Textron Inc.

Q2 2021 Earnings Conference Call

7/29/2021

spk06: Ladies and gentlemen, thank you for standing by and welcome to the Textron second quarter earnings call 2021. At this time, all participants 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 on your telephone keypad. If you should require assistance during the call, please press star then 0. I would now like to turn the conference over to our host, Mr. Eric Salander, Vice President of Investor Relations. Please go ahead, sir.
spk12: Thanks, Connie, 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 $3.2 billion, up from $2.5 billion in last year's second quarter. During this year's second quarter, we reported net income at $0.81 per share. Adjusted net income and non-GAAP measure was also $0.81 per share for the second quarter of 2021, compared to $0.13 per share in the second quarter of 2020. Segment profit in the quarter was $289 million, up from $82 million in the second quarter of 2020. Manufacturing cash flow before pension contributions totaled $509 million, up $294 million from last year's second quarter. With that, I'll turn the call over to Scott.
spk11: Thanks, Eric, and good morning, everyone. We had a strong second quarter with higher revenues across all of our manufacturing segments, operating margins of 9.1%, and strong cash generation. At Bell, revenues were up in the quarter on higher commercial revenues, partially offset by lower military revenues. On the commercial side at Bell, we delivered 47 helicopters, up from 27 in last year's second quarter. We continue to see strong commercial demand and solid order activity in the quarter across all our commercial models, both domestically and internationally, and across multiple end markets, including corporate, private, utility, and EMS. Moving to future vertical lift in June, following 214 flight hours over three years, Bell retired the V-280 Valor demonstrator aircraft. Over this three-year period, the Valor successfully demonstrated all key performance parameters from the FLARA program, including low-speed agility, long-range cruise, 305-knot high-speed flights, autonomous flight, and rapid mission systems integration. On July 6th, the Army issued the FLARA RFP, The program remains on track to the Army's schedule, with bids due in September, followed by a down-selected award in the second quarter of 2022. On FARA, Bell is about 45% of the way through its build of the 360 Invictus prototype. And lastly, Bell announced plans for a new systems integration lab in Arlington to provide integration verification validation testing on aircraft and mission systems needed to meet the requirements for both FPL programs. Moving to Textron Systems, we saw another strong quarter of... Execution with operating margins 14.4%, up 310 basis points from last order. We saw strong performance at ATAC by increased flight activity, led by our F-1 fleet on the U.S. Air Force CAPCAS program, where we have made significant investments over the last few years. In June, Sea Systems delivered the third ship-to-shore connector, LCAP 102, to the U.S. Navy. As the development contract portion of this program continues to wind down through the remainder of 2021, We expect to see revenue growth and margin expansion on the program as we increase our activity on the production contract. Also in the quarter, Land Systems delivered the fourth and final Ripsaw M5 vehicle to the U.S. Army for RCV Medium Program. The customer will begin integration and testing of these vehicles in preparation for the 2022 Soldier Operational Experiment. Land systems also unveiled the Cottonmouth, a vehicle purpose-built for the U.S. Marine Corps' Advanced Reconnaissance Vehicle Program, and was recently selected for further prototype development under an anticipated OTA contract award. Offsetting hard revenues in most of its operating units in the quarter, we did experience some top-line pressure at air systems largely related to the reduction in hours or fee-for-service activities due to the U.S. Army's Afghanistan withdrawal and impact of the sale of the true simulation business earlier this year. At aviation, revenues were up in the quarter on higher volumes for citation jets and commercial turboprops, as well as in our aftermarket business. We delivered 44 jets, up from 23 last year, and 33 commercial turboprops, up from 15 in last year's second quarter. We continue to see strong commercial demand and order activity for our aircraft, which resulted in backlog growth of $689 million to $2.7 billion at the quarter end. Through the first half of the year, we recorded over $1.1 billion in backlog growth in aviation. Both the Citation Longitude and Citation CJ-4 Gen 2 received EASA-type certification in the quarter. These certifications are expected to generate additional demand opportunities for each of these models. On the new product front, the Sussex Skycarrier Aircraft Certification Program has now accumulated over 1,200 flight hours and continues to progress well as we work towards entry into service targeted for later this year. Moving to industrial, revenues and margins were up. at both Caltechs and Specialized Vehicles from last year's second quarter, primarily due to higher volume and mix in each of the businesses. At Caltechs, despite the higher revenues, we've experienced order disruptions related to the global auto OEM supply chain shortages, which have directly impacted our production scheduling, resulting in intermittent line shutdowns and manufacturing efficiencies. At Specialized Vehicle, we saw higher revenues and improved operating performance from a strong retail pricing environment, driven by continued high customer demand in our end markets. While we've experienced continued strong retail demand for our products, we have been impacted by our supply chain's ability to fully meet this demand, and we continue to work through these production challenges. In summary, we continue to see increased commercial order flow at aviation and Bell, solid execution in our military businesses, strong retail demand for our products, the industrial segment, and improved cash generation that all contributed to the second quarter performance and our improved EPS and cash outlook. With that, I'll turn the call over to Frank.
