should become accretive as we go into 2018.

Great.

I appreciate that.

One quick follow-up.

I'm a little surprised you had the final Sensor Fuzed Weapon delivery this quarter and didn't hit double-digit margin at Systems.

Is that the impact of TAPV being 0 margins?

And I think you said you could hit 8.5% on the full year at systems.

Is that still possible?

No, I don't think that's possible, Pete.

There's no question this TAPV issue has been a problem.

As I said, the bulk of that, I think, has already been recognized obviously, but it's going to put a drag on the total year systems number for sure.

Your next question comes from the line of Cai Von Rumohr from Cowen and Company.

So I think at the -- after the first quarter, you indicated that total aviation R&D likely was going to be down in the second quarter.

Can you comment as to whether it was?

And were there any other issues that we should be aware of like used aircraft losses were higher, lower, anything like that?

No.

The deltas in both the R&D front and the used aircraft loss were negligible, Cai.

I think...

Negligible versus the first quarter?

It was up very, very slightly, and negligible versus the year-over-year comparison.

So the dynamic that's going on with respect to the margin range, Cai, is largely driven around the fact that on -- as we talked about, on the jet side, we're pressured because of a little bit higher mix around our NetJet deliveries and the fact that we're down pretty appreciably on the turbo front for both the Caravan and King Air on the commercial side as well as the T-6 on the military side.

The T-6, we fully expected.

That was baked into our plan.

All of the numbers around R&D, so far, have been essentially what's baked into our plan.

The pressure point really for us has been around the lower volumes on the King Air and Caravan fronts are what's kind of pressuring us from a plan perspective.

If the R&D at aviation was up in the second quarter versus the first quarter, where I think you said it was up like $7 million or $8 million year-to-year, by my numbers, the R&D has to come down very sharply in the third and fourth, is that -- sequentially.

Is that kind of the way things go?

Yes, I expect it will come down and largely driven by the fact that we've got the bulk of the work around the Scorpion program behind us.

There will obviously be some continued spending as we work our way in both certification, flight test program and the Air Force experimentation program, but it will certainly be down sequentially.

And then you talked of improved pricing.

On the Q1 call, you talked of improved pricing sequentially on all models.

Give us some more color on what does improved pricing mean.

Well, improved pricing, we look at everything.

Because what we disclosed is on a year-over-year basis.

For most models, we're also seeing continued sequential pricing.

There are some exceptions in there, which is why I'd be careful about it, Cai.

For instance, on Mustang, Mustang pricing was down sequentially, and that's largely because we stopped production of that aircraft and we had the last aircraft that we were selling.

And so we did do some additional discounting to move those last aircraft.

Now the good news is that's done.

We have sold the last of the production Mustang so that won't be a factor for the balance of the year.

But the teams are continuing to see progress on the pricing front, and I expect that we will through the balance of the year.

And we're willing to trade volume to make that be true.

Terrific.

Last one, Bell margin, given the huge margin you had in the second quarter, can you beat the 11% bogey you set out in the fourth quarter?

Yes, I think so, Cai.

If we were to lay out sort of just color around this thing, I think, Bell is continuing to have a strong year.

They're executing well on the military programs.

We're seeing some strength on the commercial side obviously, which is good.

I think there will be upside there that will help to cover some pressure around where we are with systems, particularly with the TMLS business, and still a little bit to be determined here around back half volumes on the aviation business.

Your next question comes from the line of Myles Walton from Deutsche Bank.

Maybe one for you, Frank, on cash flow.

First half is pretty darn good in terms of free cash flow from manufacturing.

Just looking at the seasonal pattern.

Historically, a, I'm not sure you've ever had second quarter where inventory goes down, and b, it looks like you'll be at or above the top end of the range from a guidance perspective.

Can you give some color around that?

Sure, yes.

Now look, the seasonal pattern which certainly suggests we'll be stronger in the second half.

