Q3 2020 Textron Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Textron third quarter earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you'd like to ask a question. Please press one then zero if.

You should require assistance during the call. Please press Star then zero as a reminder, this conference is being recorded I would now like turn the conference over to your host Vice President of Investor Relations Mr., Eric Selander. Please go ahead.

Thanks, Greg and good morning, everyone.

Before we begin I'd like to mention we will be discussing future estimates and expectations. During our call. Today. These forward looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release on.

On the call today, we have Scott Donnelly, Textron's, Chairman and CEO and Frank Carter, Our Chief Financial Officer our.

Our earnings call presentation can be found in the Investor Relations section of our website read.

Revenues in the quarter were 2.7 billion down from 3.3 billion in last year's third quarter. During this year's third quarter. We reported net income of 50 cents per share compared to 95 cents per share in the third quarter of 2019.

Adjusted net income a non-GAAP measure was 53 cents per share for the third quarter of 2020, adjusted net income excludes 7 million a pre tax special charges three cents per share after tax related to the restructuring plan announced in the second quarter sales.

Gross profit in the quarter was $189 million down from $297 million in third quarter of 2019 manufacturing cash flow before pension contributions totaled $344 million up $163 million from last year's third quarter with that I will turn the call over to Scott.

Thanks, Eric and good morning, everyone.

Overall, the third quarter results reflect a strong operating performance across all our teams with strong cash generation and improved margins at bell.

All we had a very strong quarter with 15% operating margin on slightly higher revenues on that.

Commercial side of Bell, we delivered 41 helicopters down from 42 in last year's third quarter.

Milton remained strong in the quarter largely due to higher aftermarket volume on existing contracts in support of the V 22, and H one fleets.

Also in the quarter Bell continued to increase the scope would support a view US military aircraft with your award of a new 213 million dollar agents bearish contract.

In the past year, each one aftermarket contracts now total over 1 billion.

Also in the third quarter belts, Monetizer 272 million dollar contract on each one program with the Czech Republic freight Yankees enforce rules.

On future vertical lift of each way to continues to fly in support of the Army's risk reduction program has now flown over 190 hours as we continue to demonstrate the capabilities of this aircraft to our army customer.

On far Bell has begun building, a 360 and Victus prototype aircraft, starting with gearboxes rotors and airframe structure.

Moving to Textron systems third quarter with strong margins of 13.2%.

In the quarter systems was awarded an initial contract to support the ground based strategic deterrent missile system as a subcontractor to Northrop Grumman work beginning this year.

Also in the quarter systems received an additional task order for the Air Force Comcast program to support I will therefore space.

This award is in addition to the two bases and also the end of the second quarter.

Systems also analysis successful fly wave the first to ship to shore connector aircraft 101 to one.

Mr Craft enough station to Panama City, Florida, where they've been placements testing and operational roles for the newest nave.

That aviation revenues were down in the quarter as expected lower new aircraft deliveries and aftermarket volume.

We delivered 25 jets down from 45 last year and 21 commercial turboprops down from 39 in last years third quarter.

Well the pandemic impact volume in the quarter, we did see aircraft utilization levels continue to recover and we're encouraged by new order flow.

Order activity was strong in the quarter, reflecting an increase in new aircraft bookings resulted in backlog growth of $400 million to $1.8 billion at the quarter end.

While the new product front inductive a third so I carried into the aircraft certification program, which date has accumulated over 240 flight hours.

Graham is progressing well and the aircraft is on track for certification and entry into service in the second half of 2021.

We announced the new Beechcraft King Air 360, which recently received a few type certification. This updated to revamp includes technological advances to the flight deck and enhancements to passenger comfort.

Moving to industrial revenues were down from last year's third quarter, primarily due to lower specialized lower volume at specialized vehicles, principally reflecting the timing of snowmobile deliveries and reduced demand and the ground support equipment business.

A specialized vehicles, we continue to see strong retail demand in our outdoor power sports business during the third quarter and expect revenue growth in the fourth quarter.

Caltech the automotive production outlook has steadily improved since the low point in may and demand from our customers has returned faster than anticipated.

Celtics teams have responded well managing costs and executing through these challenging times and delivered a strong operating performance in the third quarter.

With that ill turn the call referring.

Thank you Scott and good morning, everyone let's.

Let's review how each of the segments contributed starting with Textron aviation.

Revenues at Textron aviation of $795 million or down $406 million from a year ago, largely due to lower citation jets volume of $234 million.

