達信公司 (TXT) 2018 Q2 法說會逐字稿

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

(Operator Instructions) As a reminder, today's conference is being recorded.

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

Please go ahead, sir.

Thanks, Brad, 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 $3.7 billion, up $122 million from last year's second quarter.

Income from continuing operations was $0.87 per share, up from $0.57 per share or $0.60 on an adjusted basis in last year's second quarter.

Manufacturing cash flow before pension contributions totaled $399 million compared to $341 million in last year's second quarter.

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

Thanks, Eric, and good morning, everybody.

Segment revenue was up again in the quarter in Industrial, Aviation and Bell, partially offset by lower revenues in Systems, consistent with our expectations.

Operationally, we saw continued strength in our execution with margin improvements at Aviation, Systems and Bell.

At Bell, revenues were up on higher commercial volumes for the quarter.

On the commercial side, we delivered 57 helicopters, up from 21 in last year's second quarter.

We continued to see positive demand in the commercial space, strong representation across all our models.

In the quarter, we delivered 4 505s to the Japanese Coast Guard, demonstrating the aircraft's suitability as a basic helicopter trainer.

The 505 received certification in China with the first 3 units being delivered in June as the aircraft continues to broaden its international presence.

Moving to the military side of the business.

We signed the third V-22 multiyear procurement contract with the DoD to deliver 58 units beginning in 2020.

The $4.2 billion multiyear contract, of which $2.2 billion represents Bell's content, provides product -- program production stability through at least 2024.

The contract also has flexibility structured to allow for additional aircraft.

We also gained congressional approval in the quarter to provide 12 H-1 attack helicopters to Bahrain.

On the new product front, the V-280 Valor has now flown in cruise mode just 5 months after its first flight in December.

V-280 reached 190 knots during the May demonstration and continues to expand its [flight on load] through the flight test program, which is ongoing.

Bell also opened its new Advanced Vertical Lift Center in May located just down the street from the Pentagon.

The new office allows Bell's military customers, partners, and policymakers to interact with Bell's technology for the future of vertical lift, including the V-280 and the unmanned V-247.

Moving to Systems, revenues were down on lower volumes, primarily at Weapons & Sensors related to the discontinuance of SFW production at Textron Marine and Land Systems on lower TAPV deliveries.

At TRU Simulation + Training, our 737 MAX Full Flight Simulator was successfully updated to the highest level of qualification by the FAA, marking the first 737 MAX Simulator to be qualified at Level D.

Moving to Industrial, we saw a 10% increase in revenues with growth in each of our businesses.

At Textron's Specialized Vehicles, we introduced the Cushman Shuttle personnel carrier and the E-Z-GO Express personal transport vehicle, both powered by the industry's first 72-volt AC electric powertrain.

Within the Textron Off Road product line, we continue to expand our vehicle lineup, introducing the new Prowler Pro utility side-by-side, delivering power, comfort and reliability to this market.

Also at TSV, our growing GSE product line received an order from Beijing Capital International Airport for the purchase of 6 Safeaero de-icers to increase the efficiency of its operations at the world's second busiest airport.

Moving to Textron Aviation, revenues were up 9%.

We delivered 48 jets, up from 46 last year; and 47 commercial turboprops, up from 33 last year.

We continue to see improving order flow across our jet and commercial turboprop product lines with increasing strength coming from international markets.

On the new product front, the Citation Longitude, our new super midsized aircraft, continues in the FAA certification process.

Based on the FAA's newest certification requirements, the number of ground and flight test conditions to be met by the Longitude program has nearly doubled the amount completed on past certification programs.

This process is taking longer than initially planned as our engineering team works alongside the FAA through the enhancement certification process for the first time.

To continue with our new products, the Denali has entered the next phase of development, fabrication of the first test articles, and the Sky Courier continues to track to its development plan.

We're excited to leverage these clean-sheet aircraft and introduce segments to the market to provide a wider array of aviation solutions for our customers.

On the military side, our AT-6 Wolverine aircraft has had very positive flight performance during the Air Force's second phase of the Light Attack Experiment program.

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

Thank you, Scott, and good morning, everyone.

Segment profit in the quarter was $346 million, up $51 million from the second quarter of 2017, on a $122 million increase in revenues.

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

At Textron Aviation, revenues were up $105 million from this period last year, primarily due to higher volume and price.

Segment profit was $104 million, up from $54 million a year ago due to the favorable volume, mix and price.

Backlog in the segment ended the quarter at $1.6 billion.

Moving to Bell, revenues were up $6 million, primarily on higher commercial volume, partially offset by lower military revenues.

Segment profit increased $5 million from the second quarter in 2017.

Backlog in the segment was $5.5 billion at the end of the quarter.