We continue to believe that.

CapEx will be heavier in the second half, so it is a little back-end loaded.

Obviously, as Scott indicated, kind of we continue to see kind of volume that we need to move out there.

So it's kind of a little early to be kind of changing our guidance, but certainly, we think we have -- given the strong first half performance, we think we have upside on the cash side.

Okay.

And then one quick one on rev rec standard adoption in '18.

Is Bell the one we should think about?

Because the V-22 volume would decline in '19 from a delivery perspective, but I guess you might accelerate some of that decline in '18 if you go to POC.

Yes.

I mean, look, it impacts Bell.

It impacts systems.

It impacts kind of, frankly, top line net revenue versus gross revenue in some of our other businesses.

We're still working through kind of all of that, but we don't expect it to be -- have a material impact when you look at the corporation.

Your next question comes from the line of Julian Mitchell from Crédit Suisse.

Just my first question on Industrial.

Just wondered if there was any update on that sort of $400 million to $500 million sales guide for the year in Arctic Cat.

And also, I guess what was the actual EBIT impact in Q2 from that acquisition?

I'm sorry, Julian, I don't have that number in front of me.

And we don't...

We're not...

We're not going to go into EBIT at the individual sort of subsegment level.

But suffice to say that in terms of how the business is performing, it's performing consistent with our plan.

Understood, okay.

And then just following up on the cash flow question.

I guess if you think about the components within that full year guide of $650 million, $750 million, what sort of working capital assumption is dialed into that given where you stand now?

I'm not sure I understand how to answer the question, Julian.

We're -- I think from an operational working capital standpoint, we're pretty confident with where we are.

The issue, which I think is what kind of Frank was saying, is that when we look at the total year perspective, while we're certainly -- I think it's gone very, very well so far.

We would expect it to go very well for the balance of the year.

The issue will be around, I think, particularly sales volume at Aviation, which would be finished goods.

If we decide that we're not getting price, then we're going to trade volume.

So operationally, I think I'm not concerned.

It's a question of what the volume is going to be in the second half on Aviation.

And then my last one would just be on the King Air side.

Did the second quarter there play out largely as you thought?

I mean, the declines were a bit less than in the first quarter.

Do you still think there's a reasonable chance you can get to sort of flattish deliveries for the year as a whole in King Airs?

Or is the first half sort of too low a bar for that to happen?

Well, look, the second quarter was certainly better than the first quarter with respect to our expectations and our plan of unit volumes.

But we certainly need to see a pretty significant uptick in demand in Q3, Q4.

And I don't -- we'll have to see how the market plays out, Julian.

But you're right, look, we were off of what we would have liked to see our plan was more in the first quarter than the second.

But we do need to see a material increase in volume here in Q3, Q4 to get to where we'd like to be on King Airs.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Just following up on the last question with regards to King Airs.

Scott, do you think it's -- just trying to gauge whether you think this is a shorter-term issue where it might be international weakness.

Or do you think it's longer term where you're seeing cannibalization from the light jets coming in and eating up King Air demand?

No, I think it's really -- the dynamic, Sheila, is more around just international markets are still kind of tough.

And our exchange rates obviously are quite strong, and it's making the product more expensive.

And we're not willing to take price out of there to sort of compensate for that, and so we're kind of holding the line on that.

Again, remember, this is a market where we have a product that's a very popular product.

It's a well-accepted product, and we just kind of have to hold the line with it.

So I don't think it's a cannibalization, particularly in the international marketplace.

The King Air performance envelope and the mission that it fulfills is pretty unique, and I think we'll be fine over the long haul.

But we need to hold the line here in the near term.

Okay, that makes sense.

And then if I could follow up on the Scorpion and just the OA-X flight testing in August.

Could you just elaborate more on the process and sort of what you expect?

What's the ideal scenario for Textron coming out of it?

Well, as the Air Force has articulated, the experimentation program will really put these aircraft through their paces.

