Textron Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Textron second quarter earnings call. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question, please press 1 then 0 at any time during today's call. 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 Conner, our Chief Financial Officer. Our earnings call 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 pre-tax special charges related to the restructuring plan announced in June, and a $55 million non-cash inventory valuation charge as we ceased manufacturing at our True Simulation and 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. 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 performance 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 400th 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, Textron Systems was awarded two FMS contracts for a total of five aerosol systems, including initial spares, new equipment training, and logistics support, totaling $44 million. Together, 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, Textile and 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 two task orders on the U.S. Air Force CAP-CAS program, worth up to $240 million, covering a period of performance over the next 54 months. Authorities under these task orders are expected to commence in the fall of 2020, utilizing our fleet of F-1 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 the second quarter restructuring plan, which impacts our simulation business by ceasing manufacturing at our commercial air transport simulator facility in Montreal. In aviation, revenues are 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 the 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 at aftermarket, revenues were down 31% compared to last year's second quarter due to 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 two 350s to the Royal Flying Doctor Service of Australia, two 350s to the Ministry of Health in Greece, and two 350 ERs to the U.S. Customs and Border Patrol agencies. On the new product front, the Cessna Skycar 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 Caltechs, we exited the second quarter with a run rate of our global manufacturing operations at about 75% of planned performance levels as auto manufacturers reopened 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 remains strong throughout the quarter. In the outdoor power sports, 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 $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 for 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 higher military volume, partially offset by an unfavorable impact from performance. Backlog in the segment ended the quarter at $5.8 billion. At Hexron Systems, revenues were $326 million, up 18 million from a year ago, primarily due to higher volume in 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 Flight Safety International. Backlog in the 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 closure. 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 costs 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 pre-tax charges of $78 million on a special charges line and a non-cash inventory valuation charge of $55 million as we ceased manufacturing at our true simulation and 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 under-owned 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 power sports market, and we expect sequential growth in the power sports revenue in the second half of 2020. In 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 FAR, 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 Aeroson 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.

Okay, ladies and gentlemen, once again, if you do have a question, please press 1, then 0 at this time. Our first question is going to come from the line of Sheila Kehaglu with Jefferies. Please go ahead. Your line is open.

Hi. Good morning, guys, and thank you for the time. Scott, you just talked about what you're seeing in 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 benefits. 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, you know, we do have most of our manufacturing operations, all of our manufacturing operations back up in aviation, so we certainly expect to see, you know, sequential improvements with respect to that. You know, 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, you know, through the restructuring kind of what we believe is our run rate through the balance of the year and for 2021. I 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 Since those are primarily corporate, you know, oriented aircraft, I think, you know, as people are coming back, most businesses are worried about getting their own businesses up and operating. But, you know, certainly the dialogues are there, and as people go into, you know, 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 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 re-baselined 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 SIMS about five years ago, and 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. What are the puts and takes? How do you see the future of systems from here?

I think systems has performed really well. Again, 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. The land vehicle side now, things like RCV, you know, medium. I think our team is executing well there. We certainly expect over time to see that business grow. The dependentization of 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, you know, incremental better margins as we move out of the development deliveries and into the production deliveries going forward. So, you know, I think overall that – performance there is strong, and we expect to see continued strong margins. The growth driven by the air adversary, which, again, this is something we invested in. It took a little bit longer to get there than 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 to the business going forward. So I think systems is kind of, you know, moving into, you know, more of a growth and better margin performance, and I think you see that in the second quarter performance.

Great. Thank you very much.

And our next question will come from the line of David Strauss with Barclays. Please go ahead. Your line is open.

