textron (txt) earnings report: q1 2015 conference call...

CompanyName:T extronIncCompanyTicker:T XTSector:IndustrialGoodsIndustry:Aerospace/Defense

EventDescription:Q12015EarningsCallMarketCapasofEventDate:12.25BPriceasofEventDate:44.06

©2014TheStreet,Inc.Al l R ightsReserved Page1of24

Textron(TXT)EarningsReport:Q12015ConferenceCallTranscriptThefollowingTextronconferencecalltookplaceonApril28,2015,08:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

DougWilburne;Textron;VP-IRScottDonnelly;Textron;Chairman,CEOFrankConnor;Textron;CFO

OtherPart icipants

CarterCopeland;BarclaysCapital;AnalystSheilaKahyauglu;JefferiesandCo.;AnalystGeorgeShapiro;ShapiroResearch;AnalystSamPearlstein;WellsFargoSecurities,LLC;AnalystJulianMitchell;CreditSuisse;AnalystCaivonRumohr;CowenandCompany;AnalystPeterSkibitski;DrexelHamilton;AnalystNoahPoponak;GoldmanSachs;AnalystMylesWalton;DeutscheBank;AnalystJohnnyWright;Nomura;AnalystJeffSprague;VerticalResearch;AnalystDavidStrauss;UBS;AnalystJonRaviv;Citigroup;AnalystRonaldEpstein;BofAMerrillLynch;AnalystRobertStallard;RBCCapitalMarkets;AnalystSteveLevenson;StifelNicolausandCompany;AnalystJustinBergner;GabelliandCompany;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Ladiesandgentlemen,thankyouforstandingby,andwelcometotheTextronfirst-quarter2015earningscall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecorded.AtthistimeIwouldnowliketoturntheconferenceovertoourhost,theVicePresidentofInvestorRelations,Mr.DougWilburne.Pleasegoahead.

DougWilburne (VP-IR):

Thanks,Dan.Goodmorning,everyone.Beforewebegin,I'dliketomentionwewillbediscussingfutureestimatesandexpectationsduringourcalltoday.Theseforward-lookingstatementsaresubjecttovariousriskfactors,whicharedetailedinourSECfilingsandalsointoday'spressrelease.




OnthecalltodaywehaveScottDonnelly,Textron'sChairmanandCEO,andFrankConnor,ourChiefFinancialOfficer.OurearningscallpresentationcanbefoundintheInvestorRelationssectionofourWebsite.

Textron'srevenuesinthequarterwere$3.1billion,up$226millionfromlastyear'sfirstquarter.Incomefromcontinuingoperationswas$0.46pershare,up$0.31fromthefirstquarterof2014.TextronAviationoperatingresultsincludeda$5millionreductiontosegmentprofitfromfair-valuestep-upadjustmentstoacquireBeechcraftinventoriessoldduringthequarter.Manufacturingcashflowbeforepensioncontributionsof$20millionwasa$125millionuseofcashcomparedtoa$111millionuseofcashinlastyear'sfirstquarter.

WiththatI'llturnthecallovertoScott.

Scott Donnelly(Chairman,CEO):

Thanks,Doug.Goodmorning,everybody.Revenueswereupnearly8%inthequarter,reflectingthesuccessofourstrategyininvestinginnewproductsandacquisitions.WeachievedthisincreaseintoplineatTextrondespiteanexpecteddecreaseinrevenuesatBell.

DeclineinrevenuesatBellwasprimarilyduetolowervolumesinourV-22programwherewedeliveredsixV-22s,downfromeightaircraftayearago.WealsodeliveredfourH-1aircraftdownfromfiveunitsinlastyear'sfirstquarter.ThisisjusttimingontheH-1saswestillexpecttodeliverabout25unitsforthefullyear.

Onthecommercialsidewedelivered35aircraft,upfrom34ayearago,butourmixwasunfavorableasstrengthinthelightendofthemarketwasoffsetbysoftnessinthemediumsegment,withno412deliveriesinthequarter.

Basedonthecontinuedsoftnessinthemediumsegmentofthemarket,weareadjustingproductionlevelsandtakingadditionalcostactionstobeallowBelltoperformwithinitstargeted2015segmentmarginrangeof11%to12%.Westillexpectthatcommercialdeliverieswillbeupthisyear,butprobablyonlymodestlysogiventhecurrentdemandenvironment.

Whilethemediumsegmentremainschallenging,ourwinratecontinuestobefavorable.WegotanespeciallygoodsuccessatHELI-EXPO,wherewesigned238ordersforin-productionaircraftincludinga200-unitorderfromAirMethodsforournew407GXPmodel.Attheshowwealsosigned29lettersofintentforthe525Relentlessand24forthe505JetRangerX.

InadditiontoHAIorders,wereceivedanorderforseven412sfromtheCanadianCoastGuard,whichweexpecttobegindeliveryin2016andannouncedtwoorderstotaling31407sforcustomersintheMiddleEastandMexico,reflectingsuccessintheinternationalmarkets.WealsocelebratedtheopeningoftwonewregionalsalesandservicesofficesinTokyoandAbuDhabitobetterserveourcustomersinthoseregions.

Onthenewproductfront,wecontinuetomakeprogressonoursafety-of-flighttestingwiththe525Relentlesstestaircraftandareexpectingfirstflightsoon.Developmentofour505JetRangerXprogramisalsoproceedingwell,withasecond-flighttestaircraftnowintheair.

TherewerealsoanumberofpromisingdevelopmentsonthemilitarysideofBellinthequarter.First,theV-22wasincludedintheUSpresidentialbudgetfortheNavycarrieron-boarddeliverymission,whichcallsfor44aircraft.Thiswouldprovideasolidbasisforathirdmulti-yearcontractbeginninginthe2020timeframe.TheJapaneseV-22programcontinuestomoveforwardaswewereincountrylastmonthmeetingwithacustomerandexpectcontractsignaturethissummer.Deliveriescouldbegininlate2018.




WearealsoseeingforeignopportunitiestakeformfortheH-1sastheUSStateDepartmentannounceditsapprovalofapotentialsaleof15AH-1ZViperstoPakistan.Sowhilewecontinuetoseelingeringweaknessthemediumhelicoptersegment,webelievethegrowthoutlookatBelloverthenextseveralyearsremainsstrongdrivenbyourexpandedglobalcommercialsalesefforts,recentcommercialproductupgrades,newcommercialproductsonthewayandforeignmilitaryopportunitiesforboththeV-22andtheH-1.

MovingtoSystems,asexpectedrevenueswerealsodowninthequarterprimarilydrivenbylowervehicledeliveries.However,wearemakinggoodprogressinourCanadianTAPVprogramandbelievewearestillontrackforinitialdeliveriesinthefourthquarter.We'realsoworkingonanumberofadditionalforeignopportunitiesthatshouldcontributetofourth-quartervehicledeliveries.

AtTextronMarineandLandSystems,wewereawardedan$84millioncontractfortwoadditionalShiptoShoreConnectorunitstobedeliveredin2019,withtheoriginaltwounitsscheduledtorolloffthelinein2017and2018.

MovingtoUnmannedSystems,wewereawardedacontractfor10additionalTCDLV2Shadowretro-fitsystemsaswellasanumberofadditionalcontractsforourfee-for-serviceplatform.AtTRUSimulationandTraininglastmonth,weunveiledourBellV-280simulatorattheArmyAviationMissionSolutionSummit,givingtheArmyleadershipanduserstangiblehands-onexperienceofthisrevolutionarycapabilityofthenewplatform.

MovingtoIndustrial,wesawa9.4%increaseinrevenuesaftera7.7%negativeimpactfromforeignexchange,reflectingincreasedvolumesinourautomotivemarkets,thesuccessofnewproductprogramsandtheimpactoftheTUG,DouglasEquipmentandDixieChopperacquisitions.AtJacobsen,weintroducedanewTrucksterHDheavy-dutyutilityvehicle.Withachoiceofgasordieselengineandover3,500poundsofpayload,it'sthemostpowerfulutilityvehicleavailableinitsclassandprovidescompellingnewproductintheJportfolio.

