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spk04: At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press 1, then 0. If you should require assistance during the call, please press star, then 0. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. Dave Rosenberg. Please go ahead.
spk18: Thanks, Greg, 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 $3.5 billion, up from $3.4 billion in last year's second quarter. During this year's second quarter, adjusted income from continuing operations was $1.54 per share, compared to $1.46 per share in last year's second quarter. Manufacturing cash flow before pension contributions totaled $320 million in the quarter, compared to $242 million in the second quarter of 2023. With that, I'll turn the call over to Scott.
spk15: Thanks, David. Good morning, everyone. Aviation has higher segment revenues of $1.5 billion, generating a profit of $195 million, up $24 million from the second quarter of 2023. We delivered 44 commercial turboprops up from 37 last year and 42 jets down from 44 in last year's second quarter, while aftermarket revenues grew 13%. Aviation continued to see strong demand across all product lines. Backlog ended the quarter at $7.5 billion, up $118 million from the first quarter of this year. In the quarter, aviation began deliveries of the King Air 260 under the Multi-Engine Training Systems Contract for the U.S. Navy. To date, we've been awarded 35 aircraft, with a possible 64 on the program. Also during the quarter, aviation certified a third variant of the Cessna SkyCourier. The combi version allows operators to transport passengers and cargo simultaneously. Combined with the previously certified passenger and cargo variants, this latest variant continues to demonstrate the versatility of the aircraft to our customers. In June, aviation completed the first flight of a Cessna Citation Ascend. The aircraft is the first conforming production flight test aircraft and represents a significant milestone for the program. To date, we have completed over 400 hours of flight testing. At Bell, revenues and profit in the quarter were up as compared to the second quarter last year. On the commercial side, Bell delivered 32 helicopters, down from 35 in last year's second quarter. Moving to military, Bell completed the FLARA preliminary design review, while also continuing to release engineering drawings and place orders for long-leaning material as the program continues to ramp. In the quarter, Bell was down-selected as one of two companies for the next phase of DARPA's Speed and Runway Independent Technologies X-Plane program to create a prototype high-speed vertical takeoff and landing aircraft for the U.S. military. This program builds on Bell's success as the leader in tiltrotor technology. Textron Systems realized higher revenues while continuing to pursue new program opportunities in the quarter. Systems was awarded options three and four for the FTOAS program in the second quarter. This award includes the delivery of an aerosol and hybrid quad system to the U.S. Army for test and evaluation. As part of the Army's robotic combat vehicle competition, we announced a collaboration with Kodiak Robotics. Kodiak will integrate its industry-leading autonomous system into a Textron Systems purpose-built uncrewed military vehicle to demonstrate the autonomous operations later in 2024. Moving to industrial, we experienced lower revenues and operating profit in the quarter. As expected, we continue to see softer demand in our consumer and automotive end markets. We continue to execute on our cost reduction plan to position the cost structure for a lower-volume environment. As a result, we saw a sequential margin of improvement in Q2 and expect to see this improvement in the second half of 2024. Moving to E-Aviation, during the quarter, we completed the acquisition of Amazilia Aerospace. The Amazilia team has expertise in digital flight controls, flight guidance, and vehicle management systems for manned and unmanned aircraft. We plan on integrating their products and capabilities into our new platforms, such as the Nuva and Surveyor. The maneuver program reached a significant milestone with the completion of Vehicle 1 assembly. The prototype vehicle has entered ground testing, which supports anticipated hover flight later this year. With that, I'll turn the call over to Frank.
spk14: Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.5 billion were up $113 million from the second quarter of 2023, reflecting higher pricing of $57 million. and higher volume and mix of $56 million. Segment profit was $195 million in the second quarter, up $24 million from a year ago due to higher volume and mix of $35 million and favorable pricing net of inflation of $22 million, partially offset by an unfavorable impact from performance of $33 million. Backlog in the segment end of the quarter at $7.5 billion, up $118 million from the first quarter. Moving to Bell, revenues were $794 million, up $93 million from last year, primarily due to higher military volume of $104 million as we continue to ramp the FLAR program. Segment profit of $82 million was up $17 million from last year's second quarter, largely due to a favorable impact from performance of $39 million, which included lower research and development costs, partially offset by MIPS. Backlog in the segment ended the quarter at $4.2 billion. At Textron Systems, revenues were $323 million, up $17 million from last year's second quarter, largely due to higher volume of $14 million. Segment profit of $35 million was down $2 million from a year ago. Backlog in the segment ended the quarter at $1.7 billion. Industrial revenues were $914 million, down $112 million from last year's second quarter, mainly due to lower volume and mix of $119 million. Segment profit of $42 million was down $37 million in the second quarter of 2023, primarily due to lower volume in the mix. Text on e-aviation segment revenues were $9 million and segment loss was $18 million in the second quarter of 2024 compared to a segment loss of $12 million in the second quarter of 2023. Finance segment revenues were $12 million and profit was $7 million. Moving below segment profit, corporate expenses were $17 million Net interest expense for the manufacturing group was $20 million. LIFO inventory provision was $27 million. Intangible asset amortization was $9 million. Special charges related to the previously announced restructuring were $13 million, and the non-service components of pension and post-retirement income were $66 million. In the quarter, we repurchased approximately 4.1 million shares, returning $358 million in cash to shareholders. Year-to-date, we have repurchased approximately 7.7 million shares, returning $675 million in cash to shareholders. That concludes our prepared remarks, so Greg, we can open the line for questions.
