Textron Inc.

Q2 2022 Earnings Conference Call

7/28/2022

spk16: And welcome to the Q2 2021 Textron Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If you should have questions during the call today, please press 1 followed by the 0. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Eric Salander, Vice President of Investor Relations.
spk13: Please go ahead. Thanks, Brad, 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, 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, essentially flat with last year's second quarter. Segment profit in the quarter was $303 million, up $14 million from the second quarter of 2021. During this year's second quarter, we reported net income of $1 per share compared to $0.81 per share in last year's second quarter. Manufacturing cash flow before pension contributions totaled $309 million in the quarter, down $200 million from the second quarter of 2021. With that, I'll turn the call over to Scott.
spk11: Thanks, Eric, and good morning, everyone. Aviation had another solid quarter with higher revenues and strong execution, resulting in a 12.1% segment profit margin. We continue to see strong demand, solid pricing, and increased deliveries for our citation jets, commercial turboprops, and higher aftermarket volume from increased aircraft utilization. We delivered 48 jets, up from 44 last year, and 35 commercial turboprops, up from 33 in last year's second quarter. Order activity was strong in the quarter, reflecting continued order momentum that generated $700 million backlog growth resulting in 5.8 billion of backlog at aviation at the end of the second quarter during the quarter aviation's defense business was awarded a 91 million dollar contract for at6 aircraft spares and related support services to tunisia also at texas aviation defense earlier this week the at6 wolverine received military type certification from the u.s air force paving the way for continued global sales of the light attack aircraft on the new product front we delivered the first cessna sky courier to our launch customer fedex and also delivered the first XLS Gen 2 aircraft. At Bell, revenues and segment profit were down in the quarter, primarily reflecting lower H1 program volume. On the commercial side of Bell, we delivered 34 helicopters, down from 47 in last year's second quarter. While commercial order activity was strong across all models, supply chain headwinds impacted Q2 results as several commercial helicopter deliveries slipped out of the quarter. Overall, the strength in commercial demand, which included South Korea selecting the Bell 505 aircraft for use as its next military trainer, contributed to an increase in Bell backlog of $500 million in the second quarter. During the quarter, Bell announced a contract award of $518 million to upgrade Canada's fleet of CH-146 Griffin aircraft. This upgrade program is expected to be completed by 2028. Moving to future vertical lift, we now expect a Florida contract announcement sometime in October following the AUSA conference. As a result, we anticipate continuing our investment on this program, which will be incremental to our original segment guidance. Moving to Textron Systems, revenues were down on the quarter on lower volume, primarily reflecting the impact of last year's withdrawal of the U.S. Army from Afghanistan on our paper service and aircraft support contracts. At ATAC, we continue to see increased flight activity on our U.S. Navy and Air Force adversary air contracts. During the quarter, we delivered LCAP 104 to the U.S. Navy and continue to progress through the build process of the remaining EMD craft on the ship-to-shore connector program. Last week, the U.S. Army announced that Systems was awarded a $354 million firm fixed-price contract for the production and delivery of the XM-204 top-of-type munition and anti-vehicle system. This is an IDIQ contract with an estimated completion date of 2027. Moving to industrial, we saw higher revenues in the quarter driven by higher pricing and volume in specialized vehicles, mainly in our personal transportation and golf product lines. At Caltechs, the auto market remains challenging as we again experienced order disruptions related to the global auto OEM supply chain shortages and COVID mandated factory shutdowns in China that continue to directly impact our production schedules. In April, we closed the acquisition of Pipistrel, pioneer and global leader in electrically powered aircraft. Beginning in the second quarter of 2022, Pipistrel became part of Textron E-Aviation, a new reporting segment that includes Pipistrel's operating results and R&D expenses related to the development of sustainable aviation solutions. In the quarter, we announced that Pipistrel Velas Electro received the UK Civil Aviation Authority certification. The Velas Electro remains the only type of certified electric aircraft in the world. Overall, it was a solid quarter with strong cash generation and growth in earnings. Our teams executed well in a difficult environment where we continue to experience supply chain disruptions, labor supply shortages, and COVID-related impacts across our businesses. While these challenges drove manufacturing inefficiencies and delayed product deliveries at many of our businesses, our financial performance demonstrates the resiliency of our operations. Looking forward, we anticipate these headwinds to continue through the remainder of the year. With that, I'll turn the call over to Frank.
