Textron Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2022

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Textron First Quarter Earnings Release Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. 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 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 presentation can be found in the Investor Relations section of our website.

Speaker 1

Revenues in the quarter were $3,000,000,000 up from $2,900,000,000 in last year's Q1. Segment profit in the quarter was $304,000,000 up $48,000,000 from last year's from the Q1 of 2021. During this year's Q1, we reported net income of $0.88 per share compared to $0.70 per share on an adjusted basis in last year's Q1. Manufacturing cash flow before pension contributions totaled $209,000,000 in the quarter, up $138,000,000 from the Q1 of 2021. With that, I'll turn the call over to Scott.

Speaker 2

Thanks, Eric, and good morning, everyone. Revenues and margins were up in the quarter, driven by Textron Aviation. Aviation demonstrated strong execution in the quarter, resulting in 11.6 percent segment margin. We continue to see very strong demand, solid pricing increased deliveries from our Cetacean Jet and commercial

Speaker 3

turboprop products

Speaker 2

and higher aftermarket volume from increased aircraft utilization. We delivered 39 jets, up from 28 last year and 31 commercial turboprops, up from 14 last year's Q1. We ended the quarter with $5,100,000,000 in backlog. In March, our new commercial store crop, the Suston Sky carrier, received FAA certification and we expect to begin deliveries in the 2nd quarter. At Bell, revenues were down 1% in the quarter, largely driven by the mix of commercial products sold.

Speaker 2

On the commercial side of Bell, we delivered 25 helicopters, up 2017 last year's Q1. During the quarter, we saw momentum building commercial demand across all our product aircraft models and end markets with a strong quarter of new orders. Moving to future vertical lift, in March Bell submitted its final FLORA proposal revision to the U. S. Army.

Speaker 2

A Down Select and award announcement is expected this summer. Moving to Textron Systems, revenues were down in the quarter on lower volume, primarily reflecting the impact of last year's withdrawal of the U. S. Army from Afghanistan on our fee for service and aircraft support contracts. At ATAG, we continue to see increased flight activity and revenue on our U.

Speaker 2

S. Navy and Air Force adversary air contracts. During the quarter, Systems successfully deployed the 1st Aeroson UAS system in a maritime environment aboard a U. S. Navy guided missile destroyer.

Speaker 2

Systems expects to deploy a second aerosol in UAS before an additional shift later this year. Moving to industrial, we saw higher revenue in the quarter, driven by higher pricing Volume in specialized vehicles and our PTV and golf product lines. We continue to see strong end market demand in most of our product lines across specialized vehicles. Kautex saw disruptions related to global auto OEM supply chain shortages, they continue to directly impact our production schedules resulting in lower volume. At the product level, hybrid revenue increased 24% year over year to 12% of total Kaltex revenues in the Q1, up from 9% a year ago as On April 15, we closed our acquisition of Pipistrel, a pioneer and global leader in electrically powered aircraft.

Speaker 2

Avistro brings its technical and regulatory expertise in the development of electric and hybrid aircraft to support Textron's long term strategy to offer family sustainable aircraft for urban air mobility, General Aviation, Cargo and Special Mission Roles. 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 $1,000,000,000 We're up $175,000,000 from a year ago, largely due to higher Citation Jet volume of $93,000,000 aftermarket volume of $61,000,000 and Commercial Turboprop volume of $59,000,000 Segment profit was $121,000,000 in the Q1, up $74,000,000 from a year ago, largely due to the higher volume and mix of $55,000,000 and favorable pricing net of inflation of 16,000,000 Backlog in the segment ended the quarter at $5,100,000,000 Moving to Bell, revenues were $834,000,000 down $12,000,000 from last year due to lower commercial revenues of $32,000,000 largely reflecting the mix of aircraft sold during the period, partially offset by higher military revenues. Segment profit of $98,000,000 was down $7,000,000 reflecting lower volume and mix, partially offset by favorable impact from performance. Backlog in the segment ended the quarter at 4,800,000,000 At Textron Systems, revenues were $273,000,000 down to $55,000,000 from last year's Q1 due to lower volume of $59,000,000 primarily reflecting the impact of the U.