spk04: Okay, ladies and gentlemen, if you'd like to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1 then 0 at this time. And one moment, please, for your first question. Your first question comes from the line of Peter Arment from Baird. Please go ahead.
spk01: Yeah, good morning, Scott and Frank. Nice results. Scott, you've booked a bill over one in aviation. Maybe you could just give us a little color of what you're seeing in the market environment and any color on pricing and what aftermarket also did in aviation.
spk15: Sure, Peter. Yeah, look, I think the end market continues to be robust. We're seeing strong demand in jets, turboprops. It's pretty much, you know, across all models and across, you know, the whole family of products, which is great. Strong response to a lot of the upgrades that we've done here recently in terms of existing models. And obviously we'll expect, you know, as we go, you know, the back half of the year to see, you know, continued strength in new launches like the Ascend and such. So I would say, you know, again, as much as we've seen for the last couple of years, we're still sort of targeting that one-to-one, um, area, but robust, robust demand, which is great, uh, aircraft are flying. So, you know, we continue to see, you know, strength in the service business as well. 13% is particularly strong, you know, in the quarter, but, uh, you know, we feel good about, you know, where that's, uh, where that's been performing. So again, across, I think the whole portfolio is, is, uh, feeling pretty good in terms of the end market.
spk01: That's great. And then just a quick one for Frank. Um, Your capex, I think you're $140 million for the first half of the year. I think your guidance is $425 million. So are you coming in at a slower pace than kind of the guidance or plans to step up? And outside of maybe Flora, what are the main drivers of the step up? Thanks.
spk14: Well, we'll continue to see growth in the second half of the year, obviously, as reflected in those numbers. We're a little slower in the first half than we expected. We tend to be a bit back and loaded in CapEx, though. So we will see growth in the second half. There's probably a little opportunity in that kind of full year number, given the pace. But for now, that's a number we'll stick with.
spk01: Appreciate the call. Thanks, guys.
spk04: Your next question comes from the line of David Strauss from Barclays. Please go ahead.
spk13: Thanks. Good morning. Good morning. Scott, can you just give us an update on supply chain at both Aviation and Bell?
spk15: Sure, David. Look, it's still problematic. There's fewer problems probably than we used to have, but there are still parts that are you know, from suppliers that continue to give us, you know, some, some heartache with late deliveries. And that does, you know, create some of these issues around, you know, flow in the factory and rework and out of, out of sequence kind of things. But, you know, we, what we've been managing through that, unfortunately now for a number of years, it does continue to drew a drag on our performance, you know, in the, you know, in the aviation business and particularly, you know, the performance numbers continue to see factory deficiencies that we would like to, to get resolved. But I think the team, you know, all in all is working through that. We're still able to drive higher revenue and, you know, higher profit margins. So I think, you know, all in all, the business is performing well despite, you know, it's still a tough environment. I think you see most companies reporting and, you know, continue to see some challenges in the supply chain. Still a lot of new people, a lot of training and efficiencies and things like that. But we're working our way through it. Same thing at Bell. You know, we have a number of deliveries that, you know, that we miss. We're missing some, you know, key components. But we're working with those suppliers. And as I said, the number of them are, are getting smaller, but in this industry, every part's important. So, you know, we're continuing to have to work our way around some late deliveries of parts coming in. But as I said, I think all in all, our team's operational or are fighting through that and, you know, getting most of their deliveries done and continue to drive good margins. So we'll keep our heads down and keep fighting through that through the course of the year, I think.
