Textron Inc.

Participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session. If you would like to ask a question, please press 1, then 0. You may remove yourself from queue by repeating the same 1-0 command. 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 $3.3 billion, up $265 million from last year's third quarter. Segment profit in the quarter was $332 million, up $60 million from the third quarter of 2022. During this year's third quarter, we reported income from continuing operations of $1.35 per share. Adjusted income from continuing operations, a non-GAAP measure, was $1.49 per share, compared to $1.15 per share in last year's third quarter. Manufacturing cash flow before pension contributions, a non-GAAP measure, total $205 million in the quarter, compared to $292 million in the third quarter of 2022. With that, I'll turn the call over to Scott. Thanks, Eric, and good morning, everyone.

The third quarter was a strong quarter for Textron, with revenues up at Aviation, Industrial, and Systems, while revenues were flat at Bell versus the prior year. At Aviation in the quarter, we delivered 39 jets, flat with last year, and 38 commercial turboprops, up from 33 in last year's third quarter. Aviation's solid demand across our jet and turboprop products resulted in our strongest order quarter of the year, with a 12% increase over the third quarter of 2022. Backlog grew $521 million, ending the third quarter at $7.4 billion. In the quarter, aviation announced a new fleet agreement with NetJets, extending our 40-plus year relationship and giving NetJets the option to purchase an additional 1,500 aircraft, including the Citation Latitude and Longitude, over the next 15 years. As part of this agreement, NetJets will also be the fleet launch customer for the newly announced Citation Ascend, which is expected to enter into service in 2025. Also in the quarter, Aviation received a special missions order for 17 King Air 360s to be used for flight inspection. Aviation also announced that Surf Air Mobility finalized its initial order for 20 Grand Caravans during the third quarter. On the new product front, Aviation wrapped up a successful NBAA show last week where we announced two new product upgrades, the Citation CJ3 Gen 2 and the Citation M2 Gen 2, continuing our strategy of modernizing our existing aircraft portfolio while also investing in clean sheet aircraft. Moving to Bell, overall revenues were flat in the quarter with improved margin performance. Bell had higher military revenues in the quarter, largely reflecting the continued ramp on the FLAR program. On the commercial side, Bell delivered 23 helicopters, down from 49 in last year's third quarter. The lower deliveries reflected manufacturing disruptions related to supply chain shortages. During the quarter, Iraq ordered 15 505 aircraft to replace their pilot trading fleet, continuing the success of the Bell 505 as a military trainer throughout the world. Textron Systems, we saw higher revenues and margins of the quarter. During the quarter, Systems Aerosol and Hybrid Quad was one of two competing unmanned aerial systems that were awarded the second option agreement for the Army's Future Tactical Unmanned Aircraft System, or FTOAS, program. Under the second option agreement, the two remaining competitors will work with the Army towards a critical design review, which includes establishing the final system design and initial product baseline. Also during the quarter, systems will be one of four competitors selected to build light robotic combat vehicle prototypes for the Army. Prototypes are expected to be delivered in 2024. Systems also expanded its aerosol and UAS operations with the U.S. Navy with an award of an additional three sea-based systems aboard littoral combat ships. Moving to industrial, we saw higher revenues in the quarter driven by higher volume in both specialized vehicles and Caltechs. In specialized vehicles, we continue to see strong demand in the fleet golf business. Within Caltechs, we saw increased volumes year over year driven by the recovery in the North American auto market. Moving to e-aviation, Pipistrel's Alpha Trainer continues to gain momentum with Mesa Air ordering 25 additional Alpha Trainer aircraft in the quarter for use in their pilot development program. Also, the first new prototype, our hybrid electric unmanned cargo VTOL aircraft, is currently undergoing systems integration and has completed the initial installation of the battery and motor systems. We expect the prototype to enter vehicle ground testing phases by the end of the year. With that, I'll turn the call over to Frank.