Speaker 3

S. Army's withdrawal from Afghanistan on our fee for service and aircraft support contracts. Segment profit of $33,000,000 was down $18,000,000 from a year ago due to lower volume and mix of $11,000,000 described above And an unfavorable impact from performance of $9,000,000 primarily reflecting lower net favorable program adjustments on our fee for service contracts. Backlog in the segment ended the quarter at $2,100,000,000 Industrial revenues were 838,000,000 up $13,000,000 from last year, primarily due to a favorable impact of $46,000,000 from pricing, principally in the specialized vehicles product line, partially offset by lower volume and mix of $24,000,000 largely in the fuel systems and functional components product line due to the impact of global supply chain shortages on our auto OEM customers. Segment profit of $43,000,000 was down $4,000,000 from the Q1 of 2021, primarily due to lower volume and mix described above.

Speaker 3

Finance segment revenues were $16,000,000 and profit was $9,000,000 Moving below segment profit, corporate expenses were $44,000,000 and interest expense was $28,000,000 Our manufacturing cash flow before pension contributions was $209,000,000 in the quarter, up $138,000,000 from last year's Q1. In the quarter, we repurchased 2,200,000 shares, returning $157,000,000 in cash to shareholders. Beginning in the Q2 of 2022, Pipistrel will become part of Textron E Aviation, A new business segment where we will combine our existing initiatives with Devastrol's capabilities to accelerate our development of sustainable aviation solutions. This new reporting segment will include development expenses related to these efforts and Epistral's operating results. For the remainder of the year, we expect revenues for the E Aviation segment to be in the range of $30,000,000 to $40,000,000 and a segment loss of about $45,000,000 which reflects a net cost increase of about $20,000,000 from the e aviation guidance we provided in January.

Speaker 3

On our January call, we provided guidance for the expected costs related to e Aviation of about $30,000,000 which were included in our full year corporate expense guidance of about $150,000,000 We now expect corporate expense to be about $125,000,000 reflecting the move of $25,000,000 of expected e aviation costs to the new segment on a prospective basis. For the full year, we're reiterating our EPS guidance of $3.80 to $4 per share inclusive of the E Aviation segment results. That concludes our prepared remarks. So, Leah, we can open the line for Chris.

Operator

Thank you. And our first question is from the line of Robert Stallard with Go Research, please go ahead.

Speaker 4

Thanks so much. Good morning.

Speaker 3

Good morning, Rob.

Speaker 4

Scott, you noticed a very noted a very strong quarter I was wondering if you could comment on whether you'd seen any differences in terms of the different types of aircraft you had And whether there have been any change in the customer dynamics by type as well? Thank you.

Speaker 2

Not really, Robert. It's across the whole portfolio, jets, King Airs, it's The momentum continues to be strong. It's still more U. S. Centric than general.

Speaker 2

It's probably around eightytwenty on jets, Around 60% on turboprop where we usually see more like 60% international on turboprop. So the dynamics from what we've seen here over the last Year, let's say, kind of continued through the quarter in terms of the kinds of customers, still seeing quite a fair number of new customers Coming into the marketplace, which is encouraging, but yes, I'd say the dynamic is quite similar to what we've seen, just very strong in terms of The number of transactions, the demand out there continues to be robust.

Speaker 4

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

Speaker 3

year? No. We're staying at the $700,000,000 to $800,000,000 for now.

Speaker 4

That's great. Okay. Thank you very much.

Operator

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

Speaker 5

Good morning and thank you guys. So maybe on Aviation margins, just relative to the guidance you gave in January, 11.6% is pretty strong for the Q1 on maybe lower deliveries than we thought, but up significantly year over year and price was only 1.5%. So Maybe Scott, if you could talk about what you're seeing there, how we should expect that to progress, can we see better pricing?

Speaker 2

Well, I think the pricing remains strong. Obviously, we're selling out into the future and making sure that we get Good pricing in anticipation of continued inflationary pressures. So I think we're pretty well covered on that front. Do you think the margin is a little strong here in the Q1, Sheila, because we just Again, the flying activity is up so strongly that we saw about 38% of our revenue here in Q1 was service and aftermarket Business, so that's a little heavier mix than we would expect to see certainly for the total year and that's part of what's driving a little bit Probably higher margin in Q1 than what we guided. So it's a little bit more of a mix here between aftermarket and original equipment sales.