spk12: Thank you, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.3 billion were up $123 million from the second quarter of 2021, largely due to higher aircraft and aftermarket volume. Segment profit was $155 million in the second quarter, up $59 million from a year ago due to the impact from higher volume and mix of $25 million, a favorable impact from performance of $19 million, and favorable pricing net of inflation of $15 million. Backlog in the segment ended the quarter at $5.8 billion. Moving to Bell, revenues were 687 million, down 204 million from last year due to lower military revenues of 170 million, primarily related to the H-1 program, and lower commercial revenues of 34 million. Segment profit of 63 million was down 47 million from last year's second quarter, reflecting lower volume and mix, partially offset by a favorable impact from performance, which included lower operating expenses, partially offset by an unfavorable change in net program adjustments. Backlog in this segment ended the quarter at $5.3 billion. At Textron Systems, revenues were $293 million, down $40 million from last year's second quarter due to lower volume of $44 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 $42 million was down $6 million from a year ago, primarily due to lower volume and mix. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $871 million, up $77 million from last year's second quarter, primarily due to a favorable impact from pricing and higher volume and mix, principally at specialized vehicles. Segment profit of $41 million was up $9 million from the second quarter of 2021, primarily due to the higher volume and mix. Textron e-aviation segment revenues were $5 million, and segment loss was $8 million in the quarter. Finance segment revenues were $14 million, and profit was $10 million. Moving below segment profit, corporate expenses were $12 million, and interest expense was $28 million. Our manufacturing cash flow before pension contributions was 309 million in the quarter, down 200 million from last year's second quarter. The second quarter of 2022 included significant cash tax payments as a result of the 2022 change in R&D tax treatment. In the quarter, we repurchased 4.4 million shares, returning 282 million in cash to shareholders. For the full year, we are reiterating our earnings per share guidance of $3.80 to $4 per share, and we are increasing our cash flow from continuing operations before pension contributions guidance to be in the range of $800 to $900 million, up $100 million from our prior outlook. That concludes our prepared remarks. So, Brad, we can open the line for questions.
spk16: Of course. And our first question today comes from the line of Sheila Kealu with Jefferies. Please go ahead.
spk06: And guys, I'm impressed nine minutes today. So in terms of, you know, your guidance for the year, you read reiterated it, but several companies are missing on supply chain. So maybe can you talk about, are you seeing some of those supply chain headwinds for the second half of the year? And Scott, in your prepared remarks, you mentioned flora, the push out to mid October, you know, how does that impact results and the additional investment there?
spk11: Sure, Sheila. Look, I think if we look at the sort of across the company, first and foremost, I think Textron Aviation performance will continue to be very strong in the second half. We are trying to ramp production. We expect to try to continue to ramp production through the 2023, given the very strong demand environment. Supply chain and headwinds are causing some disruptions there, obviously. So I think we'll probably be a little light on revenue. We'll probably miss some deliveries as things push into 2023. But I think that from a performance standpoint, from a margin standpoint, the business will continue to excel. Aftermarket remains very strong, obviously, and that's an important part of the financials in the business. So I think that that business will be a strong performer in the second half and be really well positioned for us going into 2023 as well. The industrial segment, our vehicle business continues to perform well. It continues to improve. First half was pretty tough in the supply chain and the COVID shutdowns in China. I certainly expect that to improve in the second half. So we'll see better performance, you know, from Caltechs in the back half of the year. So I think, you know, continued improvement. It'll probably be towards the low end of margin just because of the first couple quarters on the automotive side, but otherwise strong performance. Systems in the second half, you know, look, we should get back. We've had these negative revenue comparisons driven largely by the Afghanistan pullout and the impact it had on our fee-for-service business. Those comps go away in the third and fourth quarter, so I think we get back to stable, even showing some growth probably towards the end of the year, resulting from some new wins and, again, very strong performance, I think, in terms of segment profit. And Bell will be the one that's a bit of a challenge. We are showing really strong performance on the commercial side. The demand environment is good. We'll certainly have a lot more deliveries in the back half of the year, but they are fighting through supply chain issues and inefficiencies. We know and fully expect we're going to see lower volume, particularly on H1 aftermarket. There's just been lower demand, lower flying in that side of the house. But the big issue we also have to face into is obviously the FLORA program, which we continue to feel good about. Our teams are working really hard on it. But that's probably a three or four month slip from where we thought it would be when we gave up our guidance originally. So obviously we have a big team and we're going to retain that team and keep pressing on. But certainly that will result in you know, some, you know, more investment in our program, you know, before we get to a contract award. So that will weigh on Bell for the total year. So I think we'll probably get there on revenue, but, you know, we'll be on the lighter side of margin, you know, given that transition.
