達信公司 (TXT) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Textron Second Quarter Earnings Call.

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

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

Please go ahead.

Thanks, Ryan, 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 presentation can be found in the Investor Relations section of our website.

Revenues in the quarter were $2.5 billion, down from $3.2 billion in last year's second quarter.

During this year's second quarter, we recorded $78 million in pretax special charges related to the restructuring plan announced in June and a $55 million noncash inventory valuation charge as we ceased manufacturing at our True Simulation + Training Montreal facility.

The net loss for the quarter was $0.40 per share.

Excluding these charges, adjusted net income was $0.13 per share, down from $0.93 per share in last year's second quarter.

Segment profit in the quarter was $82 million, down from $339 million in the second quarter of 2019.

The manufacturing cash flow before pension contributions totaled $215 million, up $113 million from last year's second quarter.

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

Great.

Thanks, Eric, and good morning, everybody.

Overall, given the difficult underlying market conditions, second quarter results were solid with strong cash performances and positive adjusted earnings.

Our defense businesses performed extremely well with revenue growth and strong operating performance at both Bell and Textron Systems.

Our commercial businesses implemented aggressive cost mitigation efforts, including employee furloughs, temporary manufacturing shutdowns and reduced discretionary spending to offset the impact of revenue declines in the quarter.

At Bell, we had a very strong quarter with higher revenues and a 14.4% operating margin driven by increased military volume.

On the commercial side of Bell, we delivered 27 helicopters, down from 53 in last year's second quarter, largely driven by lower demand for the 505 Jet Ranger X model and, to a lesser extent, delivery delays due to COVID-19 travel restrictions.

During the quarter, we achieved a number of milestones on the V-22 program, including delivery of the 400 V-22, the first delivery to the U.S. Navy of the CMV variant for the Carrier Onboard Delivery Mission, and the first international V-22 delivery to Japan.

Textron Systems revenues were up primarily due to higher volume in our unmanned systems product line.

Also within unmanned, Texon Systems was awarded 2 FMS contracts for total of 5 Aerosonde systems, including initial spares, new equipment trading and logistics support totaling $44 million.

Together with these and other awards, along with the definitization of the first Ship-to-Shore connector production contract, resulted in an increase in backlog of $505 million in the second quarter.

In the quarter, Textron Marine and Land Systems successfully completed both builders and acceptance trials for the next Ship-to-Shore Connector Craft 101.

We expect delivery of this unit to the U.S. Navy in Q3.

Also at Systems, our Airborne Tactical Advantage company was recently selected for 2 task orders on the U.S. Air Force CAPCAS program worth up to $240 million covering a period of performance over the next 54 months.

Sorties under these task orders are expected to commence in the fall of 2020, utilizing our fleet of F1 Mirage aircraft.

On the commercial side of Systems, we've seen a substantial decline in demand and order cancellations for flight simulators in light of the expected long-term impact of the pandemic on the commercial air transport business.

As a result, we previously announced in the second quarter a restructuring plan, which impacts our simulation business by ceasing manufacturing at our commercial air transport simulator facility in Montreal.

At Aviation, revenues were down in the quarter as expected due to the effects of COVID-19 on new aircraft deliveries and aftermarket demand.

We delivered 23 jets, down from 46 last year; and 15 commercial turboprops, down from 34 in last year's second quarter.

Entering the second quarter, we'd already begun to temporarily shut down our manufacturing operations by furloughing employees in response to the effect of pandemic on demand.

In the quarter, we formalized our plans to align our cost structure with the demand outlook, initiating direct and indirect workforce reductions as part of our restructuring plan.

And we have since restarted most manufacturing operations.

Looking to Aftermarket, revenues were down 31% compared to last year's second quarter due to the lower overall aircraft utilization, which has steadily trended in a positive direction from a low point in April.

Our Special Missions group remained very active in the quarter and closed several King Air orders, including 2 350s to the Royal Flying Doctor Service of Australia, 2 350s to the Ministry of Health in Greece and 2 350ERs to the U.S. Customs and Border patrol agency.

On the new product front, the Cessna SkyCourier completed a significant milestone with its first flight test in May.

Testing of the aircraft's performance, stability, control and key systems has gone well through 60 hours of flight testing to date.

Moving to Industrial, revenues were down from last year's second quarter related to the temporary closures of our manufacturing facilities across the globe.

