Q4 2019 Earnings Call
Ladies and gentlemen victory standing by welcome to the Textron earnings call at this time, all participants on the listen only mode.
If you wish to ask a question today. Please press one then zero as a reminder, today's call is being recorded I'll now turn the call over to your host Vice President Investor Relations Irick. Senator. Please go ahead Sir.
Thanks, Kevin and good morning, everyone before we begin I'd like to mentioned, 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 earnings call presentation can be found in the Investor Relations section of our website.
Textrons revenues in the quarter over 4 billion up 285 million from last year. During this year's Forthe fourth quarter, we recorded 72 million pretax special charges largely related to industrial and Textron aviation or 24 cents per share after tax excluding these special charges adjusted net income was $1.11 per share.
<unk> compared to $1.15 in last year's fourth quarter.
Manufacturing cash flow before pension contributions was 650 million up 366 million from last year's fourth quarter.
For the full year revenues were 13.6 billion down 2% from a year ago, but.
Adjusted net income was three dot.
Sellers and 74 cents per share compared to $3.34 last year during cash flow before pension contributions was 642 million down from 784 million last year with that I'll turn the call over to Scott.
Thanks, Eric and good morning, everybody.
Revenues were higher in the fourth quarter, primarily driven by double digit growth at Textron Aviation Roland Textron systems at Bell revenues were up largely through higher commercial deliveries of our 474 to nine or five or five models.
We delivered 76 commercial helicopters up from 46 and last year fourth quarter.
Our military side the V 22, tilt rotor recently surpassed the milestone a 500000 flight hours.
With more than 375, you 22 aircraft in operation across the West Marine Corps Air Force, a navy as well as internationally with Japan. This increasingly.
Crushingly large install base continues to drive significant aftermarket opportunities to support this highly utilized fleet.
In the fourth quarter. The Bell Boeing program office was awarded contracts totaling over 800 million across multiple support activities, including 375 million to provide maintenance repair and consume materials work to the US Navy airforce and require operations 218 million for logistics and engineering support for aircraft across the us military fleet.
146 million as part of the recourse Cc Ram monetization program.
68 million for logistics and as your support in Japan.
I will also received an 815 million dollar five year performance based logistics contract for US Navy for upgrades to their H, one Yankee and Zulu aircraft.
On the new product front Gulfmark the second anniversary of the two ways first flight in December .
In two years of highly successful flight demonstrations. The aircraft has flown more than 160 hours to collect data and inform requirements for the us armies future long range assault aircraft program.
In December the V. 280 flu autonomously for the first time.
Any all built demonstration flight goals, including automated takeoff and landing conversion accrues mode and precision navigation.
At systems revenues.
We're up on higher volume largely within our unmanned systems product line.
In the quarter Textron Marine land systems announced that ship to shore connector craft 100 successfully completed acceptance trials with Us Navy.
Also in the quarter Textron systems. They type was selected as an authorized provider of contracted error Eversource services for the U.S. Airforce combat Air Force's contracted or support program.
Hi Tech has also started flying is Mirage, a foreign fighters and support of their current us Navy contract.
Early in January the you US Army announced its intention to award Textron systems, a contract for four Repsol and five vehicles as part of its robotic combat vehicle medium program.
Moving to industrial we recently completed our previously announced review of strategic alternatives for our Catholics business unit.
Review considered a range of options for the business. After careful consideration, we determined that the interest of our shareholders. Our best serve with Caltex remaining as part of Textron.
The Textron specialized vehicles, we added additional independent dealers to our new truck or distribution channel and saw continued retail volume growth in the quarter.
Moving to Textron aviation in the quarter revenues were 1.7 billion up 11%.
We delivered 71 jets up from 63 last year and 59 commercial turboprops down from 67 last year's fourth quarter.
We also initiated deliveries of new citation longitude with 13 aircraft for the quarter, including the first aircraft delivered to net jets.
I would now like to update you on the December 27th accident, our which 12 plant through facilities.
First and foremost are number one priority is a health and safety for employees and we're fortunate that all 12 and ended employees have been released from hospital in a recovery.
From an operational standpoint Sky Courier located also implant three has been unaffected by the accident and that program is continuing on schedule.
Just last month, we accomplished this so six successful we made of the Sky Courier key milestone the development of this new twin utility turboprop.
The plant did incur significant damage affecting our composite manufacturing operations and we are working to recover the entire facility.
We do expect some disruptions to our production that will impact our ability to complete and deliver aircraft from the first half of 2020, but were we fully expect recover by year end with no impact or annual plan.
In December we announced restructuring plan to reduce cost improve overall operating efficiencies through headcount reductions and other actions.
At Aviation these actions largely included head count reductions.
Reflecting the completion of a long period of new product development, resulting in the entry into service solicitation latitude.
Most recently the citation longitude.
These actions are necessary to align our cost structure within the current operating environment.
As we ramp up production of launch to anticipate lower legacy aircraft demand and reduced requirements for ongoing development programs.
We also acquired Premier Aviation was relocations, Australia, which has expanded our reach of aftermarket services in the Asia Pacific region.
Reflecting our continued investment to support our customers internationally.
The new vision aftermarket increased volumes drove higher aftermarket revenues, which were up over 13% from the prior year.
In summary, we have many items the highlights in 2019 across our segments.