spk13: Okay. Thanks for that. And You know, your first half jet deliveries are relatively flat year over year. Are you still expecting higher, you know, higher jet deliveries for the year? And could you maybe comment on latitude, and specifically the deliveries were lighter year over year there, which was a bit surprising? Thanks.
spk15: Oh, look, I think we'll – we are still expecting to have higher unit deliveries in 24 than we had in 23. I would say for sure, David, we're a little behind where we would like to be on a couple of these models. Latitude is one in particular where we had a few deliveries towards the end of the quarter that we didn't get out. They've now gone, but we're working those lines hard and addressing some of the issues. Latitude specifically had one item that we had to kind of manage our way through, and I do think we'll see improved performance on that line through the balance of the year. So the bottom line is that we will have higher performance unit deliveries and I think overall good mix and the performance of the business, despite all that, will show strong margin performance on a year-over-year basis.
spk04: Great. Thanks very much. Sure. Your next question comes from the line of Sheila Kayagulu from Jefferies. Please go ahead.
spk00: Good morning, guys. Thank you so much. Scott, maybe to start on aviation, aviation profitability has been really good, 13.2 in the quarter, I think 150 basis points of net price. So how do we think about the puts and takes as we go into the second half, and is this sort of low teams a new level for aviation profitability?
spk15: Well, I do think the team is performing well, right? I mean, we've got revenues up, margins up, backlog is up, so we feel pretty good about where the business is. As I've said my answer to David's question, you know, it's not always easy. We're still dealing with challenges in supply chain and, you know, things of that nature, but I do think that we'll see, you know, continued, you know, strong margins on a year-over-year basis as we go through the balance of the year, and again, we're feeling good about where the business is. I wish it was easier. It's not, but the guys are working through it, and I do think that we'll see You know, strong margins, I think we still feel good about our guide. We still think this is probably a $6 billion business this year. I think we'll be well within the guide on the margin front. As we said earlier in the year, I think the price inflation spread, you'll see that getting smaller as the year goes on. But again, I think that'll be, you know, in part offset by the fact that we'll continue to drive better efficiencies and performance through the factory.
spk00: Great. And then maybe one on Bell. and just the military portfolio there outside of FLORA, how do you think about V-22 and opportunities there elsewhere in the military side?
spk15: So I think the balance of the military business outside of FLORA is, you know, doing well, right? I mean, we did add the H-1s from Nigeria, so that's 12, you know, aircraft. We were able to start ramping that, you know, here this year. We saw some benefit of that, you know, in the quarter as that program starts to ramp up. You know, V-22 production is still going along. Obviously, the five aircraft that were in the FY24 have now been, you know, added. So we look at that, you know, as adding a little bit of base. The cell improvement program continues to go. I think we'll see broader adaptation or acceptance of that here as we go into the future. So I think there's, you know, work going on in the FY25 budget and beyond that will provide some upgrade opportunities on V-22 as well as H-1. Saw the announcements around SIPU. So I do think, you know, while the production unit volumes obviously will continue to ramp down, we will see some, you know, good flow of upgrade and modernization efforts on both the H-1 and the B-22 lines. It will help to make that, you know, keep that solid as we start to ramp it and really move towards a production mode of the FLORA program.
spk00: Great. Thank you.
spk04: Your next question comes from the line of Miles Walton from Wolf Research. Please go ahead.
spk07: Thanks. Good morning. I was wondering, Scott, if you could talk about the aftermarket growth. You mentioned 13%, which is pretty good acceleration given utilization is decelerating. Was there anything or is there anything that's driving that, whether that's non-typical on the military side or mandates or anything of that nature?
spk15: I think all in all, Miles, we're continuing to see good growth in the aftermarket business. Demand continues to be strong. Aircraft are flying. You know, we did have a strong military, you know, quarter in particular as we, you know, build the spares pool around the METS program for, you know, the Navy contract. But it's just in general strong on the aftermarket side. The demand is there. Again, people are flying, so consumption is up. People are doing shop visits. So I think we feel, you know, we're in a very good place in terms of the aftermarket overall.
spk07: Okay. And then I guess on the performance disclosure, the $33 million drag, I know this can get a little bit apples to oranges comparison, but does that imply that performance actually deteriorates sequentially or didn't improve as much as you had in your baseline plan?