At Kautex, we exited the second quarter with a run rate of our global manufacturing operations at about 75% of planned performance levels as auto manufacturers reopen their factories.

At Textron Specialized Vehicles, our announced restructuring includes plans to streamline operations, consolidate facilities and reduce the overall cost structure across several of our product lines.

Golf and PTV retail demand remained strong throughout the quarter.

In the outdoor and powersports, we've seen the market rebound in the quarter with retail sales ahead of prior year for the month of June.

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

Thanks, Scott, and good morning, everyone.

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

Revenues at Textron Aviation of $747 million were down 306 -- $376 million from a year ago largely due to lower Citation jet volume of $178 million and lower aftermarket volume of $120 million.

The decrease in Citation jet volume largely reflected a decline in demand related to the pandemic and, to a lesser extent, delays in the acceptance of aircraft related to COVID-19 travel restrictions.

The lower aftermarket volume reflected lower aircraft utilization.

Segment loss was $66 million in the second quarter, down from $102 million of profit last year primarily due to lower volume and the unfavorable impact of $27 million from performance, which included $53 million of idle facility costs recognized in the second quarter of 2020.

Backlog in the segment ended the quarter at $1.4 billion.

Moving to Bell.

Revenues were $822 million, up $51 million from last year primarily on higher military volume offset by lower commercial volume.

Segment profit of $118 million was up $15 million, largely on air military volume, partially offset by an unfavorable impact from performance.

Backlog in the segment ended the quarter at $5.8 billion.

At Textron Systems, revenues were $326 million, up $18 million from a year ago primarily due to higher volume at our unmanned systems product line partially offset by lower volume in the Marine and Land Systems product line.

Segment profit of $37 million was down $12 million, primarily due to an unfavorable impact from performance, which included a gain of $18 million recognized in last year's second quarter related to our contribution of assets to a training business formed with FlightSafety International.

Backlog in this segment ended the quarter at $1.9 billion.

Industrial revenues of $562 million were down $447 million from last year.

$321 million at fuel systems and functional components and $126 million at Textron Specialized Vehicles, primarily due to lower volume related to temporary manufacturing closures.

Segment loss was $11 million, down from $76 million of profit a year ago, largely related to lower volume and mix, partially offset by $28 million of favorable performance.

The favorable performance in the quarter included the impact of cost reduction activities, partially offset by $8 million of idle facility cost in the quarter.

Finance segment revenues decreased $1 million and profit decreased $2 million.

Moving below segment profit, corporate expenses were $30 million, and interest expense was $37 million.

With respect to our restructuring plan announced in the quarter, we recorded pretax charges of $78 million on the special charges line and a noncash inventory valuation charge of $55 million as we ceased manufacturing at our TRU Simulation + Training Montreal facility.

Throughout the second quarter, we continued to focus on cash preservation and working capital management.

Working closely with our leadership teams across the businesses, we generated manufacturing cash flow before pension contributions of $215 million, up $113 million from last year's second quarter.

From a liquidity perspective, we believe we have sufficient funds to meet our obligations and fund our operations despite the uncertain environment.

Our cash balance at the end of the second quarter was $2.3 billion after paying down about $300 million of long-term debt and commercial paper.

We continue to maintain an undrawn revolving credit facility of $1 billion that matures in October of 2024.

With that, I'll hand it back to Scott.

Thanks, Frank.

As we begin to gain clarity around the restart of the economy, I'd like to touch on each of the segments and their outlook.

In Industrial, our Fuel System and Functional Components manufacturing operations are up and running, and we expect production to continue to ramp up through the second half of the year in line with auto OEM demand.

In the Specialized Vehicle business, we're encouraged by what we're seeing in the powersports market, and we expect sequential growth in the powersports revenue in the second half of 2020.

At Aviation, the sales team is back in the field, meeting with customers and arranging demonstration flights.

We saw a pickup in business jet flight activity in the latter part of Q2.

And we expect to see higher new aircraft deliveries and aftermarket revenue in the second half of the year on a sequential basis.

So we continue to invest in future vertical lift, where we are in the early stages of prototype development on FARA.

On FARA, we continue flight testing with the V-280, and we're actively working with the U.S. Army and responding to information requests related to the program.

