Textron Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Textron first quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, you may press 1, then 0 on your telephone keypad. You will hear acknowledgement that your line has been placed in queue. As a reminder, this conference is being recorded. I would now like to turn the conference over to Eric Salander, Vice President of Investor Relations. Please go ahead.

Thanks, Leah, 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 billion, up from $2.9 billion in last year's first quarter. Segment profit in the quarter was $304 million, up $48 million from the first quarter of 2021. During this year's first quarter, we reported net income of $0.88 per share, compared to $0.70 per share on an adjusted basis in last year's first quarter. Manufacturing cash flow before pension contributions totaled $209 million in the quarter, up $138 million from the first quarter of 2021. With that, I'll turn the call over to Scott. Thanks, Eric, and good morning, everyone.

Revenues and margins were up in the quarter driven by Textron Aviation. Aviation demonstrated strong execution in the quarter, resulting in 11.6% segment margin. We continue to see very strong demand, solid pricing, and increased deliveries from our cetacean jet and commercial turboprop products and higher aftermarket volume from increased aircraft utilization. We delivered 39 jets, up from 28 last year, and 31 commercial turboprops, up from 14 last year's first quarter. Order activity was very strong in the quarter, with $1 billion of backlog growth, reflecting continued order momentum across our product portfolio. We ended the quarter with $5.1 billion in backlog. In March, our new commercial turboprop, the Cessna SkyCurator, received FAA certification, and we expect to begin deliveries in the second quarter. At Bell, revenues were down 1% in the quarter, largely driven by the mix of commercial products sold. On the commercial side of Bell, we delivered 25 helicopters, up from 17 in last year's first quarter. During the quarter, we saw momentum building commercial demand across all our product aircraft models and in markets, with a strong quarter of new orders. Moving to future vertical lift, in March, Bell submitted its final flyer proposal revision to the U.S. Army. A down select and award announcement is expected this summer. Moving to Textron Systems, revenues were down in the quarter on lower volume, primarily reflecting the impact of last year's withdrawal of the U.S. Army from Afghanistan on our fee-for-service and aircraft support contracts. At ATAC, we continue to see increased flight activity and revenue on our U.S. Navy and Air Force adversary air contracts. During the quarter, systems successfully deployed the first aerosol and UAS system in a maritime environment aboard a U.S. Navy guided missile destroyer. Systems expects to deploy a second aerosol and UAS aboard an additional ship later this year. Moving to industrial, we saw higher revenue in the quarter driven by higher pricing and volume in specialized vehicles and our PTV and Golf product lines. We continue to see strong in-market demand in most of our product lines across specialized vehicles. Caltech saw disruptions related to global auto OEM supply chain shortages that continue to directly impact our production schedules, resulting in lower volume. At the product level, hybrid revenue increased 24% year-over-year with 12% of total Caltech's revenues in the first quarter, up from 9% a year ago as we continue to penetrate the hybrid fuel system segment. On April 15th, we closed our acquisition of Pipistrel, a pioneer and global leader in electrically powered aircraft. Pipistrel brings its technical and regulatory expertise in the development of electric and hybrid aircraft to support Textron's long-term strategy to offer families a sustainable aircraft for urban air mobility, general aviation, cargo, and special mission roles. 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 to Textron Aviation of $1 billion were up $175 million from a year ago, largely due to higher Citation Jet volume of $93 million, aftermarket volume of $61 million, and commercial turboprop volume of $59 million. Segment profit was $121 million in the first quarter, up $74 million from a year ago, largely due to the higher volume and mix of $55 million, and favorable pricing net of inflation of $16 million. The backlog in the segment ended the quarter at $5.1 billion. Moving to Bell, revenues were $834 million, down $12 million from last year due to lower commercial revenues of $32 million, largely reflecting the mix of aircraft sold during the period, partially offset by higher military revenues. Segment profit of $98 million was down $7 million, reflecting lower volume and mix partially offset by favorable impact from performance. Backlog in the segment ended the quarter at $4.8 billion. At Textron Systems, revenues were $273 million, down $55 million from last year's first quarter due to lower volume of $59 million, primarily reflecting the impact of the U.S. Army's withdrawal from Afghanistan on our fee-for-service and aircraft support contracts. Segment profit of $33 million was down $18 million from a year ago, due to lower volume and mix of $11 million, described above, and an unfavorable impact from performance of $9 million, primarily reflecting lower net favorable program adjustments on our fee-for-service contracts. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $838 million, up $13 million from last year, primarily due to a favorable impact of $46 million from pricing, principally in the specialized vehicles product line. partially offset by lower volume in the mix of $24 million, largely in the fuel systems and functional components product line due to the impact of global supply chain shortages on our auto OEM customers. Segment profit of $43 million was down $4 million from the first quarter of 2021, primarily due to the lower volume in the mix described above. Finance segment revenues were $16 million and profit was $9 million. Moving below second profit, corporate expenses were $44 million, and interest expense was $28 million. Our manufacturing cash flow before pension contributions was $209 million in the quarter, up $138 million from last year's first quarter. In the quarter, we repurchased 2.2 million shares, returning $157 million in cash to shareholders. Beginning in the second quarter of 2022, Pipistrel will become part of Textron eAviation, a new business segment where we will combine our existing initiatives with Pipistrel's capabilities to accelerate our development of sustainable aviation solutions. This new reporting segment will include development expenses related to these efforts and Pipistrel's operating results. For the remainder of the year, we expect revenues for the e-aviation segment to be in the range of $30 to $40 million, and a segment loss of about $45 million which reflects a net cost increase of about $20 million from the e-aviation guidance we provided in January. On our January call, we provided guidance for the expected costs related to e-aviation of about $30 million, which were included in our full-year corporate expense guidance of about $150 million. We now expect corporate expense to be about $125 million, reflecting the move of $25 million of expected e-aviation costs to the new segment on a prospective basis. For the full year, we're reiterating our EPS guidance of $3.80 to $4.00 per share, inclusive of the eAviation segment results. That concludes our prepared remarks. So, Leah, we can open the line for questions.