spk06: Maybe just to follow up on Bell, since you just mentioned it, you know, 22% decline, how much of that, or 23%, how much of that was due to supply chain, you know, and how, you know... How much of a decline should we expect in the second half? Is it still $3 billion feasible in terms of revenues?
spk11: Yeah, I think $3 billion is still feasible. And really, look, the split is going to be, in part, again, lower aftermarket on the military side, which is down. And that's kind of lumpy. It was actually pretty strong in the first quarter. It was pretty weak here in the second quarter. But I do think we'll see softness in that aftermarket side. But we'll see, I think, strong deliveries on the commercial side of the helicopter business that will, you know, partially offset that here in the third and fourth quarter.
spk06: Great. Thank you very much. Sure.
spk16: And our next question comes from the line of Ron Epstein with Bank of America. Please go ahead.
spk08: Oh, one moment. Brad?
spk16: Sorry about that. Please go ahead with your question.
spk07: Hi, it's Elizabeth. Can you hear me?
spk16: Yeah, we can hear you now.
spk07: Okay, great. Good, good. I'm on for Ron this morning. We noticed on your finance segment slide in your presentation that the 60 plus delinquency more than doubled quarter over quarter from 2 to 5 million. Is there anything to worry about there?
spk12: No, the finance segment's been performing very well, as you can see from, you know, kind of the earnings for finance. We continue to see good performance out of the portfolio. You know, kind of things come up from time to time where things move around, but the overall portfolio's performing well.
spk07: Great. Thank you very much.
spk08: And our next question comes from the line of Peter Arment with Baird.
spk15: Please go ahead. Yeah, thanks. Good morning, Scott and Frank. Nice results. Hey, Scott, your backlog continues to swell in aviation. You know, can you maybe talk a little bit about just how you think of managing that, you know, ramping that production? And you're obviously probably well into 2023 when you think about kind of delivery slots. Just maybe a little color there. That'd be helpful.
spk11: Sure, Peter. Look, I mean, obviously the demand's been really strong. That backlog is, you know, continuing to grow. It gives us really good visibility, which is terrific. Something we didn't have for a long time, as you know. So, yeah, we continue to work to, you know, to be able to ramp, and we'll continue to do that through the course of the year, and obviously we'll be needing to do that as we go into 2023. You know, we're working really hard on hiring on our end of things to bring staff on board and working with suppliers, you know, just to be able to meet that ramp. So, you know, we're making sure we're, you know, cautious about how we're committing to customers because we want to deliver on the dates that we'll say we'll deliver, but It's a headwind, and like I said, I think it will impact us this year on some deliveries that we would have originally had that will push off into the beginning of 2023, but our teams are obviously working every day on this stuff, and we are making progress with growing our workforce in-house, and we continue to work with our suppliers to help them meet that ramp as well. I don't think it's going to be easy, but clearly I think we have a line of sight to continue to increase our production rates as we go through the balance of this year and through 2023 as well. That's great.
spk15: And, Frank, do you have what the aftermarket growth number was in the quarter?
spk12: Yeah, it was 18% on aviation, 18%, and 33% of the revenues. Terrific. Thanks again for the results. Thanks, Frank.
spk16: And our next question comes from the line of David Strauss with Barclays. Please go ahead.
spk14: Great. Thanks, Maury. Morning. On Flora, what gives you confidence that we're actually going to see a decision here in October? I mean, we've seen several slips now. I guess what color can you give us around your confidence that we're actually going to get a decision here come the fall?