Speaker 2

And obviously, original equipment sales will strengthen We go through the year.

Speaker 5

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

Speaker 2

So our logic for doing this and breaking out as a separate segment is, as we talked about in January, because this was sort of a cross business thing, we had aviation engineers and Bell Some folks from systems, they're kind of building out the team. And it's a new space, particularly around eVTOL. We were funding that in a corporate line. With the acquisition of Pipistrel and the increasing importance, I think, of kind of these investments that we're going to make on the sustainable aviation side, We thought it would be helpful to shareholders to break that out as a separate initiative and give visibility to that. So obviously, Pipistrel is in there, its operating results are in there, but it's a $40,000,000 $50,000,000 at this point sort of a business.

Speaker 2

So a lot of the results You'll see in that segment are driven by the significant R and D investments that we're making around the Sustainable Aviation activities. And some of that is, as I said, Actually, we are already funding on the through the corporate line, as well as obviously bringing PIVASTROLL in and increasing Some of the R and D that was in that business to sort of accelerate some of the product activities that Pipstral already had undertaken. Thank you. I think you'll just get better visibility.

Operator

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

Speaker 6

Thanks. Good morning.

Speaker 2

Good morning.

Speaker 6

Scott, did you were deliveries a little short at all or are you missing deliveries given the transition to the M2 CJ4 Gen 2, I thought that was going to impact Q1.

Speaker 2

Look, I think we're probably a couple of aircraft behind where we'd like to be just in terms of schedule ramping up and getting people Hitting, but not materially. I mean, it's we expect to continue to see the growth in deliveries as we go through the course of the year. But I mean, it was

Speaker 6

And could you talk about maybe across Bell and Systems, how you did in the 'twenty two budget in terms of the final build relative to the Initial request and same thing in the initial fiscal 2023 request.

Speaker 2

I think FY 2022 finally came out about where we would have expected it to be. Our programs are I think when we look at what came out on the FY 'twenty three budget, this is a very long process. There's certainly things that we would like to see You'll have some increased funding and obviously we'll work on that between now and get into an actual appropriated FY 2023 Budget, I would say, when we look at the overall budgets and we look at the numbers that have been put out in terms of future defense Funding areas are difficult to us, particularly in the Army, things around FLARAA and FARA, it looks like those are Being funded as we would have expected.

Speaker 6

Okay. Thanks very much.

Operator

And next we go to Seth Seifman with JPMorgan. Please go ahead.

Speaker 7

Hey, thanks very much and good morning.

Speaker 2

Just wanted

Speaker 7

to ask about cash deployment and kind of The pace of share repurchases, you told us earlier in the year to expect We hope to ramp through the year and it looks like that's what's happening. But we've seen strong cash generation so far. The markets had some setbacks early How did you think about approaching cash share repurchases opportunistically? And how did the acquisition play into that thought process?

Speaker 2

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

Speaker 7

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

Speaker 2

That's what we understand, yes.

Speaker 7

Okay. Excellent. Thanks very much,

Speaker 4

Scott. Sure.

Operator

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

Speaker 2

Hey, good morning.

Speaker 3

Hi, Ron.

Speaker 2

I was wondering if you could maybe peel back the onion

Speaker 8

a little bit on what drew you to Pipistrel? And then maybe as a follow on, what else are you thinking in terms of M and A out there that could bolster your businesses?

Speaker 2

Well, I guess, what I'd say on the pivotal front, Ron, is as we look at what needs to happen, the technologies and capabilities you need To do things like eVTOL, I think our company is was already very, very well equipped in terms of aerodynamic capability and structures and loads, aircraft flight Controls, obviously, our expertise in the aviation business today in doing Part 23 aircraft certifications And the capability that we have in Bell on tiltrotor, which in essence, I think the architecture certainly where we're heading So it's a small tiltrotor sort of a product on the EVTEL front. I think we felt like we've got a tremendous amount of organic capability, but We don't have any experience to speak of around battery management systems and cell analysis and development, the whole electric propulsion side of this. And when we looked at this role, I mean, this is a perfect combination. So in my view of you, you look at what's critical from a technical standpoint to go Design, develop and certify an aircraft of that class. And by the way, not just the CVTOL, but also other applications in GA For electric or hybrid, we had a gap in that electrical propulsion side and this is pivotal strength.