At Textron Systems, revenues were down $97 million, largely on lower volumes at Weapons & Sensors related to the discontinuance of the SFW production in 2017 and lower TAPV deliveries at Marine and Land Systems.

Segment profit was down $2 million, primarily reflecting the lower net volume, partially offset by favorable performance.

Backlog in the segment was $1.2 billion.

Industrial revenues increased $109 million, largely related to higher volumes across all our product lines and a favorable impact from foreign exchange.

Segment profit was down $2 million despite the increase in revenues from the second quarter of 2017 due to the mix of products sold.

Finance segment revenues and profit were both flat compared to last year's second quarter.

Moving below segment profit, corporate expenses were $51 million compared to $31 million last year, primarily due to the impact of the increase in share price in the quarter on compensation expense.

Interest expense was $35 million, about flat with last year.

We also repurchased 8.7 million shares, returning $571 million in cash to shareholders in the quarter.

Through the first 6 months of the year, we have repurchased 14.6 million shares, returning $915 million in cash to shareholders.

To wrap up with guidance, we are raising our expected full year earnings per share from continuing operations to a range of $3.15 to $3.35 a share, up $0.20 from our prior outlook.

We expect a onetime gain of approximately $400 million from the Tools & Test divestiture in the third quarter of 2018, which is not reflected in this updated outlook.

We are also raising cash flow from continuing operations at the manufacturing group before pension contributions to a range of $750 million to $850 million, up $50 million from our prior outlook.

That concludes our prepared remarks.

So Brad, we can open the line for questions.

(Operator Instructions) And our first question today comes from the line of Robert Stallard with Vertical Research.

Scott, this one might be one for you.

On Aviation, the backlog was flat sequentially.

I was wondering if you could shed a bit of color on that, what the various parts of the division saw over the last 3 months, because that would be seem to be rather contrary to the commentary about the strengthening in business jets, for example.

Sure, Robert.

I think the market feels the same way that it did.

It's pretty strong.

I think we're pleased with the order flow.

Obviously, deliveries were up as well in the quarter, and I think the flow of orders matches up pretty well.

So in terms of the dynamic, it has stayed robust.

Obviously, we continue to push on the pricing side in the trade for volume because we still think we've got to continue to work that.

But -- and markets are still strong, and we're seeing that in both the jet and the turboprop lines.

Okay.

And then as a follow-up, separately, Textron Systems and Bell, very strong margins in the quarter.

How sustainable do you think these levels of profitability are, particularly if you're obviously having a V-22 step-down rolling through the system at some point?

Well, look, Bell had an extremely strong margin rate here in the second quarter.

I wouldn't expect that to sustain.

But I -- we've talked about that business over the long term being a 10%, 12% margin business, and I think that's still how we feel about it.

The team has done a nice job.

I think the contract in terms of Multiyear III landed about where we expected in terms of our long-range thinking.

As I said, the contract allows for some increases of a couple of aircraft here or there.

And I am optimistic that we'll see that, both in terms of U.S. demand and as well as ultimately, some foreign military opportunity.

So it's fully within our expectations and around where we thought, and obviously, we're glad to have it done.

It's a good contract and one that gives us some stability going forward.

And similar situation for Systems as well?

That had a very strong margin, too.

Yes, Systems, look, I think we certainly expect Systems to be a little bit lighter in the back half of the year.

They had a very strong start to the year.

We're still seeing very good performance in most of the businesses.

Obviously, we will see ongoing reductions in the number of TAPV deliveries as that program winds down through the course of the year.

We'll still see -- SSC, obviously, is still in its development and test phase, so that will dominate just the back half of the year as well.

And you really won't see the revenues and the margins pick up on that until we start into the [brossian] program in 2019.

So I guess, it's -- expect a lighter second half but still strong performance for the total year in that business.

And we do have a question from the line of Carter Copeland with Melius.

Just a quick follow-up on Rob's question.

Frank, I wonder, could you tell us what the net favorable cumes must have been in Bell and Systems?

And then just a second one for Scott, can you just give us some color?

You called out price and mix in the Aviation margin strength in the quarter.

Was it one over the other?

And was aftermarket a notable contributor there that we should know?

Just any kind of expanded color on which of those was more important would be helpful.

Well I can give you the color part first, I guess.

I think, at Aviation, it was strong pretty much across the board.

Obviously, we had some pricing power in there.

The aftermarket, you know we had this -- an accounting change in terms of the revenue so it will look a little flatter.

The reality is on an apples-to-apples basis, it was up high single digit, which is good for us.

The turboprop deliveries were obviously quite a bit stronger than in the second quarter last year, which we expected.

I mean, that market, particularly the international side of turboprop, has been stronger.

And on the Aviation front, it looks like we're up a couple of jets.