Thanks. Good morning. Scott, I wanted to, I guess, follow up on the question I had last quarter on NetJets. You know, back last quarter, I think NetJets talked about how they were going to reduce their plan for the year, but I think yesterday the or the day before 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, David, I think what NetJet saw is the same thing that our sales team saw, right? When this thing first hit, all activity kind of stopped. And so, you know, NetJet's sales team, understandably, saw all their sales activity taper off. I think what the note that you saw on NetJet is that they're They're seeing the same thing that we're seeing from a sales standpoint. There's demand out there. An awful lot of people, 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. I think in the mid to long term, this is a very healthy thing for the industry. I think you'll see the 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, you know, the bottom line is, as we see increased demand, whether that's whole aircraft or whether that's fractional, that's good for us. Net jets is obviously a hugely important, you know, customer of ours. And as they look at that, you know, 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. Thanks. Sure. And then a follow-up, I guess, for you, Frank, on cash flow. I was a bit surprised that inventory was a source of cash. Can you talk about where the contribution came from by business and what you're thinking now? And is it a free cash flow deposit for the year? Maybe a bit of a finer point on that now, if you could offer that. Thanks.

Yeah, look, all the businesses did a really nice job of kind of responding to the deceleration on the commercial side of the businesses. So You know, 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 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.

All right, thanks very much.

Our next question comes from the line of Carter Copeland with Amelis Research. Please go ahead.

Good morning, gentlemen.

Hey, Carter.

Hey, Scott, I wondered if you might kind of just help us to expand on that, you know, the corporate sales side of aviation and, you know, if there's any seasonality or cadence to how that that sales cycle works, and what I'm getting at is when it is that, you know, not all corporations are off, they have, you know, budgeting cycles, and there's a lot of variability across, you know, the corporate complex. When is it that you think your sales teams will get a real honest look at any, you know, any potential change in demand? Is that something that happens this year? Or is it more like next year?

Well, I guess a very good question, Carter. So, as I said, the level of activity and orders, you know, that are closing have been stronger on the light side, right? It's, you know, King Air 250s right now are very strong. M2s, you know, are strong. So, they're more, you know, private businesses, high net worth individual sort of customers. Those corporate customers that are more of our latitude and longitude, You know, 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, you know, the pace of how the economy recovers and provides certainty is going to be really important to seeing that segment of the market, you know, start to actually, you know, put down deposits and sign deals. So, you know, 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, you know, how things have kind of moved out here over the last couple months, but we need to see that continue to progress and start to head back to some degree of normalcy. So, you know, that's why I think, you know, we look at more of the, you know, latter part of Q3 into Q4 and even, you know, probably deliveries out in the beginning of 2021 as, you know, the corporate piece of America starts to make FX commitments again.

Great. Thanks for the color. And one for Frank. I wonder if you could just give us the EAC cumulative adjustments in a quarter. Just any detail on that would be helpful, as always.

Yeah. 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.

Awesome. Thanks for the details, guys. Yep.

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

Yes. Good morning. Frank, just one clarification, and then I've got to follow up. The $53 million of idle facility costs led to $27 million negative impact. So what was the positive $26 million? million if I just subtract those two numbers unless I'm reading it in properly.

So, George, there's a lot more moving pieces than that, right? So, you know, we do spike out the auto facilities. Obviously, that's a significant number. You know, 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, you know, the furloughs and you know, through the quarter, a lot of that, frankly, helped offset what would have been a more challenging idle facility, you know, cost. But there's a number of other impacts in there, you know, that you would kind of expect in a much lower, you know, volume environment. So it's not just a matter of, you know, take the total, you know, performance. It's not a total one thing, okay? So there was a lot more cost savings, you know, than that, but there was a lot of, you know, sort of other you know, noise in the quarter, I guess you would say.

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

Yeah, for sure. And that was a result of a lot of the furloughs, you know, the savings that were driven by, you know, the fact that we took out a lot of cost, both direct and indirect, through the furloughs while the plants were shut down. And obviously now that's, you know, that has transitioned from the furloughing, unfortunately, you know, where we had to make you know, 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 billion four in backlog that you say for aviation, did that include some additional net jet orders that were reversed out in the first quarter?

No, there was no change in the net jet backlog in Q2.

Okay. Okay, those are my questions. Thanks.

Next, we'll go to the line of Peter Arment. Please go ahead. Your line is open.