Thank you. And our first question is from the line of Robert Stollard with Vertical Research. Please go ahead.

Thanks so much. Good morning. Scott, you noted a very strong quarter for orders at aviation in the first quarter. I was wondering if you could comment on whether you'd seen any differences in terms of the different types of aircraft you had and whether there had been any change in the customer dynamics by type as well. Thank you. Not really, Robert.

It's across the whole portfolio. Jets, King Airs, the momentum continues to be strong. It's still... you know, more U.S.-centric, you know, than general. It's probably around 80-20 on jets, around 60% on turboprop, where we usually see more like 60% international on turboprop. So the dynamics, you know, from what we've seen here over the last year, let's say, kind of continued, you know, through the quarter in terms of kinds of customers, still seeing, you know, quite a fair number of new customers coming into the marketplace, which is encouraging, but Yeah, I'd say the dynamic is quite similar to what we've seen, just very strong in terms of the number of transactions, the demand out there continues to be robust.

That's great. Just a quick one for Frank. Is there any change to your cash flow guidance for the year?

No. We're staying at the $700 million, $800 million for now.

That's great. Okay. Thank you very much. You're welcome.

And our next question is from Sheila Kayaglu with Jefferies. Please go ahead.

Good morning, and thank you, guys. So maybe on aviation margins, just relative to the guidance you gave in January, 11.6 was pretty strong for the first quarter on maybe lower deliveries than we thought, but up significantly year over year, and price was only 1.5%. So maybe, Scott, if you could talk about what you're seeing there, how we should expect that to progress. Can we see better pricing?

Well, I think the pricing remains the same. Strong, obviously, you know, we're selling, you know, out into the future and making sure that we get, you know, good pricing in anticipation of continued inflationary pressure, so I think we're pretty well covered on that front. I do think the margin's a little strong here in the first quarter, Sheila, because we just, again, the flying activity is up so strongly that we saw about 38% of our revenue here in Q1 was service and aftermarket business, so that's a little heavier mix than we would expect to see, certainly, for the total year, and that's part of what's driving a little bit, probably higher margin in Q1 than what we guided. So it's a little bit more of a mix here between aftermarket and original equipment sales, and obviously original equipment sales will strengthen as we go through the year.

Okay. And then maybe one more on e-aviation, just creating a new segment. What was the process behind that, Scott, and how do you envision that sector segment evolving over the next few years?