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.3 billion were up $171 million from last year's third quarter, reflecting higher volume and mix of $89 million and higher pricing of $82 million. Segment profit was $160 million in the third quarter, up $29 million from a year ago due to favorable pricing, net of inflation of $39 million, and a $23 million favorable impact from higher volume and mix, harshly offset by an unfavorable impact from performance of $33 million, largely related to supply chain and labor inefficiencies. Backlog in this segment ended the quarter at $7.4 billion. Moving to Bell, revenues were $754 million, flat with the third quarter of 2022, with lower commercial helicopter volume largely offset by higher military volume. Segment profit of $77 million was up $3 million from last year's third quarter, primarily due to favorable impact from performance of $23 million, largely reflecting lower research and development costs partially offset by lower volume and mix of $16 million. Backlog in the segment end of the quarter at $5.2 billion. At Textron Systems, revenues were $309 million, up $17 million from last year's third quarter, largely reflecting higher volume. Segment profit of $41 million was up $10 million compared with the third quarter of 2022, primarily due to a favorable impact from performance of $8 million. Backlog in the segment end of the quarter at $2 billion. Industrial revenues were $922 million, up $73 million from last year's third quarter, largely due to a higher volume and mix of $45 million at both product lines and an $18 million favorable impact from pricing. Segment profit of $51 million was up $15 million from the third quarter of 2022. Textron e-aviation segment revenues were $7 million, and segment loss was $19 million in the quarter, primarily reflecting research and development costs. Finance segment revenues were $13 million and profit was $22 million, up $15 million from last year's third quarter, largely due to a recovery of amounts that were previously written off related to one customer relationship. Moving below segment profit, corporate expenses were $38 million. Net interest expense was $11 million. LIFO inventory provision was $26 million. Intangible asset amortization was $10 million. and the non-service component of pension and post-retirement income was $59 million. In the quarter, we repurchased approximately 3.1 million shares, returning $235 million in cash to shareholders. Year-to-date, we've repurchased approximately 12.5 million shares, returning $885 million in cash to shareholders. To wrap up with guidance, we are increasing our expected full-year adjusted earnings per share to be in a range of $545 to $555, up from our prior range of 520 to 530. We also continue to expect full-year manufacturing cash flow before pension contributions of 900 million to a billion. That concludes our prepared remarks, so we can open the line for questions.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, you may press 1, then 0 on your telephone keypad. Our first question comes from Sheila Cayuga with Jefferies. Please go ahead. Good morning, guys.

Thank you. Maybe if we could talk about aviation to start, Scott. Competitors on pricing were mixed at NBAA, but aviation still books seven points of gross price, three points of net price. What are you seeing in your backlog in terms of pricing? And I know, you know, everyone wants to nitpick on your backlog, but it was still up 16%. How much of that included net jets?

Sure, Sheila. Look, I would say that the price environment continues to be strong. aircraft that are going into backlog continue to do so at good pricing, so we feel good about where that is in the marketplace. In terms of the net jets, obviously the extension of the contract that we've had with net jets for a long time for 1,500 additional aircraft is a huge deal for us. It's really important to the future of the business. As you know, that's a very diversified customer base. The business and the partnership that we have with net jets is very, very important to us. In terms of the impact in the quarter, it wasn't material. As you know, the way we treat the net jets in terms of backlog is that we're basically working with net jets all the time and looking about a year out, which is the timeline where they firm up the tails and put down deposits, and we commit the delivery dates to those aircraft. So every quarter, we sell aircraft to net jets, and we add additional jets into the backlog. So generally speaking, it's right around that one-to-one range. So You know, again, it's a huge, really important thing for the future of the business, but not something that, you know, materially impacted the backlog in the quarter.

No, that's helpful. And then if you could talk about bell margins. They posted another 10% margin. What's going on there, maybe in particular on the R&D side with FLORA and FARA now that you have iTech?

So, look, I think bell performance in terms of, you know, getting their numbers and getting volume coming in, particularly as the FLORA program ramps up, is helpful. R&D is certainly a tailwind for us, and that's helping us on the performance line. Largely driven by the fact that a year ago, we were still spending a good deal of our own IRAD money in programs like FLARA, which are now in the fully funded category. So we do still have work going on, obviously, with FAR. As you mentioned, we did get the engine this week, which is great. Our team will proceed now to get that installed and start running preliminary integration tests. We will need to be waiting for the Army to give the groundwork test release for that, and then ultimately the flight test release, you know, hopefully you'll get that aircraft flying in 2024. But, you know, performance was strong, and yes, for sure part of that is, you know, reduced IRAD spending as we now have more funded R&D under the FLAR program.

Thank you. Next we moved on, excuse me, we move on to David Strauss with Barclays. Please go ahead.

Thanks. Good morning. Scott, could you just maybe give a little bit more color on the supply chain issues at aviation? You know, the performance hit, I think, was the biggest that we've seen there. So are things getting better or worse? And is it engines or what other color can you give?

Well, look, David, I guess the color I would give is that, like, obviously the business, you know, pays a lot of attention and tracks things. you know, sort of trend data. And I would say that, you know, from a standpoint, is it getting better? The trend data would say, yes, it is getting better. You know, the number of parts that come in late to PO has been declining through the course of the year. They look at labor, effectivity, and, you know, efficiencies. That has been getting, you know, mostly better as we're going through the year. But it's still a problem, right? So, you know, I wouldn't say we have any one big, like, engine that's just driving this. But as you get towards the end of a quarter, if you're missing parts for aircraft, you still can't deliver that aircraft. So it is, I guess, getting better from a context of how many parts are late to PO, but parts are still late to PO. And as we often say, David, every part is important on an airplane. So we're continuing to see that challenge across a number of aircraft types. You know, I think it will continue to help. We certainly expect it to get better as we go through time, but it's going to be something we're going to be fighting our way through. But, you know, I guess the only other point I have is despite all that, I mean, we obviously would like to have delivered some more aircraft in the quarter. And in particular, we have customers that would like to see us deliver those aircraft in the quarter. You know, but despite all that and the challenges and the headwinds around labor and supply, we're still posting, you know, strong growth in the business and good strong margin expansion in the business. So I think despite a lot of these headwinds, The business performs very well. It's growing, and it's continuing to drive improved profitability.