Inthetoolsandtestbusiness,Sherman+Reillyintroducedanumberofnewproducts,includingtheRevolutionSeriesP1400,thefirstofitskind,the14,000poundelectricpullerforlines,andanewlineofterminationtoolsforthepowerlineindustry.OperatingresultswerealsoabrightspotinIndustrialinthequarter,asthehighervolumescontributedtoayear-over-yearmarginincreaseof110basispoints.

MovingtoTextronAviation,inthequarterwedelivered33jetscomparedto35lastyear,aswellas25KingAirs.Marginsintheaviationsegmentcontinuetoimprove,reflectingourexpandedscaleandefficiencyimprovements.

OntheservicefrontatAviation,duringthequarter,weextendedourProAdvantagejetafter-marketsupportprogramstoHawkercustomers,plusaddedtoourKingAirservicefootprintwithcertificationsinSacramentoandParis.DevelopmentonournewLatituderemainsonpaceforFAcertificationinthesecondquarter,astheflighttestprogramisnowcompleteandweshouldbeontrackforLatitudedeliveriesinthethirdquarter.

TheavailabilityofusedCitationscontinuestocomedown,withusedaircraftunder10-yearsolddecliningto1.6%oftheactivefleet.Usedaircraftarecontinuingtomovefairlyquickly,andwe'vealsoseenevidenceofimprovingresidualvalues,especiallyforaircraftwithlowhours.Newjetdemandisusuallyseasonablylighterinthefirstquarter.Thecustomerinterestandinquiryactivitywasrelativelyhealthyandconsistentwithouroutlookfortheyear.

Tosumupatthispointintheyear,we'reconfirmingourfull-yearTextronguidanceforbothearningsandcashflowasweexpectedstrongerresultsatTextronAviationandIndustrialwilloffsetthelowervolumeatBell.




Withthat,I'llturnthecallovertoFrank.

FrankConnor (CFO):

Thankyou,Scott.Goodmorning,everyone.Segmentprofitinthequarterwas$259million,up$40millionfromthefirstquarterof2014,ona$226millionincreaseinrevenues.

Let'slookathoweachofthesegmentscontributed,startingwithTextronAviation.AtTextronAviations,revenueswereup$266millionfromthisperiodlastyear,primarilyreflectingtheimpactfromtheBeechcraftacquisition.Thissegmenthadaprofitof$67millioncomparedto$14millionayearago.ThiswasdrivenbyimprovedperformancereflectingtheimpactoftheBeechcraftacquisitionandhigheroverallvolumes.Backloginthissegmentendedthequarterat$1.3billion,$99millionlowerthanattheendofthefourthquarter.

MovingtoBell,revenuesweredown$60million,primarilyreflectinglowerV-22deliveries.Segmentprofitdecreased$20millionfromthefirstquarterin2014,primarilyreflectinglowermilitaryvolumeandanunfavorablemixofcommercialaircraftdeliveriesinthequarter.AtTextronSystems,revenuesdown$48million,primarilyduetolowerMarineandLandSystemsvolumes.Segmentprofitwasdown$11millionreflectingthelowervolumes.

Industrialrevenuesincreased$75millionduetohigheroverallvolumesandtheimpactofacquisitions,partiallyoffsetbya$62millionunfavorableimpactfromforeignexchange.Segmentprofitincreased$16millionreflectingthehighervolumes.Financesegmentrevenuesdecreased$7millionandprofitincreased$2million.

Movingbelowthesegmentprofitline,corporateexpenseswere$42millionandourtaxratewas30.4%.Interestexpensewas$33million,down$2millionfromthefirstquarterof2014.

Towrapupwithguidance,weestimatethatourannouncedcostreductionactivitiesatBellwillresultinpretaxchargesintherangeof$40millionto$50million,whichwillberecordedaspartofsegmentexpenses.Inclusiveofthecharges,relatedcostsavingsandlowerexpectedrevenueswestillexpectfull-yearmarginsatBellwillbeinthe11%to12%range.Fromatotal-Textronperspective,strongerresultsatTextronAviationandIndustrialareexpectedtooffsetlowervolumeatBell.

Therefore,weareconfirmingexpectedfull-yearEPSfromcontinuingoperationsof$2.30to$2.50ashareandcashflowfromcontinuingoperationsofthemanufacturinggroupbeforepensioncontributionsof$550millionto$650million.

Thatconcludesourpreparedremarks.Dan,wecanopenthelineforquestions.

QUESTIONS&ANSWERS

Operator :

Thankyou,sir.

(OperatorInstructions)

OurfirstquestioncomesfromthelineofCarterCopelandfromBarclays.Pleasegoahead.

CarterCopeland (Analyst-BarclaysCapital):

Goodmorning,gentlemen.





Goodmorning


Frank,justaclarificationor,maybe,ifyoucouldgiveusalittlemoredetail,onthechargesforthecostactionsatBell,obviously$40million,$50million,ifyoustillthinkyou'regoingtocomeinwithinthepriorrange,Iwasjustwonderingiftherewassomethingotherthanrunratesavingstherewouldapplyalotofsavings?Istheresomethingelseasanupperthat'shelpingyouovercomethat$40million,$50millionoramImissingsomething?

FrankConnor (CFO):

No,it'sreallyrun-ratesavingsandthewaythatthengetsrolledthroughtheEACsfromacost-productionstandpoint.So,obviously,we'llhaveheadcountsavings.We'llhaveratesavings.Wearedoingotherthingsonthediscretionarysideaswell.

Whenyoulookatthosesavingsfromaprogramaccountingstandpointaswellasthecost,itwillrollthroughsuchthatwedon'texpectanybigimpactinanyparticularquarterandwhatweshouldseeisthegenerallythesametypeofseasonalityfromaquarterlystandpointaswe'veseenatBelloverthepastcoupleofyearswithimprovingmarginsaswegothroughtheyearonhighervolumes.Butitwillgetspreadoutoverthatperiodoftime.


CanyouquantifyhowmuchofthatistheEAC[keum]catchesthatisyou'llgetoutofthatforthisyear?

FrankConnor (CFO):

It'snotreally[keum]catches,it'sjustaswe--there'llbealittlebitof[keum]catch,butit'smostlyaswedeliverproductwe'llhavelowercostembeddedinthoseproducts.We'reonaunits-of-deliverybasisandsoitrollsthroughaswedeliverunits


Okay,great.Thenjustoneotherone.Withrespecttothemarketsoftness,youtalkedabout,Scott,the--Iwonderedifthereisanyafter-marketservicesupportimpactinBellrelatedtotheweakness--it'sprobablyrelatedtolowerusage,thatyoumightbeseeinginBellaswell?


No,we'retryingtokeepaneyeonthatandhavesomeconcernaboutit,butintheourquarterourafter-marketactivitywasfineandwecontinuetoseeorderactivity,soutilizationstillseemstobeokay.Ithinkwhatwe'rereallyseeingismorepeoplejustalittlenervousaboutinvestinginthenewCapExandputtingnewaircraftintoreplacetheirolderaircraft.But,atleasttodate,utilizationandaftermarketseemstobefine.


Allright.Thankyou,gentlemen.

Operator :

Thankyou.OurnextquestioncomesfromthelineofSheilaKahyaoglufromJefferies.Pleasegoahead.

SheilaKahyauglu (Analyst-JefferiesandCo.):




Hey,goodmorning,everyone.Scott,howshouldwethinkabouttheprogressionofthebacklogwithinAviation?Whencanwestarttoseethatmoveupabit?


Sheila,thethingthat'smostlikelytostarttoimpactourbackloghereinthebalanceoftheyearisgettingthroughcertificationonLatitude,whichasIsaid,Ithinkwe'regettingprettyclose.We'redonewithflighttest.We'redonewithallthegroundtestactivities.Atthispoint,really,we'rereallyjustintothepaperworkexerciseofgettingthroughthat.

Soasaresult,wenowhaveacoupleaircraftthatwe'verecentlybeenabletoputouttobereallydedicatedtocustomerdemoactivity;thoseaircraftareprettybookedup.Wethinkthere'salotofdemandouttherefortheaircraft,alotofcustomerinterest.Nowthatwecanreallydedicatethoseassetstogettingoutthereanddoingcustomerdemos,wewouldexpecttoseethoseordersstarttofinalize.