spk15: Well, you know, Miles, the performance category is a messy one, as you know, right? So there's a lot of stuff in there. For sure, some of it is just some of those inefficiencies that we talked about, right? I mean, we're still... not at our standard cost where we would like to be. So part of that number for sure reflects some manufacturing variance. But as you know, there's also a lot of other stuff in there, right? I mean, the business continues to grow. So if you look at, you know, on a year-over-year basis, SG&A, IRAD, you know, these numbers, which are in line on a percent of sales basis, but those actual dollar values on a year-over-year basis also go through that performance line. So there's natural growth in SG&A. There's natural growth in IRAD. There was a legal settlement in there this quarter. So there's always lots of $3, $4, $5 million things that go through there, most of which you would kind of expect in a business that's growing and continuing to invest.
spk07: Okay, got it. Thanks so much.
spk04: Sure. Your next question comes from the line of Doug Harned from Bernstein. Please go ahead.
spk08: Good morning. Thank you. You know, on the Ascend, you introduced the Ascend at eBay, and I thought that was interesting. Europe's only about, I think, about 7% of aviation revenues. You know, how are you looking at international markets, particularly Europe, Asia? Do you see those for aviation as potentially offering a bigger share of your total revenues?
spk15: So, Doug, I don't know if it will change dramatically that overall share of revenue. You know, the jet business obviously has always been more North American centric. South America has usually been our second biggest market than Europe, you know, third behind that. So specifically, as you look at Ascend, I think we'll see a similar, you know, spread of share, much as we saw over many years with the XLS family. You know, this really, you know, the Ascend portfolio in essence, takes that historical product, which has been a home run for us, probably the most popular business jet in the world, and modernizes it, gives us great new cockpits, a little bit of thrust bump in the engine side, a much better cabin with a flat floor and larger windows. I think customers will love everything about that aircraft, from crews to passengers, performance. But I would expect we will see sort of the same kind of share because it really is the product. that is hugely strong in that mid-sized Bizjet market. But that is still largely a North American market and then secondarily South American and then European. So I would expect we'll see that same kind of share position across all those key segments with the Ascend, as we used to see with the XLS family.
spk08: And then on SkyCourier, I mean, SkyCourier seems to be, you're sort of expanding the envelope in which it can serve. How do you ultimately see that market in terms of scale, and how large could the SkyCourier fleet ultimately be?
spk15: I think it's going to be a very big market. If you look at the acceptance of that product, right now we're just trying to make them as fast as we can make them. The demand has been really strong, and it's been great to see delegates everything from the pure cargo version. This thing is a beast in terms of moving cargo around the world. We're seeing a lot of acceptance. on, you know, sort of small regional airlines, 19 packs seating. And then obviously what we did here most recently with the combi is you have a lot of markets where, you know, they need to move packs, but they also need to move cargo. And that's exactly what the combi was aimed at. So, you know, right now I think, you know, both, you know, domestic, international markets, cargo packs, now the combi, you know, the issue for us with Skycar is just continue to ramp up The production volumes, the demand is there across all those segments and in a lot of different geographies.
spk04: Very good. Thank you. Your next question comes from the line of Seth Seifman from JP Morgan. Please go ahead.
spk03: Thanks very much and good morning.
spk02: I was wondering if you could talk a little bit more about the potential. you know, where the margin can go in the industrial segment in the second half, kind of how much of the benefit of the cost-cutting program you felt like we saw in the second quarter and how much is still on the come?
spk15: Oh, I mean, I don't know if I'll give an exact number, but we certainly continue to, we expect to see it continue to grow as we move through the year. We're not expecting a miraculous turnaround in the end market demand. We're watching that very closely. So, If you look at the numbers Frank kind of went through, we've done about a third of the restructuring costs incurred here in Q2. We'll see another big chunk of that for the most part in the back half of this year as we continue to take costs out of the business to align with that volume. But I think when you look at that, it's probably going to generate – we're probably still running 100 basis points or something below where we should be, and I think the cost actions that were taken will square that away. So it's, you know, the strategy right now is keep taking the cost actions. Don't assume that you see some miraculous turnaround in terms of, you know, that end consumer demand and just keep driving, you know, sequentially improved margins.
spk02: Okay. Okay. Great. And then maybe just as a quick follow-up, you know, very good order activity year-to-date in aviation. Is there anything you'd say to distinguish where the order activity is coming from with regard to either fleet customers versus individual customers?
spk15: No, we're still seeing, you know, the spread is strong pretty much across all the customer base and both jet and turboprop. So it's pretty well across all characteristics, no matter how you want to kind of slice and dice. It's looking, you know, to be continually strong demand.
spk03: Excellent. Well, thanks very much. Sure.