Our logic for doing this and breaking it out as a separate segment is, as we talked about in January, because this was sort of a cross-business thing, we've got aviation engineers and bell engineers and folks from systems that are kind of building out this team. And it's a new space, particularly around eVTOL. We were funding that in a corporate line. With the acquisition of Pipistrel and the increasing importance, I think, of kind of these investments that we're going to make on the sustainable aviation side, we thought it would be helpful to shareholders to break that out as a separate segment initiative and give visibility to that so obviously you know pipistrelle is in there its operating results are in there but it's a you know it's a 40 50 million dollar at this point you know sort of a business so you know a lot of the results that you'll see in that segment are driven by the significant r d investments that we're making around these sustainable aviation uh activities and some of that is actually we're already funding on the through the corporate line as well as obviously, you know, bringing Pipistrel in and increasing, you know, some of the R&D that was in that business to sort of accelerate some of the product activities that Pipistrel already had undertaken. So I think it'll just give better visibility.

Sure. And next we move to the line of David Strauss with Barclays. Please go ahead.

Thanks, Maureen. Scott, was... Did you – were deliveries a little short at all, or did you miss any deliveries given the transition to, you know, the M2 or M2 CJ4 Gen 2? I thought that was going to impact Q1.

Oh, look, I think we're probably a couple of aircraft behind where we'd like to be just in terms of schedule, ramping up, and, you know, getting people hitting, but not materially. I mean, it's – you know, we expect to – you know, continue to see the growth in deliveries as we go through the course of the year. But, I mean, it was a couple aircraft probably that we would like to have gotten in the quarter, but nothing material. Okay.

And could you talk about maybe across Bell and systems how you did in the, you know, the 22 budget, you know, in terms of the final bill relative to the, you know, initial request and same thing in the initial fiscal 23 request?

I think FY22 finally came out about where we would have expected it to be. Our programs are funded to where we expected them. I think when we look at what came out on the FY23 budget, this is a very long process. There's certainly things that we would like to see have some increased funding, and obviously we'll work on that between now and getting to an actual appropriated FY23 budget. I would say when we look at the overall budgets and we look at the numbers that have been put out in terms of future, you know, defense, you know, funding areas that are difficult to us, you know, particularly in the Army, things around FLARA and FARA, it looks like those are being funded as we would have expected.

Okay. Thanks very much.

And next we go to Seth Seifman with J.P. Morgan. Please go ahead.

Hey, thanks very much, and good morning. I just wanted to ask about cash deployment and kind of the pace of share purchases. You told us earlier in the year to expect share repo to ramp through the year, and it looks like that's what's happening. But we've seen strong cash generation so far. The market's had some setbacks early on. How did you think about approaching cash share purchases opportunistically, and how did the acquisition play into that thought process?

Well, I would say that we tend to model it as more back-end loaded. I think we did do a little more acquisition opportunistically here in the quarter because of some of the moves in the share price, so we continue to execute that strategy. The acquisition of Pit Destroy was not a huge cash outlay, so that was something that we handled in within our balance sheet. So I think we have certainly cash available to deploy, and we will continue to do that opportunistically as we work through the year.

Okay, great. And sorry to split hairs here, but I think you mentioned summer award for FLARA. Still expecting that in early July?

That's what we understand, yes. Okay, excellent.

Thanks very much, Scott.

And our next question is from Ron Epstein with Bank of America. Please go ahead.

Hey, good morning. Hi, Ron. I was wondering if you could maybe peel back the onion a little bit on what drew you to Pipistrel, and then maybe as a follow-on, what else are you thinking in terms of M&A out there that could bolster your businesses?

Well, I guess what I'd say on the Pipistrel front, Ron, is As we look at what needs to happen, the technologies and capabilities you need to do things like EVTOL, I think our company was already very well equipped in terms of aerodynamic capability and structures, loads, aircraft, flight controls, obviously our expertise in the aviation business today and in doing Part 23 aircraft certifications and the capability that we have in In Bell, on tiltrotor, which, you know, in essence, I think, you know, the architecture certainly where we're heading is, you know, it's a small tiltrotor sort of a product. On the eVTOL front, I think we felt like we've got a tremendous amount of organic capability, but we don't have any experience to speak of around battery management systems and cell analysis and development, you know, the whole electric propulsion side of this. And when we looked at Pipistrel, I mean, this is a perfect, So in my view, when you look at what's critical from a technical standpoint to go design, develop, and certify an aircraft of that class, and by the way, not just the VTOL, but also other applications in GA for electric or hybrid, you know, we had a gap in that electrical propulsion side, and this is pivotal strength. So I think it's sort of the missing piece of the puzzle in terms of how we think about our ability to go off and design, develop, and certify aircraft in that space. So... I would say the more work we've done and now with the deal closed and interacting with their team, they've got superb capability and a real leader in that space. They understand it very deeply. Our teams are already integrating and getting to work. I think we're feeling really good about it. In terms of other acquisition stuff, we probably won't comment at this point, but if something happens, we'll certainly let you know.