The reality is, as you guys know, we ceased production of the Mustang.

There were about 5 of those deliveries last year.

So on a like-to-like basis, the mix was actually better because we discontinued a model.

It was not a very profitable model for us.

And those 5 aircraft turned into 5 other aircraft that are more in our standard margin region.

So I think the mix was positive as well.

So it's both price mix and, I would say, strength across the -- all the product lines.

So and on the program side, we saw, as we -- as the numbers would indicate, good performance out of both Bell and Systems on the program side, and we had $64 million of program adjustments for the quarter.

In net?

In -- that's right, net on a consolidated basis.

And we do have a question from the line of Peter Arment with Baird.

Scott, just asking regarding on the Longitude, you made some comments regarding kind of the FAA certification process is taking longer.

You're not the only one really that's been affected by this.

But maybe you could just give us a little more color as you're kind of looking at the time line for introduction of Longitude.

Peter, I think it's within the next couple of months.

The guys are working really hard at this.

The good news here is there's no issue.

It's not that there's a conflict between us and the FAA over anything technical or programmatic or the aircraft itself.

It's just the -- this new process involves the creation of thousands of pages of documentation, which we just haven't done in the past.

And it's a result of the implementation of this new process, and it's just an enormous amount of work that we haven't had on previous certifications that was a bit unplanned.

I mean, how this is being interpreted and implemented is just a lot of paperwork that wasn't really anticipated.

So it's -- again, the good news here is there's not a problem.

It's not like we're in any form of disagreement over something to do with the aircraft or anything.

It's just a lot of paperwork.

So we're working our way through it, and the FAA is working through it with us.

And you have to create all these things and review them and sign them off.

Okay.

And then just as a follow-up unrelated.

On the AT-6, it sounds like you've had some good flight performance.

How is your thinking on just kind of the discussions with your potential customer there?

Well, we think it's gone well.

I mean, an awful lot was accumulated.

A lot of flight testing was done, obviously, before the accident that resulted in a sort of the discontinuance of the flight test piece of the program.

But I think the Air Force has been very open about the fact that they're continuing to work this program.

They've got the data they need.

They felt that the flight testing that had been accomplished was sufficient.

If there's more information, they can certainly reach out to us and to our competitors.

And they're continuing with their process as described.

So we would be hopeful to see activity continue and hopefully get to some form of an RFP if they're going forward with the program in kind of the latter part of this year.

But we felt the aircraft did well.

We clearly -- I mean, customer's very open publicly about the interest in this area and the demand for a product like this, and we feel like the guys did a great job performing, and we'll just continue to work with the customer as they work through the next steps of the process.

And we do have a question from the line of David Strauss with Barclays.

Wondering just about book-to-bill at Cessna, ex the aftermarket in the quarter, is it fair to say the book-to-bill was around 1.2?

And if so, is that a fair kind of number from what you saw in the jet side, specifically?

So I think when we look at the book-to-bill number, it's -- I mean, I think the 1:1 is a fair representation.

Obviously, we're always going to have a little bit of mix within that between different models within the line and jets and turboprops and military, so -- but it's all consolidated in there.

But I think a 1:1 is a fair representation of where we are in the jet side.

And again, because deliveries were up, revenue was up -- and which means commensurately, order activity was up.

So I think, particularly when we think about where Q2 is, I mean, order rates were better than they were in Q1.

So even though the book-to-bill number may not be what it was in Q1, the reality is that the activity in the market continues at a good pace.

Okay.

And as a follow-up on in terms of your guidance reads through the year, I apologize if I missed this earlier, are you assuming higher assessment, higher deliveries out of Aviation, specifically on the jet side in your [buy] guidance today as compared to what you've [sert a year out]?

And also, the 8% margin guidance for Cessna for the year, looks like you'll come in better than that.

Yes, I think David, mostly, as we look at our revised guidance, it's reflecting just stronger margin performance in Aviation and in Bell.

And in Systems, obviously, I think, it will be slightly probably below where we were thinking, just because the Tools & Test disposition, which is a strong...

Industrial.

Margin business -- and Industrial, I'm sorry.

But the guidance increase in EPS is really driven by better margin performance in those 3 segments.

And we do have a question from the line of Sheila Kahyaoglu with Jefferies.

Scott, I was wondering, can you comment on the competitive landscape and maybe the changes you're seeing, given Bombardier and Embraer might be focused elsewhere?

So just on the competitive landscape both in the biz jet market but also maybe on the commercial helicopter market as well.

Sure.

Well, I mean, we haven't seen a big change.

I mean, it's still obviously a very competitive market.

There haven't been -- obviously, here, through the first couple of quarters, the competitive dynamic of the model-to-model comparisons are the same as they've been, so it's still quite competitive.