At Bell, we continue the successful flight testing the between valor, achieving a cruise speed of over 300 ops.
Improve the aircraft maneuverability and controlling you all to the Army's high standards for aircraft agility.
We also unveiled a bell through 60, Invictus, our offering for the us armies future tight reconnaissance aircraft competition.
On bells commercial business, we saw higher deliveries from increased order demand we've seen over the last year in half.
Textron systems, we had winds on several key development programs, including the reps selling five selected for the arms were about to combat vehicle program.
Yes on HQ selected for phase one of the Army's future Tactical UAS program.
Hi Tech selected to participate in the Air Force Comcast program.
We were down selected to continue in the Army's next generation squad weapons program.
Then TSV, we launched a new distribution channel through our partnership with bass pro shops, and cables and independent truck Marine dealers.
We also implemented a new business model to better align production with demand than our snow business and we expect both actions to drive both growth and improved performance in the outdoor power sports.
Textron Aviation, we certified in began deliveries of our newest citation longitude.
And advanced development of too new to report programs the system Sky career and the Dalai.
This backdrop, we're projecting revenues of about 14 billion for Textron's 2020 financial guidance.
Well, we're expecting continued strong execution in 2020, lower military production offset by higher military aftermarket and higher commercial volumes.
Systems were expecting modest revenue growth, partially driven by the 2019, new program wins highlighted earlier.
Industrial we'll maintain our focus on our vehicle business in 2020, as we continue to improve execution and drive improved profitability.
The vision, we are projecting growth from increased deliveries of our new citation longitude aircraft, partially offset by lower legacy demand.
We are projecting Lps and range of $3.50 to 3070 cents per share.
Manufacturing cash flow before pension contributions.
Expected to be in the range of seven to 800 million with that I'll turn the call over to Brian . Thank you Scott and good morning, everyone.
Segment profit in the quarter was 340 million down 57 million for the fourth quarter 2018 on a $285 million increase in revenues, Let's review how each of the segments contributed starting with Textron aviation.
Revenues at Textron aviation of $1.7 billion were up 11%, primarily due to higher volume and mix largely reflecting the longitudes entry into service.
Segment profit was 134 million in the fourth quarter down from 170 million a year ago, primarily due to the mix of products sold in an unfavorable impact from inflation net of pricing.
The resulting margin dilution in the quarter from the mix of aircraft sold was largely due to the initial launch two deliveries and the associated higher cost basis.
That included rework for modifications required by the final type certification and lower legacy deliveries backlog in the segment ended the quarter at 1.7 billion.
Moving to Bell revenues were 961 million up 16% from 827 million last year, primarily on higher commercial volume segment profit of $118 million was up 10 million largely on the higher commercial volume.
Backlog in the segment ended the quarter at 6.9 billion.
At Textron systems revenues were 399 million up 16% from 345 million a year ago, primarily due to higher volume.
Segment profit of 33 million was down 4 million, primarily due to unfavorable performance, partially offset by the higher volume and mix.
Backlog in the segment ended the quarter at 1.2 billion.
Industrial revenues of 927 million decreased 81 million largely related to lower volume and mix at textron specialized vehicles, principally due to the shift in the timing of snow sales to the third quarter of 2019.
Reflecting the new business model that was implemented earlier this year.
Segment profit was 44 million compared to 73 million a year ago, largely due to volume at Caltech slower volume accountemps and the shift in volume at TSV, partially offset by favorable performance in price at TSV.
Finance segment revenues increased 1 million and profit increased two mill.
Moving below segment profit corporate expenses were 22 million and interest expense was 36 million.
With respect to our restructuring plan, we recorded a pretax special charges of 72 million in the quarter.
We ended the year with manufacturing debt of 3.1 billion.
For the full year, we repurchased approximately 10 million shares and an overall cost of $503 million.
Turning now to our out 2020 outlook I'll begin with our segments on slide nine of the earnings call presentation.
At Textron aviation, we're expecting higher revenues of about 5.4 billion, reflecting higher longitude deliveries, partially offset by lower legacy deliveries.
Segment margin is expected to be approximately 8%, reflecting the dilution related to higher inventory costs and learning curve associated with the increased longitude deliveries.
And lower legacy volume.
Looking to Bell, we expect overall revenues of about 3.3 billion.
We're forecasting a margin of about 12.5% largely reflecting a change in mix of military volume.
Systems were estimating higher 2020 revenues of about 1.5 billion.
Segment margin is expected to be about 10.5%.
And industrial we're expecting segment revenues of about 3.8 billion and a margin of about 6.5% at financed we are forecasting segment profit of about 20 million.
Turning to slide 10, we're estimating 2020 pension cost to be about 33 million versus pension income of $11 million last year.
Turning to slide 11, R&D is expected to be about 550 million down from 647 million in 2019.
We're estimating capex will be about 360 million up from $339 million last year.
Moving below the segment line and looking at Slide 12, we're projecting about 135 million of corporate expense 135 million of interest expense and a full year effective tax rate of approximately 18.5%.
Our outlook assumes an average share count of about 227 million shares as we continue to deploy the majority of our free cash flow towards share repurchases in 2020.
Concludes our prepared remarks, so Kevin we can open the lines for questions.
Thank you and ladies and gentlemen, once again you wish to ask a question. Please press wind in zero on your Touchtone phone.
