Textron Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Q3 2023 Textron Earnings Release Call. At this time, all participant lines are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, this conference is being recorded.

Operator

I would now like to turn the conference over to Eric Salander, Vice President of Investor Relations. Please go ahead.

Speaker 1

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 Connor, our Chief Financial Officer. Our earnings call This presentation can be found in the Investor Relations section of our website.

Speaker 1

Revenues in the quarter were $3,300,000,000 up $265,000,000 from last year's Q3. Segment profit in the quarter was $332,000,000 up $60,000,000 from the Q3 of 2022. During this year's Q3, we reported income from continuing operations of Share compared to $1.15 per share in last year's Q3. Manufacturing cash flow before pension contributions, a non GAAP measure, totaled $205,000,000 in the quarter compared to $292,000,000 in the Q3 of 2022. With that, I'll turn the call over to Scott.

Speaker 2

Thanks, Eric, and good morning, everyone. The 3rd quarter was a strong quarter for Textron with revenues up at Aviation, Industrial and Systems, while revenues were flat And that will be your first to 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 Q3. 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 Q3 of 2022. Backlog grew $521,000,000 ending the 3rd quarter at $7,400,000,000 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 1500 aircraft, including the Citation Latitude and Longitude over the next 15 years.

Speaker 2

As part of this agreement, NetDesk 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 Surfer Mobility finalized its initial order for 20 ground caravans during the Q3. On the new product front, aviation wrapped up a successful MBAA show last week, where we announced 2 new product upgrades, the Cetacean CJ3 Gen 2 At 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.

Speaker 2

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 Q3. The lower deliveries reflected manufacturing disruptions related to supply chain shortages. During the quarter, Iraq ordered 15 505 aircraft to replace their private trading fleet continuing the success of the Bell 505 as a military trainer throughout the world. Textron Systems, we saw higher revenues and margins in the quarter.

Speaker 2

During the quarter, Systems Aerosonde Hybrid Quad was 1 of 2 competing unmanned aerial Under the 2nd option agreement, the 2 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 were 1 of 4 competitors selected to build light robotic combat vehicle prototypes for the Army. Prototypes are expected to be delivered in 2024. Systems also expanded its Aeroson UAS operations with the U. S.

Speaker 2

Navy with an award of an additional 3 sea based systems aboard the Toro combat ships. Moving to Industrial, we saw higher revenues in the quarter driven by higher volume at both Specialized Vehicles and Kaltex. In Specialized Vehicles, we continue to see strong demand in the fleet golf business. Within Caltex, we saw increased volumes year over year driven by the recovery in the North American auto market. Moving to e Aviation, 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.

Speaker 2

Also the 1st Nuva 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.

Speaker 3

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues at Textron Aviation of $1,300,000,000 were up $171,000,000 from last year's Q3, reflecting higher volume and mix of 89,000,000 And higher pricing of $82,000,000 segment profit was $160,000,000 in the 3rd quarter, up $29,000,000 from a year ago Due to favorable pricing net of inflation of $39,000,000 and a $23,000,000 favorable impact from higher volume and mix, partially offset by an unfavorable impact from performance of $33,000,000 largely related to supply chain and labor inefficiencies. Backlog in the segment ended the quarter at 7,400,000,000 Moving to Bell, revenues were $754,000,000 flat with the Q3 of 2022 with lower commercial helicopter volume largely offset by higher military volume. Segment profit of $77,000,000 was up $3,000,000 from last year's Q3, primarily due to favorable impact from performance of $23,000,000 largely reflecting lower research and development costs, partially offset by lower volume and mix of 16,000,000 Backlog in the segment ended the quarter at $5,200,000,000 At Textron Systems, revenues were 309,000,000 up $17,000,000 from last year's Q3, largely reflecting higher volume.