spk13: Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues to Textron Aviation of $1.2 billion were up $414 million from a year ago, largely due to higher citation jet volume of $174 million, aftermarket volume of $98 million, and commercial turboprop volume of $75 million. Segment profit was $96 million in the second quarter, up $162 million from last year's second quarter, due to the higher volume and mix of $117 million, a favorable impact from performance of $34 million, and favorable pricing net of inflation of $11 million. Back fog in the segment ended the quarter at $2.7 billion. Moving to Bell, revenues were $891 million, up $69 million from last year on higher commercial revenues of $99 million, partially offset by lower military revenues. Segment profit of $110 million was down $8 million, primarily due to higher research and development costs in the quarter, largely related to the future vertical lift programs. Backlog in the segment ended the quarter at $4.8 billion. At Tektron Systems, revenues were $333 million, up $7 million from a year ago. Segment profit of $48 million was up $11 million due to a favorable impact from performance. Backlog in the segment ended the quarter at $2.3 billion. Industrial revenues of $794 million were up $232 million from last year, with $169 million from fuel systems and functional components and $63 million from specialized vehicles, largely reflecting higher volume and mix. Segment profit was $32 million, up $43 million from the second quarter of 2020, primarily due to the higher volume and mix at each of the businesses. Finance segment revenues were $12 million and profit was $3 million. Moving below segment profit, corporate expenses were $37 million and interest expense was $32 million. With respect to our 2020 restructuring plan, we recorded a pre-tax charge of $4 million on the special charges line. We have another strong quarter of cash generation reflecting our focus on working capital management across the segments and cash deposits from strong order activity at aviation. Our manufacturing cash flow before pension contributions was $509 million, $294 million higher than last year's second quarter. In the quarter, we purchased approximately 3 million shares, returning $96 million in cash to shareholders. And we repaid at par $250 million of 5.95% notes with a stated maturity of September 2021. Following these activities, we ended the second quarter with approximately $2.2 billion of cash on the balance sheet. To wrap up, we now expect our full-year tax rate to be 16%, reflecting increased tax credits related to higher qualifying domestic investments in R&D. We are raising our expected full-year guidance for adjusted EPS to a range of $3 to $3.20 per share, up 20 cents from our prior outlook. We're also raising our outlook for manufacturing cash flow before pension contributions to a range of $800 million to $900 million, up $200 million from our prior outlook, with planned pension contributions of $50 million. That concludes our prepared remarks. So, operator, we can open the line for questions.
spk06: Thank you. Our first question comes from the line of Sheila Payaglu with Jeffries. Please go ahead.
spk04: could bill of 1.6 times in the quarter. I guess, Scott, what are you hearing from your customers? How do you think about the sustainability of this growth? And do you think there's any change in consumer behavior?