Speaker 2

So I think it's sort of the missing piece of the puzzle In terms of how we think about our ability to go off and design, develop and certify aircraft in that space. So I would say the more work we've done and now with the deal closed and interacting with their team, they've got superb Capability and a real leader in that space, and they understand it very deeply. Our teams are already integrating and getting to work. So I think we're feeling really good about it. In terms of other acquisition stuff, we probably won't comment at this point.

Speaker 2

But if something happens, we'll certainly let you know.

Speaker 9

All right. Thanks.

Operator

And our next question is from Pete Shevitsky with Alembic Global. Please go ahead.

Speaker 10

Hey, good morning, guys.

Speaker 3

Sorry if I missed this, but what was

Speaker 11

the sequential increase in Bell's backlog? Was that driven by commercial or just kind of legacy V-twenty 2 or Ah-one or something else?

Speaker 3

There are some commercial, but also we signed the V-twenty 2 PBL Contractify your PBL support contract.

Speaker 11

Okay. So I wanted to ask you guys about this potential Nigeria Ah-one contract just because that Seems like it could be sizable for you. I think maybe approaching $1,000,000,000 Wondering when that contract might get signed, then how to think about The start of revenue recognition and timeframe on that.

Speaker 2

Pete, it's hard to say, right? I mean, we've been working on this Program for a while, working with the Nigerians to develop this. The congressional notification and approval was a big deal. Obviously, that's an important hurdle to get through. But this does still now need to go through contracting.

Speaker 2

It is an FMS case, right? So it's a contract that needs to be negotiated between the Nigerian government And the U. S. Government and then turn around a contract down to us. So I'm always leery of providing any dates associated with anything that's FMS.

Speaker 2

So For sure, it was a major milestone to get through the congressional process, but there's probably A bit of work here still to do to get this thing under contract. So we certainly have not factored that into anything in our guide at this stage of the

Speaker 3

Okay. Thanks so much.

Speaker 4

Sure.

Operator

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

Speaker 11

Hi, good morning.

Speaker 3

Good morning.

Speaker 11

Scott, regarding the very strong extension of demand at Aviation into the quarter, Could

Speaker 1

you talk about the cadence through the

Speaker 11

quarter just given the war starting, the volatility in the stock market? Did that change anything between January March or even into April?

Speaker 2

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

Speaker 11

Okay. And then and globally, Any changes there?

Speaker 2

No. I mean, obviously, flying of assets that In Russia, our Russian register has dropped off dramatically. We don't service or support those aircrafts at this stage of the game, but that's Relatively minor as a light midsize kind of player, most of the oligarchs tend to be big iron guys. So The impact to us was pretty immaterial.

Speaker 11

Okay. And then just on the Specialty Vehicle side, How would you characterize the current demand environment, the trends there and the inventory situation? Just given the demand.

Speaker 2

Yes, sure. Look demand remains very strong. Inventory levels are at extremely low levels. Supply chain continues to be the battle, I would say, in some of our product lines, particularly around the golf and the golf derivative PTVs. We've We've seen stabilization in that in the supply chain.

Speaker 2

It's still a fight every day, but we're getting stuff out. And the market demand This robust pricing is strong. In some of the other areas, you're still getting challenges in supply chain, things get caught up. I mean, we had a lot of deliveries in So for instance, which normally that would have been done by the end of last year. As the parts finally came in, we were able to finish up units and get those out into the field.

Speaker 2

I'd say encouraging like on GSE, for instance, which has really impacted obviously by the airline side of things, the order activity has come back very robust, Which is great. So that those lines are ramping back up again. But, so I would say in general across pretty much all of those Markets that we serve, very strong demand, very low inventory out there in the channel, supply chain challenges continue, but we work from every day and We're getting stuff out.

Speaker 12

Thank you for the color.

Operator

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

Speaker 12

Good morning.

Speaker 2

Good morning, George.

Speaker 12

Scott, with the strong book to bill and You consider raising production rates further for next year or you want

Speaker 7

to wait a little while yet?