spk04: Your next question comes from the line of Noah Poppenack from Goldman Sachs. Please go ahead.
spk05: Hey, good morning, everyone.
spk04: Morning, Noah.
spk05: Morning, Noah. The business jet output just remains, I guess, low relative to how strong demand is and where the backlog is. are lead times getting long enough that it's an issue for some customers and you're losing some sales on that? Or do you sort of just not care about that because you're managing to price and the margins are good and you're okay on that front?
spk15: Well, I mean, I think largely, no, this is an industry phenomenon, right? I mean, you know, if you're out there, if you had a dramatically different, you know, lead time, you might be disadvantaged, but I think everybody is dealing with the same issue. So, We're still out there, obviously, with a book to build above one. We're selling, but we're delivering aircraft, but we're continuing to take orders into those out years. So I'd say right now it's pretty well balanced, and I don't think we're at a competitive advantage or disadvantage right now in terms of availability. We're all out competing. But in the timeline, obviously, based on the backlog, it's out there a year and a half, two years in many cases.
spk05: Okay. The additional H-1 orders at Bell, can you speak to roughly what that adds annually and how far out in the future that will go?
spk15: No, I don't think so. The Nigerian order was 12 aircraft. The upgrade programs like SIPU, that will go on for quite a number of years, but those aren't all appropriated, so I don't think I would get into it. That is the same, I would say, on the V-22 program. We think there's missile improvement opportunities. There's a number of other things that are in dialogue with our V-22 customers on enhancements. Everybody knows that aircraft's going to be around for a very, very long time. And so like any military platform, you would expect ongoing investment upgrades, enhancements. But these are all dialogues and programs that will flow over the years. So I don't think I would necessarily start to get into a multi-year forecast on those.
spk05: Okay. And then just the last one, does it make sense to walk through the math on the shadow decommission just so that's modeled correctly? How much comes out? What does it do to the margins? Did that affect the second quarter? Any clarity you can provide there?
spk15: So, look, I mean, from a modeling standpoint, Noah, this is about a $50 million business or something like that, right? So, I mean, we've we've already obviously worked our way through most of what the revenue is going to be this year as we've wound down from Q1 to Q2, so I'd say it's fairly de minimis as we go through the balance of the year. Again, I think this is one where if you look at that team from our original guide absorbed that loss of the shadow, which kind of came out of nowhere, obviously, from our perspective, and we've seen enough growth in all of the other business within systems to try to to try to make up for that revenue and, and obviously continue to hold a good margin business. So I think the team is largely got shadow, unfortunately is largely behind us and the team managed their way through that. And as position is to at least, you know, continue to operate the business well. And again, most importantly, probably in systems focus on, you know, those new programs like the FTUSs, RCBs, ARV, XM30. I mean, there's a lot of, stuff going on that business that has opportunity. But I, I would say largely what you model is we, we sort of have absorbed the loss of the shadow program.
spk05: Okay. Yeah. That looked mathematically, uh, a little tough to do, at least in the very near term. So, um, yeah, that's, that's impressive. Okay. Thank you.
spk04: Your next question comes from the line of Kyvan rumor from Cohen and company. Please go ahead.
spk17: Yes. Thanks so much. So, um, Scott, you know, you guys have been kind of warning about margins. Don't get ahead of yourself because the inefficiencies that we experienced in the second half of last year are going to flow through inventory into the P&L, and that will restrain margins. Looks like that didn't really occur, although I know mix was a plus. And as presumably your efficiencies are improving, even if not as much as we'd hoped, should we be looking for, you know, a good improvement in the second half from diminishing flow through of kind of inefficiencies so that even though I assume the mix is negative given you got more latitudes, but so, you know, you could basically sustain this 13% type margin?
spk15: Well, look, I think that the 13% is extremely strong, right? I'm not sure I would say that we're going to maintain 13% as we go through the balance of the year. But I think it's going to be solidly in that sort of that, you know, mid-12s, you know, kind of range. So for sure, we will have, you know, some, as I said earlier, probably less price inflation spread than we had. And part of that, frankly, is some next. We do have a lot of latitude deliveries, a number of which, are heavy on the fractional side, particularly in Q3. And as you know, those have lower margin than a retail latitude. So there's always some headwinds, but there's also good things that are going on. So I think this business is well within the guide that we put out there, despite the ongoing inefficiencies. And at a mid-12s percent margin, we feel like this business is performing well, generating strong margin, generating good revenue growth. generating continued strong backlog. So I think, you know, the guide that we had out there, which I think we're clearly still on track to deliver, shows that business in a very good place.