Okay. Maybe, Scott, if you could just level set us what we should expect for full-year deliveries. Are we looking more kind of 175 to 180 in that range?

Well, we're probably not going to give exact aircraft numbers, David, but it's going to be in that neighborhood, I would expect. All right. Great.

Thanks very much.

Next, we move on to Noah Poponek with Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Scott, maybe you could just spend another minute on the demand environment. In aviation and in the business jet market, it's a pretty strong bookings number with a decent amount of uncertainty out there. What are your customers saying? How much of that is just replacement? Do they have to do it kind of you know, in a wide range of macro scenarios. How's October? We'd just love to hear some more color from you.

Sure. Oh, look, no, the demand environment continues to be strong. I mean, this is a really strong, you know, a book to build, very strong, and just an absolute, you know, dollar flow of order activity in the quarter. So we just haven't seen it slowing down. You know, people are, you are buying aircraft. Are they replacing older aircraft? Absolutely. In some cases, are they expanding fleet capacity? Absolutely. We continue to see strong demand. Obviously, part of the rationale behind the NETSHIP program is they continue to see very strong demand on the fractional side. It's really across the board. It's typical of what we've been seeing for a while. It's very strong demand. you know, jets in the U.S., although there's certainly, you know, some good order activity with jets outside the U.S. It's very strong across the turboprop product lines and both the King Airs, obviously, we have the Skycar, and caravans continue to perform well. So it just continues to be a strong demand environment.

Okay. And then just on the margin in aviation, recognizing your point that it has expanded quite a bit from the trough, It's down sequentially in the incremental, the year-over-year incremental, I think, is a little light of what you normally look for despite, you know, healthy units and price. So anything to note there? And I guess what do we look for for the aviation margin to finish the year and maybe into next year?

Well, I think we're going to continue to see strong margin performance, Noah. You know, we, without a doubt, are still being impacted by performance issues just the amount of inefficiencies that are driven by those parts that are showing up late and labor turnover, which I think everybody's experiencing. It's a challenge in the industry still, and we're going to continue to fight our way through it. But I think we'll continue to do that with very healthy margins.

Can you be through that in full year 2024 numbers, or are you likely to still be battling that into next year?

Oh, I think we're going to battle that into next year. So Like you know, fourth quarter is traditionally a very high-delivery quarter. I expect that it will be a high-delivery quarter, and we'll see conversion that will give us some additional margin is typical for us in Q4, and I would certainly expect that. I think we're going to continue to fight this as we go into next year. But again, obviously we're not going to get the guidance just yet on 2024, but I think as we've seen in 2023, people should expect the business to deliver solid growth and strong margins.

Okay, thank you.

Next we go to Doug Harned with Bernstein. Please go ahead.

Good morning, thank you. I wanted to continue on the strong backlog topic. When you started the year, it looked like, I think you were thinking kind of a one-to-one book to bill for the year, and clearly it's been much better than that. Can you talk about how your expectations have changed over time. And has the mix shifted at all?

You know, no, it really hasn't. Look, I mean, we did sort of set our base plan expecting kind of a one-to-one. And look, I think eventually the industry has to get the one-to-one. I don't really think it can continue to to exceed that much for that long. But obviously our sales teams are out there and customer demand is what it is. So if it's greater than one-to-one, obviously that's terrific for the business. And as you note, we have seen that through the course of the year. So we'll continue to kind of plan and look at production volumes and adjust accordingly as we go forward. But the mix isn't markedly different. As I said, we're still seeing strong jet demand. We're seeing across all the turbo product lines We're seeing it virtually across all of our different aircraft types. Obviously, it's helped by having some new aircraft like the Skycar out there. It's helped by having some of these upgrade programs, which always stimulates the market when you do a next version of a CJ-3, a next version of an M2. We have this end announced out there. So there's a lot of things we're obviously doing to invest in the product line to kind of continue to help drive that demand in the market. But you know, for sure versus our estimation at the beginning of the year, one-to-one, the end market continues to be stronger than even we would have expected, which is obviously a positive.

Yeah, it is a positive, but I'm also, I'm interested in how you deal with this because you have delays, some delivery delays with the supply chain. You've got this huge backlog. I mean, how far out are you scheduling deliveries now? And do you start to run into a an issue here if this were to continue? Because as you say, ultimately, you'd be at one-to-one at some point.