Okay.Areyousoldoutforanyparticularmodelsthroughoutthisyear?


It'sprettytightonacouple,butifyoureallywantedone,wecouldprobablyworkwithyoutogetyouinsomewhere.


I'llaskDougforafavor.Then,IguessonunderlyingmarginswithinAviation,ifwecomparethefirsthalfoflastyearversusthequarter,about200basispointsofunderlyingimprovementexcludingthePP&A.Shouldweexpectthatkindofimprovementasweprogressthroughouttheyear,orcouldyouattributethattopricing?WasitBeech?Wasitproductivity?Maybeifyoucouldjustelaborateabitthere?


Yes,Ithinkthatthat'sprobablygoingtobetypicalfortheyear.Ithinkthevolumesweexpecttobeonlinewithwhatwe'reexpectingforthebeginningoftheyear.Wegotaslightuptick,wethink,onayear-over-yearbasisontheKingAirs,whicharedoingwell,so,yes,Ithinkthetrajectorywe'reonisgoingtotrackacouplehundredbasispointsbetter.


Okay.Thanks.

Operator :

Thankyou.OurnextquestioncomesfromthelineofGeorgeShapirofromShapiroResearch.Pleasegoahead.

GeorgeShapiro (Analyst-ShapiroResearch):

Yes.Goodmorning.Scott,Iwaswonderingontheorders,ifyoucouldjustgooutandtalkalittlebitaboutwherethestrengthis?USversusinternational,areyouseeinganyimpactnegativelyinternationallybecauseofthedollar,soalittlemorecoloronthat,ifyoucould?


Ithinkthedollarisaproblem,George,andinsomepartsoftheworld,obviously,becauseof--Imean,the




dollarhasstrengthenedsomuch.Obviouslyinsomemarkets,particularlyinEasternEuropeandRussiawhereyou'vehadalotofdevaluationandsimilarlyinSouthAmerica,it'screatedalotofproblem.

ButIwouldsayingeneral,rightnowonthejetsideofthings,themarketisverydrivenbytheNorthAmericanmarketplace,probablysomethingaroundtwo-thirdsto80/20.Interestinglyenough,it'salmostexactlyinvertedifyoulookedatKingAirs.Thestrengthoftheturbopropmarkethasbeenmoreinternational.TheUSmarketisstillgood.There'sbeenmoredemandinternationally.So,totalportfolio,it'sbalancingoutabit,butdefinitelyonthejetbusinessit'smuchmoreNorthAmericancentric,andKingAir,moreinternational.


Then,inBellonthecommercial,istheweakness,wouldyousay,totallyduetotheoilandgasmarketoristheresomethingelsegoingon?


Ithinkit'smostlyrelatedtothat,George,andcertainlypartofitisdirect.Ifyou'retalkingaboutcustomerswhosemissionisflying,specifically,oilandgasmissionsouttorigs,clearlythatmarketisverysoftrightnowgiventhepriceofoil.

Forusabiggerknock-oneffectofthatishistoricallyweseealotofsalesofalotofouraircraft,particularly412s,inemergencymedicalservicesandCSARandalotofquasi-militarygovernmentoperations,andalotofthosecountrythathaveverystrongoileconomiesareseeingalotofcutbacksintheirbudgets.Ithinkthere'sapieceofitthatisabsolutelydirectlyoilandgas,butIthinkthepartthat'sbeenabiggerissueforusisjustalotofourcustomersouroilandgas,naturalresource-driveneconomies,andthey'resoftrightnow.


Okay.Onequicklastonefor,Frank.Whatwastheafter-marketgrowthatAviation?

FrankConnor (CFO):

Itwasmid-singledigitsandconsistentwithwhatwe'vebeenseeingandexpecttocontinuetosee.


Okay.Thanksverymuch.

Operator :

Thankyou.OurnextquestioncomesfromthelineofSamPearlsteinfromWellsFargo.Pleasegoahead.

SamPearlstein (Analyst-WellsFargoSecurities,LLC):

Goodmorning.


Morning,Sam.


Canyoutalkalittlebitmoreaboutindustrial.Just,itlookslikesalesandmarginsarecertainlyrunningahead.Iknowyoumentionedautostrength,butwhereisthehighervolume?Isitthespecialtyvehicles




business,likewhatisitthat'sdrivingthingsthisyear?


Probablyonanabsolutedollarbasis,thebiggestincreaseisintheautomotiveside.We'veseengoodautodemand,butwe'vealsoseenverystrongearnsfromthevehiclebusiness.I'dsayorganicallythebusinessisgrowingnicely.Then,ofcourse,youalsohaveTUGtechnologiesintheacquisitionsideforgroundsupportequipment.

Thatacquisitionisperformingextremelywellforus.We'reseeinggreattoplineandgreatmargindeliveryoutofthat,aswell.It'skindof--I'dsaythegoodnewsis,it'sprettybroad.Theorganicgrowthofthebusinessesandproductlinesthatwewereinhasbeenverysolidandtheacquisitionsthatwe'vedoneinthatspacearealsoperformingverywell.


Okay.Thenjustaquestiononthefinanceslide,the60-plus-daydelinquencies,whydidthoseincreasesequentially?Iknowit'snotlargedollars,butit'scertainlyalargepercentagechange?


Yes,that'strue.Wehadacouplecustomeraccountsthatmovedintothat60-daywindow,andwehavealittlebitofthelawofsmallnumbersnow,soifoneortwoaircraftbecomeaproblemitcanswingthatpercentagebyaprettygoodchunk,eventhoughitmightbetwoairplanesand$20millionmakesabigdifferencefromapercentbasis.

Idon'tthinkthere'sanyfundamentalunderlyingchangethere.Imean,clearly,somecustomersinternationally,becauseofsometheissuesaroundUSdollarandcurrencyandwhatnot,thosepaymentshavegottenalittlemoreexpensive,andsoobviouslywe'llworkthroughthat.Ingeneral,Ithinkwe'llbefine.


Okay.Lastquestion,justonthe$600millioninfreecashthisyear,Iknowyou'vetalkedaboutataminimumbuyingbackenoughstocktooffsettheemployeeprograms.Oneis,howmuchbuybackisrequiredtodothat?Then,whatwouldittakeforyoutodomore?Youdon'treallyhaveanyotherdebtmaturing,soI'mjusttryingtothinkaboutwhereelsedoesitgo?

FrankConnor (CFO):

Wewillbuybacktooffsettheprograms.It'sabout3millionsharesorso.Aswe'vetalkedabout,wewill--obviously,wecontinuetolookatacquisitionopportunitiesandwehavehadasteadystreamofthose.WeexpectthatwewillpaydownalittlemoreofthebankdebtthatwetookonasitrelatedtotheBeechcraftacquisition.

Then,we'vesaidthatanyexcesscapitalafterthatwewouldlooktocontinue,again,toreturntoshareholdersthroughsharerepurchaseactivity,butthetargetfromashare-repurchasestandpointistooffsettheemployeedilutionnumber.


Thankyou.

Operator :




Thankyou.OurnextquestioncomesfromthelineofJulianMitchellfromCreditSuisse.Pleasegoahead.

JulianMitchell(Analyst-CreditSuisse):

Hi,thankyou.Justaquestionaroundanychangeinthecompetitivelandscape.InAviationandinSikorsky,youobviouslyhavesomecompetitorsbasedincountrieswherethedollarhasstrengthenedconsiderablyagainsttheirlocalbase,sohowdoes--hasthatchangedanythingyetyou'reseeingcommercially?Also,thereareobviouslysomeidiosyncraticissuesatacoupleofrivalsofyoursrightnow.Ijustwonderedifyou'dseenanychangefromthataswell?


Thedollarisnothelpfulforsurefromacompetitivenessstandpoint,andIthinkthatsomeofourEuropeancompetitorsdogetanadvantageoutofthat.Ofcourse,theyalsohaveafairbitoftheirsupplychainthatisdollardenominated,soit'snotasbigoratadisadvantageasitcouldbe,butIthinkwhenyoulookatdealsinEurope,forinstance,rightnow,itdoesmakeitmorechallenging.Again,that'sjustthenatureofacompetitivemarket.