spk17: Terrific. And then secondly, you continue to be aggressive, actually even more aggressive in terms of share repurchase. You've all tuned in, 58 million, 4.1 million shares. So you're basically whacking away at a 5% rate. What should we expect in terms of the repo in the second half?
spk15: I think we'll continue to focus on that repo, Kai. We're generating, we're getting good, strong cash flow. We feel very good about where the business is on a cash standpoint. What we do with some small acquisitions of Amazilia, relatively small dollars, but adds some real capability to the e-aviation business. Frankly, technology will help us, not just the e-aviation, but I think also at Textron Aviation as well as future opportunities at Bell. So But these are small dollars. Clearly the bulk of the strong cash flow generation that we have right now, we're allocated to the buyback, and I think we'll continue to do that.
spk17: Thank you very much.
spk04: Your next question comes from the line of Ron Epstein from Bank of America. Please go ahead. Yeah, hello.
spk06: Can you hear me? Good morning, Ron. I'm here. Yeah, good. Perfect. Sorry. Yeah, maybe just a couple quick ones. Could you do a bigger version of SkyCurrier? Is there any demand for that from your customers?
spk15: I don't know that we need to do a bigger version of it. It's a big aircraft. You have to get up next to one of those guys. Just from a regulatory standpoint, where it sits, first of all, it fits really, really well in that short-haul cargo market. Obviously, we work very closely with FedEx and particularly on designing that aircraft, so it was really you know, designed to be in that 3LD3 container, you know, kind of space where it fits really, really well. And then on the pack side, you know, from a regulatory standpoint, you hit that 19 packs, you know, line and this thing, you know, comfortably takes care of 19 passengers. So, you know, I think to do anything, you know, bigger than that, now you sort of start to step up into the ATR world and things like that. And I don't think that's really our space. I think the you know, where there was a huge gap in the market was really when you went from our caravan, you know, which obviously has been a home run in that smaller cargo and tax market, you know, and then up into that sort of light, you know, air transport kind of side. We felt like SkyCurve is in the sweet spot of that. So, and we're seeing that from a market demand standpoint.
spk06: Got it. And then on aviation, how do I frame this? It seems like we're in a unique environment where for you guys, I don't want to put words in your mouth, but everybody that you have no whitetails. Everything going down lines is owned. Have you ever experienced that before, if that's the case?
spk15: Well, I think you have to probably go back to 2007, Ron, to be there. But look, this is a business, and we talked about this for years, right, Ron? This shouldn't be a whitetail business, right? I mean, it wasn't in most of its, most of the history of business jets was not a whitetail business. I think what happened, you know, sort of financial crisis, post-financial crisis, wasn't how that business should operate. You know, this business should operate off of a, you know, depending on the model types, you know, anywhere from 12, 18 months to two years, you know, kind of a backlog so that you know when an aircraft is rolling down that line, you know, where it's going. And that's where we are, and I think that's where the industry should stay. And again, this is not a new idea, right? This is how this industry worked for decades. decades, and it's certainly good to have it back where it's supposed to be.
spk06: Yeah, that's great. And then if I can, just one last quick one. Just curious, you mentioned that e-aviation, some of the technology investments you might make inorganically could flow back to just broader Textron Aviation. Can you highlight anything that you're learning in that business that could actually help outside of e-aviation, just broader aviation?
spk15: Sure. I like the nature of what we're doing, you know, particularly with unmanned things like Nuva and when you look at the levels of automation that we believe need to be in things like Nexus, you know, these are very highly automated, you know, fly-by-wire, digital flight control, you know, almost autonomous. Even if there's not a person, even if there is a person in the cockpit like in the Nexus case, it's still, you know, in essence, you know, the capability of the aircraft is inherently autonomous. So, When you look at the Amazilia guys, this is an area of expertise that they had. We've done this. We've done a lot of fly-by-wire on V-22, for instance. Obviously, the V-280 is all fly-by-wire. The 525 is the first commercial helicopter in the world that's fly-by-wire. So we have capability in the company to do this. But I think as we go forward, not just for these things like Nexus and Nuva, But, you know, future families of products or enhancements upgrades to products is going to see more and more levels of, you know, fly-by-wire, digital control, quasi-autonomous capability. But it needs to be a much lower price point, you know, than what you've seen in these high-end, you know, very expensive systems. And so that's, you know, the technology that we're using, developing, and working both through the acquisition and the implementation on things like Nuva and Nexus is are fundamental technologies that will, I believe, you'll start to see in the lower price point, both fixed-wing and rotorcraft markets of the future. Okay, cool.