At Systems, we saw a number of awards in our Unmanned and Air Adversary businesses that will continue to drive growth in these product lines.

We're in the soldier assessment phase of FTUAS with our Aerosonde Hybrid Quad unmanned air vehicle, and we're progressing on the RCV medium program with build-out of the initial vehicles.

That concludes our prepared remarks.

So operator, we can open the line for questions.

(Operator Instructions) Our first question is going to come from the line of Sheila Kahyaoglu with Jefferies.

Scott, you just talked about what you're seeing in the aerospace with sales going back out in the field.

Can you talk about what you expect to see in terms of Aviation margins and a baseline for that?

You called out $27 million of unfavorable or $53 million of idle costs that were offset by $27 million of favorable benefit.

So just like the puts and takes and when we get back to normal Aviation margins in your view.

Well, so as you know, Sheila, we had a pretty significant expense in the quarter with respect to the underutilized facilities.

Obviously, we do have most of our manufacturing operations -- all of our manufacturing operations back up in Aviation, so we certainly expect to see sequential improvements with respect to that.

We did take out a fair bit of cost in the second quarter, initially, through the furloughs.

And now as I said, we've set through the restructuring, kind of what we believe is our run rate through the balance of the year and for 2021.

So I don't think we're going to give specific guidance on the margin rates, but suffice to say that we certainly expect to see them improve as we go through Q3 and Q4.

A lot of that obviously will depend on the level of sales activity we see.

Right now, we certainly have seen a pickup.

It's particularly in the turboprops and the light jets, which is encouraging.

We're not seeing as much activity yet in terms of the Latitudes and Longitudes, for instance, but there's a lot of dialogue going on.

And so those are primarily corporate-oriented aircraft.

I think as people are coming back, most businesses are worried about getting their own businesses up and operating.

But certainly, the dialogues are there.

And as people go into the end of the year and certainly beginning of 2021, we expect to see an uptick in the order activity there as well.

So again, we're -- we know we're going to be off considerably this year given the fact that the factories were shut for several months and we've now rebaselined the volume, but we do certainly expect to see sequential improvements in margins through the balance of the year.

Great.

And then just another question on Systems.

You entered Systems about 5 years ago.

I remember you were pretty excited about it, but a fairly quick exit.

Seems pricing is tough in that environment.

So the decision makes sense.

Margins were really good in that segment.

Kind of what are the puts and takes?

How do you see the Systems of -- the future of Systems from here?

I think Systems has performed really well.

And, yes, we have certainly this issue in the commercial transport business, which, as you can understand, given where the airlines are right now, is in a very, very tough spot.

And it's been a tough business, and so I think it makes sense for us to scale back in that area.

The balance of Systems' performance has been really strong.

Our unmanned business continues to grow and execute really well.

On the land vehicle side now, things like RCV medium, I think our team is executing well there.

We certainly expect, over time, to see that business grow the definitization.

The Ship-to-Shore Connector program was a big deal for us to now be under the production side.

So clearly, we expect that to grow and, again, continue to see incremental better margins as we move out of the development on deliveries and into the production deliveries going forward.

So I think, overall, that the performance there is strong, and we expect to see continued strong margins, like, growth driven by the Air Adversary, which again, this is something we invested in.

It took a little bit longer to get there than when we would have liked, but I think we feel great about the awards that we've received, and that will add both revenue and good margin growth for the business going forward.

So I think Systems is kind of moving into more of a growth and better margin performance.

I think you see that in the second quarter performance.

And our next question will come from the line of David Strauss with Barclays.

Scott, wanted to, I guess, a follow-up on the question I had last quarter on Netjets.

Back last quarter, I think Netjets talked about how they were going to reduce their plan for the year.

But I think yesterday, they came out with something with an announcement saying that they were going to reverse that.

Can you just talk about how that impacts you?

Well, look, I -- David, I think what Netjets saw is the same thing that our sales team saw, right?

When this thing first hit, all activity kind of stopped.

And so Netjets' sales team, understandably, saw other sales activity taper off.

I think what the note that you saw on Netjets is that they're seeing the same thing that we're seeing from a sales standpoint.

There's demand out there.

An awful lot of people, and we talked about this on the last call as well, are looking at increased use of private aviation, lots of customers that have not been in the private aviation space before that are inquiring and looking at using private aviation on a go-forward basis.