But like I said, we will and have continued to sort of trade price over volume to try to put some discipline into that marketplace.

But the competitive dynamic, I would say, is largely unchanged.

And the same is true, I think, on the helicopter side.

I mean, the good news is the market, particularly in the lighter end of the market, is as competitive as it's been.

Obviously, we're seeing a lot of growth around the 505 as a new model coming in and as that thing is ramping up its production, and a lot of delivery is coming out.

We feel great about where that product is.

It competes very, very well given its performance and capabilities.

But we're also seeing very strong performance on the 407.

There's some nice upgrades to the product, but it's a competitive marketplace, but it's a very strong product.

Even 429s, which, as you guys know, we're expecting a little lighter deliveries this year, but 429 order activity has stepped up pretty significantly.

So again, I think our -- the market is very competitive, but we've got a great set of products that are doing very well.

And then on R&D, if you could just comment, you've gone through a phase of higher R&D, what are you focusing on over the next 18 to 24 months?

So we probably won't get into guiding too much beyond this year, but as you know, I think our overall R&D number, we do expect to see some modest reduction on the fixed-wing aviation side largely as we scale back things ex Scorpion.

But we continue to invest, obviously, in Longitude.

We've got Denali coming down.

We have Sky Courier coming along.

So there still is strong R&D spending in Aviation, just probably not as much as we've seen in the last couple of years.

Bell, on the other hand, has stepped up a little bit.

We have 525 in the flight test program.

We have V-280 flying.

So there is obviously still spending there.

But we'll largely see sort of a shifting somewhat of the

R&D around some of the businesses.

But obviously, what's important for us, I think, going forward is that as we see these revenue increases and we see the benefit, frankly, of some better end markets in some of these new product launches, it does become a bit of a tailwind for us in terms of overall margin rates.

And we have a question from the line of Seth Seifman with JPMorgan.

Following up on the V-22 and understanding that you don't want to give very much guidance beyond this year.

I think one thing that might be helpful for people, just to level set, is the amount of earnings headwind, even if it's just some qualitative commentary that we can expect as the V-22 starts to ramp down next year, we all know it's happening, seemed (inaudible) a little over $400 million of EBIT at Bell this year.

How can we think about the headwind there?

Well, you really won't see much impact to this lower rate really until late next year, right, as you start to get into the next fiscal year of funding.

And I need to be careful here because this -- given this 606 stop so it's not -- doesn't tie out specifically to deliveries anymore, so it's really more of a cost accumulation thing so it's kind of hard for me to -- I'm not exactly sure how to articulate that to you beyond -- I mean, you guys kind of know, obviously, it's public in terms of what the contract delivery dates are.

As I said, I think there'll probably be some additional unit volumes added into each year.

So I think of the new contract as sort of a floor, if you will.

But I wouldn't expect a big impact in 2019.

It starts to become more material into 2020.

And we can probably help you guys, by the way, with the -- just in terms of the contract stuff probably offline.

Yes.

And we do have a question from the line of George Shapiro with Shapiro Research.

Yes, a couple of quick questions.

Back on the book-to-bill being 1, can you separate it out into how the turboprop was versus the new jets?

Or how the defense switch was versus the new jets?

No, George, I don't think we're going to get -- I mean, we're not going to start kind of breaking out the book-to-bill by the individual product models and whatnot.

But just again, from a color standpoint, it's been pretty strong.

We're very, very happy with the order flow in both the jets and the turboprop side.

Look, military deliveries were up in the quarter, right?

You'll see that on the T-6s.

So there's obviously some impact of strong sales on T-6.

But despite the 1 -- you say 1:1, that's okay.

That's okay.

It's -- the facts are that order flow was stronger in the second quarter than it was in the first quarter, and we continue to feel good about where the market is heading, on both turboprop and the commercial jet business.

And R&D in the quarter at Aviation, Scott, sequentially, was it down a little bit year-over-year?

Can you give those 2 qualitative comments?

Well, look, I would -- again, from a color standpoint, George, as we've indicated, I think the quarter was consistent with kind of the color that we've been providing, which is that we'll see some reduction at Aviation offset by some increases largely at Bell with the flight activity going on, and the quarter was typical of that.

And one for you, Frank, the tax rate was pretty low again.

Have you changed your outlook for the year?

And why was it low?

Yes.

We had some benefits from some discrete items in the quarter.

So the guide -- our revised guidance assumes a tax rate of about 19.5% for the year, but essentially reflects the first couple of quarters of discrete items that we benefited from.

And we do have a question from the line of Sam Pearlstein with Wells Fargo.

Just on the guidance, the $50 million increase in the cash flow, looks like about half of that is a CapEx reduction.