Thesethingsswingaround.IthinkifyoulookatLatinAmericaandEasternEurope,Russia,thecurrencydevaluationsmakesitachallengeforbothdollar-andeuro-denominatedbusinesses,justbecauseofthecurrencydevaluation.AtanyrateIthink--Iwouldnotsaythatithasmarkedlychangedwhat'sgoingon.Itmakesit,certainly,tougherinEurope,butIthinkwe'restillwinningandfeelreallygoodaboutwherewearefromashareperspective.

WhenyoulookatdealsinAsia,we'recompetitiveandwe'rewinning.Ithinkeventhoughthehelicoptermarketinparticularweseeasbeingprettysoft,I'dsaythatwefeelverygoodaboutourorderratethisyear.IntermsofshareIthinkwe'redoingquitewell.


That'sveryhelpful.Then,mysecondquestionisjustontheSystems,therevenueswereweak,butitsoundedlikeverymuchinlinewithyourplanningassumption.Itdoesn'tsoundlikeyourfull-yearviewhaschangedonthatsegment,soIjustwonderedifyoucouldconfirmthat?Alsoanycoloratallonthelinearityofthesalesprogression?Isitgoingtobeavery,veryQ4-loadedyearatSystemsbecauseoftheTAP3deliveryschedule,ordowestarttoseethingsimproveabitbymidyear?


Ithinkwe'llseethingsimproveabitbymidyear,Julian,butabsolutelyourexpectationsandwherewethinkit'sgoingwillbeveryback-endloadedandthatreallyprimarilyisdrivenbythevehicleprogram.Weclearlyexpect,andwethinkwe'reontrack,tohaveaprettybigfourthquarteronthevehiclesideofthebusiness.


Great.Thankyou.


Sure.

Operator :

OurnextquestioncomesfromthelineofCaivonRumohrfromCowenandCompany.Pleasegoahead.




CaivonRumohr (Analyst-CowenandCompany):

Yes.Thankyouverymuch.GiveusalittlemorecolorondemandatAviation?Yousaycustomerdemandisquote/unquotehealthy,andyet0.85book-to-billhardlylookslikehealthy.HowwasitatCessnaversuslegacyBeech?Howdiditrolloutsequentially,sincewe'veheardthatJanuaryandFebruarywereveryweakandMarchimproved?


Ithinkthenormalseasonalityisdemandisinlinewithourexpectations,IguessiswhatIwouldsay,Cai.Theearlyfirstquarterisalwaysverysoftfromanorderintakeperspective,andIthinkthat'swhatwesawforthemostpartthisyear.Onaseasonalbasis,it'sperformingexactlyaswewouldhaveexpect.

Ithinkweprobablyhadthe,intermsofcustomeractivityandwhatnot,asstrongaswe'veseeninawhileinQ1,andwe'reprettyhappywithhowthingsareprogressing.Obviously,asIsaidearlier,therealdemanddriverforusintermsofanykindofbacklogbuildwouldbearoundLatitudeasthatthinggoesthroughitscertificationprocess.Eventhoughthecustomerenvironmentisconsiderablybetterthanithasbeen,itisstillafullbusiness.

Peopleareinconversationsandastheygetclosetowhentheywanttotakedeliveries,that'swhentheyputtheirdepositdownandsignup.Aswe'vesaid,we'dlovetobeoutthreetosixmonths,andwecertainlyhaveacouplemodelsworkoutinmoreinthatrange,butgenerallyspeaking,it'sstillmoreofaflowbusiness,butwithalotmorecustomersareinthequeueandalotmoreconversationsgoingaroundtoyieldwhatweneedtoseeintermsofdeliveries.Frankly,wefeelprettycomfortablewiththat.


GiventhatCessnadependsontheUS,wheretheeconomyisimprovingsomewhat,andBeechdependsontheforeignmarket,wherethere'slessevidenceofthat,couldyoucontrastdemandbetweenthosetwosectors?


Cai,they'vereallybeenprettysimilar.Ithinkifyoulookathowdealsprogress,thenumberofcustomersthatareinconversations,whentheyactuallyplacetheirordersandtakedeliveries,asyoupointoutanditismoreinternationalontheKingAirsidethandomesticonthejetside,butstillaverysimilarprospecting,selling,order-taking,sellingprocessforbothplatforms.


Okay.Then,twoquickonesonBell.Yousaidcommercialupabit.Wouldthatincludethe412?Secondly,ifyou'regoingtohave$40millionto$50millionofpretaxcharges,howmuchwouldtherunratesavingsbeagainstthat?


Intermsoftheunitdeliveries,westillthinkthey'llbeupslightlyoverayearago,primarilydrivenbyhighervolumeson407sand429soffsetbyprobablyslightlylowervolumeson412versuslastyear,whichiswhywecomebacktothemixissueiswhatpressuresmarginsideofthisthing.

So,we'restillfeelingreasonablygoodaboutvolumesonthelights,butclearlynotsoonthemediums.Intermsofthecostandthatroll-through,Imean,Iwouldsaymostofthecostisrelatedtoseverancesandreductionsofpeople.Generallyspeaking,ifyouforgetprogramaccountingandinventoryandallthatsortofstuff,yougenerallyexpectthatthosecostsarerecoveredinanine-monthwindow.Obviouslyhow




yourecognizethatandseeitthroughtheP&LisgoingtobemoreofafunctionoftheprogramaccountingandtheEACsandhowthatcomes.

AsFranksaid,you'llseenotawholelotofimpactonaquarter-to-quarterbasisthroughthebalanceoftheyearbecausewhilewe'lltakethecostsassociatedwithrestructuring,thatwillmanifestitselfinaprogramaccountingwhereyouwon'tseemuchdifferenceintermsofthenetimpactthroughthebalanceofthisyear.Obviously,asyougooutintime,youwouldstarttoseeapositivebenefitofthat.


Okay.Thankyou.

Operator :

OurnextquestioncomesfromthelineofPeteSkibitskifromDrexelHamilton.Pleasegoahead.

PeterSkibitski(Analyst-DrexelHamilton):

Hey,Scott,Ithinkyoumentionedsecondhandpricinginusedjets,inyouropeningremarks,beingmaybemodestlyimproved.Canyoutellus,istheimprovementrollingthroughtomeetpricingonsomeofthelegacymodels,oristhatsomekindofaflashenvironmentandyoujustgetapricingpoweronthebrand-newmodels?


We'veseenpricingfairlystableonthenewmodels.We'veseenabeginningofsomeuptickofresidualvaluesintheusedaircraft,asyouseeinthe[Vrefs]andthebluebooks,whichisencouraging.Idon'tknowthatthere'sadirectcorrelation,frankly,tosaying,okay,thepriceisupontheusedandthereforetranslatesdirectlytopriceonthenew.

Itdoeshelpusintermsofacustomerthatwantstotradeintheiroldaircraftorselltheiroldaircraftandstepupthenewaircraftintermsofthatgapinvaluebetweenwhattheyknowtheycangetfortheirusedaircraftandhowmuchadditionalcapitalthey'rewillingtoputintobuynewairplanes.Soasweseethoseresidualvaluesstartingtorebound,Ithinkitdefinitelybodeswellfordemandonthenewaircraftside.


Okay.Understood.Then,justwantedtofollowup.Idon'tknowhowwidespreadthiswas,butIsawatleastonearticleduringthequarterthattalksaboutalotofnervousnessontheTAPVprograminCanada,justontheredesign.Canyoutelluswhenistheredesigngoingtobedoneandfullytested?Howthoroughisthis,suchthatitcouldeliminatetheriskintheprogram?


Theredesigniscomplete.Wehavehadinitialvehicleswiththeredesignfullyincorporatedintothemandoutgoingthroughthetestenvironment,soasweweredoingtheredesign--andthesethingsareallfairlywellisolatedtothesteeringsuspensionsystem,whichbasicallywejusthadtobeefitup.