First question in queue is from the line of Peter Ahmed of Baird. Please go ahead.
Please.
Your line is open now.
Good morning, as Scott Frank.
And Scott I guess I'll, just start high level I guess on aviation.
Just talking about the outlook it feels like.
With longitude ramping in finally getting across the goal line, that's big step forward, but just kind of I see the legacy rates coming down what's kind of is there an expectation on kind of unit volume expect for for 2020.
I think overall unit volume will be fairly flat Peter so it's from on a unit number will have.
I will clearly more a lot more launched two so the revenue guide.
Is obviously up but so that the unit volumes would be kind of flattish you'll just have higher.
Unit revenues driven by the fact that will have significant mix of launches. Okay. And then just on the launch itself. There was expectation that this was going to help a lot on the on the factory absorption side is there just to a point in time, when inflection where we get through kind of the learning curves, what's your expectations around that yes clearly.
The first quarter first in the front really most of the first half will will be selling while the aircraft that were fabricating late last year, obviously, a number of those have a lot of the rework the.
Basically inventory.
We'll deliver here, particularly in the first quarter, the learning curve is going well, but for sure.
We'll expect to see a more normalized margin rate.
On longitude as you get into the back half of the year. So that's that's the challenge in terms of mix sizes are going through sort of.
Moving the aircraft that have incurred a fair bit of rework. So soon certification process and then getting a learning curve under our belt.
Which we feel good about in terms of early Fabs and all the feeder lines are coming into final on but will really start to see those aircraft that are deliver in the second half the year had in the final Assembly line.
Here is we get into the first half.
And just lastly on just overall demand in Biz Jets, just what's your current taken we've been.
Obviously, you've been had some fits and starts with the trade and kind of this stresses last year can you maybe give us your overall environment.
I think it's pretty consistent with what we've talked about going into the third quarter.
Longitude, obviously being a brand new product and very well well received in the market we feel good about.
How thats going in curly new product like that will drive some demand activity, which is great on the legacy side things continue to be sort of flattish to down as we've talked about in third quarter. Our our approach here is that we would.
Lower volumes bring back some of our production.
Capacity and make sure that we don't have to get the situation, we've got a bunch of.
Excess aircraft and start to drive.
Pricing activity so I.
I think were we made those adjustments going into the fourth quarter and I think we'll hold those for our perspective at this point will hold up.
Through through 2020, if something starts to change or we see things strengthen there's certainly a lot of conversation Peter is not like the mark is out there, but getting people to commit as has been a little bit softer than we saw that through the whole back half of of 2090. So I think the of the market is has been pretty stable here for the last three.
Six months.
Appreciate the color. Thanks.
Thank you next question is from the line of Sheila Kaye of Jefferies. Please go ahead.
Hi, Good morning, guys from chopping my last month so.
Hi, Steve.
Yes.
Just wanted to follow up quickly on Peter's question, you at 7.8% margins in the fourth quarter 13, longitudes out the door. So when we think about the quarterly aviation margin cadence does it dipped below that in the first half and also putting the incident.
We entered the picture of sale.
Is this the kind of do we expect a steeper drop in the first half.
Yes, so look I mean, we know we don't normally go into a quarterly kind of progression, but considering particularly with the impact of plant three.
I think that we will probably be somewhere in the 10 to 15 aircraft.
Late in Q1 in Q2.
We're still in the process of finalizing understanding all the tooling, which everything appears to be repairable, but it will take some time to get the composite operation backup in.
And running so given that and the progression, we just talked about with Peter on the margin.
Kind of going from a tougher marginal longitude and becoming more normalize as we get sort of exiting 2020.
I think that progression at aviation is going to start the year.
Sort of low single digit in Q1 is going to move to mid single digit in Q2, and then high single digit Q3, and double digit Q4, and that's again thats really normally we don't kind of going to that level detail, but I think we have to make sure people understand that we're going have water deliveries in Q1 Q2, driven by this composite.
Factory issue.
And that compounded with the the change of margin rate of launches versus a year.
We will give us that sort of progression so.
So again, a full year sort of impact and I think consistent with the guided we've given you, but we clearly expected Q3 Q4.
We're going to be out the more normalized margin rates that we expect others business, but it will be light in Q1 Q2, given the launch Dtwod mix on the until late deliveries frankly, evault a lot of its legacy aircraft impacted by the plan through situation.
Okay. Thanks, it's pretty clear I'm, sorry for all that detail on the quarter, but bigger picture question, you decided to keep cash tax I guess, what was the rationale behind deciding to keep it and you've also announced some restructuring for two years in around now where that business today and what brings the profitability levels back up to that 6.5% range that you're guiding to.
Well look Hell, Texas, we've always talked about is a good business has been a good cash generator for also generates a very good ROI see solid returns and what we were asked and sort of per from a lot of investors that.
Maybe this is something that within the portfolio holds back or.
Our PE and our ability to generate a better stock prices. So we're going to go look at this we went into the process knowing that considering the profitability that business and for where things were in the automotive sector that we would probably see some dilution, but some dilution versus.
Our potential re rate on the on the multiple could result in something good for our shareholders as we went through the process.
The reality was that what was of the pricing on in terms of what.
Anyone would be willing to pay for that business right now would have created a level of dilution that theres no way.