Speaker 2

Well, I would say, George, as you guys know, we talked about the rates kind of increasing through the course of this year. Certainly, with the demand that we're seeing and the level of backlog, we'll plan on continuing to raise those As we go into 2023, so we do this on a pretty real time basis. So as the order activity continues to stay demand, We'll stay on the ramp that we've already committed to in 2022 and certainly we're not ready to guide 2023 yet, but I would certainly expect that we'll continue to push on increasing those rates as we go into 2023 as well.

Speaker 12

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

Speaker 2

Well, look, the lead times are always sort of in that 9 months or so kind of timeframe. There Certainly long lead, longer lead components that are part of that in engines and some other critical technologies, but we work with our suppliers every day on So we're forecasting that demand so that they're ready to meet that ramp. So for those critical long lead items, the discussions are Happening in real time and they understand what our expectations are in terms of supporting the ramp, not just through the balance of this year, but into 2023.

Speaker 12

And one quick one for Frank. Given the weak systems sales in the Q1, is your guide of $1,300,000,000 for the year still good or it's going to come down No, we're still

Speaker 3

kind of maintaining that type of area. We expect that the first half with systems We'll be on the lighter side and then we'll see momentum and growth going into the second half.

Speaker 12

And what drives the growth in the second half?

Speaker 3

Just kind of the timing of program activities and kind of other things.

Speaker 12

Okay. Thanks very much.

Operator

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

Speaker 10

Hi, good morning everyone.

Speaker 3

Good morning.

Speaker 10

Is all of your prior full year guidance reiterated this morning?

Speaker 2

Well, I mean, yes, we're not changing any of our guidance. So we held the range On EPS, obviously, we did the Pipistrel deal, so we have some additional dilution. We think we can overcome that by some over performance in a couple of areas and the catch we're holding in at least at this point to our previous guide.

Speaker 3

So We're not reguiding the segments, but

Speaker 2

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

Speaker 10

Okay. Yes, I know, I mean, just given where the Earnings and cash flow is usually seasonally pretty weak in the quarter. Just given where those came in, in the quarter, it seemed to outperform even what Maybe you had been looking for a quarter ago when you got it. So just wanted to make sure we're on the same page there.

Speaker 2

Yes. No, look, as I said, I think we had strong aftermarket In the quarter, which is good mix for us. But as we talked about last year, I do think when you guys model these things, You will see more linearity than we've seen for quite a number of years and that's because having that strong backlog, we were able to plan production, customer deliveries, That activity will be more linear than what we've had in previous years.

Speaker 10

Okay. Just honing in on that Aviation margin I mean, the way that was forecasted to start the year, it was sort of a low 20% incremental for the year. It's over 40 in the quarter. There's a strong pricing environment. You have low capacity utilization and volume coming into that.

Speaker 10

It would seem like you could have Better incrementals than you've had in the past for a period here. Recognizing your point on the mix in the quarter, I mean, just What's your latest thinking on where those incrementals can land as you move through the year?

Speaker 2

I mean, we always feel like this is probably a 20%, 25% incremental. Absolutely, in the quarter, it was considerably stronger than that. Again, that's largely mix driven. And on a year over year basis, The revenue, it's we're going off relatively low levels, right? I mean, last year's deliveries were light.

Speaker 2

This year's are certainly stronger, and So we get some overhead benefit out of all that. So I think we feel great about the margins we delivered in the quarter. I think we'll have a very strong year, but it's This was a very strong mixed quarter.

Speaker 10

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

Speaker 2

No. Look, I mean, every customer is different, right, in terms of when what their For sure, there's a lot of customers at this point that the market's changed dramatically in the last year or so, right? So there are folks that would have thought, hey, I can Just call up and I can get on a craft here on a short cycle or finding that that's not the case, right? The lead times Our back where they've been more historically in this industry. So that being said, part of Our plans, as we talked about going into next year, is we expect we will continue to increase production rates because we certainly don't want to create a situation here where we lose a customer because of Timing.

Speaker 2

So it is a balancing act here, but we need to we certainly do with this backlog and the demand we continue to see in the market, we do need we will need to continue to increase rates. But I think we want to do that responsibly and work with our suppliers to make sure we don't put ourselves in a bad situation. But yes, we will continue to meet Production increases to try to avoid that problem.

Speaker 10

Okay. That's excellent. Okay. Thanks so much.