So I think in the mid to long term, this is a very healthy thing for the industry.

I think you'll -- you see, frankly, the rate of flying, the number of cycles has rebounded much quicker than you've seen in other pieces of aerospace.

So that's very encouraging.

And the bottom line is, as we see increased demand, whether that's whole aircraft or whether that's fractional, that's good for us.

Netjets is obviously a hugely important customer of ours.

And as they look at that -- those latitude and longitude markets, and see increased demand, that demand will flow right back to increased volumes in Textron Aviation.

Okay.

So is it fair to say that they -- after revising down their plan with you, they've revised up their plan with you?

I think that's very safe to say.

Okay.

Sure.

And then a follow-up, I guess, for you, Frank, on cash flow.

So I was a bit surprised that inventory was a source of cash in the quarter.

Can you talk about where the contribution came from by business?

And what are you thinking now?

I know you had said free cash flow positive for the year, a bit of a finer corner on that narrative, if could offer that.

Yes.

Look, all the businesses did a really nice job of kind of responding to the deceleration in the -- on the commercial side of the businesses, so we saw all the businesses, frankly, perform well in terms of a working capital and inventory management.

And so as you said, I mean, we saw it -- a strong working capital performance in the quarter.

We expect to continue to see good working capital performance in the back half of the year.

We're not going to get into specific guidance, but certainly, expect from the second half of the year to be cash flow positive and cash flow positive for the full year.

Our next question comes from the line of Carter Copeland with Melius Research.

Scott, I wondered if you might kind of just help us expand from that in the corporate sales side of aviation and if there's any seasonality or cadence to how that sales cycle works.

And really what I'm getting at is, when it is that -- it -- not how corporations are up, they have budgeting cycles.

And there's a lot of variability across the corporate complex.

When is it that you think your sales teams will get a real honest look at any potential change in demand?

Is that something that happens this year?

Or is it more like next year?

Well, that's a very good question, Carter.

So as I said, the level of activity and orders that are closing have been stronger on the light side, right?

It's King Air 250s right now are very strong.

M2s are strong.

So they're more private businesses, high net worth individual sort of customers.

Those corporate customers that are more of our Latitude and Longitude, there's a lot of dialogue going on.

There's conversations, but you're right.

Look, they have their budgeting cycles.

Obviously, a lot of companies have been watching their CapEx very closely just as we have been.

So I think it really -- the pace of how the economy recovers and provide certainty is going to be really important to seeing that segment of the market start to actually put down deposits and sign deals.

So I wish I could give you a lot better insight than that.

I mean, we're watching the economy like everybody else.

We certainly are encouraged by how things have kind of moved out here over the last a couple of months, but we need to see that continue to progress and start to head back to some degree of normalcy.

So that's why I think we look at more of the latter part of Q3 into Q4 and even probably deliveries out in the beginning of 2021 as the corporate piece of America starts to make CapEx commitments again.

Great.

And one for Frank.

I wonder if you could just give us the EAC adjusted -- cumulative adjustments in the quarter.

Just any detail on that would be helpful, as always.

Yes.

The net, we were $17 million favorable, so a bit down from a year ago on a year-over-year basis.

Favorable was 46%.

Unfavorable was 29%.

Our next question comes from the line of George Shapiro with Shapiro Research.

Yes.

Frank, just one clarification, and I got a follow-up.

The $53 million of idle facility costs that led to $27 million negative impact, so what was the positive $26 million if I just subtract those 2 numbers, unless I'm reading it improperly?

George, there's a lot more moving pieces than that, right?

So the -- we do spike out the idle facilities.

Obviously, that's a significant number.

The net -- to net that down to where the overall performance number is, has a lot of parts to it, right?

I mean there's a lot of cost savings obviously that we derive through the furloughs and through the quarter.

A lot of that, frankly, helped offset what would have been a more challenging idle facility cost.

But there's a number of other impacts in there that you would kind of expect in a much lower volume environment.

So it's not just a matter of take the total performance.

It's not [out of] one thing, okay?

So there was a lot more cost savings than that, but there was a lot of sort of other noise in the quarter, I guess, you would say.

But it netted out to a pretty significant positive relative to the idle facility costs that you took.

Yes, for sure.