Speaker 3

Segment profit of $41,000,000 was up 10,000,000 Compared with the Q3 of 2022, primarily due to a favorable impact from performance of $8,000,000 Backlog in this segment ended the quarter at 2,000,000,000 Industrial revenues were $922,000,000 up $73,000,000 from last year's Q3, largely due to a higher volume and mix $15,000,000 from the Q3 of 2022. Textron E Aviation segment revenues were $7,000,000 and segment loss was $19,000,000 in the quarter, primarily reflecting research and development costs. Finance segment revenues were $13,000,000 and profit was 22,000,000 up $15,000,000 from last year's Q3, largely due to a recovery of amounts that were previously written off related to one customer relationship. Moving below segment profit, corporate expenses were $38,000,000 net interest expense was 11,000,000 LIFO inventory provision was $26,000,000 intangible asset amortization was $10,000,000 and the non service component of pension and post Retirement income was $59,000,000 In the quarter, we repurchased approximately 3,100,000 shares, returning 2 $235,000,000 in cash to shareholders. Year to date, we've repurchased approximately 12,500,000 shares returning $885,000,000 in cash to shareholders.

Speaker 3

To wrap up with guidance, we are increasing our expected full year adjusted earnings per share to be in a range of $5.45 to 5.55 up from our prior range of $520,000,000 to $530,000,000 We're also continuing to expect full year manufacturing cash flow before pension contributions of $900,000,000 to $1,000,000,000 That concludes our prepared remarks.

Speaker 2

So we can open the line for questions.

Operator

Thank Our first question comes from Sheila Kahya with Jefferies. Please go ahead.

Speaker 4

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 booked 7 points of gross price, 3 points of net price. What are you seeing in your backlog in terms of pricing?

Speaker 4

And I Everyone wants to nitpick on your backlog, but it was still up 15%. How much of that included NetJet?

Speaker 2

Sure, Sheila. I would look, I would say that the price environment continues to be strong. Aircraft that are going into backlog continue to So at good pricing, so we feel good about where that is in the marketplace. In terms of the NetJets, look, obviously, the extension of the contract that we've had with NetJets for a long time for 1500 additional aircraft is a huge deal for us. It's really important to the future of the business.

Speaker 2

As you know, that's a very diversified customer base. The business and the partnership that we have with NetJets 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 NetJets in terms of backlog is that we're basically working with NetJets 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. Every quarter, we sell aircraft to net jets and we add additional jets into the backlog.

Speaker 2

So generally speaking, it's Right around that 1 to 1 range. So again, huge, really important thing for the future of the business, but not something that Materially impacted the backlog in the quarter.

Operator

No, that's helpful.

Speaker 4

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 and D side with FLARA and BARA now that you have ITEP?

Speaker 2

So look, I think Bell performance in terms of the numbers and getting volume coming in, particularly as the flower program ramps up It's helpful. R and 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 I read money in programs like FLORA, which are now in the fully funded category. So we do still have work going on, obviously, with Farr. 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 ground test release for that.

Speaker 2

And then ultimately, the flight test Release, hopefully, as you'll get that aircraft flying in 2024. But performance was strong and yes, for sure part of that is Reduced IRAD spending as we now have more funded R and D under the FLAR program.

Operator

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

Speaker 5

Thanks. Good morning.

Speaker 6

Good morning, Lou.

Speaker 5

Scott, could you just Maybe give a little bit more color on the supply chain issues at Aviation. The performance hit, I think, was the biggest that we See there. So are things getting better or worse? And is it engines or what other color can you give?

Speaker 2

Well, look, David, I guess the color I would give is that, like obviously the business pays a lot of attention and tracks Sort of trend data and I would say that from a standpoint of it getting better, the trend data would say, yes, it is getting better. 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 Efficiencies that has been getting mostly better as we're going through the year, but it's still a problem, right. So it's 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 that's You still can't deliver that aircraft.

Speaker 2

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. We're continuing to see that challenge across the number of aircraft types. I think it will continue to hope we So expect 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 I guess the only other point is despite all that, I mean, we obviously would like to deliver We're aircraft in the quarter, and in particular, we have customers that would like to see us deliver those aircraft in the quarter.