Can you just talk, is it straight net income improvement?

And then on the CapEx, is it related to the adversary air?

Can you just talk about how you're viewing the adversary air spend this year and next kind of compared to before?

Yes, Sam, so there's a couple of things going on here.

Obviously, expectations for a little stronger margin rate, therefore, better earnings is obviously falling through in the cash flow.

There's a debit that we had to take out of that with the second half of Tools & Test not being in there, both from the free cash flow generation, but obviously, some of that CapEx reduction is reflective of not having CapEx in that business in the second half of the year.

And there is some benefit on the aggressor work.

So given where we are on those contracts and time lines, we are deferring some of that.

Obviously, we're still comfortable that we have everything lined up in support of future Air Force programs, but we have been able to defer some of that CapEx in 2018.

So those are all sort of contributing to that net -- net benefit of $50 million, taking all that into consideration.

Okay.

And then can you talk a little bit about just the distribution inventory levels with Arctic Cat now that you've kind of ended the winter season, just where did you end up and how is that looking?

So Sam, I'm afraid I don't have those numbers at my fingertips here, but I mean, we continue to make progress.

And I would say most importantly, when we look at what's in the inventories, it's pressure stuff, right?

So I mean a lot of the stuff that was really older inventory has been moved off their, off their books.

I mean, obviously, these guys are taking restockings of current model year product.

Probably not a lot of change in snow, I mean we're at that time of the year obviously, where we are producing all the snow product for next year.

And we'll start those load ins here as you get into the latter part of the year.

I'd say the good news is demand from the dealers what we are seeing is up, and we've got a couple of great new products.

I mean last year was great, in terms of burning down a lot of inventory; we had some new stuff that came out last year that helped.

But we've got a pretty -- couple of pretty exciting 2019 models that are driving some pretty strong preorder -- preseason order demand, which we are building now and we'll start to load in here in the next couple of months.

And we do have a question from the line of Ronald Epstein with Bank of America Merrill Lynch.

This is Caitlin on for Ron today.

Just wanted to touch on orders a little bit.

What's driving -- what do you see is really driving the incremental orders at Textron Aviation?

Are you seeing more interest from individuals or corporates?

And then are the orders really more for replacement, aircraft upgauging or just new purchases?

So it's -- I would say that the order activity continues to be across virtually all the models, so it's not isolated in one area or the next.

We always have a lot of -- the bulk of our customers are current aircraft owners of one type or the other, and most of them are upgauging.

Although a lot are simply replacing older aircraft that they've had now for probably longer than they would like to have had them.

So it's -- you know, Cate, it's really, it's across the board.

There is no particular dynamic that's changing it one way or the other.

I'd say the one thing that we did see in the quarter which is encouraging is an uptick in international orders.

So this has been pretty U.S.-centric here for the last number of years and, obviously, it was great to see the U.S. market getting stronger over the last, say, 6, 9 months, but we're also now seeing more strength in the order rate in Europe and in Latin America, some Asian activity.

So we are seeing more participation internationally as well.

So it's broad-based in terms of the models.

The segments, be it jet, turboprop, and also now starting to see some broadening of the strength internationally.

And we do have a question from the line of Jon Raviv with Citi.

Scott, when it comes to Aviation production rates, how are you balancing that decision-making process with the price you [may] want to hold on to and drive with backlog growth?

And then also how much pricing you get to see before you kind of start [steering] up the supply chain.

And I guess a related question is are you actually having discussions with your suppliers on potentially raising your production rates?

This is always something -- this is something we look at on a -- really on a real-time basis, right.

So depending on what activity we are seeing, and whether we can get the -- meet the pricing targets that we have out there, we're looking at this on a week-to-week basis.

So there are certainly suppliers that we know and have had [early] discussions and know where they stand.

If we need to just even without a whole lot of supplier work, if we need to flex a couple of aircraft here and there, we can do that.

So I'm not sure I would go into it any further than that.

I mean, we feel like right now we're well matched to meet the demand, but based on the price levels where we are, and if things continue strengthening and we decide that we need to take it up, then, we'll obviously, we have the flexibility to do that.

Okay.

And then going forward, some of the margin drivers that we should think about.

Now we know that Turboprops is getting better, that's accretive.

But is there something done in your production process on the jet side which could enable the typical incremental margin targets you talked about or even perhaps enable us to exceed those?

Well, I think part of why we are feeling good about the margin and incorporating that as part of our guidance increase is that the team is executing well.

I mean, obviously, the -- as I said earlier, I mean, it's not like we're seeing a big change in versus our plan on the volume side, but the guys are executing well, we are getting good volumes through the shop, we're getting good productivity.

And of course, we are continuing to drive the pricing.

So the combination of those is giving us an incremental margin lift.