Yeah. Well, we obviously continue to work with our supply chain to try to make necessary adjustments. And as I said, I think that the trend line is improving, but it still comes down to a part. So I'm missing a few parts. I can't deliver an aircraft. If I'm missing one part, I can't deliver an aircraft. So it is still a problem, but I do think it's trending in the right way. Obviously, as we adjust and think about our production rates going forward, we're working with those suppliers, you know, to kind of forecast to them how we're going to adjust our rates into the future. But that's a real-time activity, right? That's going on all the time. So, you know, as I kind of indicated earlier, I think we will expect to see, you know, increased deliveries, you know, again in 2024 versus 2023. And that's, you know, partly the stronger demand and it's partly, you know, getting some of these supply chain issues resolved and getting back to where we can make you know, generate additional volume out of the factory.

Okay, very good. Thank you.

Next, we go to the line of George Shapiro with Shapiro Research. Please go ahead.

Yes, good morning. Morning, George. Maybe this one for Frank. The increase in guidance, I mean, this quarter you got a big benefit from finance, somewhat offset, I guess, but e-aviation being worse than what I would have expected, and a lower tax rate. Was there operational benefits in that EPS increase you got, or was it mainly these items I just mentioned?

No, we're seeing, as Scott said, I mean, we're seeing strong performance across Bell, and so, you know, kind of I think Bell's going to come in at higher margins than we would have originally guided. We're seeing strong performance at systems. they'll be at least the top end of our original guidance range. We're seeing, frankly, better volumes and solid and strong margin performance in the industrial segment. And then at aviation, we're also seeing, despite some of the volume headwinds, we're seeing strong profit growth and kind of strong overall year-over-year growth. So those are certainly the operational aspects. TFC is an operational thing. It was a recovery from a write-off from many years ago, so a good, solid performance out of the businesses.

Okay, and Scott, on the last call, I think there was a comment that maybe deliveries would be higher, closer to somewhere in the 40s from what we saw this quarter, so I assume that's all supply chain. I mean, is that going to continue in the fourth quarter as well, so we'll see strong deliveries, but maybe less than what we would have thought six months ago, and does that bode for next year being a lot bigger than what you might have thought before?

Well, I would say, George, that for sure we are delivering fewer aircraft than we originally expected, and that is as a result of these issues and challenges that we're still seeing in the supply chain. We have forecasted, and just the way we run our manufacturing operations, obviously we took down some of the units to accommodate that, You know, did we have aircraft that moved from Q3 to Q4 this year? Absolutely. You know, do I think we'll have aircraft that will move from Q4 to Q1? Absolutely. You know, again, how much of that is, you know, is our aircraft that you would add on to what we were originally planning in our 2024 guide versus where we'll be? You know, I mean, that'll all be incorporated into what we guide when we get into 2024, George. So, And again, we're not at a point to do that. We're still working, you know, through all those kind of numbers. But the only color I would give you is expect that, you know, you certainly would expect to see, you know, good growth and over the 2023 numbers. So, you know, for sure, you know, be it just overall demand or things, you know, that are moving from 23 to 24, 24 should be a strong year for us.

Okay. Thanks very much.

Next, we move on to Kaivon Rumer with TD Cohen. Please go ahead.

Yes, thank you so much and good quarter. Frank, could you maybe talk a little bit about do we see, you know, do you get any benefit out of the latest IRS clarification of Section 174? And should we be concerned about pension being a significant headwind next year?

On the 174, we had been following, you know, kind of what the guidance clarification resulted in. So there's no change from a cash tax standpoint. With regard to pension, you know, as you know, we'll go through our year-end process around that. I would not expect it to be a headwind. So I think that, you know, kind of we shouldn't have a problem with pensions and, you know, from a headwind standpoint as we move into 24-4.

Got it. Okay. And then, Scott, strategically, I mean, you've announced a couple of new updates at NBAA, but, you know, you haven't done a major new clean sheet in a while, and not that the rest of your competitors have done anything. But what's your thinking looking out a couple of years? Obviously, you've got, you know, good demand now. You've got some nice smaller new products coming. but do you think that, you know, you need to start something bigger, you know, for the next three to five years?

Well, I think where we are right now, Kai, I mean, obviously we've just come up with the SkyCurrier program. We had Denali, which is, you know, in certification. That's coming along very nicely. I think that'll be a spectacular product for us. You know, we did just announce the Ascend, which is a pretty big program. You know, that's, you know, and so I think, You know, I guess, you know, strategically, Kai, I think where we are on the, you know, sort of that latitude-longitude family are in really good shape. Those are both relatively, you know, new aircraft. Certainly there will be upgrades and enhancements to those programs as we go down the line. But, you know, we sort of have turned from, you know, a long period of time, a decade really, of making major investments in those aircraft. you know, mid to super mid, you know, aircraft and have gone back now and, you know, made some pretty good investments in, you know, some of the turboprop, you know, family. And, you know, again, that light to midsize jet Ascend, I think is going to be a fabulous product for us. That kind of fits that space where the XLS has lived and the XL before that for many years, home run, you know, product for us. And I think the Ascend is going to be, you know, kind of filling those shoes. So, We're really excited about that. And again, Denali is going to be a great product. That's, I think, doing well here going through the certification process right now. So we're always, as you know, there's always stuff on the drawing board and ideas and plans that we're always working on. But we don't have any new announcements for you beyond that stuff. We're pretty full up right now, actually.