Our view would have created enough of early read on the multiple there would be good for our shareholders. So we we went through the process what was very rigorous we looked at a larger firms alternatives and options and the end there was no wafer us to get our head around this being something that would be accretive for our shareholders and again, it's a good business.
Generates good cash it generates good earnings look were worse also sitting at kind of a low part of an automotive cycle, but that team has done a really nice job managing through that and it has stayed desal business. Obviously, we did some restructuring because we think that others are probably towards the bottom of the auto cycle, but it's.
It's not going to come snapping back so we wanted to make sure that we.
Make sure we adjusted the right costs, so that as we go through a period of.
Relatively speaking lower volumes, we maintained good margins as a business and I think we'll do that.
Okay. Thank you.
Sure.
Our next question is from the line.
Copeland.
Okay.
Millions research. Please go ahead your line is open.
Got you there.
Okay Misty Copeland your line is open.
Finally got an excellent Kevin.
One moment please.
Next question is from the line of Pizza risky.
Please go ahead Sir.
Hi, Thanks.
Scott sorry to beat on this but so the plant three issue that's more of a revenue issue in the first half that a margin issue am I understanding that right and so the margin pressure in 2020 is almost wholly due to the longitude is accurate.
Nope I think that the lower volume obviously in Q1 Q2, considering that we period expense all of our R&D and Rs DNA I mean, our costs are going to be more evenly spread over the course of the year. So when you pull.
10, or 15 aircraft out Thats, a big chunk of revenue and particularly its a lot of our legacy.
Good margin business.
So I think that it's a combination of both.
Both the.
Progression of longitude profitability through the course of the year, but.
Q1, Q2 impact of missing.
That revenue.
This does not trivial and that's why I thought it would help to try to guide what we expect that margin rate to look like to of course the year. Yet. Another is helpful. Thank you and so if things stay on track I know you said in the past you wanted this business to be at a double digit business.
Is there any reason to think that can be true in 2021, assuming these from obviously you are going up learning curve on longitude, but and assuming plan three doesn't happen again.
Yes look I want to be careful the we're not we're not quite ready to guide 2021, just to get worse, but but yes look as you get into the third and fourth quarter I would expect to see margin rates in aviation that are indicative of how that business should perform in a normal placing as a so that should be in that.
High single digit to low double digit range.
Okay.
Thanks, guys sure.
Next question.
One moment please.
That is David Strauss of Barclays. Please go ahead.
Thanks, Good morning.
Yes.
You noted in in Q4 add any deviation.
Installation net of pricing was was a headwind can you maybe break the pieces out there inflation versus pricing and then also how you're thinking or when when you've got baked in for inflation versus pricing in in 2020 guide for for aviation.
So the I mean, the dynamic in Q4 was prices for pretty flattish and so thats why we have a negative because clearly there was some inflation in Q4, and we didnt have priced offset that so.
It was fairly flat again part of our dynamic in rationale for.
Pulling back on the volume, particularly on those legacy aircraft is to make sure that we can maintain the price levels that we have.
In the industry. So I don't think we'll probably get into breaking out.
Sort of the components of the guide around the price inflation number, but clearly we would.
Like to drive to get that back in balance.
Okay and.
Hi up on that question couple quarter that a couple quarters I go I asked was on the potential upside from Max Max Simulators, obviously now it looks like theres going to be.
Turing simulator training could you just talk about.
What do you see maybe.
In terms of order interest there and.
Potential upside from us.
Well, we have certainly continued to see order interest and I think particularly now with the what you're seeing out there publicly around the need for Max Sim training in some capacity associated with a return to service. That's that's picking up so we have largely been following the lead to Boeing who is our biggest customer in this in this space.
And we are going to increase the number of Maxim later, so we haven't production. So I think thats that's good but it's good for our total company, it's not going to.
Yes material impact, but it is we'll certainly see a little bit of an upside on the number of maxims.
Okay. Thanks, very much sure.
Next question is from the line.
One moment please.
Jon Raviv of Citi. Please go ahead.
Hi, Thank you good morning.
Yes, Thats just policies here jump back deviation margin I mean, I appreciate that high single digit low double digit.
Second half is normative, but really just still thinking about the overall underlying earnings power of this business I mean at some point, we were always thinking that this could be a pretty strong incremental margin business clearly with rates down.
Some of that this year, but as you kind of re emerge out of what could be a tough year. This year given that some of the dynamics.
Is it still fair to think about this is a double digit type business going forward given some of the changes you've made.
Yes, absolutely that's our expectation and I think that what we're we've we obviously had a fair bit solution here in Q4 and expect out in the first half of.
The next year I mean, what's your set the plant three things side, which is an unusual circumstance, obviously longitude we fully expect to be.
Strong margin product, that's an outstanding product, we've got a bunch of in the field now it's been well received by customers at flying beautifully feedback on those we've taken delivery on several customers were flying. This thing hard is is outstanding. So I think this thing is going to be a great part of the business, but clearly there was a lot more cost in 2019 and gets.
Through.
The certification process and all that was entailed there.
And we still have cost as we go into 2020 in pursuit of certifications around the world in the entry into service. There's always some costs associated with these things as you roll them out into the into the marketplace, but.
This thing is going to be an outstanding product is going to be a product that has the kind of margin rates that we expect across our jet line and.
This is a a transient problem I think we end up in a in a very good place and we've ever expectation for this business to be a double digit margin business.