And that's as a result of a lot of the furloughs, the savings that were driven by the fact that we took out a lot of cost, both direct and in direct furloughs while the plants were shut down.

And obviously, now that has transitioned from the furloughing, unfortunately, where we had to make permanent adjustments, for which we took the restructuring to align the costs on a go-forward basis.

Okay.

And then just a follow-up to David's question.

So the $1.4 billion in backlog that you say for Aviation, did that include some additional Netjet orders that were reversed out in the first quarter?

There was no change in the Netjet backlog in Q2.

Next, we'll go to the line of Peter Arment.

Scott, just circling back on your comments about the -- at Aviation on the aftermarket side, if we look at kind of the jet flight activity as kind of you mentioned, it does kind of look like a true V from what we saw the falloff from March and now July.

How did aftermarket perform kind of exiting the quarter?

I know it was down, Frank mentioned, 31% in the quarter.

And just kind of your expectations for what we should expect in the second half.

Yes.

It was down total of 31% for the quarter, Peter, as we mentioned.

But if you look at the progression of biz jet cycles in both North America and Europe, our big markets, there was a pretty marked change from April to June, and so I would expect that the aircraft showing up and part consumption and service work will kind of lag that a little bit.

So even though we certainly saw activity pick up pretty significantly through the quarter particularly as we got into to June, we certainly expect to see that start to positively impact the service business in Q3 and Q4.

So there's a -- I mean, I think there's just a lag between those aircraft utilization rates picking up and service activity picking up.

Okay.

That's helpful.

And then just a quick one on -- are you seeing any further kind of supply chain disruptions at all that's meaningful or anything to call out?

Nothing that I would say is material, Peter.

It's a food fight every day.

You still have suppliers that have a flare-up or a shutdown or whatever.

So -- but look, it's stuff the guys -- our guys manage through it every day, and we've had some impacts in -- across all of our different businesses, right, where there's an issue with a supplier here or there, and we just kind of manage and work our way through it on a day-by-day basis.

Next, we'll go to the line of Robert Stallard with Vertical Research.

Scott, this is probably one for you.

You mentioned that Aviation is now at a better run rate, a run rate you're happier with.

I was wondering if you could give us an idea of how that run rate compares to where you were at the start of the year, maybe sort of a percentage change versus where it was then and where it is now.

And then I've got a second follow-up question as well.

Robert, I think, again, there's not huge visibility, right?

But I think if you look -- the way we think about it right now, given the fact that we had the plant shutdown for a couple of weeks and the adjustments that we've made looking more towards end of the year and 2021 rates, we're going to be down somewhere in the 30-or-so percent, probably 30% or 40% down in terms of deliveries in 2020.

The run rates would anticipate that you probably get half that reduction back as you go into 2021.

But there's a long way between here and 2021.

But that's sort of how we're thinking about setting production rates at this stage.

That's great.

And then one for Frank.

You were paying down some debt in the quarter.

Have you got any plans for further debt reduction in 2020?

It was a bit unusual.

In the rest of aerospace, you'll see adding liquidity or paying things back.

Well, you'll recall, in the -- earlier in the year, we did a debt offering to essentially prefund kind of our 2020 maturities.

And so that paydown of debt was effectively just the paydown of that.

We have another $350 million of debt coming due in November.

That again we have effectively kind of already refinanced.

So kind of other than that, we feel like kind of we're in good shape from a debt structure standpoint, but that's what we have in front of us.

Next, we'll go to the line of Seth Seifman with JPMorgan.

Guys, I wonder, when -- you just talked about the run rate in Aviation and the decline in '20 and expected pickup in '21.

Should we expect that to include a mix shift along the lines of what you talked about toward smaller?

And then as part of that, I guess I was a little surprised when you mentioned not seeing as much pickup on the Longitude, Latitude side if Netjets is, in fact, starting to come back and talk about taking some more deliveries.

And so maybe if you could talk about the dissonance there.

Well, look, I think the mix, as I said, right now, we're seeing the pickup in activity is more oriented towards the smaller aircraft.

We certainly do expect it to shift to a better mix of -- or not a better mix, but a different mix of larger aircraft as the year progresses.

I think with respect to Netjets, again, we are working with these guys every day, so we're factoring in what we believe their demand is going to look like.

We said, look, we didn't put stuff into the backlog in Q2.