Good morning, Scott, Frank. Scott, just circling back on your comments about the aviation on the aftermarket side, if we look at, you know, 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 fallout from March. to 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.

Yeah, it was down total of 31% for the quarter, Peter, as we mentioned. But, you know, if you look at the progression of, you know, bizjet cycles in both, you know, North America and Europe are, you know, are big markets. You know, there was a pretty marked change from April to June. And so I would expect, you know, the aircraft showing up and part consumption and service work, you know, will kind of lag that a little bit. So even though we, you know, certainly saw activity pick up pretty significantly through the quarter, particularly as we got into June, we certainly expect to see that, you know, start to positively impact the service business in Q3 and Q4. So there's a, I mean, 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 that. Are you seeing any further kind of supply chain disruptions at all that's meaningful or anything to call out?

You know, nothing that I would say is material, Peter. It's a food fight every day. You know, you still have, you know, suppliers that have a flare-up or a shutdown or whatever. But look, it's stuff our guys manage through it every day and You know, we've had some impacts across all of our different businesses, right, where, you know, there's an issue with a supplier here or there, and, you know, we just kind of manage and work our way through it on a day-by-day basis.

Appreciate the follow-up. Thanks.

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

Thanks very much. Good morning.

Good morning.

Scott, this might be 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, 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 plants shut down for a couple of weeks and the adjustments that we've made you know, looking more towards, you know, end of the year in 2021 rates, you know, we're going to be down somewhere in the 30 or so percent, you know, probably 30 to 40 percent down in terms of, you know, deliveries in 2020. The run rates would anticipate that you probably get, you know, half that reduction back as you go into 2021. But, you know, 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's obviously a bit unusual when the rest of aerospace is obviously adding liquidity and paying things back.

Well, you'll recall earlier in the year, we did a debt offering to essentially pre-fund kind of our 2020 maturities. And so that pay down of debt was effectively just the pay down of that. We have another $350 million of debt coming due in November, that again, we have effectively, you know, kind of already refinanced. So, you know, kind of other than that, we feel like, you know, kind of we're in good shape from a debt structure standpoint, but that's what we have in front of us.

That's great. Thank you very much. Next, we'll go to the line of Seth Seisman with J.P. Morgan. Please go ahead. Your line is open.

Thanks very much. Good morning. 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 mixed shift along the lines of, you know, what you talked about toward smaller? And then as part of that, I guess I was a little surprised when you mentioned, you know, not seeing as much pickup on the longitude, latitude side if NetJets is, in fact, you know, starting to come back and, you know, 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 and activity is more oriented towards the smaller aircraft. We certainly do expect it to shift, you know, 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 net jets, again, you know, we are working with these guys every day, so we're factoring in, you know, what we believe their demand is going to look like. You know, 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, you know, backlog for, you know, larger aircraft through net jets pick up in the third and fourth quarter.

Okay, great. Thanks. And then just as a follow-up in industrial, if you could talk about sort of the, you know, the relative loss between autos and specialized vehicles and kind of the, you know, the path back to profitability for each. It sounds like maybe autos has a pretty clear path at Caltechs and, you know, is that the case? And if you could talk a little bit about vehicles.

Well, we don't go down into the off-profit, you know, by the individual businesses. But, you know, obviously in Q2, you know, we saw the vast majority of our plants in the Caltech's world shut down. And there was just no demand. The global auto OEMs had all shut down, so we shut our plants down. As I said, we're back at least, you know, globally running around that 75%. If you look, and again, guys, remember, we base our data based on what IHS is looking at and you know, in terms of our forecasting, we don't really make this stuff up. So we expect to see, you know, that utilization and those plants, you know, pick up in Q3 and Q4. But there's no question that, you know, again, given where things are right now, Q2 was a really tough quarter, you know, for Caltechs when you got all your plants shut down around the world. So the lines have now picked up. They're operating. You know, they're back performing and continue to see that volume. So that'll be a you know, a really significant contributor in terms of change of profitability in industrial as you go into Q3 and Q4. You know, 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, you know, remain robust. We did see a significant uptick in retail activity, particularly in June on the outdoor power sports markets as those markets came back up. And, you know, the good news is as a result of all that, you know, we've turned those factories back on and are starting to produce 2021 model years given you know, the demand in the market. So, I think, you know, there'll be improvements sequentially in both businesses. But, you know, from a relative basis, it was a tough quarter in Caltechs when your plants are shut down.