Thanks.

Our next question is from Pete Stavisky with Alembic Global. Please go ahead.

Hey, good morning, guys.

Sorry if I missed this, but what was the sequential increase in Bell's backlog? Was that driven by commercial or just kind of legacy V22 or AH1 or something else?

There was some commercial, but also we signed the V22 PBL contract, the five-year PBL support contract.

Okay. So... I wanted to ask you guys about this potential Nigeria AH-1 contract, just because that seems like it could be sizable for you. I think maybe approaching a billion dollars. Wondering when that contract might get signed, then how to think about, you know, the start of revenue recognition and timeframe on that.

You know, Pete, it's hard to say, right? I mean, you know, we've been working on this program for a while. The Nigerians developed this, the congressional notification and Approval was a big deal. Obviously, that's an important hurdle to get through. But this does still now, you know, need to go through contracting. It is an FMS case, right? So it's, you know, a contract that needs to be negotiated, you know, between the Nigerian government and the U.S. government and then turn around and contract down to us. So I'm always leery of providing any data associated with anything except FMS. So for sure it was a major milestone to get through the congressional process. but there's probably a bit of work here still to do to get this thing under contract. So we certainly have not factored that into anything in our guide at this stage of the game. Okay.

Thanks so much.

Sure.

Next we have a question from Robert Spingarn with Melius Research. Please go ahead.

Hi. Good morning. Morning. Scott, regarding the very strong, you know, extension of demand at aviation into the quarter, Could you talk about the cadence through the quarter, just given the war starting, the volatility in the stock market? Did that change anything between January and March or even into April?

No, it really didn't. The activity has stayed very strong through the whole quarter.

Okay. And globally, any changes there?

No. I mean, obviously, flying of assets that are in Russia or Russian registered has changed. has dropped off dramatically. We don't service or support those aircrafts at this stage of the game, but that's relatively minor. As a light, mid-sized kind of player, most of the oligarchs tend to be big iron guys, so the impact to us was pretty immaterial.

Okay, and then just on the specialty vehicle side, how would you characterize the current demand environment, the trends there, and the inventory situation? I would say various.

Yeah, sure. Look, demand remains very strong. Inventory levels are at extremely low levels. Supply chain continues to be the battle, I would say, in some of our product lines, particularly around the Gulf and the Gulf derivative PTVs. We've seen stabilization in that supply chain. It's still a fight every day, but we're getting stuff out. And the market demand is robust. Pricing is strong. In some of the other areas, you're still getting demand. You know, challenges in supply chain, things get caught up. I mean, we had a lot of deliveries in the quarter around snow, for instance, which normally that would have been done by the end of last year. You know, as the parts finally came in, we were able to finish up units and get those out into the field. I'd say the encouraging, like on GSE, for instance, you know, which is really impacted, obviously, by the airline side of things. You know, the order activity has come back very robust, which is great, so those lines are ramping back up again. So I would say, in general, across pretty much all of those markets that we serve. Very strong demand, very low inventory out there in the channel. Supply chain challenges continue, but we work from every day and are getting stuff out.

Thank you for the caller. Next, we go to George Shapiro with Shapiro Research. Please go ahead.

Good morning. Scott, with a strong book to bill and You consider raising production rates further for next year, or you want to wait a little while yet?

Well, I would say, George, as you guys know, we talked about the rates kind of increasing through the course of this year. Certainly with the demand that we're seeing and the level of backlog, we'll plan on continuing to raise those as we go into 2023. So we do this on a pretty real-time basis. So as the order activity continues to stay demand, we'll stay on the ramp that we've already committed to in 22, and certainly we're not ready to guide 2023 yet, but I would certainly expect that we'll continue to push on increasing those rates as we go into 2023 as well.

And what are the kind of lead times that you're comfortable with, and where are you now?

Well, look, the lead times are, you know, always sort of in that nine months or so kind of time frame. There's certainly long lead, longer lead components, you know, that are part of that and engines and some other critical technologies. But we work with our suppliers every day on sort of forecasting that demand so that they're ready to meet that ramp. So for those critical long lead items, the discussions are happening in real time and they understand, you know, what our expectations are in terms of supporting the ramp, not just through the balance of this year, but into 2023.