Thanks, and then and then you talked about how some of the restructuring is based on lower development plans going forward.
Something I think is helps you guys as recently as investing in new products, and we're going to drive some growth and what could be a flattish market and how do you think about that going forward and they're still parts of your portfolio. Some would suggest could use.
So.
Some some upgrades here in there.
So how you're thinking about the skyline beyond Sky Korean Denali.
Okay. Thank you if you look at the product portfolio right now in aviation obviously, the last five years of driving latitude and longitude have completely transformed our jet.
Product line and positions in a very good place when you're.
I think about the Sky Kerr, which is fabulous product in a new market segment for us really is going to be a great growth driver we've not been in the high performance single, that's our rationale for Denali is great market, which I think we'll get Bergen to presentation.
Beyond that we obviously always have some some things that we're looking at I think theres clearly opportunities do some upgrades and refreshes across.
Some of the core of the rest of our product line in both the jet and the turboprop side of things and so we'll pursue those they just won't be of the magnitude of a have a clean sheet brand new airplane like a lot of Tudor or launches. So when we talk about pulling back on some of the R&D I think thats not just reflecting that you don't have two major.
No.
Our 25 aircraft that are in process. So I think we'll continue to have a robust product line up both in this darker denali and other upgrade so I'm not all concerned that we're we're going to underwhelm. The R&D side. We know you have to do refresh products to to continue to drive growth here.
The same is true across the rest of our portfolio I mean, we've obviously made massive investments and things like to be to 80 program. The petrify program, but a lot of money to the far program.
I actually see some R&D come down in that business as we go into in the next year, but that's really driven because you have things like floor and FARA that have been.
Virtually all funded under R&D that will now start to move into a larger cost share.
On the on a couple of government programs and clearly five to five is winding down in terms of the level of R&D to support its certification so.
Those are those two businesses drive the bulk of our R&D, obviously systems is a smaller number but still if you look at things that are the new programs that are are happening and starting to drive growth, which we're seeing in 2020.
It's as result of the investments that we've been making in some of those product lines around everything from the next generation of unmanned aerial vehicles like up to you I guess.
I mean, obviously should the shore was a huge investment as it turns production thats going to help to drive.
Some growth and much improved profitability.
The M. This RSV is US again this is of a lot of R&D that we've been putting into these businesses and in some cases small acquisitions over the last few years.
That are starting to turn around Andrew.
But growth in those businesses.
Yes, I appreciate that color Scott. Thank you sure.
Our next question is from the line.
Please up sell season.
Morgan. Please go ahead.
Thanks, very much and good morning.
Morning.
Scott Scott when you talked about the no the outlook being for flattish overall delivery volumes with longitude, adding and the legacy portfolio coming down I mean, there is generally not a ton of visibility.
Is that expected decline in the legacy portfolio kind of view of what you're seeing in the spot market or is it.
The majority of latitude deliveries that are one customer and that customers changing its mix of deliveries.
From from Safra.
I'm not sure understanding and entirely self immediately if legacy deliveries are coming down a lot of the legacy deliveries ROI, our latitudes to match at his nets coming down significantly and making a transformation from latitude and longitude and that's why.
Legacy deliveries are down or is it your sense of the spot market.
Being weaker and Thats why legacy deliveries are down.
Well I think in general as we've talked on Q3, we expect legacy deliveries just to be down given the outlook of the overall market.
You're right when you look at a latitude, yes, we do expect lower levels of deliveries much at all.
On latitudes next year versus this year and you're right I'm not I'm not to have its initially trade just where the market is right now.
With wants to company as a brand new product, you'll see a lot more deliveries net of the launches class aircraft and in 2020. So so yes, I mean, you're right. There is that there are certainly an X, but we'd certainly expect to deliver fewer latitudes next year to net jets than we had previously but the dynamic of the of the legacy is it.
But just as somewhat softer market.
Not inconsistent with our we saw it back in Q3.
Yes, I understand I understand.
And then on at Bell.
You've kind of traditionally talked about valentines, 12% margin business.
Starting the guide this year at 12, and a half I mean.
The business has executed very well for probably like five years or so now.
Yes is the is the baseline margin for bell kind of maybe higher than than you thought.
I would still say, we're in that 10% to 12% range right. So I think at 12 and a half obviously has very strong performance for that business, we feel very good about a particularly.
We started very high level of R&D again, we will benefit a little bit from having.
Higher levels across share as we move some of the military programs into.
Initiated real military acquisition programs as opposed to straight.
I read funded but look I think the.
The position that Bill is in right now.
Is.
Quite strong if you had a large MD program, which tends to be lower margin, that's going to mix of down a little bit, but I think youre going to stay in that 12, 10% to 12% margin rate even in that circumstance, which obviously would be a terrific. New story right that you are driving what will be a very large MD program with a lot of future growth.
The production phase so.
Great I would kind of leave that 10 12 out there.
Thanks, Thanks for asking for sure.
And next questions from the line of private seeing them.
Credit Suisse. Please go ahead.
Hi, good morning.
I wanted to Scott to go to back towards the higher level view here and you touched on valuation in your desire to improve it when you were answering sheilas question on cash tax and disposition.
And I wanted to go to the valuation thinking about cash flows you've got sales growth in 2020, but we've gone through a period here, let's say from 18 to 20 were earnings.