They've got a bunch of different mission scenarios.

That includes a lot of different flight envelope, a lot of different mission scenarios, ordinance missions that are going to be run over the course of that August, maybe into beginning of September.

And so they don't have a specific criteria or a pass-fail.

They just -- they want to see what the aircraft are capable of.

Obviously, you have things like a Scorpion and an AT-6, which are both very, very capable platforms, very different in terms of their performance envelope.

And they want to see what each of those aircraft can do as well as an A-29, which we expect is also in there.

So it really is -- it's unusual.

It's not a matter of, "Hey guys, you got to do X or Y or Z or here's the pass-fail grade." They want to see what the aircraft are capable of.

So that will be the first step in our process here.

And as the Air Force has said, that will kind of inform them as to what they think their next step is.

Your next question comes from the line of Rajeev Lalwani from Morgan Stanley.

In regard to systems and defense overall, can you provide some color on the puts and takes around growth next year and what we should be focusing on?

You talked about the TAPV and what's going on there, but putting that aside.

Well, obviously, we're not quite ready to get into guidance for next year in terms of dynamics you just mentioned, particularly around TAPV and Ship-to-Shore Connector, which have been some of the more challenging points of the Systems business.

We'll have most of TAPV behind us, which is good, so I certainly see an improved year in that regard, and we expect that volume to largely be replaced by other vehicle programs, which historically have been normal, good margin programs for us.

So we certainly see a significant change in margin rate on a year-over-year basis there.

Ship-to-Shore Connector, which, again, has been a multiyear fixed-price development program, which has always been a difficult margin program, is going to be converting and starting to transition into production.

We're in the process of negotiating long-lead material and the initial production units.

So again, from a year-over-year basis, I think particularly around the TMLS business, which has been a challenge for us in the -- here in the last couple of years, frankly, we should see that business transitioning from fixed-price development and a difficult fixed-price development and production program into more typical margin programs going forward.

And then on free cash flow, given the comments you made earlier about inventory control and capital management, how are you thinking about conversion going forward?

Look, no differently.

It's -- we're -- we should be converting cash kind of a bit under 1x.

It depends on CapEx levels and spending levels and deposit activity and things like that, so there's volatility to it.

But we've been focused on better working capital management, and that's what we're seeing.

But no change in longer-term expectations.

Your next question comes from the line of Peter Arment from Baird.

Just a quick one, Scott, on -- falling back on Scorpion.

I know, obviously, the experimental program is the most important thing here near term.

But was there any incremental takeaways from discussions in Paris, I mean, seeing the aircraft over there?

Well, I'd say from a Paris perspective, we continue to get good exposure from potential foreign customers, which has always been a key focus on the Scorpion program.

I think that the aircraft, especially now that we have the production versions available, which is something that a number of the prospective customers have wanted to see, we continue those dialogues.

Some are kind of watching and waiting to see a little bit what happens with the Air Force OA-X experimentation program.

And others continue to have more specific discussions with us around when they want to come over, when they want to fly the aircraft and are laying, in some cases, their own plans and budgets in place for the program.

So I'd say, Paris was positive.

And -- but again, we really are very focused on the OA-X experimentation program because I think that not only will the U.S. Air Force get a good read on the capability of the platform, but I think a number of our prospective international customers are likewise watching to see how that program goes.

That's great.

And then just 2 quick ones, Frank, just housekeeping.

On the stock buyback, what's left on your availability for that?

And then also, what's the expectations for the tax rate for the year?

I think last update was around 30%.

Yes.

I think we've got about 20 million shares or so left on the authorization.

But we'll just redo the authorizations as required, so there's no real -- there's no limitation relative to authorizations really, because that's a continuing thing that we look at.

And tax rate should be around 28.5% for the year, so we'll be a little better than where we had originally guided.

Your next question comes from the line of Drew Lipke from Stephens.