And one quick one for Frank. Given the weak system sales in the first quarter, is your guide of $1.3 billion for the year still good, or it's going to come down some?

No, we're still kind of maintaining that type of area. We expect that the first half with systems will be on the lighter side, and then we'll see momentum and growth going into the second half.

And what drives the growth in the second half?

Just, you know, kind of the timing of program activities and, you know, kind of other things.

Okay. Thanks very much.

And next we have a question from Noah Poponek with Goldman Sachs. Please go ahead.

Hi. Good morning, everyone. Morning. Is all of your prior four-year guidance reiterated this morning?

Well, I mean, yeah, we're not changing any of our guidance, so we held the range on EPS. Obviously, you know, we did the pipistrelle deal, so we have some additional dilution. We think we can overcome that, you know, by some overperformance in a couple of areas, and the catch we're holding, at least at this point, to our previous guide.

Yeah, we're not re-guiding the segments, but, you know, we're

Yeah, we don't normally, as you know, Noel, we don't usually go back and try to re-guide the segments, but I would say the color, which we usually provide, is that, you know, I mean, I don't expect we'll maintain this level of margin at aviation every quarter, but I do think we'll be towards the high side on that, you know, which helps to cover some of the dilutions associated with the acquisition and increased R&D spending in that area.

Okay. Yeah, no, I mean, just given where the earnings and, I mean, cash flow is usually seasonally pretty weak in the quarter, just given where those came in in the quarter, it seems seemed to outperform even what maybe you had been looking for a quarter ago when you got it. So just wanted to make sure we're on the same page there.

Yeah, it did. Look, as I said, I think we had strong aftermarket in the quarter, which is a good mix for us. But as we talked about last year, I do think when you guys model these things, you will see more linearity than we've seen for quite a number of years, and that's because having that strong backlog – We were able to plan production, customer deliveries, and all that activity will be more linear than what we've had in previous years.

Okay. Just honing in on that aviation margin again, I mean, you know, the way that was forecasted to start the year was sort of a low 20% incremental for the year. You know, it's over 40.25%. you know, there's a strong pricing environment. You have low capacity utilization and volume coming into that. It would seem like you could have a better, you know, better incrementals than you've had in the past for a period here. Recognizing your point on the mix in the quarter, I mean, just what's your latest thinking on where those incrementals can land as you move through the year?

I mean, we always feel like this is probably a 20-25% incremental. Absolutely, in the quarter, it was considerably stronger than that. Again, that's largely mixed driven, and, you know, on a year-over-year basis. You know, the revenue, we're going off relatively low levels, right? I mean, last year's deliveries were light. This year's are certainly stronger, and so we get some overhead benefit out of all that. So I think, you know, we feel great about the margins we delivered in the quarter. I think we'll have a very strong year, but it's, you know, this was a very strong mixed quarter.

Okay. And then just on the... aviation lead times for customers to buy airplanes. Are there any models that have moved, you know, well outside of the timeframe where you, you know, you've talked in the past about needing to keep it in a range so as to not lose a customer for having to wait too long for an airplane. Has anything moved out of that range?

Well, I mean, every customer is different, right? In terms of when, when, what their expectations are. I, I for sure, there's a lot of customers at this point that, you know, the market's changed dramatically in the last year or so, right? So there are, you know, folks that would have thought, hey, I can just call up and I can get an aircraft here on a short cycle are finding that that's not the case, right? The lead times are back where they've been more historically in this industry. So, you know, that being said, you know, part of our plans, as we talked about going into next year, is we expect we will continue to increase production rates because we certainly don't want to create a situation here where we lose a customer because of timing so it is a balancing act here but we need to you know we certainly do with this backlog and the demand we continue to see in the market we do need we will need to continue to increase rates but i think we want to do that responsibly and and work with our suppliers to make sure we don't you know put ourselves in a bad situation but yeah we will continue to meet you know production increases to try to avoid that problem okay that's that's excellent okay thanks so much

And our next question is from Peter Arment with Baird. Please go ahead.

Good morning, Scott, Frank. Hey, Scott. On the aftermarket, so I think Frank mentioned 38% of the mix in the quarter. I'm just curious how you see that kind of sustaining or what's really behind the step up there. I know there's a lot of flight activity, but if the flight activity continues, should we expect that just kind of continues to flow through? Maybe just a little more color on that.