spk06: Thank you very much. Sure.
spk04: Your next question comes from the line of Christine Laiweg from Morgan Stanley. Please go ahead.
spk11: Hey, good morning, everyone. Scott and Frank, I mean, the strength in aviation is clear. Scott, you mentioned in Ron's question that, look, we're kind of almost back to that pre-financial crisis levels regarding the backlog. If you take out the performance headwind that you highlighted in the quarter, margins of aviation would have been 15.5%. I mean, this is also back to pre-financial crisis levels margin. So, yes, you know, when the performance headwinds tail off and the backlog continues to hold secure, You know, is the mid-teens margin kind of the new normal in aviation?
spk15: Well, Christine, I guess what I would say is, you know, look, some of those performance items, you know, for sure are associated with these factory inefficiencies. And we do expect, you know, over time for those things to get better as we get better, you know, supply chain deliveries as our workforce becomes better. you know, more seasoned, you know, again. So I do think there will continue to be underlying improvements going forward in those areas. But as I also said, you know, some of these things around performance are also just fundamentally associated with the growth of the business, right? We are going to see more sales commissions when we have, you know, more sales and we are going to see R&D, again, not necessarily a headwind from a percent of sales standpoint, but you're going to see, you know, higher R&D numbers as we continue to invest in the business. So, But I think the bottom line answer to your question, Christine, is we're not going to put a number out there right now, but clearly, you know, over the last few years, we continue to see improvements in the margin performance of this business. And I think, you know, it's reasonable to expect that we'll continue to see that going forward.
spk11: Thank you. That's really helpful context. And then maybe pivoting to a defense question, the European defense budget seems to be moving higher, a little faster and steeper than the U.S. defense budgets. I guess, how do you think about opportunities for European sales? It hasn't been a huge part of your portfolio historically, but with the leverage of the business pretty low, what's also your interest in expanding European capabilities either organically or inorganically?
spk15: Well, we do have a number of sales campaigns that go on in Europe. It's not, as you noted, has not been a huge part of our business in the past. I do think as you look at foreign military sales opportunity, things like the FLORA program, clearly that's a big part of where the Army is focused, is looking at partner countries around the world. Just as we saw for many, many decades, things like the Black Hawk become really important parts of those businesses from an international sales perspective, including Europe. We obviously will expect that to happen over time. There's also some organic things. So again, you know, if you look at rotorcraft again, I guess, you know, right now we've, you know, we did announce, you know, sort of a teaming, you know, relationship with our, with Leonardo around pursuit of the European next generation rotorcraft opportunity. So that's, you know, kind of organic, but you know, that would be a product that's tailored to that European market. So I do think there are opportunities out there and we're pursuing those and we'll compete for those, you know, going forward.
spk11: Great. Thank you.
spk04: Your next question comes from the line of George Shapiro from Shapiro Research.
spk16: Please go ahead. Good morning. Good morning, George. Scott, the year-to-date orders have been about $3 billion in aviation, about the same as last year's first half. Do you think you can reach the $1.86 billion of orders that you had in last year's third quarter, which was particularly strong?
spk15: You know, George, I don't know. I mean, we're, you know, as we kind of guided, we think this is going to end up as a one-to-one year. That's still our view. So, you know, if you look at, you know, order activities, you know, last year, they were stronger than that. But I do think we're, again, our expectation is we're in sort of a more normalized world here where, you know, one-to-one is a good book-to-bill target. You know, we are... coming through the first half of the year strong, which is great. I mean, I'd love to see that continue, obviously, but I don't think necessarily $1.6 billion and a quarter is probably pretty sporty.
spk16: Okay. And then maybe one for you, Frank, that inventories year-to-date are up like $467 million, obviously less in the second quarter with better deliveries, but still up $110 million in the second quarter. I mean, For the end of the year, do you expect that inventory level to come down to close to where it was at the end of last year, or are we going to stay a couple hundred million above it?
spk14: We'll certainly expect to liquidate inventory in the back half of the year, but in order to grow the business for next year, we need inventory in order to sell products. We expect we'll see some inventory growth on a year-over-year basis at year-end, but you know, not at the levels you've seen to date. I'd say overall, you know, obviously that offsets from working capital in other areas. So we think working capital is kind of flattish type number for the year. So, you know, obviously there are offsets and payables and other things associated with that. But we do need some inventory growth in order to grow the business.