I guess first question is on Longitude.

Can you update us on where we stand as far as potential order activity there?

And then when you look at just kind of the level of competition in the super midsized segment, how confident are you in your ability to hit your margin goal for the program as we stand today?

Well, I think we're pretty confident.

The aircraft is flying really well from a performance standpoint in terms of the things our customers look at around range and useful load and speed.

We have a better aircraft than other aircraft that are in that segment today.

So I think that as we talk to customers about the aircraft and accumulate a lot of information around the flight testing, it's all very positive.

I think people are very enthusiastic.

We just -- keep in mind, we just built the first one that really has a nice -- real aircraft with a real customer interior and are just entering into the phase where customers will get a chance to actually fly in the aircraft on demo flights.

So we do have -- we have already had some order activity, but you wouldn't expect at this point to see a whole lot of that until people can actually fly the aircraft.

And that's the phase that we're entering into at this point.

So I think we'll do well.

I think it's -- again, from a performance and pricing standpoint, I think we're in a good place, and we'll see how it plays out through the balance of the year.

Okay.

And then just jumping over to Scorpion, 2 questions on that.

I mean, on the one hand, you've got key members of the Air Force testifying and consistently stating publicly that the OA-X program is a strategic priority.

And you've got Senate Armed Services Committee dedicating $1.2 billion.

But on the other hand, if you look at the Air Force's unfunded priorities list, there's no mention whatsoever of the program.

So I'm curious, what do you think of it?

How do you kind of reconcile those 2?

And what's your take on the criticality of the program?

And then just also the $2 billion of light attack for that Saudi package, do you believe that's dependent on the OA-X program?

And what do you think your odds are there for that Saudi piece?

Well -- so I guess what I would say as far as the U.S. Air Force is concerned, remember that where they are in this process is an experimentation program.

So I think the chief and a lot of very senior people at Air Force have been articulating the need for a platform like this, and they feel that it's important to the Air Force to have a capability like this.

But it would be hard for them, I think, even on an unfunded list to advocate for something that they haven't flown and seen demonstrated.

So I think that their interest and desire on the program and certainly, as you note, the Senate Armed Services, for instance, saying, "Look, we recognize this is a need, and we want to put budget authority in there for it," we also can't get the cart in front of the horse here.

They -- I think the Air Force is being pragmatic about the fact that they need to execute the experimentation program, understand what the capability is of the platforms that they're looking at and then take their next step, whatever that might be.

So I think from a process standpoint, they're doing it in an appropriate fashion.

It'd be very hard for the chief to say, "Hey, I'm going to go advocate for something that I haven't flown and don't really know what it's capable of doing." So I think that's kind of where the process is on the Air Force side.

In terms of the Saudi budget item around OA-X, obviously, this is one of the customers that we're in discussions with, but these are early on, on discussions.

There's certainly a number of things they'll be looking at.

But we think that the performance envelope, the capability of what Scorpion can do makes it a very viable product for what their requirement is, but it's still in its formulative stages, I would say.

Your next question comes from the line of George Shapiro from Shapiro Research.

I wanted a clarification on Scorpion R&D, Scott.

It would seem to me like the Scorpion R&D was maybe up $5 million or so in the second quarter relative to the first quarter as opposed to the expectation it was going to be down a little bit.

Is that fair?

No, George, we don't -- obviously, we don't break out R&D in the individual businesses or certainly by product line.

But without any numbers to it, there was a significant amount of spending around Scorpion in the quarter.

It was pretty comparable to where it was in the first quarter.

I mean, we really have talked more about first half, second half around Scorpion because of the balance of work that we had to get done here in the first couple of quarters.

But -- so there was no material change from where we would have expected it to be, but we still, as I said, do believe you will certainly see less spending as we go into the back half of the year.

And maybe, Frank, first quarter, you disclosed in the Q that there was an $11 million pricing benefit at Aviation.