And cash flows have been somewhat flattish and that's the case in the forecast again, you've talked about a number the reasons what needs to happen to get the cash flow return on sales above this kind of 5% level.
Other than learning curve on longitude and some of the other puts and takes you've talked about what is the potential.
For this business and then separately for Frank just regarding the extra week I guess in the fourth quarter in the year.
How does that play at 2020 are we back to where we were.
Well, let me just so from a high level the k. the we've had.
A bell that has gone over the last few years from.
$4.5 billion business in the in the peak of the V 22 World down to 303.2 $3.3 billion business at the same time that it's been investing heavily in things like five to five and things like be to 80.
And obviously V 22 has done a significant ramp down from the 40, a year to 20 year to wotif low low double digit year. So.
I think our focus in that business has been making sure that we're investing for the future while still maintaining strong execution and strong margin rates I think we've been we'll do that I certainly think we're at a point here as we go forward into into 2020, there's some really important milestones around.
We are the acquisition process goes on things like the B to 80 program.
Finally going through and completing.
You know search on five to five so things that have been.
Costs with no revenue or margin over the last few years.
So I've certainly been pressure points right. So the margin has stayed good with the absolute number has certainly come down owing to the.
We have reduced revenue, but I think we're in a really really good place to see that turn here as we go through the next few years.
Systems as a similar sort of us.
You get the revenue turn a little bit here, you've got decent revenue growth in 2020 are you, saying you catch up on the other end 20 122.
Absolutely look I think as as we said part part will part of what we see here in the interim on Bell.
Is this transition from unit deliveries to a very large and growing installed base, which starts to drive more aftermarket and that's what we're seeing what's driving the growth in in 2020 is that you are starting to see although this this significant growth in the aftermarket side.
The business largely military but also some on the on the commercial side.
Moving to the fact that we have a very large installed base now out there on the V 22 in each one programs.
What really then we'll drive that next tranche of growth is driven around some of these new platforms in which we've been investing like 50 to 80, some odd fives.
So that is the dynamic in Bell systems, a similar story right. We have some great platforms platforms that were sort of on the downside of their program of record as they phased out what you start to see the new program wins again investments that we've been making that are now positioned and our award winning some of these contracts that we'll get that.
Thing back to where we see revenue growth in the business.
Look I think systems this year, delivering 10 plus percent margins forecasting.
10, plus percent margins, that's a good business the issue for us has been.
You get the overall business to start to drive positive revenue and we're going to see that 2020 is as we've guided and talked about so I think that was already making that term aviation again, we've gone through a very heavy period of investment that has resulted in allowed to is the launch twos.
Been frustrating to see that sort of in many cases, just sort of replace legacy platforms, but without having that portfolio with the latitude and longitude you'd be in a really tough spot. So I feel great about where that businesses position. The team has historically executed very well.
As we have just withdrawn production obviously, we have.
A challenge around launch due to just getting those those margins where they need to be but we clearly have a line of sight to get there is we'll work our way through 2020.
Obviously that business is much more dependent on what is the end market do beyond 2020% 2021, and we have no idea how to make that call yet, but I think we have a really good product lineup and a couple of things the pipeline obviously it will help that so.
Our earnings have been growing but we've had too much pressure on not enough revenue growth and I think we're seeing where the opportunities are here in 2020 as we saw at the end of 2019 that we can get the topline to start growing.
Okay. Thank you for all that color.
Thank you next question here in line.
Noah Poponak Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
No.
Scott any new regulations into why the business jet market deteriorated over the last three to six months and specifically why used inventory keeps going back up every month you just typically don't see this in the middle of of an economic cycle.
Is it just PMI has it been weak in global growth just hasn't broken out and it's as simple as that or anything new you've learned there. Yes look I don't think we've seen as much growth over the last six months I think there's certainly been plenty of reasons for small businesses business, guys, which is the bulk of our customer base in the in.
In the jet market.
To have some pause and what you've seen us in capex spending right they've been holding back little bit. So I think as some of the trade things are starting to get a little bit will that noises sort of settling down.
On the.
The Brexit noise, which again I don't shouldn't have another shoe to direct impact on us, but it but it does create uncertainty in the in the market that seems like it's on a path to at least becoming resolved uncertain.
And what were the middle of a very political cycle right now so I think as we work our way through the year in the.
Politics, and where things are going to land become more clearer than I'd be optimistic that businesses would get back to.
A more aggressive move in terms of willingness to spend capex and invest in there in their businesses not just an aircraft, but in general which is certainly what drove a lot of the growth. If you went back into the.
The.
Late 17 early early part of 18, so we're hopeful that happens, but we need to see that.
Do your customers specify to you that an election is particularly concerning to them and kind of puts on pause or not necessarily.
I'd, rather not get into the politics of it no, but I mean, certainly there's differing views about what the business climate looks like depending on the outcome of the election, So it's kind of natural diabetes.
Some reflection on that with.
People that are businesspeople.
Yes.
And then Frank on the cash flow outlook for 2020.
Can you help us out with the nets.
Longitude related working capital assumption, you're making in there because I.
I think you had a decent amount to unwind, but you're also still ramping the production rates over just like to understand that piece and then therefore, the the underlying total company piece outside of that.
Yes kind of overall that the.