Speaker 2

But despite all that and the challenges and the headwinds around labor and Supply, we're still posting 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 continued to drive improved profitability.

Speaker 5

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 So 180 in that range?

Speaker 2

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

Speaker 5

All right, great. Thanks very much.

Speaker 7

Sure. Next

Operator

we move on to Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 8

Hey, good morning, everyone.

Speaker 2

Good morning, Ron.

Speaker 8

Scott, maybe you could just spend another minute on the demand environment. It's pretty in aviation and in the business jet market, it's a pretty strong bookings number with a decent amount of uncertainty out there. So What are your customers saying? How much of that is just replacement, so they have to do it kind of in a wide range of macro scenarios? How's October?

Speaker 8

We just love to hear some more color from you.

Speaker 2

Look, Noah, the demand environment continues Strong. I mean, this is a really strong book to bill, very strong when there's an absolute dollar flow of order activity in the quarter. So we just haven't seen a slowing down. People are buying aircraft and Are they replacing older aircraft? Absolutely.

Speaker 2

Or in some cases, are they expanding fleet capacity? Absolutely. We We continue to see strong demand obviously part of the rationale behind the Netship program as they continue to see very strong demand in the fractional side. So it's really across It's really across the board. It's typical of what we've been seeing for a while.

Speaker 2

It's very strong jets in the U. S, although there's certainly some Good order activity with jets outside the U. S. It's very strong across the turboprop product lines in both the King Airs. Obviously, we have Sky Curtar and Caravans continue to perform well.

Speaker 2

So it's just continues to be a strong demand environment.

Speaker 8

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 and the incremental the year over year incremental, I think is a little light of what you normally look for Despite healthy units and price. So anything to note there and I guess What do we look for the aviation margin to finish the year and maybe into next year?

Speaker 2

Well, look, I think it's we're going to continue to see strong margin performance, Noah. 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 is 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.

Speaker 8

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

Speaker 2

I think we're going to battle that into next year. So like you know, 4th 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 But again, I mean, 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.

Speaker 8

Okay. Thank you.

Operator

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

Speaker 9

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.

Speaker 9

Can you talk about how Your expectations have changed over time and has the mix shifted at all?

Speaker 2

No, it really hasn't. Look, I mean, we did sort of set our base plan expecting kind of a 1 to 1. And look, I think eventually the industry has to get the 1 to 1. It's not I don't really think it can continue to exceed that much for that long. But Our sales teams are out there and customer demand is what it is.

Speaker 2

So if it's greater than 1 to 1, obviously, that's terrific for the business. And as you've 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 is markedly different. As I said, we're still seeing strong jet demand we're seeing across all the turbo product lines.

Speaker 2

We're seeing it virtually across all of our different aircraft types. Obviously, it's helped by having some new aircraft like the Our carrier out there, it's helped by having some of these upgrade programs, which always stimulates the market when you do an ex version of the CJ3, an ex 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 lines to kind of continue to help drive that demand in the market. But For sure versus our estimation at the beginning of the year 1 to 1, the end market continues to be stronger than even we would have expected, which is Obviously a positive.

Speaker 9

Yes, it is a positive, but I'm also I'm interested in how you deal with this because you have delays, The supply 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 an issue here if this were to continue? Because as you say, ultimately, it should be at 1 to 1 at some point.

Speaker 2

Yes. Well, look, 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.

Speaker 2

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 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 as I kind of indicated earlier, I think we will expect to see Increased deliveries, again, in 2024 versus 2023.

Speaker 2

And that's partly the stronger demand and it's partly getting some of the

Operator

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

Speaker 10

Yes, good morning.

Speaker 3

Good morning, George. Good morning, George.

Speaker 10

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 it was mainly these items I just mentioned.