Theseverityoftheconditionsofthetestwere,frankly,beyondanythingthatwe'veexperiencedbefore.Wehavealotofthesevehiclesoutthere,obviously,ofvariousdifferenttypes,andwe'veneverhadissuesorproblemswithanyofthosecomponents.Buttheseverityofthetesting,frankly,pushedsomeofthesethingstoliterallybreaksomeofthesesteeringnumbers.

Theredesignwas,inessence,justbeefingupthoseindividualcomponents,mostofwhichareavailable




andusedinsomelargervehicles.Interestinglyenough,insomecasestheywereactuallycheaperthanthelighterversionsbecausethey'remanufacturedinhighervolumes,andsowe'vebeentestingeachofthosenewcomponentsaswecouldgetourhandsonthem,andthosehavegonewell.

AsIsaid,wenowhaveacouplevehiclesouttherethatarecompletelythenewdesignconfigurationwithallofthenewconfigurationcomponents,andthetestingsofarisgoinggreat.Itisanendurancetest,soyouhavetogetthroughthatphase,whichwilltakeusanothercouplemonths,beforewe'recomfortableenoughtosaywe'rereadytogointotheformalcustomertesting.Sofar,thedesigniscompleteandtheinitialtestingresultsareverypromising.


Okay.Appreciateit.


Pete,Doughere.Iwouldaddthatarticle,ifit'stheonethatI'mthinkingof,Ithinkifyoureaditclosely,alotoftheinformationandquotesinthatarticlearereallyfromlastyear.It'sreallynotcurrentdata.


Yes,itwasquitedated.Thiscustomerhasbeenterrifictoworkwith.Ithinkeverybodyhashadtheirheadaroundthesamethinginwantingtomakesurewewentbackthroughtheprocesssothatthetestwassuccessful.Thetoneandthefactsinthatarticlewereprettydated.


Okay.Iappreciateit,guys.

Operator :

Thankyou.OurnextquestioncomesfromthelineofNoahPoponakfromGoldmanSachs.Goahead.

NoahPoponak(Analyst-GoldmanSachs):

Hi,goodmorning,everyone.


Morning.


Scott,areyousurprisedthatthelegacy,notnewproductsCessnademandenvironmentisnotgettingbetterfaster.Because,Iguessit'sbeenafewquarterssinceyoufirstcitedstabilization,youkeepgivingustheinventoryasapercentageoffleetnumberforyou,andit'simprovedalot,andIdon'tevenknowifthatcouldgoanylower.

Istherejusttoomuchtotalmarketusedinventory,soyou'restillcompetingwitheveryoneelse'susedinventory?Orisitjustalong-cyclebusinessandittakestimetogetescapevelocity,oristhismarketjustatastructurallynewlowerdemandlevelforawhile?


Thenumbers,asyousay,aredownintermsoftheusedavailable.It'shardtoimaginetheycouldgomuchlower,frankly.Theyarecertainlywellbelowhistoricalnorms.TheonlythingIwouldsayisthatthey




stillhave,probably,arelativelyhigherspreadbetweenwhatthevaluesareforthoseusedaircraftasopposedtonewaircraft.Ithinkthat'sstillisadragonsomeofourcustomersbecause,again,thattrade-inpremium.

Tosay,okay,ifIgofromusedtothenew,howmuchcashdoIhavetokickintodothatishigherthanithashistoricallybeen,soIstillthinkthatreplacementcycle,peoplewilldragthatoutjustgiventhatvaluegap,ifyouwere.

But,theaircraftstillkeepgettingolderandthey'reusingthemmore,andIthinkyou'llhavethislongertimelineintermsofhowmanyyearsoldtheiraircraftisbeforetheytradein.Ithinkthat'stheprimarydynamicstilldrivingthemarketplace.

That'swhyIthink--we'vebeentalkingnowforacoupleyears,really,aboutthepercentagecomingdownandcomingdownandcomingdown.Thispastquarter--soit'sreallythefirsttimethatwe'restartingtoseethatresidualvaluecomeup.Ithinkthatisactuallymoreimportantthanjustthatpercentage.

And,frankly,we'vebeensurprisedthatwithsuchalowinventoryofusedaircraft,you'dthinkfromasupply-demandstandpointyou'dstarttoseethepricingcomeup,atleastwe'refinallystartingtoseethat.We'vebeensurprised,frankly,overprobablythelastyear,asthatnumberreallystartedtodrop,thatyoudidn'tseeacorrespondingresidualvalueincrease.LikeIsay,finallywearestartingseeingthat,whichisencouraging.That'swhat'sdrivingthatkindofdemandenvironment.


Ontheupgradingtopic,istherealsoanissuewithlengthoftimethejetiswiththefirstowner,whereinpriorcyclesbecauseofthemaintenancewarrantybeingfiveyearsyouweregettingatonofupgradinginyearsfourandfive?

Nowfolksareextendingthatbecause,obviously,aplanecanbeusedsubstantiallylonger,andonceyougopasttherolloffofthemaintenancewarrantyandyoudothatfirstmajorcheck,youthenhavesignedupforkeepingtheairplaneforalotlongeruntilyougettothenextmajorcheck.Isthatoveralltimeanissue?


Ithinkthattimeisclearlybeingextended.Whatyou'reseeingismorecustomersthatgettotheendofthatwarrantyperiodwherehistoricallywouldhavesaid,okay,I'mgoingtogoaheadandtradein.

Again,yougobacktothat,what'sthestep-upcost?What'sthepremiumtogofromthat5-year-oldaircrafttoabrandnewaircraft?Instead,you'reseeingpeoplethatarestickingwithit,puttingitonpartprogramsandwedoprovide,obviously,forcustomers,andalwayshave,forsecondcustomers,theabilitytoinessenceextendwarrantiesandpaytoprotectthemselvesfromthosecosts,whichisgoodbusinessforus.

Ithinkthisallcomesback,Noah,tothatbasicdynamic,allright,I'matfiveyears,whetheritbecomingoffwarranty,whetherit'showmanyhours,whetherit'sjust--orgoingtolargerlift,it'sextendingthatliftbecausethatresidualvalueissubstantiallylowerthanithistoricallyhasbeen.


Gotit.Then,justlastly,onthemarginfortheoverallaviationsegment,Imean,youhaveanoutstandingmarginforecastfortheyear,couldyoupossiblyupdateusonthat?Justbecauseitlookslikewiththeverygoodfirst-quarterperformance,onecangetsubstantiallyhigherthanthatrangeyouhavethere,just




evensimplyusinga20%sequentialincrementalmarginthroughtherestoftheyear.Anymorecoloronwhereyouexpectthefullyeartoland?


Noformalupdate,Noah.AsIsaid,andIthinkasFrankreferenced,wefeellikegiventhedemandenvironmentandtheperformanceofthebusinessintotalandwe'restillearlyintheyear,obviously,butourperspectiveonthemarketandcertainlyourperspectiveonhowtheteamisexecutinganddeliveringoncostintheproductprograms,we'llprobablybetowardsthehighsideofthatnumber.


Okay.Thanksalot.

Operator :

Thankyou.OurnextquestioncomesfromthelineofMylesWaltonfromDeutscheBank.Pleasegoahead.

MylesWalton (Analyst-DeutscheBank):

Thanks.Goodmorning.FrankorScott,Ithinkyoualludedtotheserviceextensiontooffercustomers.Iwascuriousifyou'dtalkaboutthelevelofuptickyou'reseeingonthatextensionofyourserviceprogram?Also,oneyearposttheHawkeracquisition,canyoucommentonthelevelofcrosstotalizationyou'vehadinbringingcustomersovertotheCessnalineup?Anymetricsyouhaveagainstthattosupportit?


Wehaveadedicatedteam,frankly,thisiswhattheydoforalivingisreachingouttoourHawkercustomers.PartofwhatwejusttalkedaboutaroundourProAdvantagesystemisbeingabletogoouttothosecustomersandbeabletoputthemonthesamekindofmaintenanceandserviceprogramsthatwecurrentlyhavetodayforourCitationcustomers.ThatprogramandtheneedsofthosecustomersiswhatdrovethatcreationofthatprogrambasedontheinteractionsthatourdedicatedHawkerteamhashadwiththosecustomers.