spk16: And one last one. Industrial in the first quarter, you pretty much said, was primarily weak because of special vehicle's This quarter, you kind of said, didn't say that. So do you assume that both Caltechs and special vehicles were relatively weak in this quarter?
spk14: Well, Caltechs was down on a year-over-year basis, but it wasn't particularly weak. It was just, you know, we had a very strong second quarter last year, frankly, both in specialized vehicles and Caltechs. So you had a really tough compare from both a volume standpoint as well as a margin standpoint. But... Caltech on a sequential basis was up quarter over quarter, but it was down a bit on a year-over-year basis. But Specialized Vehicle was down kind of more on a year-over-year basis, coming off a very strong second quarter last year.
spk16: Okay, thanks very much.
spk04: Your next question comes from the line of Pete Skibitsky from Olympic Global. Please go ahead.
spk12: Hey, good morning, guys. Good morning, Pete. Hey, Scott, as we think about, you know, some of the softness in the consumer that you're experiencing at TSV, maybe, you know, to your Caltech's comments as well, you know, less so, but you guys aren't seeing that extent to any of your aviation customers at all. And I, you know, not even on the pistons or the turboprops. I'm asking in particular because it seems like deliveries on your lighter jets and aviation, that citation is, in the first half, where we're a little bit lighter year over year versus the larger jets. I just want to understand how you're seeing the health of your customers there. Obviously, they have bigger balance sheets, but I just want to get a sense.
spk15: Yeah, Pete, I'd say when you look at our lighter aircraft, I mean, M2, CJ-3, CJ-4, we're seeing strong demand, so book DeVille on those guys is good. Even You know, pistons, I mean, you know, for the most part, we're just trying to make them faster, right? I mean, you know, the piston aircraft training demand remains very high, right? It's very hard to find a 172 anywhere, you know, so I think the piston side of the business is good. The light jet side of the business is good. It's that, you know, again, these are people with stronger balance sheets, obviously, and, you know, looking out, you know, over time and, You know, there's backlog, so you can't get one for, you know, a year or 18 months, you know, whatever it may be, even in the lighter, you know, jet side of things. So we continue to see good order floor there. It's that, you know, it's that discretionary, you know, sort of point of sale kind of consumer, you know, generally financed, you know, kind of market that's just, that's down. As I said, we're aligning costs, you know, around that. As Frank said, it's tough, particularly this quarter. We had a really strong quarter for a lot of those kind of products a year ago. It's softer now, and so we've made necessary cost and production volume alignments to match that. But no, we're absolutely not seeing that behavior when you look at light jets or Bell 505s, Bell 407s. I mean, the market for those, even the lower price point jets and rotorcraft continue to do very well.
spk12: Okay. Okay. Interesting. Last one for me, just on GBSD. Sentinel looks like it passed its Nunn-McCurry review. Any change that you guys expect to the program profile for you guys?
spk15: No, I don't. We're continuing to work very closely with Northup. I think the program is progressing well. We've had a number of things that have added scope to what we originally had bid on the program. So, I think we have a great relationship with these guys. That piece of the program is going well. As you guys know, I mean, just in the media, you know, a lot of the cost issues around the infrastructure as opposed to the, you know, the missile itself have been, you know, a big issue. So for sure, you know, there's scheduled challenges, which I think are well documented. Northam talks about them. Their customer talks about them. But, you know, we continue to, I think, execute well on the program, see scope increases on the program. and continue to make good progress on our piece of the overall weapon system.
spk12: Okay, thank you.
spk04: And your final question today comes from the line of Gavin Parsons from UBS. Please go ahead.
spk09: Thank you. Morning. Morning. It sounded like Aviation Guide in line with the initial thoughts, industrial margin maybe a little below, but Can you just kind of go around the horn a little bit and update what's tracking above or below to allow you to stay in the guidance range?
spk15: Yeah, I think you actually did a pretty good job there. I think the aviation guys are well within their guide and having a great year. I think that Bell and Systems will probably come in a little bit above their guide. Strong performance in both those business. As we've talked about, we'll probably be a little below the guide on the industrial segment just because of lower volume, particularly in that consumer space, but Net, I think we feel pretty good about where things are, and most businesses are performing really well.
spk09: Okay, appreciate it. And then maybe just on pricing on orders, it seems like you're still getting maybe mid-single digits on deliveries. Is it a similar level what's going into the backlog today?
spk15: I mean, we're probably not going to give price forecasting, but I would certainly say price continues to be strong in the marketplace.
spk09: Okay, thank you.
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