spk11: Well, Sheila, I think, you know, we had a strong order quarter for sure. I think, you know, the queue will come out and you'll see that we had services was about, aftermarket was about 31%. I think when you account for that and you account for used aircraft sale, our book to bill actually probably is closer to two. in terms of, you know, new equipment. That order activity continues to be strong here as we've gone through the end of the quarter. So, I think, you know, the sustainability appears to be quite strong. As I'm, you know, as we've seen through the course of the year, we have an awful lot of new customers coming into the market, which I think is great. We've got, you know, very low used aircraft available for sale. I mean, it's sort of at record low level. So, You know, people that are coming into the market, there's not a whole lot to be had out there in terms of quality, you know, relatively new used aircraft, and that's driving a lot of strength in the new side. I think, you know, from everything we're seeing, it appears to be quite sustainable. The demand is there flying. You know, if you look at that, it's at the highest levels we've seen in a very long time in terms of daily utilization. So, I think demand, you know, if you look at sort of the macro level, everything from charter to club to fractional to whole ownership is very strong. It's very U.S.-centric in terms of jet right now, although we're starting to see some pickup in the South American and European markets, particularly on the turboprop side, we're starting to see more activity South America, as you know, those international markets tend to be the dominant part of our market. They haven't been just because they're a little slower. So, I think when you look at the demand that we're seeing, and then you start thinking about South America and the European markets starting to come back, and frankly, just corporate. I think we're talking about a lot of high net worth individuals, small businesses, things like that are really driving it so far. And the addition, I think, as we go further into the year and start to see more corporate activity will help to make it a sustainable demand environment.
spk04: Thanks for that, Keller. And then maybe one more on Bell. Since you mentioned it in your prepared remarks about the R&D impact, is that more on FARA or FLARA? And kind of how do we think about that progression of company-funded R&D?
spk11: It's both, but FARA, frankly, at this point is the bulk of it, although we're seeing obviously some pickup here on B&P spending as we are preparing the FARA proposal. But this year, the lion's share of it is around the FARA program. He's making great progress. As I said, we're progressing really well in terms of the design and the assembly of the first aircraft for the first flight test activity. But you'll see this composite of higher R&D spending associated principally with those FDL programs, you know, through 2022. Great.
spk06: Thank you. Thank you. Our next question comes from the line of Peter Arment with Baird. Please go ahead.
spk00: Yes, thanks. Good morning, Scott and Frank. Scott, just following up on your aviation comments, just the main environment obviously sounds like it's really broad base and across the board. I think the original plan was to kind of get back 50% of the recovery of your previous 2020 production plan. Just how are you thinking about that and managing it?
spk11: I think we're on track for that, Peter. As we go into the end of the year, obviously, we've been raising our production rates as we expected to not only accomplish that this year, but as we kind of gave color around 2022 to get us back to those you know, 2019 level. So I think that's going well. And obviously, you know, strong demand makes us feel pretty good about, you know, continuing to bring those rates up as we go through this year and into 2022.
spk00: Okay. And just as a quick follow-up on just the margin performance, I mean, I think year-to-date you're kind of 7% versus guidance of 5.5%. So it's just the guidance increase that you're giving today, obviously, you're forecasting a continued strong margin performance at aviation second half.
spk11: You know, we are, Peter. I think, you know, the color on aviation, given the strength of the market, you know, we're probably going to be guiding up a couple hundred million dollars of revenue is the way to think of it, and probably a couple hundred basis points of a better margin. Terrific. Thanks so much, Scott. Sure.
spk06: Thank you. Our next question comes from the line of Pete Skibitsky with Lembic Global. Please go ahead.
spk01: Good morning, guys. Nice quarter. Scott, maybe to follow up on the UAV fee-for-service, as the U.S. continues to pull troops out of Afghanistan and I think maybe even more out of Iraq, maybe quantify how much of a headwind that program was in the quarter for you and kind of how much we're expecting it to be to negatively impact the full year.