Thank you very much.

Next, we'll go to the line of Pete Skibitsky with Alembic Global. Please go ahead. Yeah, good morning, guys.

Scott, coming into the second quarter at systems, I guess I thought, you know, true and like combing would be big revenue headwinds for you. And I imagine true 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, you know, almost like a secular growth driver at this point?

Yeah, the unmanned business continues to grow and do really well for us. It was the largest, you know, offset in there. You know, marine land was, you know, a little bit of driving. You know, look, a year ago, this is, I think, our last quarter where we had the last of the ANA and the TAPV programs, but, you know, the ship to shore side was strong, and obviously we expect to continue to grow through the course of the year. So, you know, for sure, you know, a significant headwind, obviously, with with the simulator business shutting 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 two task orders that we were awarded is about, as we said, about $240 million over the next four and a half years. So if you look at that, that's about you know, $50 million a year of revenue. And, you know, we expect to be a good margin. You know, look, we've invested in the aircraft. We have the assets. Our team's done a great job. There's already 10 of the aircraft that are, you know, through airworthiness and flying and ready to go. So we should be, you know, starting to see that revenue in Q4 of this year associated with those programs.

Okay. I appreciate the conversation.

Our next question comes from the line of John Raviv. Please go ahead. Your line is open.

Thank you, and good morning. When we talk about the long-term growth opportunity in business, I mean, it's the kind of market where you need the cost of entry to be lowered 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, you know, more of us, if truly more of us start flying around on a smaller plane?

Well, I think, you know, in general, the aftermarket business has always been the more profitable part of all of these aerospace businesses. And I don't see that changing. I think as we look at the dynamic, which, again, 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 line of a product at that entry level, whether it's jet or turboprop, you know, through the King Air family and the M2 and CJ line. And then as, you know, people look into the larger, whether it's that XLS line, space or latitude or longitude, I think we've got a very, very competitive product. I don't even think our portfolio has ever been better. So, you know, the strength at 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 those midsize aircraft as well.

Thank you, Scott. And then as a follow-up on... On capital allocation, I mean, 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're still in a pretty good position. So how do you think about capital allocation going forward? You know, maybe later this year, entering 21, you have a little more visibility. I mean, I ask that in the context of sometimes down markets where, you know, you guys are down 30% deliveries and your competitors are down 30% deliveries in BizJets. Sometimes those markets are ripe for some consolidation. So any thoughts on capital allocation and budget 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, you know, right now. Obviously, you know, there's actions that we'll continue to take to continue to strengthen that and de-risk that, you know, on a go-forward basis. In terms of consolidation, I think everybody says consolidation makes sense in this industry. You know, do I see that happening any time 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. 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've demonstrated so far that we're in very good shape.

Indeed. Thank you, Scott. Our next question comes from the line of Noah Popanek with Goldman Sachs. Please go ahead.

Noah, are you there?

Possibly have your mute button on?

Hey, guys. Can you hear me?

Yeah, we got you.

Okay. Sorry about that. You know, it sounds like Neches is clearly saying it. But I'm curious, you know, in the new orders at Cessna in the quarter, did you actually have, you know, real deal customers that came in and said, you know, I don't want to fly commercial or, you know, I've always been on the fence and the risks, perceived risks of flying commercial are pushing me, you know, over that fence I've always sat on. I'm trying to get a sense for, you know, how real that trend is from, you know, not wanting to fly commercial to flying private versus being more anecdotal.