Speaker 3

No, we're seeing as Scott said, I mean we're seeing strong performance across Bell. And so I think Bell is going to come in at higher margins than we would have originally guided. We're seeing strong performance at systems. There'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.

Speaker 3

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 that's those are certainly the operational aspects. GFC 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.

Speaker 10

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 Q4 as well, so we'll see strong deliveries, but maybe less than what we would have thought 6 months ago and does that bode for next year being a lot bigger than what you might have thought before?

Speaker 2

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. Yes, we have forecasted and just the way we run our manufacturing operations, obviously, we took down some of the units to accommodate that. Did we have aircraft that moved from Q3 to Q4 this year? Absolutely. Do I think we'll have aircraft that will move from Q2 to Q1?

Speaker 2

Absolutely. Again, how much of that is our aircraft that you would add on to what we were originally planning in our 2024 guide versus Where we'll be, I mean that's that will 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 through all those kind of numbers. But the only color I would give you is expected You certainly would expect to see good growth and over the 2023 numbers.

Speaker 2

So for sure, Be it just overall demand or things that are moving from 2023 to 2024, 2024 should be a strong year for us.

Speaker 10

Okay. Thanks very much.

Speaker 6

Sure.

Operator

Next we move on to Cai von Rumohr with TD Cowen. Please go ahead.

Speaker 11

Yes. Thank you so much and good quarter. Frank, could you maybe talk a little bit about, Do we see 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?

Speaker 3

On the $174,000,000 we had been following kind of what the guidance clarification resulted in. So we there is no change to from a cash tax standpoint. With regard to pension, 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 kind of we shouldn't have a problem with pensions From a headwind standpoint as we move into 2024.

Speaker 11

Got it. Okay. And then Scott, strategically, I mean, you've announced There are a couple of new updates at NBAA, but 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 Good demand now. You've got some nice smaller new products coming.

Speaker 11

But do you think that you need to start something Bigger for the next 3 to 5 years?

Speaker 2

Well, I think where we are right now, Cai, I mean, obviously, we've just come off We have Denali, which is in certification that's coming along very nicely. I think that'll be a spectacular product For us, we did just announce the Ascend, which is a pretty big program. That's and so I think, I guess, strategically, Cai, I think where we are on the sort of that Latitudelongitude family are in Really good shape. Those are both relatively new aircraft. Certainly, there will be upgrades and enhancements to those programs as we go down the line.

Speaker 2

But we sort of have turned from a long period of time, a decade really of making major investments in those Mid to super mid aircraft and have gone back now and made some pretty good investments in some of the turboprop family and 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 product for us, and I think the Ascend is going to be 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 and going through the certification process right now. Look, 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 that's No, we don't have any new announcements for you beyond that stuff. We're pretty full up right now actually.

Speaker 11

Thank you very much.

Operator

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

Speaker 7

Thanks so much. Good morning.

Speaker 3

Good morning. Good morning.

Speaker 7

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

Speaker 2

No, we really haven't, Robert. It's been 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 what could you be a 12 to 18 month softness in the economy. 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 we certainly have not seen any impacts of this short sighted kind of hey guys, what's going to happen in the economy in the next 18 months Window, the deliveries, people are taking their aircraft.

Speaker 2

We haven't seen any problems there. And again, from an order perspective, they're out Way beyond that period that might be of any concern.

Speaker 7

Yes. And then similarly on the industrial side of things, What sort of demand pull are you getting from your customers at both Kautex and Specialized Vehicles?

Speaker 2

Look, we've been seeing a very strong year. The Kautex North American in particular has been growing, Europe has been growing. So we are 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 This morning, it looks like Ford has got a tentative agreement, which is great. We haven't seen much impact From that yet and hopefully this will get resolved before it has any kind of material impact to us.

Speaker 2

We're pretty diversified in terms of the OEMs that we serve and In North America, a lot of the Toyotas and the BMWs, Mercedes that are in the southern part of the country. So Anyway, the volume does continue to grow at Kaltex. We've seen nice volume growth in the vehicle business as well. So for sure, we pay close attention to sort of the high end consumer. If you're going to have a slowdown, adjust accordingly.