The guide at least at the upper end reflects one to one cash conversion on net income so were generally expecting good working capital performance there isn't anything extraordinary in there.
On a relative to longitude there kind of continue to expect maybe some ramp in longitude but.
But theres nothing significant from a working capital standpoint kind of embedded in that guide.
I'd say that kind of COVID-19, we did work our way through.
Although headwind associated with multiyear to transitioning the multiyear three so as it relates to 2019 cash performance. We absorbed one hundreds of millions of dollars of that reversal in 2019 that did kind of reflect on that 19 performance and kind of we put that behind us as we move into 20. So we're expecting that we'll see good.
Cash flow performance in 2000.
I thought you had been saying 19 was pretty substantially impacted by longitude build up and that that would release beyond 19, well. This there's some of that but there's there's you can see some inventory build just errors kind of payables from an overall working capital standpoint that part ill also go to offset some.
Some of that build.
The biggest drag on 19 was this the at Bell with the kind of government payments timing, where we were kind of ahead on multiyear too and then we.
Multidose restructure has us kind of incurring costs before we received cash and so that was a big reversal that impacted 19, we will not see in 20.
Okay. Thanks, so much.
Next question is from the line of Robert stolen.
Vertical research. Please go ahead.
Thanks, Josh good morning.
Art.
Scott first of all on the business can't pricing environment.
I was there any if you are seeing any deal capacity is acting in an even more rational manner in response to the demand environmental perhaps you're seeing any change in response to the magnitude and its entry incentives.
Well in general I guess I don't know that we've seen a huge change. Robert This is again I think we probably all want to be cautious about making sure that were not.
Not running production in the greater than demand right that always will create some bad behavior in the.
In the in the market of course is always the other guy right. So thats why we just want to make sure we're not participating in that process and like I think we've fought to get pricing back to a reasonable level that represents the value of the of the product and I think we got that back over that.
17, 18 timeframe. So we just want to make sure that we hold.
Pricing and get increases that are reflective of inflation going on right is perfectly reasonable business position take I think so I think in general that's the overall dynamic as the way we see it and how we think we should help how we think we should behave.
I wanted to pricing I'd say, we're I think we're pleased with that we're getting the value that we expect to get from an aircraft that is performing very well customers love the Calvin the range the speed.
And.
The price levels in there are appropriate and we're continuing to to make sure that we're we're getting the right value aircraft. So.
Okay and then.
As a follow up at a different matter I see on Capex.
And that decision that to not sell the business.
If the automated environment would improve multiples of to move higher would you reconsider the sale in the future.
Our I don't think we will make we don't make any comments about M&A. We look we went out and we had to do this in a public way, which was very difficult as you can imagine on our team to go to go through that but I mean, our general view is we don't really want to forecast or comment one where the other on M&A and I I.
I think given where we are in that process will go back to that practice. So.
Yes, good business does really well for us and we're going to focus on running it.
Thanks Arsenal.
And next we have George Shapiro.
Research. Please go ahead.
Yes.
Good morning.
Yes, I was just wondering we had talked about.
If the economic environment got more stable towards the ended the year.
That you'd see some improvement in the business. It sounds like from your comments that you haven't I was just wondering why you might think that is and we.
Certainly have a pretty good environment economic and stock market wise.
Well George I don't know I mean, I can't I am not im not trying to be an economic forecast or but I think theres still a fair bit of uncertainty in a lot of it at this point is.
I think the trade things seem like they're quieting down, but theres still enormous amount of political uncertainty that is in front of us every day.
So I think in large part people want to see how all this plays out.
It makes a big difference when you think about tax policies and things of that nature. So.
I think that.
Look the market hasn't stopped that are there still fair bit of activity going on there's lots of conversations going on but it's.
I think that.
It's still those that uncertainty does create some friction to people going ahead and.
Doing a deal.
And that's why again Thats, why we pull back little bit on production.
We are our position is that customers are going to make their decision we're not going to.
Used price to to try to go accelerate just decisions if they don't want to make that decision yet.
Okay and have you seen any tougher competition from BARDA given the state to Darrin.
And would you ever have an interest in their aviation part of the business.
Well I guess, there's I don't think we've seen any dramatic change in the dynamic in lots of deals are competitive deals and.
Price activity and whatnot is seems like it's been fairly.
Fairly stable, so I don't see a big change in that and look with respect to the.
Hey side again, we hope we see the articles and you're all the noise, but we would.
Not comment on any M&A activity.
Okay and Frank one for you the inventories were up like $250 million for for the year I mean, so what is still in inventory that effectively wasn't delivered in the fourth quarter.
Well thats thats across the entirety of the corporation charge, but again Thats. We are ramping longitude. So there is additional inventory at aviation that reflects that that ramp.
Yes, I was just wondering because the cash flow turned out a little bit weaker than you were expecting on so I thought maybe there's something else going on there no cash flow is right in the middle of our guidance kind of again as I said before the cash was impacted certainly for the year by.
A significant headwind it fell associated with military programs.
And then I guess one last one.
The profit mix it industrial between special and Cow tax you alluded to that and the we leased and it was primarily special vehicles. It cow tax wasn't down much that would imply that special vehicles didn't earn much in the quarter. I mean is that correct assumption and if so if you can expand on like.