Obviously, the dialogue with them continues, and I would certainly expect to see backlog for larger aircraft through Netjets pickup in the third and fourth quarter.

Right.

Okay.

Great.

And then just as a follow-up in Industrial, maybe if you could talk about sort of the relative loss between autos and specialized vehicles and kind of the path back to profitability for each.

It sounds like maybe autos has a pretty clear path at Kautex.

And is that the case?

And if you could talk a little bit about vehicles.

Well, we don't go down into the op profit by the individual businesses.

But obviously, in Q2 we saw the vast majority of our plants in the Kautex were all shut down.

And then there was just no demand.

The global auto OEMs had all shut down, and so we shut our plants down.

As I said, we're back at least globally running around that 75%.

And we -- if you look -- and again, guys remember, we base our database on what IHS is looking at.

And in terms of our forecasting, we don't really make this stuff up.

So we expect to see that utilization in those plants pick up in Q3 and Q4.

But there's no question that, again, given where things are right now, Q2 was a really tough quarter for Kautex when you got all your plants shut down around the world.

So plants have now picked up.

They're operating.

They're back performing and we continue to see that volume.

So that will be a really significant contributor in terms of change of profitability in Industrial as you go into Q3 and Q4.

In the case of the vehicle business, look, I think we performed well in the quarter in the vehicle business.

The Golf and the PTV markets remained robust.

We did see a significant uptick in retail activity particularly in June on the outdoor powersports markets as those markets came back up.

And the good news is, as a result of all that, we've turned those factories back on and are starting to produce 2021 model years given the demand in the market.

So I think there'll be improvements sequentially in both businesses.

But from a relative basis, it was a tough quarter in Kautex when your plants are shut down.

Next, we'll go to the line of Pete Skibitski with Alembic Global.

Scott, coming into the second quarter at Systems, I guess I thought TRU and Lycoming would be big revenue headwinds for you.

And I imagine TRU had to be.

But collectively, is it just that the headwind from those units were just more than offset by this ISR services business?

Is that just kind of almost like a secular growth driver at this point?

Yes, the unmanned business continues to grow and do really well for us.

It was the largest offset in there.

Marine and Land was a little bit of driving -- look, our -- a year ago, this is our -- I think our last quarter where we had the last of the ANA and the TAPV programs, but the Ship-to-Shore side was strong.

And obviously, we expect to continue to grow through the course of the year.

So for sure, a significant headwind obviously with the simulator business shut down, but the rest of the businesses are growing and, again, performing well.

Okay.

That's great.

And then ATAC, any color that you can give in terms of how big that unit can be with all the wins it's kind of collecting?

So the 2 task orders that we were awarded is about -- as we said, about $240 million over the next 4.5 years.

So if you look at that, that's about $50 million a year of revenue, and we expect to be a good margin.

And, look, we've invested in the aircraft.

We have the assets.

Our team has done a great job.

There's already 10 of the aircraft that are TRU airworthiness and flying and ready to go.

So we should be starting to see that revenue in Q4 of this year associated with those programs.

Our next question comes from the line of Jon Raviv.

When we talk about the long-term growth opportunity in Bizjets, I mean it's a kind of market where you need the cost of entry to be lower to attract a lot more people in there.

So just thinking in sort of long term about that business, what does that business model look like in that kind of world?

I mean how much of profit comes from aftermarket versus OE today and how might that change going forward if there is truly a -- more of a -- if truly more of us start flying around on a smaller plane?

Well, I think in general, the aftermarket business has always been the more profitable part of all of these aerospace businesses.

So -- and I don't see that changing.

Look, I think as we look at the dynamic, which again is -- we'll see how this plays out.

But as we see a lot of people entering into the business jet or business aviation marketplace, I think our portfolio is in a very good place to serve that, right?

I mean we have a very strong lineup of product at that entry level, whether it's jet or turboprop, through the King Air family and the M2 and the CJ line.

And then as people look into the larger, whether it's in that XLS space or in the Latitude or Longitude.

Now I think we've got a very, very competitive product.

I mean, I think our portfolio has ever been better.

And you'll -- so the strength of that entry point is what we're seeing the most activity picking up right now.

But I clearly would expect that like everything, you'll see people migrate into the -- those mid-sized aircraft as well.