spk11: Well, obviously we've had, you know, ongoing interaction with the acquisition side of the Army. Everything is all obviously very quiet, you know, from a proposal evaluation stage. You know, the indications we get, you know, from the acquisition side are that they're going through their process and, you know, there haven't been data requests or, you know, proposal-related activity here for some time. So we know they're in their, you know, their detailed evaluation phase. You know, Secretary Bush, who we saw last week, indicated that, and he has said this publicly in several forums, that he expects that they're on track to make an announcement after the AUSA conference. That's, what, the 10th, 11th or so of October. So when he says that, we're kind of surmising that means sometime in that mid-late October timeframe. So that's what we're currently trying to factor into our plans and what we need to do to make sure that our team that's assembled, which are currently working, obviously, on the risk reduction program, know we'll continue to have activity and keep progressing this thing while they finish their evaluation but you know the dates i'm i'm quoting are again kind of publicly you know secretary bush has has made those statements and again i there's no indication from him when we met that there's anything other than just working through their process okay um frank couple questions um
spk14: How do you see, you know, you've raised your free cash flow guidance, but how do you see working kind of pieces of working capital, mainly inventory and advances going from here the rest of the year? And then any initial thoughts on pension for 23 given, you know, given asset returns and discount rates? It's a pretty big income item for you guys. Thanks.
spk12: Yeah. So on the cash flow side, you know, kind of we're consistent with where we had been. We continue to see good working capital performance. You know, the supply chain issues and, you know, kind of potential delays and deliveries obviously could create a little bit of pressure on the inventory side. But I don't expect that to be at all significant as we go into year end. But we obviously raise cash flow guidance, anticipating continued overall good working capital performance. And that's bolstered by strong order activity. and customer deposits, you know, frankly, both at Aviation and at Bell on the commercial side as well. So overall good cash flow performance so far year to date and expect that to continue through the remainder of the year. Look, on the pension side, it's, you know, kind of too early. I guess, you know, right now if you snap the line, The interest rate impact would more than offset the impact on the asset valuation side in terms of kind of creating any headwind associated with pension. So we have the potential for some additional tailwind given where things are right now as we move into 23 from pension. Great. Thank you.
spk16: And our next question comes from the line of George Shapiro with Shapiro Research. Please go ahead.
spk04: Good morning. Frank, quick one. Why would corporate expense so low in the quarter?
spk12: That has to do with the share price impact that, you know, kind of flows through corporate for our equity-related comp programs. So, you know, unfortunately we, you know, we saw a tough overall market and tough share price performance for us in the quarter. So that impacts that number. You know, I'd say in terms of overall for the year, you know, kind of given where the overall market environment is, we're probably 10 million-ish better, we expect, on corporate expense from an overall cost for the year. But, you know, that hopefully that number for, you know, kind of is not a sustainable quarterly number because of the share price performance.
spk04: Okay, and then you'd also mentioned that in Bell there was an adjustment, unfavorable adjustment. May, can you quantify that?
spk12: Yeah, we don't talk about that, you know, kind of by segments, but the comment related to we did see some unfavorable program adjustments this quarter, and when you compare that to a year ago, we had some favorable program adjustments. So, you know, the overall V between the two years um you know kind of created more negative program adjustment therefore so that's the nature of the comment you know overall expenses are down at bell anticipating the you know kind of the reduction uh in volume um but frankly volume is uh has come out a little faster than we anticipated and so it did have some negative impact on performance okay then for scott
spk04: In terms of the general aviation demand, did you see any changes as they went through the quarter? And is July continuing to be strong?
spk11: George, so far the market feels about the same. Demand is strong. It continues to be a strong business jet market in North America. In the quarter, we saw a significant pickup in international activity, particularly in our turboprop business. So strong international demand on King Airs, which certainly helps. You know, we see some more of the corporates, you know, coming back in as corporate flight activity picks up, but still seeing a lot of new entrants into the market as well. So I think that, you know, as we look at sort of how Q2 played out and, you know, continues now in the beginning of Q3 is indicative of, you know, really strong demand across, you know, the entire portfolio of products.
spk04: Okay. Thanks very much.
spk16: And our next question comes from the line of Noah with Goldman Sachs. Please go ahead.
spk10: Good morning, everyone. Scott, how are you going about deciding exactly where to lay the Cessna production and deliveries for the remainder of this year and next year?
spk11: Well, I mean, you know, for the most part, no, these are pretty well booked. So, you know, we know what commitments we've made to customers in terms of delivery dates. I mean, as you know, unlike it was for a long time, this is pretty well booked business. So we know the models, we know the makes, we know the interiors and colors. I mean, you know, we know what we've got to go do. That's not a problem. The challenge is just getting enough people and suppliers to deliver the parts and, you know, get the stuff in there and get it. get it produced. So it's a good problem to have, but it's still a problem, right? So we're working our way through that. And like I said, I think the performance of the business, despite a lot of those interruptions and disruptions, they're largely getting it done. I do think we'll have some aircraft slip out because of some particular supplier issues that we're not, you know, we just know their delivery dates aren't going to get there, but it's a relatively small number of aircraft. And Again, that's offset by a very strong aftermarket. The utilization of the aircraft is very high. That drives a lot of service business, which is great. And just overall, I think the business is performing really well.