Intermsofconversion,that'salsosomethingwelookatandareworkingon,andwecertainlyhavehad.someofthose.Iwouldexpect,frankly,whenyoutalktoalotofHawkercustomers,manyofwhomareinHawker900sand850s,thingslikethat,thesearecabinsizesinmissionsthatfitquitewelltowherewe'retalkingaboutgoingwithLatitudeandultimatelyLongitude.IthinkmostofthatconversionwillstartbecomingmorematerialaswehavetheLatitudeandtheneventuallytheLongitudeoutinmarketplace.


Okay.Thenaclarification.Fromasalesperspective,itsoundslikeBellmaybelookingfor$4billionroughlyatthestartoftheyearandmaybeit'safewhundredmillionlighterthanthat,isthatabouttherightthinking?


That'sprobablyaboutright.


Okay.Allright.Great.Thanks,guys.

Operator :




Thankyou.OurnextquestioncomesfromthelineofJohnnyWrightfromNomura.Pleasegoahead.

JohnnyWright (Analyst-Nomura):

Hey,guys.Abouttherestructuringpointsagain,youguyssawalotofmoneythereinthelast12to18monthstakingcostsout.Howconfidentareyouthatthere'sanother$40millionto$50milliontokeepyouinthatguidancerange?Wherearethenewareasyou'refocusingonthatyouhaven'tlookedbefore?


You'reright,we'vegonethroughanumberofrestructuring,frankly,overthelastcoupleofyearsinanticipationoftheV-22volumescomingdown.Ithinkallthat'sreallychangedhereisthatwhilewewereundertakingtotrytomakesurewehadacoststructurethat'ssupportedthat,we'veseenthesoftnessonthecommercialside.Idon'tknowthatthere'sanyparticularlydifferentstrategyhere.

Obviously,we'relookingverymuchatstructureandlookingatorganizationstructuretotrytofindmoreefficientwaystooperategiventhatit'sasmallerbusinessintermsofrevenueandtopline.It'sprimarilyaroundstructureinlayers,overhead.Wearenotimpactingourcriticalprograms,sotheinvestmentsinthe525and505andV-280,whicharesignificant,thosearecontinuingfullspeedahead.

Thisisneveraneasyprocesstogothrough,obviously,butwe'reworkingveryhardtomakesurethatthecostscomeoutinplacesthatarediscretionaryorotheroverheadandindirectburdenasopposedtoaffectinghowwemanufactureanddeliverwhatweneedtoandmakesurethatwecontinuetomaketheprogressonournewproductprograms.


Okay.Thanks.CanyoujustprovideanupdateontheScorpion?Whereweareattermsoftimingforfirstorders,maybejustanumberofcustomersyou'reinconversationwithatthispoint?


There'sanumberofcustomersinconversationrightnow.Iwouldsaythatthenumberofcustomersthatwe'retalkingtoisprobablyincreasingatthispoint.Iwouldn'thazardaguessafirst-orderdateatthisstageofthegame,butIthinkwehavealotofgoodcustomerconversationsgoingon.

Theprogramiscontinuing.We'reintheprocessofcompletingthedesignmodificationsthatwewantedtomakecomingoutoftheoriginalflightdeskdemoprogramandareintheprocessofthebuildcycleforwhatwillleadtothefirstconformingaircraft.That'swhereweareontheprogram.


Great.Thankyou.

Operator :

OurnextquestioncomesfromthelineofJeffSpraguefromVerticalResearch.Pleasegoahead.

Jef f Sprague (Analyst-VerticalResearch):

Thankyou.Goodmorning,gentlemen.


Morning,Jeff.





Ithinkyou'vecoveredalotofgroundhere.Iguessacouplethings.OnLatitude,canyougiveusthesenseoftowhatdegreeyoudohavesomeordersinhand?Obviously,you'reindicatingthatonceyouthinkyou'vegotfinalcertitpicksup,butanycoloryoucanprovidethere?


WedohaveanumberofordersfortheLatitude,Jeff,soIthinkwe'reinaprettygoodplaceintermsofinitialdeliverycommitmentsandcustomersthatarewaitingforustogetthroughcertandbeginthedeliveryprocess.Therearesomeslots,obviously,togofortheyear.AsIsaid,Ithinkwehaveaveryrobustlevelofcustomerinterestandabunchoffolksthatarewaitingtodemoandflytheaircraftandatthatpointmaketheirdecisiononorders.

Havingnowfinishedtheflighttestprogram,we'llhaveacoupleaircraftflyingaroundthecountry,fullyconfiguredforcustomerinteriors.It'sprettybookedup,soIthinkthere'salotofinterest,alotofcustomers,buttheyallwanttoflytheaircraft.We,obviously,doneanumberofcustomerdemos.We'vehadanaircraftthatwehadoutthereforawhiledoingdemosandthatgeneratedsomemoreofouractivity,andIthinkwe'reatthepointnowintheprogramwherethatpacewillincrease.


Then,justtakingthatastepfurther,youhadthismixdowninQ1andit'sobviouslyalow-volumequarter.IunderstandtheLatitudemissionisobviouslydifferentSovereignandXLSthecapabilitiesaredifferent,butistheresomeperipheralcannibalizationofthoseproductlines,youthink,onanticipationofLatitude?


TheonlythingIcanthinkof,Jeff,isfromamixedstandpoint,lastyearinQ1wehadjustgottentheSovereign+certificationinthevery,veryendof2013.WehadalotofSovereigndeliveriesinthefirstquarterof2014,soIthinkwehadgoodSovereigndeliveriesinthefirstquarterthisyear,butnotsomethingthatwouldhavereflectedthatpent-updemandgivingthelatecertificationofSovereignayearago.


Sure,thatmakessense.Onelastone.JustbackonBell,youhititacoupletimeshereintheQ&A.Itsoundslikeontherestructuringyou'retellingusthateffectivelyallormostofthat$40millionto$50milliongetsrecovered,soyou'reclosetonet-netneutraloncostversusbenefitonrestructuring.A,isthatcorrect?

ThenB,ifIjustthinkaboutthatbeingawash,I'mstillstrugglingalittlebitwithgettingfrom9%andchangeinQ1to11%to12%fortheyear.Obviouslythere'ssomeseasonalvolumelift,butisthereanythingelseinthemixoranythingthatreallysupportsyourconfidenceinthatrange?


Thereis.Firstofall,yourassumptioniscorrectwithrespecttothediscussionaroundtheincurringoftherestructuringchargesandwhatthatdoesonanetbasisthroughthebalanceoftheyear.

Okay,sothat'smoreorlessawash.Intermsofhowwethinkaboutquarterlyprogressionofmargins,generallyspeaking,asweworkthroughtheyearatBell,wedoseeincreasedvolumesandwedoseemorefavorablemix.Inthefirstquarter,asIsaid,wehadzero412s,sowewouldexpectthequarterly




progressionofmarginrate,giventhattherestructuringandthebalanceandthatnettingout,youwillseesomeofthenormalincrementalimprovementsinmarginratethroughthecourseoftheyear.


Okay.Great.Thankyouverymuch.

Operator :

Thankyou.OurnextquestiondoescomefromthelineofDavidStraussfromUBS.Pleasegoahead.

DavidStrauss (Analyst-UBS):

Goodmorning.


Morning,David.


Scott,couldyoutalkaboutwhatyou'reseeingintermsofutilizationonyourownfleetthat'soutthereinservice?Obviously,wecanseetheFAAdata,butIjustwantedtogetasenseofwhatyou'reseeingintermsoftheutilizationonyourownfleetasitcomesinforservice?Doesthat--areyouseeingapickupthere?ItlooksliketheFAAdid.Itpickedupearlierintheyear,butnowhasfallenback.Thanks.


David,Idon'thavethatonthetipofmytonguehere.Weusuallykeeptrackoftheaverageflighthours,andIdon'tknowifIhavethatinfrontofme.UsuallywhattheFAAisreportingistakeoffandlandings,andweusuallylookattheaveragedailyutilization.Therehasn'tbeenahugechangeinthat,frankly.It'sintherounds.


Doyouthinkthat'sthemissingpieceinallofthis?Iknowwe'vetalkedaboutusedinventoriesandusedpricing,butdoyouthinkit'sreallypossiblethatwecanhavemuchofarecoverybeforeweseeapickupinaveragedailyutilization?