And then just a follow-up on capital allocation, I mean, if truly we're in a tough time right now, and you're having to conserve cash largely.

But how do you think of -- I mean you are still in a pretty good position.

So how do you think about capital allocation going forward, maybe later this year, entering '21, if you have a little more visibility?

The asset in the context of sometimes down markets where you guys are down 30% deliveries and your competitors down 30% deliveries in bizjets.

Sometimes those markets are right for some consolidation.

So any thoughts on capital allocation and biz jet consolidation in that context going forward?

Well, look, I mean it's probably early to talk about that.

I think we're very happy with where we are from a cash standpoint and our balance sheet right now.

Obviously, there's actions that we'll continue to take.

We continue to strengthen that and derisk that on a go-forward basis.

In terms of consolidation, I think everybody says that consolidation makes sense in this industry.

Do I see that happening anytime in the near term given valuations and sort of all the uncertainties?

It's kind of hard to imagine that's something that's on the near-term horizon.

So right now, obviously, we're very focused on making sure the company is in good shape and healthy and weathering through this.

And I think we're demonstrating so far that we're in very good shape.

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

Noah, are you there?

Hey, guys, can you hear me?

Yes, we got you.

Okay.

Sorry about that.

It sounds like Netjets is -- clearly, we're seeing it, but I'm curious.

In the new orders at Cessna in the quarter, did you actually have real-deal customers that came in and said, "I don't want to fly commercial, " or "I've always been on the fence and the risks I -- perceived risks of flying commercial are pushing me over that fence I've always sat on."

I'm trying to get a sense for how real that trend is from not wanting to fly commercial or to flying private versus being more anecdotal.

Well, look, no, I think as we said before, the -- I think it's very real.

But remember, it starts with charter and club and hour and then moves into fractionals and before whole ownership, right?

I mean somebody that's never been on a business jet before doesn't buy a new airplane, right?

I mean there's a progression here, which is, I think, kind of the normal entry of anybody going into business aviation.

They're not going to jump in with a large equity position.

They're going to start to see it by utilizing it and get some experience with it on a sort of by the hour and progress to fractionals, and that's sort of the normal process that we see.

So I think when you talk to the folks that are out there operating, and it's across everything.

It's charter companies that are flying older aircraft.

It's guys like Wheels Up that are very strong club membership models.

It's the Netjets.

And, yes, I think Netjets is seeing both the folks that are interested in cards, but also fractional shares.

So you see people migrating to these known brands as well that are new to the business.

So I don't think it's anecdotal.

I think it's quite real.

But again, from our perspective, it starts more in a non-equity mode and sort of migrates through the path towards ownership, whether that's a fraction or ultimately in a whole aircraft line.

Okay.

Okay.

Pretty interesting.

In Bell commercial, is it -- do you have the visibility or desire here on the call to share similarly to how you just did with Cessna in terms of how you see the production loading in for the back half of this year and then into 2021 on Bell commercial units?

No, look, it's a totally different market, right?

So it -- it's not -- it doesn't share a particular analogy around that.

I think when you -- the only area where we've seen lighter activity has been in aircraft that we sell on a more short cycle, right?

It's a high net worth individual.

It's more of a discretionary spend, which is some of the 505, which we've seen lower volume, and we've talked about seeing lower volume.

I think we'll see lower volume through the balance of the year.

But a lot of the other aircraft are going into EMS.

They're going into police, training, power, public.

That piece of the market tends to have a longer lead time, sort of a different acquisition process.

So look, I think we'll -- there's no doubt that you'll see some softening in the commercial side, but nowhere near as dramatic as you see in the fixed-wing market.

And obviously, the other part of Bell, which is a very strong defense business, where utilization is high, deliveries are good, aftermarket is very strong, so I think it's hard not to feel good about where Bell's positioned both in terms of their performance as well as opportunities for the future, so.

Yes.

I appreciate that color.

It's actually really helpful.

But I was actually just asking if you would provide the directional rate of change in commercial units you see for this year and next year that -- the same way you did for Cessna there.

No, I would not.

I mean other than giving you some color on it, you're going to be lighter on 505s for sure, and we've adjusted production accordingly, but the rest of the market is better visibility.

Okay.

I think my question didn't come across, but I understand now.

Thanks very much.

Our next question comes from the line of Ron Epstein with Bank of America.