Thank you very much.

Next, we move on to Robert Stollard with Vertical Research. Please go ahead.

Thanks so much. Good morning. Good morning. Scott, there's some concerns yet again about the outlook for the economy and higher interest rates and all that. And I was wondering, in the aviation division, have you seen any of your customers starting to get a little more concerned about their ability to take jets and trying to defer things?

No, we really haven't, Robert. It's been... You know, I mean, if there's been a cancellation here or there, it's none that I'm even aware of here lately. I think the demand is strong. And, look, people are thinking about, you know, what could you be a 12, 18-month, you know, softness in the economy. You know, the reality is right now people are talking about deliveries that are out way beyond that just because of the nature of the backlog. So I don't think, you know, we certainly have not seen any impacts of this, you know, short-sighted kind of, hey guys, what's going to happen in the economy in the next, you know, 18-month window, the deliveries, people are taking their aircraft, we haven't seen any problems there. And again, from an order perspective, you know, they're out way beyond that period that might be of any concern.

Yeah. And then similarly on the industrial side of things, what sort of demand pool are you getting from your customers at both Caltechs and Specialized Vehicles?

Well, we've been seeing a very strong year. The Caltech side of things, North American in particular, has been growing. Europe has been growing. So we've seen nice increases in volume growth here in 2023. I expect we'll see that continue in 2024. Obviously, everybody was a little bit worried about the UAW situation. I see this morning it looks like Ford has got a tentative agreement, which is great. We haven't seen much impact from that, you know, yet, and hopefully this will get resolved before it has any kind of material impact to us. We're pretty diversified in terms of the OEMs that we serve, you know, and particularly in North America, a lot of the, you know, the Toyotas and the BMWs, Mercedes, you know, that are in the southern part of the country. So anyway, the volume does continue to grow at Caltechs. We've seen nice volume growth in the vehicle business as well. So for sure, we pay close attention to, you know, sort of the high-end consumer. If you're going to have a slowdown, you know, adjust accordingly. But, you know, all in all, the golf market, the commercial market, you know, it's staying strong. Even the consumer market, which, you know, it's not as strong as it was, as you see most people in, say, 21, 22, but its volumes are still quite strong, you know, on a historical basis. So I think the business, and that's a lot of the, you know, the intersection of all those things is what's been driving nice growth for us. That's great.

Next call.

Next, we move on to Christine Leeweg with Morgan Stanley. Please go ahead.

Hey, good morning, everyone.

Good morning.

You know, Scott, you know, and Frank, you know, leverage in the balance sheet is pretty low at less than one turn of EBITDA. You know, free cash flow is pretty solid. You've mentioned the demand environment is strong. I guess, you know, looking at the stability and the strength of your businesses, what's your appetite for either an incremental outsized capital return to shareholders in excess of your existing share purchase plan or some sort of transformative deal?

Well, look, Christy, you know, clearly our focus and what we've communicated and what we've been executing on and did again here in the third quarter is really focusing our capital returns around share buybacks. We continue to do that here in the third quarter, so it was another quarter of strong returns. Obviously, we agree. I mean, I think our balance sheet is a good place. We're generating strong cash flows, and we'll continue to use that on the share buyback. In terms of any acquisition opportunity, look, we're always keeping an eye out for things, and if there's something that makes sense for us, obviously, we have a balance sheet and an ability that we can do that. Obviously, we'd have to you know, convince ourselves that that's something that's, that's good for our shareholders. And, um, there have been a couple of deals out there where we concluded that wouldn't be the right thing, but you know, we, we certainly always keep an eye out, um, and contrast that versus just continuing the share buyback program, which I think has been very successful.

Great. And maybe, you know, following up on what we've seen in the industry, Amber Air signed a 20 year licensing agreement to service Pratt's GTF engines, including the Airbus AP20neo. Considering your strength, uh, in services for business jets. What's your appetite to join that engine MRO ecosystem and expand your addressable market?

I don't know all the details of that. I mean, obviously, we work very, very closely with our engine suppliers and making sure that there's great MRO capability for them. Obviously, there's engine programs, which we you know, promote with those suppliers. But I mean, we love our service business. Our service business has been growing. As you know, over the last decade, we've taken a lot of this and do a lot more direct service around our aircraft, you know, than we used to do. And that's been a big success for us. But getting into the engine MRO business is not something that I think would make any it would make any sense for us. You know, I mean, I know a fair bit about the engine world. The value in, in engine overhaul is in the parts and those parts come from those, uh, those suppliers. So I think that's probably best left to, uh, to them to manage.