Oh, no, I think, as we said before, 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 ship 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, you know, position. They're going to start to see it by utilizing it and, you know, get some experience with it on a sort of by-the-hour and progress to, you know, fractionals, and that's sort of the normal process that we see. So, you know, I think, you know, when you talk to the folks that are out there operating, and it's across everything. It's, you know, it's charter companies that, you know, are flying older aircraft. It's, you know, guys like Wheels Up that are, you know, very strong, you know, club membership, you know, models. It's the NetJets. And, again, I think NetJets is seeing, you know, both, you know, folks that are interested in cars but also fractional shares. So, you know, you see people migrating to these, you know, 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, you know, more in – non-equity mode and sort of migrates through the path towards ownership, whether that's in a fraction or ultimately in a whole aircraft owner.

That's pretty interesting. In Bell Commercial, 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'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? That's a high net worth individual. It's more of a discretionary spend. you know, 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. You know, that piece of the market tends to have a longer lead time, you know, sort of different acquisition process. So, look, I think, you know, there's no doubt that you'll see some, you know, some softening in the, 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, you know, defense business where utilization is high, deliveries are good, aftermarket's very strong. So I think, you know, 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... Yeah. Appreciate that, Keller. It's actually really helpful. But I was actually just asking if you would provide the directional, you know, rate of change in commercial units you see for this year and next year the same way you did for Cessna there.

No, I would not. I mean, other than giving you some color on, you're going to be lighter on 505s for sure, and we've adjusted production accordingly. But, you know, the rest of the market is better visibility.

It's my question to come across, but I understand now. Thanks very much.

Ryan, do we have another caller in the queue?

Our next question comes in the line of Ron Epstein with Bank of America. Please go ahead.

Hey, good morning, Jason. Do you guys have any whitetails at aviation right now? I mean, are all the tails sold? 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, you know, as you know, for years now, we've built a forecast. And that's, you know, kind of what we continue to do. So... If you're inquiring about wanting to buy an aircraft, I'm sure I can help you. That was good. Another life. No, Ron, look, obviously we do everything we can do to match supply and demand. The adjustments that we've made by having the factory shut down, that obviously helped align to a lower demand environment that we've been seeing, and the adjustments that we've made to the you know, to the run rate on our production, you know, through the balance of the year into 2021 is all aimed at, you know, making sure that we're building the number of aircraft that we expect to be selling. And we've gotten pretty good at it, so we'll keep doing it. We just along the way, obviously, up or down, but that's certainly our objective. But, look, the one thing I would say, I mean, because you remember, as I unfortunately remember the whole creation of the whitetail thing years ago was because you saw these massive cancellations. And we haven't seen that, right? I mean, you know, the customers that were in our backlog have stayed in our backlog. And we talked about, you know, the situation on the fractional side. And now we're seeing that, you know, improve as demand comes back into the marketplace. But, you know, the good news here is unlike previous cycles, you know, the two big dynamics you don't see different. You don't see this, you know, float 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. You know, we're seeing, you know, lower, you know, volume, obviously, just given the nature of the pandemic over the last few months. 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 the use because there's 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. Thank you for the color on that. 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, you know, resize and cost cutting and so on and so forth for obvious reasons. But when you think about text Ron from your seat and you look past the pandemic, are there any opportunities here to make some fundamental changes at the company to 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? Does this give you an opportunity 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, you know, into the market. So we were already situated in a position where we had gone through a very large R&D phase. We still have things like SkyCurrier and Denali that are on the roadmap, but these are much smaller programs and something of a magnitude of a longitude. We're also getting back to doing a lot of, you know, upgrade programs to our existing, you know, aircraft that are out there. So I think from our perspective, this is, you know, as we look over the next, you know, couple, two, three years, I think we've got a great portfolio. We have a lot of, you know, things like the SkyCurrier, which should have 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 keeps refreshing that product line. So certainly, you know, we're taking out costs associated with that lower run rate, you know, on production going forward, at least through late this year 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 a dramatic change beyond, you know, probably that R&D profile. And looking at a couple of other businesses, obviously, as we've seen, you know, the slowdown, we are doing some things around restructuring and, you know, 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, you know, some of our operations, you know, into 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, great.

Thank you. Sure. 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.