Speaker 3

Sure. And

Operator

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

Speaker 11

Good morning, Scott and Frank. Good

Speaker 2

morning, Jeff.

Speaker 11

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

Speaker 2

Sure. Well, Peter, the flying hours are very strong, obviously, And that ultimately drives our aftermarket revenue, as we all know. I'm not predicting a change in that. I think we continue to see very robust flying hours. I think our service business, aftermarket business will stay strong through the whole course of the year.

Speaker 2

It's more about the OEM original equipment side ramping up, which is just going to change That ratio as opposed to an expectation that aftermarket will go down. So it's just on a percentage basis at 38%, that's pretty strong, right? We're normally in that In the low 30s in terms of our aftermarket.

Speaker 3

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

Speaker 2

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

Speaker 11

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

Speaker 2

Peter, it's everybody is dealing with supply chain challenges. I think our team does a great job of managing From issue to issue, as I said, we're a little bit behind schedule on a couple of things. It's just ramping up employees, our suppliers ramping up employees. It continues to be a challenge. I mean, there's most things we're able to work our way through.

Speaker 2

There's a couple out there. We've got a couple of critical suppliers, Unfortunately, had some supply chain, their supplier suppliers that were in Russia and that's created Some issues, so we see some suppliers are having to go resource.

Speaker 3

The good news is, at least on a

Speaker 2

couple of critical ones, they've got suppliers that have built those parts before, But it's created a gap, right, because all that not just finished goods, but stuff that was work in process in these Russian suppliers is basically unavailable to us As a result of the sanctions, so we're kind of you got to transition in resource to somebody who knows how to do it, but it creates a gap. And We'll have to manage our way through that gap. Again, the timing of does it affect an aircraft or a few aircraft here or there? I mean, I think we are I'm expecting that. I think our financials can hold together, but there are certainly some aircraft from a timing standpoint that we see At risk, the good news is most of these things are things where we can continue our production processes and build the aircraft, paint, do everything and It's something that can be incorporated very late in the game.

Speaker 2

So I think we'll be able to catch up pretty quickly once the flow of some of those things starts again. But it's an everyday thing, Peter, I think let's say, for the most part, we worked through it. There's going to be a couple items here or there that could impact us by a few aircraft, and we'll have to manage our way through that.

Speaker 11

Appreciate all the details. Thanks.

Operator

Next, we go to the line of Cai von Rumohr with Cowen. Please go ahead.

Speaker 2

Kyle, you might be on mute. Hello.

Speaker 9

Excuse me, I'm here. I was on mute, correct. So Pipistrel Basically, has focused on fixed wing applications and lift cruise Cargo Designs. And you guys, to the extent you've kind of shown models have focused on tiltrotor for the UAM market. As you put these 2 together, what do you think are the target markets that are of greatest interest to you?

Speaker 2

That's a great question, Kyle. I think that the I think there's a broad range of applications for electric and hybrid electric aircraft. UAM kind of sort of hijacked that story here for a long time and that market is probably a very real market. It It could be a huge market and certainly one that we want to play in, but from my perspective, it's by no means the only market for electric or hybrid electric Aircraft, as you mentioned, cargo, like we have a lot of interest from customers who talk about doing unmanned cargo. And to this A lot of them are trying to figure out how you take existing platforms and unman them.

Speaker 2

There's good work going on in that space, but I don't know if that's the answer. I think that Some of the work that Pipistrel has done, architecturally, frankly, what they're doing in the cargo space is not unlike some of what we've done with Small aircraft in the unmanned world for the military side, but the work Pivotal has done. This is a serious cargo machine. It's kind of a 1,000 pound Utilization, so there's those are some of the things that we'd like to add additional R and D to try to accelerate bringing some of that So the market, there's some other work in sort of more traditional GA aircraft that could be electric or hybrid Electric, so I think that this is certainly there's a bet here for us, Kai, on the UAM side And a mega market opportunity that we need to play in, but by no means is it the only one. I think some Everything from pure electric for the trainer to cargo to GA of all sorts, These are all opportunities that we're looking at pretty hard.

Speaker 2

I think frankly some of them will happen faster than the UAN market is going to happen.