Great. Thank you for the color.

Sure. Next we go to Jason Gursky with city. Please go ahead.

Yeah. Good morning. Hey, Scott is wondering if I could get you to just, uh, put aside the, um, supply chain issues for a moment and just assume that they weren't there and talk a little bit about what you're hearing from your customer in aviation and how long customers seem like they're willing to wait for a jet. And if you all could just kind of wave a magic wand and get your production to the right level for the right wait time for those customers, what would that wait time be? If we're two-plus years today and we were less than 12 months prior to the pandemic, what's the right level that we should all be thinking about as things kind of settle out?

Well, look, it's a good question. There's no way to know totally the answer to that. I mean, there's no question that right now we have customers that would like to see us have delivery dates earlier than what we're able to promise them. I mean, that's true. I think that obviously this adjustment that's going on is that I think obviously for a decade or so, customers knew they could come in when they wanted to get a new aircraft and get something delivered in a very short period of time. That wasn't true historically, as you know, and it's certainly not true today. you know, I do think that, you know, we've gone through, you know, some challenging phases with customers who are kind of accustomed to say, well, geez, I should be able to get that, you know, in six, you know, three months or six months and say, no, our guys actually, it's a couple of years. But I think the market is adjusting to that, right? Customers know what the order backlogs look like in the industry. And people now realize that, you know, if you're you're thinking about your fleet planning, you're thinking about your current aircraft, and when you're going to want to do an upgrade, that you need to be thinking about that being a couple years out, not something that you just, you know, could come in inside of a quarter or even inside of a year and get a transaction done. So, you know, I think we're probably on the, certainly at a point where customers would like earlier delivery dates and what we can promise them, but I think customers are getting accustomed to the fact that this is a couple year kind of a timeline and they need to plan accordingly. which frankly is not all bad for them either because then they can think about how they plan the sale of their used aircraft. It's a much more, it's a better market environment for everybody, including, you know, those buyers because so many of them currently own an aircraft. I don't know if that helps you because, I mean, there's not really a specific answer here, but two years is a long time, but, you know, people have to kind of plan accordingly at this stage of the year. Yeah, yeah.

I think what a lot of us are trying to figure out is, you know, once these supply chain issues work their way through, you know, how much we might see production rates across the industry come up over time. If we're two years now, it's the sweet spot 18 months, and we can kind of back into what that would mean from a production rate perspective. I think it's what we're all trying to better understand.

Yeah, that math is too sophisticated for me.

Maybe an easier one then. Can you talk a little bit about the margin and the margin opportunity in that business over the longer term based on new product offerings and product development things that you're working on today? Just whether there's any structural opportunity for margins in that business over the longer term. Thanks.

Well, look, I mean, I think we still have margin opportunity. You know, I mean, this business should be a high single-digit, you know, margin. I mean, it's got a lot of auto in there. Caltex is a good business. It generates good cash. It generates good margin. But, you know, we're obviously right now, you know, you're still trying to get some of the auto volumes, you know, back up, you know, around the world. And, you know, we have obviously capacity to do that. So better utilization, you know, more efficient utilization of some of that. capacity would be would obviously be helpful and that's part of what's driving the margin you know improving this year you know the same is true in the in the uh in the vehicle business you know we've touched strong demand across most of those product lines some of them are still recovering from some of the postcode some of them still are struggling with you know a lot of the same kinds of supplier you know labor challenges that we talk about in aviation um and that's you know we're still you know have a fair bit of inefficiencies in some of those factories as we manage our way through that. So I do think there's still some upside in terms of margins in the future. Okay, great. Thank you very much.

Next, we move on to Miles Walton with Wolf Research. Please go ahead.

Thanks. Good morning. Hey, Scott. I was hoping to lead off on the NetJets agreement, and I realize it's not in backlog, so maybe this is a little bit of a cart in front of the horse, but when you sign up to deliver or grip on 1,500 jets over 15 years in a preinflationary market. I imagine that's probably a little bit more straightforward, maybe. I just wonder, how do you do that in a very volatile, potentially inflationary backdrop? How do you put the constraints and guardrails in place on those realized sale prices? And just to confirm, does this start to fold in in 2025?

So like I want probably might as well go into all of the, the, the gory details of the arrangement, but you know, we've always worked with, you know, there's always been a factor in how we work with net jets that, you know, takes into consideration market pricing. So it's not something that's a, you know, a fixed price 15 year thing. I mean, nobody could do that. I mean, you know, in the industry. So, you know, there's adjustments that are made that have to do with market pricing. That's a, you know, frankly, you know, a very fair, equitable deal. Um, because again, you, you really have to think of, of net jets, you know, I mean, they're out selling aircraft into this marketplace. So we, you know, um, oh, the, the, the, you think about all the guys almost as a wholesaling, right. Of these aircraft, you know, to net jets. And then they, you know, they have a, a spread for covering their costs and sales and, and, and running their business. So, There is a market adjustment scheme that's incorporated into this thing, so nobody's trying to sit down and imagine what pricing is 15 years from now.