Sure. Well, look, Peter, the flying hours are very strong, obviously, and that ultimately drives our aftermarket revenue, as we all know. I'm not predicting a change in that. I think we continue to see very robust flying hours, and so I think our service business, aftermarket business, will stay strong through the whole course of the year. It's more about the OEM, you know, original equipment side ramping up, which is just going to change that ratio as opposed to an expectation that aftermarket will go down. You know, so it's just on a percentage basis At 38%, that's pretty strong, right? We're normally in the low 30s in terms of our aftermarket.

Full year aftermarket last year was 29% of total revenues.

So it's a function. We have a numerator and a denominator here, right? I think this is just the numerator is going to grow on the OE side, so the mix will change a little bit. But I certainly have no reason to believe the aftermarket isn't going to stay strong for the whole year.

That's helpful. And then just, you know, we're hearing on a lot of the calls about, you know, just pressure with the supply chain, particularly in aerospace. You guys didn't really call it out, but I'm sure you're dealing with it. How would you characterize kind of the supply chain?

You know, Peter, it's everybody's dealing with supply chain challenges. I think our team does a great job of managing from issue to issue. As I said, we're a little bit behind schedule on a couple things. It's just ramping up, you know, employees. Our suppliers are ramping up employees. it continues to be a challenge. I mean, there's most things we're able to work our way through. You know, there's a couple out there where we've got a couple critical suppliers who unfortunately, you know, had some supply chain, you know, their supplier suppliers that were in Russia, and that's created some issues. So we see some suppliers that are having to go resource. The good news is, at least on a couple critical ones, they've got suppliers that have built those parts before, but it's created a gap, right, because all that not just finished goods, but stuff that was work in process in these Russian suppliers is basically unavailable to us as a result of this sanction. So we're kind of, you know, you've got to transition and resource to somebody who knows how to do it, but it creates a gap. And we'll have to manage our way through that gap. Again, it's a timing of, you know, does it affect an aircraft or a few aircraft here or there? I mean, I think we are kind of expecting that. I think our financials can hold together, but there are certainly some aircraft from a timing standpoint that we see at risk. The good news is most of these things are things where we can continue our production processes and build the aircraft, paint, you know, do everything. And, you know, it's something that can be incorporated, you know, very late in the game. So I think we'll be able to catch up pretty quickly once the flow of some of those things starts again. But, you know, it's an everyday thing, Peter. I think for the most part, we work through it. There's going to be a couple, you know, items here or there that could impact us by a few aircraft, and we'll have to manage our way through that.

Appreciate all the details. Thanks.

Next, we go to the line of Kai Von Rumer with Cowan. Please go ahead.

Kai, you might be on mute. Hello?

Excuse me. I'm here. I was on mute, correct? So Pipistrel basically has focused on fixed-wing applications and lift cruise cargo designs. And you guys, you know, to the extent you've kind of shown models that focused on tilt rotor for the UAM market. As you put these two together, what do you think are the target markets that are of greatest interest to you?

That's a great question, Kyle. I think there's a broad range of applications for electric and hybrid electric aircraft. You know, UAM kind of, sort of hijacked that story here for a long time. And that market is probably a very real market. It could be a huge market and certainly one that we want to play in. But from my perspective, it's by no means the only market for electric or hybrid electric aircraft. You know, you mentioned the cargo. We have a lot of interest from customers that talk about, you know, doing unmanned cargo. And, you know, to this point, a lot of them are trying to figure out how you take existing platforms and unmanned them. There's good work going on in that space, but I don't know if that's the answer. I think that some of the work that Pipistrel has done, you know, architecturally, frankly, what they're doing in the cargo space is not unlike some of what we've done with some smaller aircraft in the unmanned world for the military side. But, you know, the work Pipistrel has done, you know, this is a serious cargo machine. It's kind of a thousand pound utilization. So there's, you know, those are some of the things that we'd like to add additional R&D to try to accelerate bringing some of that to the market. There's some other work in sort of more traditional GA aircraft that could be electric or hybrid electric. So I think that this is, you know, certainly there's a bet here for us, Kai, on the UAM side, you know, and a mega market opportunity that we need to play in, but by no means is it the only one. I think some of the stuff that was drawn, everything from pure electric for the trainer to you know, to cargo, to GA of all sorts. You know, these are all opportunities that we're looking at pretty hard. I think, frankly, some of them will happen faster than the UAM are going to happen.