Will you be able to quantify what the new margin guidance is for the year?

No, we won't go back segment-by-segment, but I think just from a color standpoint, Jon, you expect to -- versus the kind of aggregate numbers that we gave you guys, you'd expect that we'll finish the year a little stronger in Aviation, Bell and Systems and probably just a little bit lighter on the Industrial side.

And we do have a question from the line of Cai Von Rumohr with Cowen and Company.

Could you give us a little more color at Aviation in terms of how much of the gain was price?

How did the preowned do?

Did you book a profit or a loss?

And maybe how much was the kind of after-market business?

So I'll go backwards, I mean, aftermarket, Cai, on -- again, there was a change in the accounting of how the revenue is shown on some of these engine programs, but if you look at sort of the -- net that out, the after-market growth was strong with a high single-digit number.

Now on a percent basis, aftermarket did shrink somewhat as a percent of the total because we had strong deliveries on the original equipment side.

So I would say a strong contribution from aftermarket, but still a somewhat smaller percentage of the total given the strength on the front end of the business, which is good.

So the margin improvement, obviously, the price is a strong contributor in there, but we are also seeing our ability to convert some of these higher volumes into better gross margin on the product.

So the guys are doing a good job on cost and overhead control.

And -- so the intersection of those 2 things is what's driving that profitability.

We always had, it's not a big material number, there's a little bit of noise always around, from quarter-to-quarter, how much used aircraft valuation and whatnot is in there, but it's not a -- something that's going to swing it one way or the other.

Now one thing to keep in mind, Cai, as we go through the balance of the year is, we are going to have the first Longitudes coming out, and as you would expect, there will be some margin pressure associated with those.

But we still feel like, given the performance overall of the business and how it's doing, we are still going to see net -- better margin than we originally guided despite some of the overhang of the new product launch on Longitude.

Okay.

And my question on price.

In the first quarter, your 10-Q indicated you got $9 million benefit from price.

Could you tell us how much was that benefit in the second quarter?

And you'd mentioned also, a couple of months to certification on the Longitude.

I mean do you expect to deliver any in the third quarter?

And how many can you deliver given it looks like it's taking longer to get it certified?

So the price number in the quarter will be about $29 million.

The Longitude, look, I'm hedging a little on in the date, Cai.

And I -- obviously, I don't want to be doing that, but we're working through a process that we haven't gone through before, so that's why I'm trying to be -- give us a little bit of room here.

But yes, we certainly expect to deliver the first Longitudes in Q3.

But we have to get through the process, and it's proving to be a little more difficult than we thought.

But we would certainly still expect to make initial delivery in Q3.

And I don't know that we've ever guided the total number of Longitudes we'll have for the balance of the year, but I don't see us coming off of our original expectation.

It just means we'll have all deliveries in sort of late Q3 through Q4 or even if for some reason this thing doesn't get across the goal line here for the first one, and they would all deliver in Q4, right.

I feel good, I mean our production activity, again there is nothing with the aircraft, there's nothing that causes us to have to go back and make changes to the aircraft.

We've been building the aircraft, they're going to be ready to go, it's a matter of getting all the certification work complete.

So I don't foresee at this point a risk to what our plan was in terms of the 2018 Longitude deliveries.

And we do have a question from the line of Drew Lipke with Stephens Inc.

Just first question on Industrial.

Can you maybe elaborate a little bit more on the driver of the negative mix impact there and what you're seeing there?

Well, Tools & Test is a good margin business, so that margin obviously won't be there in the second half of the year.

So when we look at the total mix across the Industrial Segment, I would expect to see some reduction in that.

Now that's the operating profit level, obviously, we're in the process of doing buybacks to try to mitigate what that means in terms of EPS.

But as we indicated when we did the transaction, we expect we will see a few cents of dilution in 2018, that's factored into what we gave you guys in terms of the revised guidance, so that takes that into consideration.

But as we said, with the buyback programs, and as we look into 2019, we expect that, that dilution goes away.

But from a mix standpoint, we are taking a good margin business out of the second half of the year.

And then with Arctic Cat, can you talk about ORV and snow retail trends.

I know April was tough with weather.

Sounds like the ORV industry really rebounded in May and June.

What are you seeing in terms of industry trends?

And can you comment on kind of your market share and just the overall profit improvement at Arctic Cat?

Well, I think, we are seeing profit improvement in Arctic Cat, and we would continue to expect to see incremental margins, frankly, overall in our Industrial segment improving as the year goes on.

I mean, despite that we are taking out Tools & Test, so the total year guidance is down a little bit, but we would certainly expect to see positive progression here through the balance of the year.

Look, the Snow is obviously not in a retail phase right now, right, we're kind of in the production side of that and the stocking.