And then in terms of the initiation of the contract, is it at 25 start deliveries with the last one running through 24?

Yeah, I think that's about right. I mean, again, it's an add-on, right? So it extends the agreement we already have, and we sit down obviously every quarter and sort of true up what's that deliveries that are a year out. But yeah, I think if you looked at how many aircraft were left on the old agreement versus the new agreement, it's kind of phasing kind of 24, 25 timeframe. Okay, cool.

And then, Frank, just to clean up, can you level set us on interest and tax rate for the year at this point, given we only have a quarter left?

Yeah, interest is, expense is going to come in a little better than we had originally guided, just given what's going on with, frankly, our investment in our cash balances. and tax is probably going to be a little bit better also than we had guided, maybe a point better than our original guidance. Okay.

All right. Thanks, guys.

Next we move on to Peter Arment with Baird. Please go ahead.

Yeah, good morning, Scott and Frank. Nice results. Scott, on systems, the performance there continues to be really, really good, and there was obviously a bullish tone down at AUSA around, just a lot of the modernization efforts. How are you feeling about the kind of visibility of that business going forward?

Oh, Peter, I think they're in a very good place. You know, I mean, a lot of the things that we've been working on for a very long time are starting to kind of come to roost. You know, we had a nice, strong growth in the quarter. That's driven by things like XM250, which, as you know, were sort of decade-long investments in IRAD for some of these new munition systems, which are doing well. The Sentinel program, obviously, we're one of the partners with Northrop Grumman. That program continues to grow nicely. We had some very important down selects here just in this quarter around the RCV program with the Army, the ARV program with the Marine Corps, the FCUS down select with the Army. I think the business is performing well. The margins are strong. We've got this business back into a growth mode and we have several additional opportunities out there that are material Um, you know, do you win all of them or not? I don't know, but I mean, we have, you know, probably four or five pretty significant opportunities that will, you know, we'll close here over the next couple of years. So I think the businesses is executing well, they're delivering on their existing programs very well. And I think they've got a lot of, uh, pretty significant growth opportunities that we've been, you know, are, are, are clearly in the pipeline.

Appreciate that call. And then just Frank, just a quick one on, do you have the, um, what services growth was for in aviation for the quarter?

Yeah, it was 3%, and aftermarket was 33% of SIP revenue for the quarter. Appreciate it. Thanks, guys.

Next, we go to Ron Epstein with Bank of America.

Please go ahead. Hey. Good morning, guys. Morning, Ron. Excuse me. The industrials business did well. So my question is this. In the past, Scott, I think you've intimated or maybe more direct than that, that it's not core? Is that still how you're thinking about it or not? I mean, how do we think about the industrials business in the context of the kind of greater text run, which seems to be evolving quickly towards a bigger A&D company?

The way we're looking at industrial right now is providing good growth and strong performance improvements and generating good cash. That's how we think about it. Is it core? Is it not core? We've never defined core or non-core. I certainly have never said that. What we have said, Ron, is that when we think about M&A activity in the company, we certainly would view that the places that we would add additional capital would probably be in our aerospace and defense areas. you know, portfolio. And that's kind of how we look at the M&A world as opposed to thinking that we should increase the size of our industrial business. But certainly to the extent that we can drive organic growth in these businesses, you know, and make smart investments and generate good returns for shareholders, I think that's, you know, the best thing we can do for the shareholders is make sure those businesses are performing as well as they can perform. Yeah, fair enough.

And then on the M&A front, like you mentioned, What's it like out there right now? Are there opportunities? Are there directions that you want to go in terms of A and D? Are you more A-focused or D-focused or agnostic?

Probably agnostic. We've done some small deals here in recent times, largely around expanding some of our services footprint. Obviously, we did the Pipistrel deal, which has turned out to be, I think, a great acquisition for us to help you know, grow our focus in, you know, the future for our e-aviation business. Obviously, there's some opportunities there that could be massive opportunities in the future or not. You know, we don't know, but I think that's a nice acquisition that's given us some real additional capability, you know, in the company. Again, as I said, you know, most of what we look at in terms of any material M&As in that A&D space, you know, as you know, Ron, deals only come along so often, so you kind of keep an eye out and, you know, you know, look at things as they come down the pike. So we'll, you know, that's what we've been doing and we'll continue to do that. And if something makes sense that we think is a great deal and be good for our shareholders, then we would certainly, you know, be willing to participate in that. We obviously have the capacity to do, you know, a fairly material deal, but it has to be something that, you know, financially makes sense.