Can you disclose what it was this quarter or we've got to wait for the Q?

No, we had some positive pricing, but we'll wait for the Q.

And then aftermarket, relatively flat or up a little in the quarter?

Flat.

Flat at Aviation, yes.

And then, Scott, just in general, you say that the demand is kind of like what you've been expecting so far in Aviation.

But we've got a book-to-bill of 1. Business jet cycles have been going up.

Used planes as a percentage of fleet keep coming down.

You're getting better pricing.

So I mean, what else does it take to get you to be slightly more positive on where the cycle is going?

Well, I think just more order demand.

I do think -- look, the business jet market in terms of where we expect it to be is about where we thought it would to be, right?

I mean we are trying to get some pricing out there, and we're succeeding with that.

We have to succeed with that.

I think that we would feel better about the prospects for it if we did see something around tax reform where people felt better about their businesses and, therefore, more likely to spend CapEx.

But the business jet market is largely where we expect it to be.

I don't think it's much better or worse.

I think there could be some upside if we could get some tax stuff done.

But really the thing that's creating more of a drag or something kind of which we're watching more closely is really around more on the turboprop side, which is a different dynamic, as we talked about, being a more international market for the Caravans and King Airs.

But I think the business jet side is performing as we expected.

Your next question comes from the line of Ronald Epstein from Bank of America.

How has the aftermarket been going for Textron Aviation broadly speaking when you think about spare parts and training services?

The whole non-OE piece of the business, how's that growing?

It's pretty flat on a year-over-year basis, Ron.

And what do you think is causing that?

Well, I mean, we haven't had a dramatic change in fleet size obviously.

All right, so you're not seeing the kind of installed base grow.

I mean your -- our relative level of deliveries is sort of flat to, well, below what it's been here in the past decade certainly.

And you see a lot of older aircraft that start to -- aren't being flown that much.

So there's no -- at a macro level, there's nothing to drive a whole lot of additional service when your installed base really isn't changing dramatically.

Yes.

So I mean when we think about what's been going on in the mid to light business jet market and, I guess, to some extent, even the largest are even worse more recently.

Strategically, when you think about the portfolio, Scott, I mean, when is it time to start doing some portfolio repositioning?

You're talking about around the aviation side?

Just in general, right?

I mean here we are, how many years, 8 years past the financial crisis, and biz jets aren't growing again.

And I mean when -- I don't want to say when do you throw in the towel, but when do you start thinking about different -- bigger legs to the business, something like that, to bolster growth?

Well, look, Ron, without getting into -- I mean, obviously, if we had something in the M&A world that we were on the verge of doing, we would kind of talk more about that.

I don't think there's anything on the near horizon that we would have any conversation.

I think when you look at each of the individual businesses, Aviation is probably -- perhaps our best example right now is that we're trying to focus our R&D dollars in expansion of our portfolio within that business, right?

So when you look at Denali going into the single-engine turboprop space.

As you look at Longitude and then Hemisphere, going up into those classes of aircraft where we haven't been, we are trying to focus our R&D spending in those spaces that will give us net growth, right?

So Scorpion certainly falls into that category.

So most of the money -- virtually all of the money right now that we're spending is in products that will be adds to that portfolio, which are not going to take away from existing aircraft sales because they're in a different class of aircraft than what we've had in the past.

So I mean that is our strategy organically, to do that in the Aviation business.

Obviously, the same is true in the Bell Helicopter business.

So you look at the 525, which is the biggest bird we've ever done.

You look at the 505, which we're starting to realize some of the benefits going back into the light helicopter side where we haven't been for a number of years.

Obviously, we've got the V-280s and V-247s to expand the portfolio into a very large part of the military market.

When you look at the vehicle business, expanding more into the consumer side.

So again, I -- from an investment standpoint, I think where we're focusing our R&D dollars organically across our businesses is principally in expanding beyond the portfolios that we have historically served to try to drive growth even in a flattish environment.