Speaker 2

But all in all, The golf market, the commercial market, it's staying strong, even the consumer market, which It's not as strong as it was as you see most people and say 2021, 2022, but it's volumes are still quite strong on a historical basis. So I think

Operator

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

Speaker 12

Hey, good morning, everyone.

Speaker 3

Good morning.

Speaker 12

Scott and Frank, leverage in the balance sheet is pretty low at less than one turn of EBITDA. Free cash flow is pretty solid. You've mentioned the demand environment is strong. I guess 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 repurchase plan or some sort of transformative deal?

Speaker 2

Well, look, Cristiano, clearly Our focus and what we've communicated and what we've been executing on, again here in the Q3 is really focusing our capital returns around Share buyback, we continue to do that here in the Q3. So it was another quarter of strong returns. Obviously, We agree. I mean, I think our balance sheet is in a good place. We're generating strong cash flows and we'll continue to use that on the share buyback.

Speaker 2

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 have to convince ourselves that that's something that's good for our shareholders. And There have been a couple of deals out there where we concluded that wouldn't be the right thing, but we certainly always keep an eye out and contrast that versus just The share buyback program, which I think has been very successful.

Speaker 12

Great. And maybe 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 A320neo. Considering your strength In services, for business jets, what's your appetite to join that, engine MRO ecosystem and expand your addressable market?

Speaker 2

Yes, I don't know all the details of that. I mean, we're 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 promote with those suppliers. But I 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 Than we used to do and that's been a big success for us.

Speaker 2

But getting into the engine MRO business is not something that I It would make any sense for us. I mean, I know a fair bit about the engine world. The value in engine overhaul is in the parts And those parts come from those suppliers. So I think that's probably best left to them to manage.

Speaker 4

Great. Thank you for the color.

Operator

Next, we go to Jason Gerske with Citi. Please go ahead.

Speaker 6

Yes, good morning. Hey, Scott, I was wondering if I could get you to just put aside the supply chain issues for a moment and just assume that they 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, to the right wait time for those customers, what would that wait time be? For 2 plus years today, 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?

Speaker 2

Well, 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 for 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.

Speaker 2

That wasn't true Historically, as you know, and it's certainly not true today. So I do think that we've gone through some challenging phases with customers who are kind of accustomed Well, geez, I should be able to get that in 6 3 months or 6 months and say, no, our guys, actually it's a couple of years. But I think the market is adjusting to Right. Customers know what the order backlogs look like in the industry. And people now realize that if 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 of years out, not something that you just It could come in inside of a quarter or even inside of a year and get a transaction done.

Speaker 2

So 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 of year kind of a timeline and they need to Which frankly is not all bad for them either because they can figure out how they plan the sale of their used aircraft. It's a much more It's a better market environment for everybody, including those buyers because so many of them currently own an aircraft. I don't know if that helps you because I mean it's not really a specific answer, but yes, 2 years is That's a long time, but people have to kind of plan accordingly at this stage of the year.

Speaker 6

Yes. I think what a lot of us are trying to figure out is Once the supply chain issues work their way through, how much we might see production rates across the industry Come up over time. If you're 2 years now, is the sweet spot 18 months and we can kind of back into what that would mean from a production rate perspective. I think What we're all trying to better understand.

Speaker 2

No, that math is too sophisticated for me.

Speaker 6

Maybe an easier one then on Endoscale. Can you talk a little bit about the margin and the margin 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.

Speaker 2

Well, Look, I mean, I think we still have margin opportunity. I mean, this business should be a high single digit margin. I mean, it's got a lot of auto in there. Caltex is a good business. It generates good cash.

Speaker 2

It generates good margin. But we're obviously right now, You're still trying to get some of the auto volumes back up around the world and we have obviously Has to do that, so better utilization, more efficient utilization of some of that capacity would obviously be helpful. And that's part of what's driving the margin improving this year. The same is true in the vehicle business. We've said strong demand across most of those product lines.