Idon'tknowthatthere'sahugecorrelationfromtheADUtothenewaircraftsale.Ireallythinkthatismoreabasisofresidualvaluesversusnewaircraftsale.WelookattheADUsmoreasafunctionofserviceactivityandhowmuchactivitywe'regoingtoseethroughtheservicecenters.Again,that'sbeenrelativelystablewith--asfleetsgetolderandtheinstalledbasegetsbigger,that'swhat'sbeendrivingourguidancearoundthatmid-single-digitgrowth.That'swhatwecontinuetosee,eventhoughwe'vehadrelativelystableADUsnowforquitesometime.


IsthatADUnumberstillwellbelowwhatyouguyswereseeingpriortothefinancialcrisis?


Oh,sure,yes.No.Ifyouwentbackandyoulookedat--itdroppedoffattheendof2008,beginningof2009injusttothe0.67,0.65,0.64,Imean,it'sbeenprettyflatforseveralyearsnow.





Right.Okay.Thankyou

Operator :

OurnextquestioncomesfromthelineofJasonGurskyfromCiti.Pleasegoahead.

JonRaviv(Analyst-Citigroup):

Goodmorning.It'sJonRavivonforJason.QuestionbackonBell.Iwasjustwondering,istheremoretocut,perhaps,ifthisoilmarketweaknesscontinues?Relatedtothatis,doyouhaveanyvisibilityon412deliveriesthisyear?Myunderstandingisthatthisisusuallyaspotmarketforhelicopters,thatis.Thenifthemarketdoescomeback,doyouhavetohirebackupordoesthisrestructuringsuggesthigherstructuralmarginsgoingforwardwhenthingsimprovemaybenextyearortheyearafter?


Look,ourintent--youneverliketogothroughthiswiththeorganization.Ourintenthereisthatwewoulddothisandthatpositionsustogothroughwhatwethinkisafairlyleanthisyeararoundthatsegmentofthemarketandthenwellintothenextyear.Thenofcourse,wehavethingslike505sand525sandnewthingsthataretickingin,andwe'vealsotakensomeorders.

Someofthe412scanbeabitofaspotmarketaircrafthereandthere,butoftenthey'rearealsofleetbuys.SowhenyoulookattheCanadiandeal,forinstance,that'sseven412s,butthosedeliverieswon'tstartuntilsometimenextyearinto2017.Ithinktherearesomeotheropportunitiesouttherearound412sthataregoingtobesimilar.There'scustomeractivitygoingonandsomeofthemarefleetbuys,butthey'regoingtobe,fromatimingperspective,they'llbeoutthere.

Intermsoftheabilitytohirebackifwehavesomethingontheproductionline,obviouslywenowwhotomodulatethatproductionline.Thosefolkstendtobeonrecall,andwecanbringpeoplebackinifweneeddothattoincreasetheproductionvolumes.Clearly,onthesalaryside,we'retryingtomakeitastructureofjusthowweorganizeandrunthebusiness,sothatwouldn'tnecessarilybeavolumerelatedactionlateron.Certainlyontheproductionside,wehavetheabilitytoscaleourproductioncapacityupanddownbasedonfuturevolumes.


Great.Thanks.Then,justfollowinguponcashdeployment.HowwouldyoucharacterizeyourM&Aappetiteatthispointgivenwherethingsareandespeciallyasarelativelysizablepotentialhelicopterassetcouldcometomarket?


IwouldsaythatgenerallyspeakingontheM&Asidethewaywethinkaboutitismorealongthelinesofalotofthedealswe'vedonewithTUGingroundsupportequipment,withoursimulationbusinesses,withtheShermanandReillys,that'sthegeneralscopeofwhatwelookat,transactionsthatareinthatsizethatareverycomplementarybuiltontoourexistingbusinesses.

Withrespecttothereferenceyou'remakinginthehelicopterindustry,Idon'tthinkthere'sprobablytoomuchtosayaboutthat.It'saprocessthat'slargelydrivenbythatcompany,who'sbeenprettypublicaboutthefactthatthey'redoingsomething.I'msurewe'llallseewhatthey'regoingtodoontheirtimeline,whichIthinktheydescribedasbeingsometimemidyear.





Thankyou.


Sure.

Operator :

OurnextquestioncomesfromthelineofRonaldEpsteinfromBankofAmericaMerrillLynch.

RonaldEpstein (Analyst-BofAMerrillLynch):

Scott,justmaybebackingupontheendofthatlastquestion,itseemslikethere'spotentialtodoallkindsofM&Agoingforward.Imean,theremightbesomeotherpropertiesinthemarket,evenoneinWichita.CanyoujustremindusbroadlywhatyourthinkingisaboutdoingM&Aatthispointgiventheassetbasethatyoualreadyhave?


Ronald,we'requiteopentoM&A.We'vedoneafairbitofactivityhereoverthelastfewyears.We'vebeen,generallyspeaking,veryhappywiththeresults.They'vebeenveryaccretivetotheCompany.

We'vebeenhappywithwhatthey'vedoneintermsofstrengtheninginthemarketplace.Clearly,thatrangesfromtheBeechcraftsoftheworld,whichforusisaverylargedeal,butwe'rereallyhappywithhowthat'sgone,bothtacticallyandaroundcostandstrategicallywhereitpositionstheCompanygoingforward.

AsIsaid,wehadabunchofsignificantlysmallerdealsthatwethinkhavedonereallygoodthingsforourportfolio.They'vehelpedstrengthenthebusinessesthatwehave.They'veputusintosomeexcitingnewspacesthatareverycomplementary,likethesimulationsideofthings.We'vestrengthenedourutilitysideofourtoolandtestbusiness.TheTUGstuffongroundsupport,asIsaidearlier,hasgonereally,reallywell.Wethinkthat'sagreatspaceforustobein,andit'sperformedverywell.

We'reopenforbusinesswiththatrespect.Therearethings,obviously,thathavetomakealotofsenseforus.We'renotjustgoingouttotryanddoM&AforthesakeofdoingM&A.Theyhavetobethingsthat,inourview,fitwiththeportfolioandthestrategyoftheCompany.AsaresultmanythingsIthinkourinvestorswouldagreearetherightplacesforustodeploycapital.


Sure.Maybejustfollowingupononeofthose,theMechtronixacquisitioninthesimsspace,Imean,howisthatgoing?Areyoupickingupshare?Howcouldyou--ifyoucangiveuscoloraroundthat?


Yes,it'sgoingverywell.We'reveryhappywithit.Thestrengthofthatbusiness,orthefoundationofit,wasmoreintheairtransportside.Aswesaidatthetimewedidthedeals,wewantedtoincreaseourexposureinaviationfromjustGAintothecommercialcivilairspacesideofthings,andwe'rereallyhappywithit.We'vehadsomebigstrategicwins,particularlywithBoeingonthe737MAX.Wecontinuetoexecutewellonthatcontractandpickupmoresimulatorsastheyprogressdownintheirprogram.

Wehavesomeothernewplatformsthatwe'reinvestinginwherewe'vehadsomewinsthathaven'tbeenannouncedparticularlyyetthatIthinkwillcontinuetohelppositionusasaveryseriousplayerintheairtransportmarket.




Ofcourse,we'releveragingthoseassetstohelpthingsliketheV-280wetalkedabout.OneoftheissuesaroundtheV-280withourarmycustomeris,doyouhavethemaneuverabilityandthecapabilitythatthey'reusedtotodaywithamoreconventionalhelicopter?

AndbytakingthetechnologyandthecapabilitywehaveintheCompanynowandveryquicklygoingoutandbuildingaveryrealistic,well-modeledsimulatorallowscustomerstogetinthereandgo,wow,thisthingdoesperformlikeaconventionalrotorcraft.Ithinkit'shelpingusinperformingwelltactically.Strategically,Ithinkit'sdoingallthethingsthatwehopeditwoulddo.


Okay.Great.Thanks.

Operator :

OurnextquestioncomesfromthelineofRobertStallardfromRoyalBankofCanada.Pleasegoahead.