spk10: You've had bookings in excess of revenue by about 50% several quarters in a row. The backlog isn't all new build, but just the implied bookings. It's running about $2 billion a quarter. Do you try to take the production system and the revenue to a place that would match some assumption of that order rate slowing down and try to get the revenue and the orders to land in the same run rate? Or do you want the orders to keep exceeding revenue and keep growing the backlog from here? Or can you just not even do that because it's customer-dependent?
spk11: Well, I mean, look, there's a lot of moving parts here, right? But, I mean, to be honest, if you had your dream, you'd have a one-to-one, right? You'd keep building and keep selling, and everything would be great. So, you know, obviously right now demand is stronger than that, which leads to that backlog going out further in time. You know, that's certainly not all bad, but it gives us visibility, and, you know, we'll plan a production rate. Again, we are increasing our production rates, and we'll continue to increase those rates, you know, in the next year. But look, we keep a close eye on that, right? Because in the end, this is about matching supply and demand. And I think, as we've talked about before, this is a business that should run off backlog, right? I mean, it's better for our customers. It's better for us. I think the whole market is in a better place when, you know, there's adequate time for people who have their aircraft to sell their aircraft and do their upgrades and have a better flow in manufacturing and customizations. So, look, a one-to-one is a healthy place to be. You know, you're You can't build backlog forever, obviously, right? I mean, you get to a point where somebody's not going to order an aircraft if it's not available for, you know, three or four years. And it's, you know, there's more customization and longer lead time probably in order cycle around some of the larger aircraft and smaller aircraft. So that, you know, you have that dynamic in there. But look, I think we're in a really good place. Obviously, we want to maintain a backlog and we need to balance it where it's a good spot for both ourselves and our customers. And I think that's where we are right now. So, yeah. Yeah, demand continues to grow, and so we will grow our production rate, but, you know, there's no objective to try to get this back to where you're not working off of a backlog. I don't think that's good for the business or the overall market.
spk10: Yeah, no, I meant it more, you know, anticipating a slowdown in the order rate and therefore keeping the supply tight, but... Well, look, the good news, though, is, I mean, we're out far enough that if you do see a slowdown at some point, you know, you can adjust that, right, and...
spk11: and that interview starts season out. Yeah, absolutely.
spk10: And then just on the margin, you know, it's another incremental that's well above that sort of longer term framework you have in the segment. Can you give us some color on how much of that is price versus absorption versus mix? And then, you know, where do you see that for the remainder of the year?
spk11: Well, look, I mean, I think we're still coming out of some you know, highly disruptive times when you look at the year over year, right? So we saw this in the first quarter as well. You know, price overinflation is good, and we've needed that in this industry, obviously, for a long time. So I think that, obviously, is a positive contributor. But, you know, I still think if you think about the long term, the gross margins, you know, the mix between original equipment and aftermarket, that this is a business that generally you should expect to see sort of that 20%, 25% We're a little stronger than that, coming off some pretty extraordinary times. But, you know, as we go forward, I think that's a reasonable expectation is that you generally will see somewhere in that 20%, 25% range.
spk10: Okay. Thank you. Sure.
spk16: And our next question comes from the line of Kai Von Rumer with Cowan. Please go ahead.
spk03: Yes. Thanks so much for taking the question. So, Scott, could you talk a little bit about supply chain, specifically at aviation, and also labor availability in the Wichita area? You seem to have obviously done pretty well. What kind of a challenge is it, and is it getting better or getting worse?