Speaker 2

Some of them are still recovering from some of the post COVID. Some of them still are Struggling with a lot of the same kinds of supplier and labor challenges that we talk about in aviation. And that's We're still 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 of the future.

Speaker 6

Okay, great. Thank you

Speaker 3

very much.

Operator

Next, we move on to Myles Walton with Wolfe Research. Please go ahead.

Speaker 9

Thanks. Good morning. 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 carton from the horse, but when you sign up to deliver our grip on 1500 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?

Speaker 9

And just to confirm, does this start to fold in, in 2025?

Speaker 2

So, like I want to probably might as well go into all of the gory details of the arrangement, but we've always worked with There's always been a factor in how we work with NetJets that takes in consideration market pricing. So it's not something that's a fixed price 15 year thing. I mean, nobody could do that in the industry. There's adjustments that are made that have to do with market pricing. That's frankly, a very fair equitable deal, because again, you really have to think Of NetJets, I mean they're out selling aircraft into this marketplace.

Speaker 2

So we the you think about it, I guess, almost as a wholesaling, right, of these aircraft to net jets and then they have A spread for covering their costs and sales and running their business. So there is a market adjustment scheme that's Incorporated into this thing. So nobody is trying to sit down and imagine what pricing is 15 years from now.

Speaker 9

And then in terms of the initiation of the contract, is it a 25 start deliveries, the last one running through 2024?

Speaker 2

Yes, 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. So, but yes, I think if you looked at how many aircraft were left on the old agreement versus new agreement, kind of phasing kind of 2024, 2025 time frame.

Speaker 9

Okay, cool. And then Frank, just a cleanup, can you level set us on interest and tax rate for the year at this point, given we only have a quarter left.

Speaker 3

Yes. Interest is expense is going to come in a little better And we had originally guided just given the 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.

Speaker 9

Okay. Thanks guys.

Operator

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

Speaker 13

Yes. Good morning, Scott and Frank. Nice results. Good morning. Scott, on systems, the performance there continues Really good and there was obviously a bullish tone down at AUSA around just a lot of the modernization efforts.

Speaker 13

How are you feeling about the kind of visibility of that business going forward?

Speaker 2

Okay. I think they're in a very good place. 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. We had a nice strong growth in the quarter that's driven by things like XM250, which As you know, we're 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.

Speaker 2

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. So 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. Do you win all of them or not?

Speaker 2

I don't know. But I mean, we have Probably 4 or 5 pretty significant opportunities that will close here over the next couple of years. So I think the business is executing well. They're delivering On their existing programs very well and I think they've got a lot of pretty significant growth opportunities that we've been are clearly in the pipeline.

Speaker 13

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

Speaker 3

Yes, it was 3% and aftermarket was 33% of SIP revenue for the quarter.

Speaker 13

Appreciate it. Thanks

Operator

guys. Next we go to Ron Epstein with Bank of America. Please go ahead.

Speaker 6

Hey, good 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 Textron, which seems to be evolving quickly towards a bigger A and D company.

Speaker 2

Well, look, Ron, I mean, the way we're looking at Industrial right now is providing good growth and strong performance improvements and generate good cash, and That's how we think about it.

Speaker 6

So is it so I guess is it core? Is it not core?

Speaker 2

We've never defined core or non core. I certainly have never said that. Look, I'm getting what we have said, Ron, is that when we think about M and A activity in the company, we certainly would view that the places that we would additionally or add additional capital would probably be in our Aerospace and Defense Portfolio and that's kind of how we look at the M and A world as opposed to thinking that we should increase Size of our industrial business, but certainly to the extent that we can drive organic growth in these businesses and make smart investments and generate good returns for shareholders. I think that's The best thing we can do for the shareholders is make sure those performances those businesses are performing as well as they can perform.