spk11: I mean, we don't go into that level of detail probably, but just, you know, it's – I guess our point is we're seeing growth in a lot of the other pieces of that business, and the Afghan issue is holding some of that back. I think the margin performance continues to be strong. Look, I think we're fairly optimistic that we'll redeploy those assets and utilize them in other applications, but that's probably something that will be more of a 2022 impact. It takes a while for for that to happen. So I don't think it's not a horrible story. It's just the reality of the pullback in Afghanistan. And I think, you know, we've been conservative in terms of how we manage those assets. The team's done a great job with that. So it's, you know, it's not a bottom line problem right now. And again, I do think a lot of those assets will get redeployed into other opportunities, but it is creating a little bit of a top line headwind. So when you look at systems, I think we're really happy with the performance there. We'll probably see margins a couple hundred basis points better than what we originally were guiding you guys, but we're probably just kind of on track to the revenue line because of some of the pressures on that Afghanistan pullout.
spk01: Okay. Last one for me, also at systems. They're bidding on some pretty meaningful ground vehicle programs, right, OMFV on a team and the Marine Corps program. How do you guys ensure that you guys get an adequate return on those programs? Especially OMFV, it's an order of magnitude bigger than, I think, most of the things that they've done there. I think about the return you get just in light of, you know, the type of return you got in the TAPV program. Well, thanks, Peter. Look, these programs –
spk11: you know, will not be structured in a way, you know, where you're taking on a, you know, an EMD program and also committing, you know, the full life of production at a fixed price contract. So, you know, I get your point. I think the business learned a lot about that, and certainly we would never put ourselves in a contracting situation where we had that kind of exposure. So, look, these could be phenomenal programs. They could be great programs. I think our guys are technically, we're in a, you know, a good place on some of them. I mean, there's a long way to go, obviously, on things like OMFE, but they are huge opportunities, and, you know, it's going to take some time for them to come to fruition. But, yeah, certainly, you know, we're not going to look at a contract situation where we have the kind of exporters that we had on TEPI.
spk01: Sounds great. Thanks, guys.
spk06: Thank you. Our next question comes from the line of Carter Copeland with Melius Research. Please go ahead.
spk08: Hey, good morning, guys. Just two quick ones. One, Scott, I wondered specifically if you could just speak to what you saw or what you continue to see in terms of trade-in activity, just given the used inventory dynamic that you talked about, what you're seeing in that regard. And then a second one for Frank on the – the performance in ATAC and systems, was there anything sort of one time in nature in that regard that we should be aware of or anything we should think about in that regard? Thanks.
spk11: Look, on the used, you know, our activities reflect what's going on in the market, right? So I think our used aircraft inventory is quite low. You know, aircraft have largely sold out of our book. The need for trade-in is down dramatically. You know, as you guys know, we do run what we call market assist programs. So, you know, we'll help customers with the resale of their aircraft, ideally not even ever putting it onto our book. And we continue to try to do that. And, you know, frankly, as the backlog builds and that time frame from, you know, someone deciding to buy a new aircraft, you know, they have a much longer window for, the remarketing of their aircraft than what we saw when there was a lesser backlog and shorter cycle sales. So I would say that the dynamic of the used aircraft has been reflected in our own used aircraft department, and it's, I would say, all positive.
spk13: So on the systems mix, no, there was nothing kind of unusual in the quarter. Overall consolidated net program reviews were positive 15 million. And, you know, I think it just, again, reflects, as Scott said, the strong performance, you know, across the system's businesses and the expectation of, you know, a couple hundred basis points better than what our original guide was for the year.
spk08: Okay, great. Thanks for the call, gents. Yep.
spk06: Thank you. The next question comes from the line of Ron Epstein with Bank of America. Please go ahead.
spk09: Go ahead. Good morning, guys. Morning. Scott. Could you give us a little bit of a breakdown on maybe the customer demographic? I mean, how much of it is wealthy individuals versus corporates? Who are you seeing coming back to the market?