Speaker 9

Great. And so if you think about it, with the FAA today sort of being A lot tougher on what you have to do to get things certified and you got a lot of targets. I mean, if you

Speaker 3

look at the other guys

Speaker 9

who are focusing on UAM, I mean, we're talking 3, 4 years from vision to actual getting certified. So that would imply, if you're really going after that, a fair lift in terms of your R and D spend. So do you have any rough sense in terms of what kind of an envelope that's in like the Cisco To $100,000,000 could it go to $200,000,000 because the potential is so big, how should we think about that?

Speaker 3

Well, Guy, we'll sort of work

Speaker 2

through that here year by year. And obviously, part of our objective on creating the separate segment is to give you guys Visibility into where what kind of investment we're placing into that space, does it become that big A number probably not in my view. Remember, when we've talked a little bit about this before, right, we don't when you look at some of the amount of money that Companies are spending in the space. It's facilities and building out factories and it's a lot of infrastructure that frankly we already have. So I think our investments will be much like they traditionally are for 1 of our aircraft programs, which is the engineering resources Some tooling to the extent that we need to do that, but we can leverage an awful lot of what we already have.

Speaker 2

But anyway, look, you guys will get Good visibility because of the breakout of the segment and what those investments are. Obviously, we're very open to talking about that and showing Those kinds of numbers, but the certification issues, look, I think people don't understand what that process is all about, right? We just certified fixed Sky carrier as a Part 23 aircraft this past quarter. We know the Part 23 process. Yes, It's challenging.

Speaker 2

Any certification program is very challenging, but it's that's something we work through all the time. So I think we know how to navigate through that process and work For the FAA to get there, obviously now with Pivotal, similarly they understand that process and have worked out and frankly have already certified an electric aircraft with the So I think the regulatory framework is one that a lot of people don't understand. I think we do understand it.

Speaker 9

Terrific. Thank you very much.

Operator

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

Speaker 13

Hey, good morning, guys.

Speaker 3

Good morning. Good morning.

Speaker 13

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

Speaker 2

Well, look, we obviously will disclose price versus inflation. I think in most of our businesses, our guys are doing a really nice job Recognizing that the where the inflation is and we're getting price to offset that, not just here in the near term, but in how we're pricing products delivering out into the future with reasonable expectations about what the inflationary environment will look like. So I mean as much as this is sort of new territory, It kind of is what it is, right? The inflation is very real and we have to get price to offset that and then we've been doing that. So Look, it's harder.

Speaker 2

We've had some government fixed price contracts that are that you're working through that put a little more pressure on it. But clearly, As we price and bid new programs, we factor in that inflationary pressure to that as well. So I think in general, we talk about it a lot. I think our teams are very sensitive to what's

Speaker 13

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

Speaker 2

Look, I think it will be very, very similar, right? I mean, we have relationships with companies today, obviously, where we have Fleet programs, the fractionals, for instance, or other charter operators or big cargo Operating companies, I mean, we do this as a normal course of business. So I think I don't worry about that at all. I mean, I see all these announcements People are talking about things that are years into the future and business models that aren't well defined yet. I just we don't need to do Right.

Speaker 2

When you talk about direct consumer for us, that's easy. We do that every single day, right. We sell Cessna 172s and 182s and 206s and Bonanzas. By the way, Obviously, part of what we're doing with Pipistrel is leveraging that sales team all around the world that's selling our aircraft The Suston and the Beechcraft brands will also be out there selling and servicing the Pivotal brand. But I think specifically around eVTOL, As this market evolves and the business starts to build, we will absolutely be a player in And I'm not worried at all about our access to those customers and ability to sell our product to those customers.

Speaker 2

It's what we do.

Speaker 5

Great. Thanks for the color, Scott.

Speaker 12

Sure.

Operator

And we have no other questions. You may continue.

Speaker 3

Okay.

Speaker 1

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

Operator

Thank you. Ladies and gentlemen, this conference is available for digitized replay starting today at 10 am Eastern Time and will be available through October 26 at midnight. You may access the digitized replay by calling 1-eight 66 207-1041 and enter the access code of 5,89,4411. Again, that dial in number for the replay is 866-207-1041 with the access code of 58, 94411. And that does conclude your conference for today.

Operator

Thank you for your participation and for using AT and T Teleconference Service. You may now disconnect.

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Earnings Conference Call
Textron Q1 2022
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