Speaker 13

Yes, fair enough.

Speaker 6

And then on the M and 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?

Speaker 2

Yes, probably agnostic, Bogron. We've done some small deals here in recent times, largely around expanding some of Our services footprint, obviously, we did the Pivastrol deal, which has turned out to be, I think, a great acquisition for us to help grow our focus And the future for our aviation business, obviously there's some opportunities there that could be massive opportunities in the future or not. We don't know, but I think that's a nice acquisition It's given us some real additional capability in the company. Again, as I said, most of what we look out in terms of Any material M and A is in that A and D space. As you know, Ron, there's only deals only come along so often.

Speaker 2

So you kind of keep an eye out and Look at things as they come down the pipe. So we'll 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 be willing to participate in that. We obviously have the capacity to do A fairly material deal, but it has to be something that financially makes sense.

Speaker 6

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

Operator

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

Speaker 14

Yes. Good morning, guys. Just want to follow-up on Myles' question and maybe see if we can get into the gory details of the NatJet Steel 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?

Speaker 2

No, they don't. Look, I saw the relationship and the way this works is that 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 On market right now, which is fabulous. But they sit down with us in real time. I mean, every quarter looking out a year out and Given where the market is and what sales activity looks like, what their pipeline looks like, firming up those aircraft that are going to deliver in roughly that 1 year window.

Speaker 2

So when the market is strong and the settlement, we expect that thing to continue to grow. If there was a slowdown, then you would expect to see that number come down. So it's a total 100% alignment around that end market.

Speaker 14

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 if you could ever get to the high end of that deal?

Speaker 2

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

Speaker 14

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

Operator

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

Speaker 1

Hey, David.

Speaker 5

Hey, thanks. Just wanted to ask specifically on FLARA. I think you guys have talked about getting to Kind of $800,000,000 to $900,000,000 annual revenue run rate on FLARO. Where are you fully ramped to that rate In Q3, and if not, did that have something to do with the Bell margin holding up, I think, certainly better than we had thought?

Speaker 2

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 23 to 24, I would say the ramp is going well. I mean a lot of our internal resources ramping up the engineering activity is happening At a pretty good clip, but obviously a lot of that is also getting all of our suppliers on board and getting a lot of the Key partners ramped up. It took some time from the original contract award to get those guys on to contract. So as you go through the rest of this year and As you grow into 2024, there's the inside kind of bell heads, if you will, but there's also a lot of ramp That's the pass through to our partners on the program as well.

Speaker 5

Okay. And I Apologize if you've already touched on this, I may have 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.

Speaker 2

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

Speaker 5

Okay. All right. Thanks very much.

Speaker 3

Sure.

Operator

And we have a follow-up from Cai von Rumohr with TD Cowen. Please go ahead.

Speaker 11

Yes. Thank you very much. So 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 Q4 because your original guidance assumes a very big step up It looks like it's going to be tough to hit. And you also had talked about margins Kind of coming down as FLAR effort ramped and maybe some color in terms of where the margins could be?

Speaker 11

Thanks.

Speaker 2

Yes, I'm not sure I have a whole lot of additional color on the margin side, Cai, other than we certainly expect it to be Given the performance through the course of the year, that will be over the top end of what we originally guided. So I think we still feel The bell will finish out a very strong year. But the numbers are significant and I appreciate that and it certainly looks like a big ramp. We've had a couple of issues very specific around our 505, which is a fairly high volume product, But relatively speaking lower dollar per unit 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 505.

Speaker 2

So, obviously, we would like to get them out. Customers want us to get them out, But the miss on a number of those very light helicopters won't have a big material impact to the performance overall at Bell.

Speaker 11

Thank you.

Operator

And ladies and gentlemen, that does conclude the Q and 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 4029700847 and use the access code 5,95, 1,112.

Operator

Again, that's 866-207-1041 or 4029700847 with the access code 5,95, 1,112. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Textron Q3 2023
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