spk11: I don't know that we can give a super big click on Ron, but as I said, it's largely driven by... When we talk about high net worth individuals, these are usually folks that have family businesses, small businesses, private companies, which is historically the core of our customer base. I think that's where a lot of demand is coming in as you look at larger, particularly with the longitude out there and the latitude where we have products that have a stronger appeal, we think, to the corporates. um you know those folks are just starting to come back and you know as corporate aviation departments start to fly more i think we'll see more activity you know particularly in those uh those classes of aircraft in that in that corporate world but you know in the meantime it is that um that customer base that we've historically seen you're just seeing new customers of that same demographic i guess as you refer to it you know they're coming into the market got it got it and then
spk09: Your cash levels are relatively high versus history, pre-COVID, I call it, you know, PC. Are you still interested in industry consolidation? I mean, how are you thinking about deploying that capital?
spk11: Well, look, at this point, Ron, we kind of watch opportunities as we always do. I don't think there's anything pending. We'll certainly let you guys know when that happens. But, you know, in the meantime, you know, we continue to allocate the bulk of our cash into stock buyback. And I suspect we'll continue to do that. As Frank said, you know, we made a couple of, you know, debt payments here in the quarter. We don't have any more, you know, corporate payments until the 2024 timeframe. So I think we have a lot of flexibility around that. around cash but at this point um you know our principal allocation of that is towards um sure bye-bye great thank you very much sure thank you our next question comes from the line of noah popinak with goldman please go ahead hi good morning everybody
spk10: Questions on the guidance revisions. In order to get into the middle of the new EPS range, EPS in the third and fourth quarter would have to be essentially exactly flat from the second quarter, actually technically down slightly. And seasonally, the business usually ramps through the year, and you have end markets that are improving through the year. If you could just walk me through how that happens. And then the earnings raise looks like $45, $50 million of net income. And then you've taken the free cash up $200 million. If you could just bridge that difference.
spk11: I'm not sure how much detail modeling I can go into on the call, Noah. But look, I think we are seeing a little bit of linearity, as you guys know, when we came through the You know, the COVID period, obviously, there was a lot of inventory reductions across the company. We're trying to be more linear in how we do that. I mean, I think aviation is a good example. You know, we're not having, you know, some of the historical where you get this, you know, this big inventory build through the first couple of years, you know, quarters and most leads off on three and four. We're seeing a little more linearity, a stronger delivery here in Q2. And, you know, that's helping to, you know, give us a more linear, better managed working capital, I would say. So... um in terms of the the modeling around dps i kind of help a little bit here is you know think about aviation being up a couple hundred million on revenue and a couple hundred basis points of a better margin versus the guide systems a couple hundred million i'm sorry a couple hundred basis points of a better margin you know versus our our initial guide you know i don't think bells you know bells about where we expect it to be they're performing well but they're performing more or less to the to the guide. And I think, you know, industrial will probably be around in that same area, right? I mean, I would have liked to have some upside. We probably are going to be a little bit softer just because of the challenges on some of the supply chain. But, yeah, strong performance, you know, certainly on year-to-year revenues, margins, you know, are up. But it's a little more challenged in terms of capitalizing on some of that in-market demand. But, you know, the opportunities are there.
spk10: Okay. I understand. And, Scott, your response earlier to the question around the prior Cessna jet production plan, you know, recovering half of the 20 decline and then getting back to 19 and 22, you know, it sounded like you're sort of just reiterating that despite the strength in the market. Maybe that's just because, you know, it's been strong, but for a relatively short period of time, you want to see that sustain. You don't want to get ahead of yourself. But I wondered also how much of that is that you're looking at pricing over volumes. And, you know, you had the experience of having to reduce price and then, you know, changing the strategy to hold firm on price instead of chasing volume. And I wonder if you could just speak to how you'll handle that now that the market is stronger. Can we expect, you know, a bigger focus on price over volume even as demand increases? Or how are you going to handle that?