Well it is but George we don't generally we don't get into the good margin mix in the segment I think the commentary was that no as it relates to vehicles, we certainly had a lower volume year over year and as Frank said, a big part of that was snow.
Because we delivered.
No product is largely in Q3 versus Q4 years ago, and we should be delivering them in Q3. So it's a good thing that we did them in Q3 versus.
On Q4.
So the.
The overall volume was was lower which certainly has an impact on margin, but we don't we're not going to breakout anymore detail on the.
Margin splits between the different sub segments.
Okay. Thanks, very much sure.
Next question is from the line of sight tighten tumor.
Cowen and company. Please go ahead.
So Scott.
Maybe update us on.
The upcoming down selects far far and flora and if you win one or both of them.
What's that speakeasy essentially a win is just a ticket to the next level of competition. What's the chance that you will be spending some of your own money and I know the dollars that they have or you are not huge but we'll be spending some of your own mommy and therefore that would be in earnings drag.
As you want to win what's really a very sizable potential.
So our our guide incorporates that CPI. So we have been spending.
No our I read money with.
I don't really know match on foreign little match over the years on.
On floor, there certainly has been some some government money on the on the V. 280 program, but again largely that's been funded through our I read numbers.
So.
What we have in our in our plans as you look at 2020.
The.
Amount of R&D actually increases.
In in Bell.
But you have a much higher level our participation of government funding than we had just under street I read funding so.
I will take something like a far far I think they will down select to the two companies to go due to fly off we expect that to be in February and March timeframe is what they're saying.
What we love our offering and we've talked a lot about thinking that it's so this is if this is fabulous performance. It clearly meets their requirements. We think it's taking great new technology that we matured on five to five.
Now the army the remember the remember the running that program is they provide a few very high level critical requirements, but they're not prescriptive in terms of how you.
Accomplish that so the downside process from five to two.
We will happen again, probably not February March timeframe.
If it does happen we will have a lot more.
R&D effort in the business, but it will actually be less R&D in terms of I read than we spent in previous periods. Because again you do have a very large portion of government cost share, where we had known before on that program. So.
It's it's looks relatively neutral to the overall plan, even though it's a lot more R&D because of the dynamic of the cost share.
The floor program again Youre right. This is the anticipation is that sometime probably in the March timeframe, what they're saying as they would award two contracts in all likelihood. They don't say it has to be too, but sort of expectation I suppose it's too.
With me to 80, we obviously have the expectation that we would be one of those.
That's not a huge program because it really is going through in sort of.
Crossing T's, and dotting I's and working on risk reduction towards the ultimate MD offer OTI, a decision, which is probably still in.
No.
2021 is what they're saying, so thats not a big mover for us one way or the other in the year, but the far program is but again, it's not.
It's not a headwind because you're even though you have a much higher level of of R&D on that program that does have a large caution.
Terrific Great answer and then second won the Corona virus, clearly, becoming a bigger issue.
Have you done any preliminary thinking in terms of.
What this might mean E taken a look at 2003 on the Sars virus and was a benefit to biz jets because people didnt want to travel on public air transport or were not allowed to was this a negative what does it do for bell what are your thoughts.
Okay. It's a good question look I'm not going back to 2003 to to try to do that so I don't know that I certainly don't know the answer that question I mean in terms of direct impact to the company. We obviously, we do business in China.
Largely in the automotive side so.
Of course automotive volumes have already been down pretty dramatically in the in the last couple of years. So weather has a further impact on that are not as is hard to tell I I think look like everyone. We've got to watch and wait and see what happens here after they get through the Chinese new year and.
Does this thing to contain start to settle down or is it become a bigger problem. So at this point I think were were more or less than in a watch and wait.
Thank you.
Thank you and final question on today's conference is from the line of Carter Copeland.
This research. Please go ahead.
All right good morning, gentlemen, I figured out how to use the mute button. So.
And that for anybody has been on a Andy calls for years. This isn't my first screw up so thanks for having me back.
Hi, Scott if I.
I kind of I wondering if you could give us some color on the board decision around the changes to the incentive compensation plan. The addition of TSR to that and just what that what that what we should take from that in terms of what you see is relative risks and opportunities for that for the.
Corporation.
Well look harder I mean, the Genesis of that thing is that for many many years. This company has been on a.
A long term plan that kind of rolled through three years. Okay. So it was a three year plan that had TSR as kind of our our wrapper. If you will around that three year performance. So TSR was absolutely a factor.
But the goals and objectives were set annually and that really stems back to.
Just normal volatility around business Jets and can you really put together a three year plan.
It has in the.
Credibility to it.
So.
The new plan, obviously still has TSR. It has it is a direct factor as opposed to wrap around so it remains a very important part of our.
Our performance objectives, and ultimately our our compensation.
But we were trying to put together something that could do a three year forecasted plan rather than the series of of a one year plans that built that three year plan. So.
And we tried to do longer term metrics like things around ROI season long term cash.
And just we just have to adapt and considers a lot of unknown around.
The fact of one of our business business, but biggest businesses as a bizjet business, where it's just hard to predict what that end market looks like over a period of three year. So.
I think we've come up with a set of metrics that can accommodate some of that that volatility.
And have a more conforming if you will.
Three year plan of which TSR still remains an important metric.
Great. Thanks, Scott.
Sure.
Okay.
Thank you Kevin and thank you all with that.
We end the call.
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