RobertStallard (Analyst-RBCCapitalMarkets):

Thankssomuch.Goodmorning.


Goodmorning.


TofollowontoRon'squestion,butfromtheotherdirection.Itlookshowwe'veseenabitofM&Apickingupindefensesectorwithpeoplelookingtoputassetsontothemarket.Iwaswonderingifyouhadanyexpressionsofinterestinsomeofyoursystemsassetsandwhatyourcriteriamightbeifyouwerelookingtosellsomethingsthere?


IguessIwouldsay,no,wehavenot.Whateveritmightbeorwouldbewouldhavetobesomethingthatwethoughtwasinthebestinterestofourlong-termshareholdersandgeneratealotofvalue.


Okay.Haveyougotanyspecificfinancialmetrics,maybe,youmighthaveinmindthen?


Nope.


Okay.Maybeontheaviationside,Scott,youmentionedtheUSmarketforCessnasbeingprettygood.Iwaswonderingifyoucouldmaybegiveussomeanideaofwhatendmarketshavebeenbetterormaybeworse?Haveyouseenanyimpactintheslowdowninenergy,forexample?


I'msorry.Slowdowninwhat,Robert?

FrankConnor (CFO):




Energy.


Oh,energy.No,Idon'tknowhowmuchcolorIcangiveyouonthat.It'sbeenprettybroadbased.Obviously,ourCitationcustomerbaseis,forthemostpart,small-tomid-sizedbusinesses,lotsofprivately-heldcompanies,andit'sprettywellacrossthatwholenormalspectrumofourkindofcustomers.

Wealwaysseerotationsintheindustry,whetherenergyisdoingsomething,realestaterightnowisprettystrong,construction,theseare--it'saprettybroadbaseofindustries.Idon'tknowthatIcouldreallygiveyouanycolor,specifically,thisquarterastowhichonesaremoreactivethanothers.


Whataboutmaybeonthechartsorthefractionalside,hastherebeenanyimprovementthere?


Wehaven'thadafractionalaircraftsalein,Ithink,thesevenyearsI'vebeenhere.It'sbeensince2008.Intermsofnewaircraftintothefractional,obviouslysomeofourcurrentfractionalcustomersaresellingaircraftastheyrolloffthedealsfrompreviouscustomers,sothere'sanaftermarketoutthere,butthere'snothingnewthatwe'resellingintothefractionalrightnow.

Wehavehadafairbitofclosedcharteroperation,obviously,WheelsUphasbeenabigcustomerofKingAirsandhasputsomeusedXLSsintoit,butthat'sprobablythesumtotalofwhatIseegoingon,intermsofoursales,directlyintothefractionalorchartermarket.


Thanks.


Now,wehopetoseethatchange,obviously.TheNetJetguyshaveselectedtheLatitudeastheirmid-sizedplatform.Andwiththatproductnowgettingtocertification,there'sanawfullotofactivitybetweenourselvesandNetJetsonhowwehelpmarketandtakethatproductintothefractionalmarkets.

Ithinkwehavesomesignificantupsideintermsoffractional.NetJet,obviously,isaverypowerfulplayerinthatendmarket,andthefactthattheychoseLatitudeastheirmid-sizedplatformIthinkwillbeabigboosttous.


Thanks,Scott.

Operator :

Thankyou.OurnextquestioncomesfromthelineofSteveLevensonfromStifel.Pleasegoahead.

SteveLevenson (Analyst-StifelNicolausandCompany):

Thanks.Goodmorning,everybody.


Morning,Stephen.





Couldyougiveusanupdate,please,onScorpionandmaybealittlebitmoreoninternationalinterestforthatplaneaswellasV-22?


Sure,soScorpion,theprogramisprogressingvery,verywell.We'vegotatonofflighthours.It'sbeenaverybusytestanddemonstrationprogram.Theaircraftisperformingextremelywell.AsIthinkwe'vementionedbefore,there'sacouplethings,aswewentthroughthetestprogram,thatwefeltwewouldmodifywhenwewentintothefull-gradeproduction.

We'vehadanengineeringteamthat'sbeenincorporatingallthosechanges,andwe'regettingreadytoundertakeabuildofwhatwouldbetheconformingaircraftreadytogointocertification,testingandproduction.

Intermsofthetechnicalsideoftheprogram,I'dsayit'sgoingverywell.Intermsofthebusinessdevelopmentside,wehaveanumberofcustomersthatareongoingconversationsaroundtheaircraftandhaveseentheaircraft.There's,whatIwouldcall,normalbusinessdevelopmentactivity.Thoseprocessestendtotakeawhile,because,asyoucanimagine,they'regovernmentsalesandsobudgetingandevaluationandwhatnotis--theytaketheirnormalcourse.Butthere'sanumberofconversationsgoingon.

IntermsofthingslikeV-22,you'veseentheJapanesedealhasbeenannounced.It'sbeenbudgeted.There's

detailednegotiations,andwe'rehopefulthatsometimethissummerthatwillactuallybeundercontract.

They'vealreadybudgeted,Ithink,thefirstfiveaircraftofatotalof,Ibelieve,19thattheyaretalkingabout,andsoIthinkthatprogramisprogressingwell.There'sanumberofothercustomersforwhichthereareactivediscussionsunderway,soIthink,combinedwiththeCODannouncementaswellasthoseactivities,IthinkwegotaverystrongfutureonV-22s.

Theonlyissueforusisjustthetimingofgettingthesethingsthroughthe--gettingthemundercontractandgettingthemintotheproductionprocess.Theunfortunatesideisit'sprobablynotamaterialimpacttousuntilthelateteensasopposedtosomethingthatwouldhelpusoutnextyear,justgivenhowlongittakestogetthemundercontractandgetitgoing.


Gotit.Thankyouverymuchforthecolor.


Dan,Ithinkthatwe'realittlebitovertimehere,sowe'lltakeonelastcallherethat'sstillinqueue,andthencallitaday.

Operator :

Thankyou,sir.OurlastquestionfortodaycomesfromthelineofJustinBergnerfromGabelli&Company.Pleasegoahead.

Just inBergner (Analyst-GabelliandCompany):

Goodmorning,everyone.





Morning.


MyonequestionwhichremainsafteralltheotherquestionshavebeenanswerediswithrespecttoBellandcommercialmix,willthatweighonmarginsevenafterthecostreductionsthatarebeingtakenarecompleted?Ordoyouexpectyou'llbeabletooffsetthemixheadwindsaswell?


Iwouldsaythatonthe--asyoulookthroughthecourseoftheyear,again,what'stypicalforusisthatwe'llseenotonlyoverallhighervolumethroughthebalanceoftheyear,butwe'llseeahighermixof412saswemovethroughtheyear.That'swhatreallydrivesthatquarterlyprogressionofmarginratethroughthebalanceoftheyear.Thatwouldbetrueacrossallofourplatforms,frankly.

Asyoulookatthecostsavingsassociatedwiththerestructuringthatwe'redoing,thatreallymanifestsitselfinoverallmanufacturingratesandoverheadrates,andsothecostsand/orbenefitsassociatedwiththatarespreadacrossallofourcommercialandmilitaryproductlines.Theunderlyingmixandvolume,whichwillincreasethecourseoftheyear,isreallywhatdrivesthatincrementalmarginrate.


Okay.Butyoudon'texpectanongoingmixheadwindsaswelookouttonextyearandthefollowingyears?


No,notatthistime.Iwouldexpectthatwewilljustseeournormalprogressionwherewehavehighervolumesof412sthroughthebalanceoftheyear.


Thankyou.


Allright.Thankyou,ladiesandgentlemen.

Operator :

Ladiesandgentlemen,thisconferencewillbemadeavailableforreplayafter10AMEasterntimetodayuntilJuly27,2015atmidnight.YoumayaccesstheAT&Texecutiveplaybackserviceatanytimebydialing1-800-475-6701andenteringintheaccesscode337219.Internationalparticipantsmaydial1-320-365-3844.Forbothnumberspleaseuseaccesscode337219.

Thatdoesconcludeourconferencefortoday.

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THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISA




REPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.

THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.

textron (txt) earnings report: q1 2015 conference call...

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