spk11: It's a good question. And I do think that, you know, part of the dynamic here is that, as you know, we've gone through a very long period of time where, you know, book to bill was just the backlog just wasn't strong enough to support, you know, let's say a six to nine month order delivery window. There was too much short cycle sale going on. It's It's particularly challenging for the factory, you know, to do that, to load things, you know, the right way, to not have rework when, you know, people buy on short cycle and you're reconfiguring and, you know, tailoring the aircraft, you know, too late in that manufacturing cycle. So, you know, there's no doubt that this business, I think this industry is healthier when you've got, you know, more like a six- to nine-month backlog. And it gives you better visibility. I think it's better for the customer in the end in terms of the ability to customize and, you know, get the configuration of the aircraft straight. So... You know, that's a lot of what we look at. So, you know, obviously we are increasing, you know, the volume consistent with what our expectations were, you know, for the year. And, you know, obviously you're feeling good about that, you know, increased rate as we go into next year given the backlog. But for sure we want to be cautious here and not, you know, increase volume and get back to a situation where you just got too much short cycle sales going on.
spk10: Okay. Excellent.
spk11: Thank you.
spk06: Thank you. Our next question comes from the line of David Strauss with Barclays. Please go ahead.
spk03: Thanks. Good morning. Scott, on Cessna Aviation, can you talk about where headcount levels are? Have you started to add back where you think headcount needs to go and whether you're seeing any challenges in terms of getting the workforce that you need?
spk11: So we are increasing headcount, commensurate with the increase in the production volumes we've gone through the year. We started hiring programs probably about a month or so ago to bring folks in to ramp back up again. Obviously, a number of those folks are people that have been laid off and have come back into the company, but we're having to do additional hiring beyond that. And look, I think everybody in the country is having the same challenge with some of the programs that are out there but those programs should wind down as we get you know i think into that you know labor day time frame so you know we are hiring um it is a challenge i think hiring will get easier as the as the year goes on we get off some of these unemployment programs that are frankly creating huge distance items for people not to work okay and um i guess a big bigger picture question um caltex uh can you talk about you know how caltex will play in a
spk03: EV world or as EV penetration continues to pick up in the future, how that business, the potential for that business to transform itself and participate in that. Thanks. Sure.
spk11: There's two steps to this EV world in Caltech. The first, which we're already participating on and frankly is a very good business for us, is the move from straight gas to the a lot of the hybrid vehicles, right? So, you know, the fuel systems have some unique technologies for those hybrid applications, and we've done well in that space. And the volume of that, you know, frankly, continues to grow, and it's growing even faster now, you know, sort of post-COVID than even it was on pre-COVID. So, our participation on those platforms is very good and a good part of our business and a growing part of the business. On a pure BEV world, I think that we will see a transition just as we saw, frankly, Caltex became Caltex because you move from metal gas tanks to plastic or composite gas tanks. And we think the same opportunity is there for battery enclosures. And we're working with a lot of the OEMs right now on opportunities to move from these metal battery enclosure systems to a composite enclosure system. It's lower weight, it's lower cost, so it's very beneficial to the OEM and to the platform, and we're working through qualifications of those technologies as we speak.
spk03: Great. Appreciate the follow-up. Thanks. Sure.
spk06: Thank you. Our next question comes from the line of Seth Seifman with J.P. Morgan. Please go ahead.
spk02: Thanks very much, and good morning. I wonder, Scott, if you could talk a little bit more about the aftermarket in aviation. It sounds like it was up about over 30 percent in the quarter. We see really high activity. Is that something where it's still accelerating as we head into the back of the year, and what kind of growth do you expect for aviation? for 2021 there?
spk11: That is, it's up around that number on a year-over-year basis. It's up about double-digit on a sequential basis. So what's happening, Seth, is the utilization of the aircraft is up as high as we've seen it in a long time. So people are flying, the aircraft are being utilized, and that obviously correlates to service and parts consumption. So We have seen it ramping up nicely as, you know, aircraft have gone back into service, and we do expect it to continue to grow through the balance of the year.
spk02: Okay. Okay. And then just, you know, I heard your comments earlier that focus on share purchases for now, which makes sense. When you think about opportunities for M&A, do you think at all about the defense side of the business? And, you know, we see this major focus at the Pentagon on JADC2? And, you know, is there a need in terms of thinking about the future of the defense business to, you know, be more focused on communications technology? And, you know, might that at some point become an area for M&A?