So that's, which again, I think, is quite favorable for us.

We feel really good about where that business is and what the stocking orders look like.

On the Dirt side of the business, we are seeing improvements.

Having the XX out there is -- it's later than was expected when we did the acquisition, but it is fully in the market.

And we're frankly struggling to meet demand of producing them.

And we've just launched the Pilot Pro, which launches into the -- really the largest segment of that market.

We think we've got a great product.

But again that's one that's just barely starting to run through the production line and get deliveries out to the dealer.

So again, a model that's we are seeing strong demand, we've just got to produce as quickly as we can.

So I think the end market of all the data I see is positive here in the last couple of months.

We are certainly seeing strong demand on the products that we've launched into the marketplace and obviously expect to see the revenue and the margin continue to expand through the balance of the year.

And you think you're holding serve on market share?

Oh.

Yes -- no, I expect we're feeling very good about Snow.

I think our market share is going to be up, which will be quite strong.

And again, with, like, on the sort of the backs of a couple of launches here around XX and Pilot Pro, we certainly are seeing an uptick and expect to see a continued uptick in our share through the balance of the year.

And we do have a question from the line of Rajeev Lalwani with Morgan Stanley.

Just I wanted to come back on the Aviation side.

You touched on this a bit before, but as you think about just trying to get margins up and before you start pushing volumes, where are you trying to get through -- get back to?

I mean are we looking at just sort of a historical average going back to historical peaks kind of a thing?

Is that guiding you at all?

And then unrelated to that, as far as maybe delays around product development with the FAA certification and all, how does that impact some of the other products you're working on, Sky Courier, Denali, maybe even the Hemisphere, if at all?

Well, Rajeev, look, I -- I'm not -- we're not -- I don't want to go out and make some target number or a target around historical numbers, I mean because our -- the revenues, the mix of product, the volumes are just totally different than where those were.

But look, our objective is to just keep improving this thing every year, driving cost, driving price and push up -- look, this clearly needs to be a double-digit margin business, I fully expect it's going to get back up into the double-digit margin business, and that's -- the team is pretty focused on working to get there.

And it's sort of all of the above, right, it's cost, it's new products, it's pricing.

And I think that the march we're on here as we go from last year through this year into next year is all moving in the right direction.

In terms of the FAA question, look, I think, as these new processes are different for different models and different weight classes and things like that, so I don't know that we'll -- we have to understand how each model is going to go.

But the difficult thing, obviously, is the first time you go through this, we are learning.

Frankly, our local FAA office is learning in implementing this, and understanding what it really means.

And so I think, obviously, we would be in a better position to anticipate how this needs to go, what kind of documentation needs to be created and how does it change -- as changes happen through the development program.

So I would be, I don't know, maybe cautiously optimistic that we can execute through it better in the future.

But right now, it's sort of a bit of a discovery process in terms of all this documentation.

So it's certainly not an efficient way to go through it.

But I'd like to think that as we and FAA get through this process, we'll be able to look back at it, maybe make some modification to the process to make sure that it's all value-added, but then also as you go through it a second time and a third time, you're going to be better at doing it, more efficient at doing it.

I'm sure that was not as clear as you might like, but I don't know how to make it any clearer, because we are just trying to figure it out, Rajeev.

And we do have a follow-up question from the line of Seth Seifman with JPMorgan.

I just wanted to follow up.

I appreciate the color on Industrial.

A couple of years ago, in the middle of the decade, this was like a mid 8s business margin-wise.

Without Tools & Test, it seems like it should still be able to be an 8% margin business, I just want to verify that you think that's correct?

And kind of how long does it take to get there?

And what are the -- what's sort of the key factor?

Is it execution on the specialized vehicle side?

Is it reaching a certain volume on the specialized vehicle side?

What sort of needs to happen to get to that level?

Well, look Seth, I think, there is no question this should be an 8% or better margin business, we're just sort of caught in a position here where we disposed of something that was accretive to that margin rate, and have just acquired something that was quite dilutive to that margin rate.

So we're sort of catching it here in the middle of this thing.

So there is no question that we need to be at or north of that historical kind of margin rate.

And I'm confident that we are going to get there, right.

I think that there is -- the vehicle business is the critical one to drive that.

And clearly, we need to see increased volumes.

We have every expectation that we can continue to gain share in that area, we've got some great new products that are going into it, but we also have to do a great job on driving cost in that as well.

So we're just, I'd say we're taking a business that was losing money and turning that around, that's making positive steps in the right direction.

And like I said, I think, you should see us expanding those incremental margins through the balance of the year and all the way through next year.

Now this is a business that needs to be a good, healthy margin business, and I think we will get there.

And we do have a question, a follow-up question from the line of George Shapiro with Shapiro Research.