Maybe a quick one and then a follow-up.

Do you guys have any whitetails at Aviation right now?

I mean are all the tails sold?

Or -- and do you have any used aircraft floating around?

I don't know, Ron.

We haven't used the whitetail word in a very, very long time.

So as you know, for years now, we've -- we build to a forecast.

And that's kind of what we continue to do.

So if you're interested, if you're inquiring about wanting to buy an aircraft, I'm sure I can help you.

Okay, I wish I could, in another life.

Ron, look, we -- obviously, we do everything we can do to match supply and demand.

The adjustments that we've made by having the factory shutdown, that obviously helped align to a lower demand environment that we've been seeing and the adjustments that we've made to the run rate on our production through the balance of the year and into 2021 is all aimed at making sure that we're building a number of aircraft that we expect to be selling.

And we've gotten pretty good at it, so we'll keep doing it.

We adjust along the way obviously up or down, but that's certainly our objective.

But look, well the one thing I would say, I mean, because if you remember -- as I unfortunately remember the whole creation of the whitetail thing years ago was because you saw these massive cancellations.

And yes, look, we haven't seen that, right?

I mean our -- the customers that were in our backlog have stayed in our backlog, and we talked about the situation on the fractionals side.

And now we're seeing that improve as demand comes back into the marketplace.

But the good news here is, unlike previous cycles, the 2 big dynamics you don't see different.

You don't see this flood of incoming calls saying, "Hey, I want to cancel my airplane." People want to keep their airplane.

It was on order.

And also, I'd say on the used side, right, you don't see this flood of aircraft going into the used market.

The used available for sale remains at very low levels.

We're seeing lower volume, obviously, just given the nature of the pandemic here over the last few months.

And -- but again, that lack of aircraft flooding into the used market, which a number of years ago, obviously put huge price pressure in that light segment.

We're actually seeing a little bit of an uptick in some of the pricing on used because there's just not a lot of them out there that are very new aircraft.

And so I think that market remains healthy, which is good.

Okay.

That's great.

And then maybe just one much bigger picture question.

As we listen to a lot of these calls with different management teams, there's a lot of focus on resizing, cost cutting, so on and so forth for obvious reasons.

But when you think about Textron from your seat and you look past the pandemic, are there any opportunities here to make some fundamental changes at the company that make the company stronger when we get out of the pandemic either from a portfolio reshaping point of view or some other things that you just couldn't do if it was business as usual because everybody was so busy, right?

I mean does this give you an opportunity to like to take a breath and look at the company and make some changes that you maybe couldn't have done or wouldn't have been easy to do when you're trying to get your airplanes out the door and gas tanks out the door and so on and so forth?

Well, look, specifically at Aviation, I think this is more about recognizing that over the last few years, we've had very high R&D levels, right, as we brought Latitude and then particularly as we brought Longitude into the market.

So we are already situated in a position where we had gone through a very large R&D phase.

We still have things like SkyCourier and Denali that are on the road map, but these are much smaller programs and something of a magnitude of a Longitude.

We're also getting back to doing a lot of upgrade programs to our existing aircraft that are out there.

So I think from our perspective, this is -- as I -- we look over the next couple 2 or 3 years, I think we've got a great portfolio.

We have a lot of things like the SkyCourier, which should add a lot of growth and is a great product that's coming along really well.

And then you've got a lot of upgrade programs, which are not as R&D-intensive but keep refreshing that product line.

So certainly, we're taking out cost associated with that lower run rate on a -- on production going forward, at least through late this year and into 2021.

We can adjust accordingly obviously if we see a stronger demand.

So I would say in terms of Aviation, I don't see such a dramatic change beyond probably that R&D profile.

And looking at a couple of other businesses.

Obviously, as we've seen the slowdown, we are doing some things around restructuring and fundamentally changing the business going forward.

The things we've talked about with the air transport side of the business, some of the things in the vehicle side, where we're consolidating some of our operations, we can do other operations, just making them run more efficiently.

And in those cases, I think, absolutely, we're in a better position as we come out of this downturn than we were from a fundamental structural cost standpoint, we're in a better place going forward.

Okay.

Ryan, that does it for questions in the queue, and we will end the call.

Okay.

Ladies and gentlemen, that does conclude today's conference.

I'd like to thank you for your participation.

You may now disconnect.