spk11: Well, look, I think I guess I would say broadly set that, you know, the A&D space is primarily where we look on the M&A side. I guess I wouldn't talk about any specific technology or obviously particular opportunity, but that is the space where we tend to be looking. And from a cash standpoint, look, I think our balance sheet's in very good shape. We'll continue to do share buybacks, and if there was something out there that we needed to do, I think we have plenty of access, either cash on the balance sheet or or, you know, financing through debt. So I'm, you know, I think from a cash standpoint, we'll continue to do the buyback without being too concerned about our ability if we need to do M&A. But I would say that I won't talk specifically around communications, but certainly the A&D space is where we look.
spk02: Okay, great. Thanks very much.
spk06: Thank you. Our next question comes from the line of Robert Stollard with Vertical Research. Please go ahead.
spk07: Thanks so much. Good morning. Scott, I just wanted to follow up on that comment you made earlier about the six- to nine-month window for aviation lead times. Are you actually in that window yet, or is it still a little bit shorter than you would like?
spk11: Oh, I think we're in that window.
spk07: Okay, that's nice and easy. And then secondly, again on aviation, similar to Ron's question earlier, are you starting to see more interest from the fleet buyers, or are you actually quite happy, like, going with these individual customers because generally you get better pricing on them?
spk11: Well, our, you know, I mean, our fleet, you know, sort of activity tends to be centered really around, you know, NetJets, obviously, which is a, uh you know very important uh you know customer for us and i mean that's sort of fleet obviously at the at the netjet sales level that's you know individual um you know customers buying shares so i um that's that's the bulk of what we looked at on on uh i think what you would kind of call fleet i mean obviously there's other opportunities out there where we have customers that want to buy you know numbers of aircraft you probably saw the announcement around the you know the caravan deal um Obviously, we've had programs with Skycur, for instance, with FedEx, which are large aircraft acquisitions. But I don't think we've seen anything different or unique going on or the difference between fleet or retail and our bias one way or the other. There's a good fleet opportunity, and we'll compete hard for that. But the bulk of our sales, when you look at this, the order book and what's going on are individual aircraft sales. Right. That makes sense.
spk07: Okay. Thanks so much.
spk06: Thank you. Our next question comes from the line of George Shapiro with Shapiro Research. Please go ahead.
spk15: Good morning. Scott, I want to pursue, you said that you're comfortable with getting jet deliveries halfway back from the last couple of years. But that would imply, like, if it's 165 or 170, not much of an increase in Q3 deliveries. or Q4, and usually Q3 is kind of maybe a little bit better than Q2, but Q4 is usually at least 20 airplanes above the prior cores, which would suggest that deliveries should get back more to, like, 180 or 190. So I'm just curious as to where my math is wrong.
spk11: Okay. George, I would say that if you look at what we're trying to do, and I kind of referred to this earlier, we're trying to get to a much more linear delivery flow. So when you look at, again, considering the demand environment, we're able to flow this thing in a lot smoother fashion. The order book, the backlog supports that so that we don't have you know, this extreme spike, you know, when you get into fourth quarter, you know, which has been delivered by, you know, or driven historically by later sales in the year. So I think when you look at the order book, what's happening is you're getting a more linear operation. You're getting a lot more backlog, longer lead time on aircraft, and that lets us be a lot more linear in terms of our deliveries through the course of the year.
spk15: Okay, so you're obviously not expecting that big bounce in the fourth quarter like we've traditionally seen.
spk11: No, George. Look, I think it's always a little bit stronger than the rest of the year, but nowhere near as nonlinear as you've seen for the last decade.
spk15: And given the backlog that you're seeing now, do deliveries next year get above the 2019 level?
spk11: We're probably not quite ready to guide next year, but it's certainly, you know, we're trying to aim to get that back into that 2019 range. Plus or minus a few aircraft will probably give that guidance in January.
spk15: And could you tell us what percent of the orders this quarter were to net jets or other fleet providers?