Yes, Frank, if I look sequentially, inventories dropped like $165 million.

Now is that partly due to taking out Tools and putting it as assets for sale?

Or is it more due to the delivery of the -- high delivery of the Aviation planes?

And I would expect maybe it comes down some more in the second half as you actually make some Longitude deliveries.

So if you could give us some color on that?

Sure.

Yes, so part of the reduction in the quarter on a sequential basis was Tools & Test, that was about $100 dollars of it as we moved the Tools & Test assets and liabilities to held-for-sale.

So we had about $65 million of other inventory reduction.

And certainly, yes, given our seasonal pattern and higher deliveries in the second half of the year, we would expect for inventory levels to come down as we move through the year.

And then one follow-up on Bell.

If you take out the 2.2 billion V-22 backlog, sequentially the Bell backlog was down a little bit.

Is that from military?

Because it would seem like commercial is getting better?

And then also Scott, I think, in the first quarter you expected a pickup in the medium helicopters, we didn't see it in the second quarter, we see it in the second half?

Sure.

So absolutely, George, the 22 went in from the multiyear.

Obviously, we continue to deliver V-22s and H-1s which takes it out of the backlog commercial side of the business, order flow continues to be strong.

So again, we don't get in and break down all these pieces, but from a color standpoint, that's a fair representation of what's going on in terms of the business and the order rates and the backlog at Bell.

On the medium side, as I say, we've seen 412 orders, we've seen strong 429 orders.

There are still a number of 412 campaigns that are out there.

So I think, we see frankly strong order flow and activity across all the models.

Okay.

And then just last in Aviation, what's the lead time if you want to increase production rates?

3 months?

6 months?

Well, it depends on the model, George.

We usually would say it's more like out in that the 6 to 9 months.

I mean, you've got the long-lead items like engines, for instance, that kind of gate that.

And again, I try to be careful with an exact number because all of our suppliers have their own flow of activity, and they have flexibility within their own system.

So if we want to go in and make a change to our plans that are shorter than that, there are cases where we can do that.

So we can flex volumes by a few units.

But if you're really talking about a dramatic change, then, yes, it takes a long time.

But guys, we are never going to be what you see in the media where we are going to come out and say, we are going from 40 to 50 over the next 2 years.

I mean, that's not the nature of our business, obviously.

It's more of a flow activity and, obviously, we are communicating and talking to our suppliers all the time, and looking at the order rates all the time.

So I'm just not worried about the market and order and getting out of line with what we can do in terms of demand.

It's just not an issue.

It's asked about a lot.

It's not something we worry about a lot.

We work it every day.

And we do have a question, a follow-up question from the line of Jon Raviv with Citi.

Appreciating in Aviation, appreciating that Denali and Sky Courier are certainly important for the portfolio, but just after Longitude launches, what are those engineers going to do, or ordered to be moved to, as long as Hemisphere is still on hold?

Is there any interest in looking back at the lower end of the portfolio considering there's relatively less new product from your competitors down there?

I missed the beginning of your question, Jon...

What do the engineers that have been working on Longitude do?

They're already on other programs.

Most of them have moved already to the Denali program and the Stryker program.

That's where most of the activity is right now.

I mean, obviously, there's a good-sized testing that's working and on the certification process for Longitude.

But we've sort of worked through a lot of the design phases of Denali, we are building the first flight test articles, as we speak.

So a lot of detailed design activity really now is in the Sky Courier side of things.

We don't have anything to announce today in terms of the rest of the portfolio.

I mean, obviously, we are always looking at upgrades and what we need to do to make the whole rest of the product line stay fresh, but there's nothing that I would announce at this point.

Okay.

And then just on Longitude, just slot availability, can you just comment on how sold you are at that point?

And then a related question is, how have you adjusted or how are you adjusting the selling of larger aircrafts given Textron Aviation's historical focus on more of the owner-operator?

Oh, we've been working the sales side of the Longitude for a while now.

I think our teams have done a good job out there.

We have a great set of prospects.

A lot of flights have been in this aircraft.

I mean there is no shortage of customers that are interested in it, and our sales folks are talking with those folks, a lot of demonstration flights have been going on, continue to go on.

And we feel very good about our prospect list.

So I mean, obviously some more activities going on and there is a pretty strong pipeline of people that are very interested in the aircraft that are watching and waiting for the certification process.

But in terms of our ability to go out and sell this aircraft, I'm not concerned about that.

We seem to be reaching the customers that have an interest in an aircraft of this class.

And that does conclude our question-and-answer session, and I'd like to turn the conference back to your host for closing comments.

Please go ahead.

Okay, ladies and gentlemen, that concludes our call for today, thank you for joining us, and we'll talk again next quarter.

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