spk11: You know, Kai, it's kind of flat, right? I mean, on the labor front, look, we are making progress. But if I look at the ramp as we think about this year going into next year, we're looking to add you know, kind of net, you know, a hundred people or so a month. So that's, you know, we're running hiring fairs. We are seeing people coming back into the workforce. You know, we're, we're, we're working that, you know, hard. It's that, it's the entry level, you know, bringing new people in and, and obviously, you know, you've got training and development. So, you know, there's only so fast we can do it, but we're, we are working and like Wichita has always been a great place for us in terms of availability of labor and people that, you know, have good work ethic and stuff. So we're, We're continuing to work that, but it's a sizable number of people that we need to bring on board to support that ramp every month. So when you go to the supply chain, Kai, look, I think a lot of our smaller suppliers continue to struggle with a little COVID thing here and there. And when we have an issue and some people can't show up to work, we're big enough that we can kind of try to move people around and sort of keep things going. Not easy, but our guys do a pretty good job of that. you know, when you've got smaller suppliers and they lose a chunk of their workforce for a week, you know, they can, they'll, they slip a week on, on part availability. So again, our guys do everything they can to, you know, to manage those inefficiencies and do out of station work. And, you know, they're, they're constantly working this. So I don't think it's getting worse, but it's, you know, unfortunately we haven't seen it get dramatically better. And then, you know, you always have a couple of suppliers where, you know, what the lead times are, if they've had an issue or a problem, you know, we talked last time about some, you know, resourcing out of Russia and the U S manufacturers, you know, that's a, that's a discontinuity. That's the, you know, we'll, we will get caught up on some of that, but I do think it'll impact us, you know, in pushing some things into 2023. But again, none of all that, um, I think the business is performing really well, you know, despite those, those challenges.
spk03: Terrific. And you've owned Pipistrel now for a little over a quarter. Um, Could you give us some thoughts on where you plan on taking the products here? Specifically, you know, before Pipistrel, you had some VTOL designs. Do you hope to take their technology and pursue that area? You have the Nuva. You've got a number of potential opportunities. Maybe give us some color in terms of where you're thinking of taking that.
spk11: Sure, absolutely. Look, the Nuvo you just mentioned, we're very excited about that thing. They've done some good work in the past. That is one of the areas that we're adding R&D to try to accelerate that and get the first aircraft flying. I think when you think about unmanned, I actually think unmanned cargo is probably something that's a reasonable expectation for acceptance in the marketplace and growth, and that Nuvo is kind of a 1,000-pound aircraft. cargo kind of a crap. The guys are working hard on that right now. And again, that's an area where we've accelerated some of our investment to bring that to market. You talk about Nexus and sort of the eVTOL space. As we were talking about, Kai, I think that when we look at our company, we feel great about our aero and fatigue and structures and flight control guys. Obviously, these things look like, at least in our view, is sort of a mini uh, you know, tilt rotor kind of a technology. We actually do that. We have the right technical talent to pull that off. Our, our weak spot in terms of organic capability was around the powertrain and electric propulsion. And the, the, uh, pivotal guys are fantastic at that. You know, this is what they do. And so, you know, in that particular area on the VTOL, absolutely. We have, you know, that team now engaged in adding some resources to help our team in, in Wichita, uh, to, uh, to deal with the battery storage, battery energy, and electric propulsion trains that would support eVTOL. So I'd say so far, we've only owned them for a couple of months here. They've got some great current product line. You've got things like Pantera that have been sold previously under sort of experimental tickets. I think we have a great pathway for that to be a great airplane, part of our portfolio as a certified IFR aircraft. So again, areas where the teams that do that kind of work in, in Wichita are now helping the team in Slovenia on how do you lay out a product certification for an IFR aircraft. So far, I'd say the integration is going really, really well. The Pipistreaux folks have a fabulous engineering and technical base, and we're just growing that.
spk03: Okay. Terrific. Thank you very much.
spk16: And our next question comes from the line of Robert Stallard with Vertical Research. Please go ahead.
spk01: Thanks so much. Good morning. Scott, probably a question for you. Obviously, concerns out there about a slowing global economy. I was wondering if you'd seen any sign of this in your industrial division. And if this were to occur, switching over to aviation, how would you say the setup here differs from what you saw back in, say, 2007, 2008, peak of the last cycle?
spk11: Well, that was a great question. I mean, look, we haven't seen it yet. You know, I mean, I think, you know, we all kind of keep an eye on things and everyone sees some softness in some of the, you know, the, let's call it lower end retail sort of side of things. I think that makes a lot of sense. People are obviously putting a lot more cash into their gas tank that takes some of that discretionary spending away. But we keep a very close eye on this in terms of the demand, particularly in some of that industrial world. But we're still seeing a very strong demand environment. We continue to be gated more by supply chain issues and just getting product out there. Dealer inventories are still at very, very low levels. So we'll continue to keep a very close eye on it, obviously, but we're not seeing that change just yet. On the GA side, Robert, I think we have the situation today, having lived through that 2008-9, is just a totally different dynamic, right? You had a liquidity-based, you know, financial crisis. You know, today, I would argue we have absolutely the opposite of that, right? The world is awash in money. And I think, you know, if you go on the aviation side, you had political overhang back in 8-9, right, where, you know, it was bad to have a business jet. And today, you see, you know, a situation where you know, good, bad, or indifferent, the commercial airlines and, you know, the whole network of commercial travel is struggling. And you see people, you know, moving and be incentivized to move into the business, you know, aviation world. So the dynamic is just, you know, wildly different. I think the underlying economics are just totally different, right? You went from a liquidity problem to a world that's just awash in money. So totally different dynamics.