Great. And so if you think about it, with the FAA today being a lot tougher on what you have to do to get things certified, and you've got a lot of targets, I mean, it's If you look at the other guys who are focusing on UAM, I mean, we're talking three, four years, you know, from vision to actual, you know, getting certified. So that would imply, you know, if you're really going after that, a fair lift in terms of your R&D spend. So do you have any rough sense in terms of what kind of an envelope that's in? Like, does this go... to $100 million? Could it go to $200 million because the potential is so big? How should we think about that?

Well, we'll sort of work through that here year by year. And obviously, part of our objective on creating this separate segment is to give you guys visibility into what kind of investment we're placing into that space. Does it become that big a number? Probably not, in my view. Remember, we've talked a little bit about this before, right? When you look at some of the amount of money that some companies are spending in the space, it's facilities and building out factories. It's a lot of infrastructure that, frankly, we already have. So I think our investments will be much like they traditionally are for one of our aircraft programs, which is the engineering resources and some tooling to the extent that we need to do that. But we can leverage an awful lot of what we already have But anyway, look, you guys will get good visibility because of the breakout of this segment and what those investments are. Obviously, we're very open to talking about that and showing those kinds of numbers. But the certification issues, look, I think people don't understand what that process is all about. We just certified the Skycar as a Part 23 aircraft this past quarter. We know the Part 23 process. Yes, it's challenging. Any certification program is very challenging, but that's something we work through all the time. So I think we know how to navigate through that process and work with the FAA to get there, and obviously now with PIVIS rule. Similarly, they understand that process and have worked that, and frankly, have already certified an electric aircraft with EASA. So I think the regulatory framework is one that a lot of people don't understand. I think we do understand it.

Terrific. Thank you very much.

Next we go to Christine Leibweg with Morgan Stanley.

Please go ahead. Hey, good morning, guys.

Good morning.

In terms of inflation, can you discuss the effect of that on your reporting segments? And then also, where do you have the strongest ability to pass through on pricing? And which ones are you more concerned about?

Well, look, we obviously will disclose price versus inflation. I think in most of our businesses, our guys are doing a really nice job of recognizing where the inflation is, and we're getting price to offset that, not just here in the near term, but in how we're pricing products that are delivering out into the future with reasonable expectations about what the inflationary environment will look like. So, I mean, as much as this is sort of new territory, it kind of is what it is, right? The inflation is very real, and we have to get price to offset that and And then we've been doing that. So, look, it's harder if you've had some government fixed price contracts that you're working through that put a little more pressure on it. But clearly, as we price and bid new programs, we factor in that inflationary pressure to that as well. So I think, in general, we talk about it a lot. I think our teams are very sensitive to what's going on from an inflationary standpoint and understand the need to get the price offset.

Thanks, Scott. And maybe following up on eVTOLs, when you look at some of these new players coming into the market, trying to build an airplane, but at the same time, they're pursuing these strategic partnerships around the world with ride-sharing companies, other tech companies trying to figure out the distribution side on a direct-to-consumer relationship. How do you think the go-to market of an eVTOL business would be similar or different to what you do for Cessna or for Bells?

Look, I think it'll be very, very similar, right? I mean, we have relationships with companies today, obviously, where we have fleet programs, diffractionals, for instance, or other charter operators, or big cargo operating companies. I mean, we do this as a normal course of business. So I think I don't worry about that at all. I mean, I see all these announcements, and people are talking about things that are Years into the future and business models that aren't well-defined yet, we don't need to do that. When you talk about direct consumer, for us that's easy. We do that every single day. We sell Cessna 172s and 182s and 206s and Bonanzas. By the way, obviously part of what we're doing with Pipistrel is leveraging that sales team all around the world that's selling our aircraft today under the Cessna and the Beechcraft brands. We'll also be out there selling and servicing the Pipistrel brand. But I think specifically around eVTOL, as this market evolves and the business starts to build, we will absolutely be a player in that. And I'm not worried at all about our access to those customers and the ability to sell our product to those customers. It's what we do.

Great. Thanks for the call, Scott.

Sure.

And we have no other questions. You may continue.

Okay. So why don't you just give them the replay number, and that will end the call.

Thank you. Ladies and gentlemen, this conference is available for digitized replay starting today at 10 a.m. Eastern Time and will be available through October 26th at midnight. You may access the digitized replay by calling 1-866-207-1041 and enter the access code of 5894411. Again, that dial-in number for the replay is 866-207-1041 with the access code of 5894411. And that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.