spk11: No, we don't break that down, George.
spk15: Okay, I figured I'd try. Thanks.
spk11: That's a good try. I was really close to giving it to you by serial number, but... Okay, thanks. All right.
spk06: Thank you. Our next question comes from the line of Kai Von Rumer with Cohen. Please go ahead.
spk14: Yes, thanks a lot, and good results, guys. So could you comment a little bit about pricing at both Bell and at Aviation? And, you know, kind of if you get the good orders and better pricing, I mean, I assume that would start to show up more in the next couple of quarters.
spk11: Well, yeah, I mean, you'll see in the queue, you know, Kai, that, you know, when you look at, you know, Aviation particular where, you know, solid pricing, you know, probably $11 million, you know, net of inflation. So, again, I think the pricing environment is certainly, you know, stronger than it has been. And, you know, we'll continue to, you know, to press on. You know, I mean, there's no doubt we feel like the margins in this business need to be better. And volume and productivity and efficiency are all part of it. But prices has to be part of that as well. So... And we don't usually get into any kind of price discussion around Bell, so I don't think we need to do that. But I would suffice to say that we're pleased with the commercial side of the business. The order activity, much like what we've been talking about on the textual aviation side of things, is strong.
spk14: Got it. And so I was a little surprised by the vigor of the margins at Bell, given that most of the volume came from commercial, where the margins tend to be lower, and the R&D was still strong. Can you give us some color? Are the margins going to be level? Or as we go on, you know, with the R&D for FARA and FLORA, could there be more margin pressure? Sure.
spk11: Well, I mean, we did put, obviously, the pressures of the increased R&D spending and the FAL programs, you know, into our guide. And I think we're, you know, pretty comfortable that we're on track to hit that guy, even with those R&D pressures.
spk14: Excellent. Thank you very much. Sure.
spk06: Thank you. Our next question comes from the line of Christine LeWag with Morgan Stanley. Please go ahead.
spk05: Hi. Good morning, everyone. Good morning. Following up on your comments in aviation, if you're in that six-to-month backlog window right now, if we continue to see a strong order activity, can we see you bring forward some of this volume in 2021 and accelerate production?
spk11: um you know the lead times of the aircraft you know make it difficult to have much movement i mean you can always do an aircraft or two you know depending on what that demand looks like but you know inside of six months it's pretty hard you know to adjust that just given the long cycle nature of you know particularly some of our supplier components i see so if we see this order activity let's say this is a little strong for the rest of the year that's really more of a 2022 story then
spk05: yes that's correct yeah we would we would we would incorporate that production you know ramp into what would end up being 2022 deliveries for sure great and then also on aftermarket uh you mentioned right we're seeing strong budget utilization also we see that with takeoffs and landings at a 12-year high how much of a pricing upside do you have in aftermarket and how do we think about the margin differential between aftermarket and new aircraft deliveries and aviation
spk11: Well, we don't break out those margins. I mean, but it's, you know, the fact that we're seeing, you know, increased demand on the aftermarket side in general, that tends to be good margin, you know, business for us. And so it's generally, you know, good mix. But I don't think there's, you know, a real material change in what that's doing, you know, for the business. It's highly dependent on, as you said, we're seeing, you know, at least in modern time, record levels of utilization, be it takeoff and landing cycles, average tail utilization. And that's going to continue to drive aftermarket growth, which is certainly good for the overall mix of the margin of the business.
spk05: Thank you.
spk12: Okay, Connie, I believe that's all the questions in the queue at this time.
spk06: Yes, that is correct.
spk12: Okay, could you announce the replay number?
spk06: Great, thank you. Just one moment. Ladies and gentlemen, this conference will be available for replay beginning at 10 AM Eastern today. You can access the digitized replay information at any time by dialing 1-866-207-1041 and entering access code 785 4134 international participants may dial 402-970-0847 those numbers again are 1-866-207-1041 and 402-970-0847 with access code 785-4134 That does conclude our conference for today. We thank you for your participation and for using AT&T conferencing service. You may now disconnect.
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