spk01: That's great. Thanks.
spk16: And our next question comes from the line of Pete Skibitsky with Alembic Global. Please go ahead.
spk09: Hey, good morning, guys. Question on systems. Sorry if I missed this, but are you still expecting 1.3 billion for the full year? And if so, which programs are going to ramp in the back half?
spk11: Well, I think that we'll, I'm not sure it's, It's probably going to be a one-two or something in that, Peter. I think we continue to see growth in our services business on adversary air. We're continuing to see growth in our weapons and munitions business as GBSD continues to ramp. We just mentioned an award on the XM-204. It's a program we've been working on for a very long time that's across some you know, obviously very important milestones here that will start to contribute growth to the business. So, you know, it's, it's, it's, it's across all the other segments, you know, the, the comparative that we've struggled with really has been, you know, this Afghanistan, you know, withdrawal. And I think you'll, again, you'll start to see this business pick up and go back into a growth mode here in the, in the latter part of the year driven by those, those programs.
spk09: Okay. And just last one for me, um, Much smaller program, but I'm just curious if you guys are tracking the SOCOM Armed Overwatch program, just because it seems like the type of thing that could be maybe leveraged internationally, and he just got the AT6 certified. So just wondering if you think that might be awarded this year and if it's going to be meaningful to you or not.
spk11: Well, look, it would be, Peter. I think that the Armed Overwatch, you know, our expectation is that that could be announced any day, any week. you know, here, you know, again, the Air Force is in their, you know, proposal evaluation, so all is quiet there, but, you know, they're going through their process. So, yeah, absolutely, I think that's something that will be, you know, announced in the pretty near future. But, you know, regardless, you know, the fact that we, you know, we did get the military type certification on the AT-6 is a big deal for us on the international markets. As you know, we've already taken our first orders for that because customers expected we would get the We have a large installed base and a very successful product in the T-6 on the trainer side of things. So an awful lot of customers have been in dialogue with us around their desire to go be able to transition from that T-6 into an AT-6 for their light attack aircraft. So I think that we see a bright future for that product. Now that we have the MTC, if we were to win the Armed Overwatch Program, that would obviously be a huge opportunity for us. But either way, I think, you know, we feel really good about where the AT6 is positioned going forward.
spk09: Great. Thank you. Sure.
spk16: And our next question comes from the line of Seth Seifman with JP Morgan. Please go ahead.
spk02: Okay. Thanks very much, and good morning, everyone. I was wondering if you could talk a little bit more about Bell and just kind of, you know, sort of the pace of recovery through the year, but also, you know, with H1 ramping down, just, you know, the extent to which the EBIT level that we saw in Q2, even though, you know, there was some one-time aspect to it, you know, to what extent does that become kind of, you know, a preview of 23, 24 as H-1 goes away, and we think about the transition potentially into FARA?
spk11: Well, I think what we saw this quarter is probably kind of where Bell's going to be here for a little while as we see those lower aftermarket military volumes. Again, we'll see commercial kicking in here with some increases on the revenue side. And obviously a lot of this will depend on where FLORA goes, right? So, you know, obviously we're optimistic about the program, but the Army, you know, it's their decision and hopefully we'll see that happen here in that October, you know, sort of timeframe because that's, you know, clearly that's really important for us, you know, for the future in terms of, you know, that program moving from the investment phase, which has, it has been now for almost a decade and move into a, you know, a real, a real program. So.
spk02: Okay, thanks. And then I apologize if you mentioned it, but I think, you know, you said a few deliveries might slip out due to supply chain issues in aviation. You know, if we thought that, you know, the target was kind of to get back to 2019 level of 206, should we still be thinking about, let's say, 200 deliveries? And do these supply chain issues have much impact on the quarterly cadence in the second half?