Now obviously, if we can get some tailwind in the aviation side, that's all good for us.

But we need to be spending our money in places that will drive long-term growth by expanding the breadth of those product lines.

Yes.

And then maybe one more, just sort of smaller business but I thought it was intriguing.

When you had us all down in Georgia and we were visiting the facilities down there, the aircraft -- or what to call it, airport ramp mobile infrastructure business, right, with the deicers and TUG and Douglas and all that, how is that business going?

I mean are you seeing growth there?

And is there more to do there?

Because that seems like an interesting niche.

Sure.

Look, it has been -- the acquisition that we started with TUG a few years ago has gone extremely well.

The deal went as we expected from a just integration standpoint.

The growth of the business has been strong.

We've added the deicing side with Premier and then with Safeaero last year.

And we continue to look at what would be likely smaller deals, but we still kind of hunt around that area.

We like it.

We have a good position there today, I think a very good reputation with customers across that market.

And certainly, that's an area that we would continue to look at things where we could expand, because the ground support world has been a -- it was a great acquisition for us, and it continues to perform well on an organic basis as we introduce more product into that space.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Just had a couple of follow-ups.

Were margins up or down year-over-year in just the pure jet original equipment piece of aviation, so ex Beech, ex prop, ex aftermarket, ex R&D?

Just the Cessna jet OE piece.

Well, obviously, we don't provide that, Noah.

But we did talk from a color standpoint about one of the pressures being higher mix of NetJet Latitudes.

And that does put some pressure on margin rates.

On the other hand, we had some positives around trying -- as we've improved our pricing, that is on the beneficial side.

So the bulk of the pressure obviously is more around the lack of the turboprops.

But we have been challenged and, as you know, we'll continue to be challenged around the mix associated with higher NetJet deliveries.

Okay.

Yes, okay.

Maybe I should have even asked that ex that.

I'm just trying to better understand if margins are going...

Oh no, I'll just send you our gross margin by aircraft, and then we won't have a question.

Well, there'd still be a good half a dozen airplanes in that question, and it's an up or down question.

I'm just trying to understand if -- because pricing getting better but margin's going down is tough to square.

Although, obviously, the prop and the military mix stuff...

That's what's driving it, Noah.

The prop and the military is our -- is the primary driver.

When you look at our equipment sales, that's just difficult.

Those are great products for us.

And look, the issue -- obviously, the military is a separate discussion.

But when you look at the Caravans and the King Airs, we're trying to maintain the price discipline in there.

We need to keep these as fair profitable products.

And that's -- you're going to see -- you have seen and would continue to see lower volumes if -- because we're going to try to hold the line there.

Okay.

And then just one more.

I know you mentioned up -- maybe some upside to the full year plan for the Bell margin, but I wanted to just maybe better understand what drove it to be so strong in the quarter in an effort to better understand what's sustainable versus what was purely specific to the quarter.

And it kind of looks like -- H-1 having 5 extra units, if I were just to, super rough math, assume they're $25 million a copy and a 25% incremental margin, that would kind of get you right to what the year-over-year EBIT change was, the $30 million.

So is that directionally correct, that it was mostly the H-1 mix?

Or is there some cost savings in there that's sustainable going forward?

It's a combination of both.

Obviously, the H-1 volume is helpful to us, but we also had good cost control and overall business performance.

But there's -- not like there was some big onetime thing in there.

Noah, on the military side, you need to think about incremental margin coming through at a [NOP] margin, not a gross margin level, just the way the accounting works and the accumulation of cost and into inventory in that area.

So that would be -- so what I said would be much too high?

Yes.

Okay.

And then so that would imply something like half of it was just sort of savings and performance.

And at this time, there are no further questions.

Great.

Terrific.

Thank you.

That concludes our call.

We'll see you next quarter.

Ladies and gentlemen, that does conclude your conference for today.

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