Got it. All right, cool. Thank you. Sure.

Our next question is from Pete Skibitsky with Olympic Global. Please go ahead.

Yeah, good morning, guys. I just want to follow up on Miles' question and maybe see if we can get into the gory details of the NetJet deal a little bit. But my main question is, Scott, is there a minimum number of aircraft that they're obligated to take each year under this deal? And if so, how does that compare to the prior deal?

No, they don't. The relationship and the way this works is that You know, I mean, our friends at NetJets are out every day selling aircraft, and they're selling those shares. And, by the way, I think that's a very robust, strong market right now, which is fabulous. But they sit down, you know, with us in real time. I mean, every quarter looking out a year out and, you know, given where the market is and what sales activity looks like, what their pipeline looks like, you know, firming up, you know, those aircraft that are going to deliver in, you know, roughly that one-year window. So when the market is strong and they're selling, you expect that thing to continue to grow. If there was a slowdown, then you'd expect to see that number come down. So it's a total 100% alignment around that end market.

Okay. And how do you think about the high end? I mean, on average, 100 aircraft a year would be more than 50% of your deliveries this year. How do you think about contemplating that? if you could ever get to the high end of that deal?

Well, again, that's based on the end market, right? I mean, if the end market can usually be that robust, but I would, I guess what I would say is if the end market is going to be that robust on the fractional side and all likelihood is also going to be that robust in the, in the whole aircraft side. So you'd have to expect to see overall production output growing, you know, not locked into where it is in the 2023 number.

Right. Fair enough. Fair enough. Okay. Thank you guys. Sure.

And we have a follow-up from David Strauss with Barclays. Please go ahead.

Hey, David.

Hey, thanks. Just wanted to ask specifically on FLORA. I think you guys have talked about getting to kind of $800 million to $900 million annual revenue run rate on FLORA. Are you fully ramped to that rate in Q3? And if not, did that have something to do with You know, the Bell margin holding up, I think, certainly better than we had thought.

No, I wouldn't say there's a margin impact to it, but certainly we're not ramped to that rate yet, David. I mean, that will grow here as we go through, you know, 23 to 24. I would say the ramp is going well. You know, I mean, a lot of our internal resources, ramping up the engineering activity is happening here. at a pretty good clip. But, you know, obviously a lot of that is also, you know, getting all of our suppliers on board and, you know, getting a lot of the, you know, key partners, you know, ramped up. It took some time, you know, from the original contract award to get those guys onto contract. So, you know, as you go through the rest of this year and particularly as you grow, you know, into 2024, there's the inside, you know, kind of bell heads, if you will. You know, but there's also a lot of ramp, you know, that's the pass-through to our partners on the program as well.

Okay. And I apologize if you've already touched on this and I missed it, but the supply chain issues that you called out on the commercial helicopter side, how do those compare to kind of what you're seeing on the aviation or jet side? I think you hadn't really highlighted supply chain as a challenge on the Bell commercial side prior to today.

Yeah, it's very similar issues, David. I mean, they're It's very similar issues.

Okay. All right. Thanks very much. Sure.

And we have a follow-up from Kai Von Rumer with TD Cohen. Please go ahead.

Yes. Thank you very much. So, you know, your deliveries were down 50% at Bell and Commercial. Maybe give us some color on like what's the demand there and what should we look like in the fourth quarter? Because your original guidance assumes a very big step up that looks like it's going to be tough to hit. And, you know, you also had talked about margins kind of coming down as FLORA effort ramped and maybe some color in terms of where the margins could be. Thanks.

Uh, yeah, I'm not sure I have a whole lot of additional color on the, on the, on the margin side, Kyle, that we certainly expected to be, you know, given the performance through the course of the year, that it'll be over the, over the top end of what we originally guided. So I think we still feel that the bell will finish out a very strong year, but the numbers are, are, are significant. And I appreciate that. And it certainly looks like a big ramp. The, you know, we've had a couple issues very specific around our five Oh five, which is a, you know, fairly high volume product, you know, but a relatively speaking, you know, lower dollar per unit, you know, volume. So a lot of the numbers miss and a lot of the challenge, frankly, in Q4 in terms of the units is around those 505s. So obviously we'd like to get them out. Customers want us to get them out, you know, but the miss on a, you know, on a number of those, you know, very light, you know, helicopters won't have a big material impact to the performance overall at Bell.

Thank you.

And ladies and gentlemen, that does conclude the Q&A portion of today's conference. If you would like to access the digitized replay of this call, it will be available after 10 a.m. Eastern Time today through October 26, 2024 at midnight. You may access the replay by calling 866-207-1041 or 402-9700. and use the access code 595-1112. Again, that's 866-207-1041 or 402-970-0847 with the access code 595-1112. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.

We're sorry. Your conference is ending now. Please hang up.