spk11: Look, I think it's going to be, you know, South of the numbers you're talking about here, we've never given the exact number, but like I say, I think you can expect that our original guide on the revenue is probably going to be short a couple hundred million dollars, but on the margin side, it's going to be north of our guide because, again, I think our business is, despite all these disruptions, is performing really well, very strong aftermarket. Frank mentioned really strong growth again in the So, you know, as you look through the balance of the year, I think aviation will continue to perform really, really well. But for sure, these supply chain issues are going to have a, you know, force a few aircraft out of the year.
spk02: Okay, great. Thanks very much. Sure.
spk16: And our next question comes from the line of Robert Spingarn with Milius. Please go ahead. Hey, good morning.
spk05: Good morning. Scott, on the slippage in the deliveries that we're just talking about here, you mentioned it's a lot of small suppliers, but are engines involved at all? Is there an engine shortfall? Sure. And so is that the dominant factor, or, again, it's across the airplane?
spk11: Well, it's across airplanes. I mean, the engine impact on one particular model is probably our single biggest impact, and, again, that's one we're – I think they're working really hard at trying to get this stuff back in. And I think, you know, the good news is in that particular case, the resourcing is well-defined. It's well-understood. It's someone who's built the part before. You know, I think there's a good path to getting back on track. But, you know, I just don't see that, you know, getting itself resolved and not impacting deliveries this year. But, you know, those are a couple moving into 2023. And, again, financially, we're going to be fine. You know, again, the business is performing really, really well. you know, the bigger issue for me is frankly, I got, I have some customers obviously that want their aircraft that are going to get pushed into, into next year as a, as a result of that. But I think the path to get that resolved is, uh, is, is quite clear. And it's been, it's been worked really hard. So, you know, the other craft, there's, you know, it's a couple of here, a couple of there, you know, it's, it's small, you know, there's just a lot of suppliers, a lot of issues. And it's a, it's a, it's a bit of a fight every day. So.
spk05: Right. And it looks like your pricing is, is outpacing inflation. Um, But if inflation continues to stay where it is or gets worse, are there any protections being built into the newer contracts?
spk11: No, look, we, I mean, most of our, you know, our aircraft, you know, these deals are negotiated. I mean, we know what the delivery dates are and our guys have put in appropriate, you know, you know, pricing associated with what our expectations are on the inflation side. So, you know, when we have, you know, the few deals we have that are kind of out there in time and, pre-negotiated take into consideration you know market pricing at the time so you know i think we feel like we have a you know adequate protection and adequate you know incorporation of of inflation going forward okay thanks so much sure and our next question comes from the line of christine lewag with morgan stanley please go ahead hey scott uh back on uh textron aviation i mean
spk00: You reported margins at 12%, the highest we've seen since 2008. And when we look back, it's really been 14, 15 years since we've seen a real light and mid-sized biz jet upcycle. At this point, you know, use inventories in your favor. You're getting pricing. You're getting orders. If we continue to see sustained demand and the supply chain issues ease, are there any structural differences in the business today that could prevent margins from going back to that mid to high teens that we saw in 07, 08 at some point? I mean, not this year, clearly, but, you know, at some point.
spk11: Look, I think, you know, the way we look at the market right now and the performance of the business and the mix of aftermarket and aircraft and all the programs, you know, the new models, I mean, obviously, we have a very different portfolio product today than we did back then as well. I think the cost structure of the business is really, really well managed. It's well aligned to what the volumes are. And so, certainly our expectation is that we'll continue to see positive margin progression as we go into the future. That's absolutely our plan. And look, as you said, it's been a long, hard fight from back in the 2008 days to get to where we are today. But this is kind of back to where you've got a business running the way it's supposed to be running and with a strong backlog like it's supposed to have. And the dynamics, as you mentioned, used aircraft available for sale are at record lows. being a real problem for quite a number of years. So look, I think the 12% margin, this is a spectacular business. And I do think we can continue to improve those margin rates as we go into future years.
spk00: Great. Thanks, Scott.
spk11: Sure.
spk16: And with that, there are no further questions for today's call. Today's conference will be available for replay after 11 a.m. Eastern today through October 27th. You may access the AT&T replay system at anytime by dialing 1-866-207-1041 entering the access code 545-6778. International participants may dial 402-970-0847. And those numbers again are 1-866-207-1041 and 970-0847, again entering the access code 545-6778. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Services. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-