Lower aftermarket volume of $95 million and lower commercial turboprop volume of $83 million.

Segment loss was $29 million in the third quarter down from $104 million of profit last year, primarily due to the lower volume.

Backlog in the segment ended the quarter at $1.8 billion.

Moving to Bell revenues were 793 million up $10 million from last year on higher military volume, partially offset by lower commercial revenues, primarily due to the mix of aircraft sold in the period.

Segment profit of 119 million was up 9 million largely due to favorable impact from performance.

Operating margin at the segment was 15% up 100 basis points from last year.

Backlog in the segment ended the quarter at $5.7 billion.

At Textron systems revenues were $302 million down $9 million from a year ago, primarily due to lower volume of $20 million at Tru simulation and training.

Segment profit of $40 million was up $9 million due to a favorable impact from performance, partially offset by lower volume.

Operating margin of 13.2% was up 320 basis points from last years third quarter.

Backlog in the segment ended the quarter at 1.9 billion.

Industrial revenues of $832 million or down a $118 million from last year, primarily from lower volumes specialized vehicles.

Segment profit was $58 million up $11 million from the third quarter of 2019, primarily related to fit a favorable impact from performance of 24 million.

Simply reflecting cost reduction activities huh.

Actually offset by lower volume and mix.

Operating margin was 7% up 210 basis points from last years third quarter.

Finance segment revenues were 13 million and profit was $1 million.

Moving below segment profit corporate expenses were $28 million and interest expense was 38 million.

With respect to our restructuring plan announced in the second quarter, we recorded pre tax charges of $7 million on the special charges line.

Subsequent to the ended the quarter, we entered into a closing agreement with a state tax authorities that will result in the recognition of tax benefits that will reduce our tax expense in the fourth quarter by approximately $40 million to $50 million.

Turning to the balance sheet, we issued 500 million of fixed rate 10 year notes at a coupon of 2.45% in the third quarter and use.

The proceeds to repay debt to pay down the 500 million dollar 360 loan.

We entered into in the in the first quarter.

Following the cash performance in the quarter, we ended with approximately 2.7 billion of cash on the balance sheet and we have effectively prefunding asked all our existing term debt maturities through 2021.

In the fourth quarter, we expect to repay $350 million of floating rate notes due November and $362 million of outstanding borrowings on the corporate owned life insurance policies that were drawn in the first quarter for additional liquidity.

While we continue to believe it is prudent to maintain a higher than normal cash balance as we close out the year, we expect to reactivate our share repurchase program on an opportunistic basis in the fourth quarter with that I will turn it back over to Scott.

Thanks, Frank to wrap up our teams executed very well and generated solid results in the third quarter.

During the fourth quarter, we expect our defense businesses to continue their strong performance at eight.

In addition, we anticipate a return to profitability as they begin to capitalize on the new aircraft order flow generated in the third quarter.

At an industrial we expect a continuation of the rebound in our end markets.

Concludes our prepared remarks, operator, we can open the lines for questions.

Okay, ladies and gentlemen, if youd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one zero at this time and one moment. Please for your first question.

Your first question comes from the line of Robert Stallard from vertical research. Please go ahead.

Thanks, so much good morning.

Okay.

First of all Scott.

Wondering if there's been any change to your thoughts on Twentytwenty one deliveries at aviation and are you still thinking about the same as you were three months ago.

I think the order flow has been encouraging Rob and I would say at this point our plan is that we probably see about half of the recovery.

If you look at the the dipped from from 19 to 20, we would expect to see about half that come back and in demand and 21.

Okay, and then secondly from me in terms of the fourth quarter, you gave us some points on the business and I was wondering if the very strong cash flow that you saw in the third quarter can be continued or did you pull some items forward into the third quarter.

Oh, I think we'll continue to see good cash flow, so it's pretty balanced across working capital and across all segments of the business as as you know we tend to.

Growth in inventory going into the fourth quarter, and then burn down and this year.

Mentor was obviously something we've been managing much more closely but I expect that we will continue to see good cash.

Generation in Q4.

That's great. Thank you very much.

Your next question comes from the line of Peter Arment from Baird. Please go ahead.

Good morning, Scott rank are here.

Thanks, guys, just maybe good to see the backlog kind of spike up in aviation can you give us a little color there on kind of what the mix of what you're seeing there.

Yes, it's pretty much across the board, we've seen nice pickup in jet activity.

And it really is from lights through our midsize Super mid size.

Platforms, which is good and also pretty strong order activity in the in the King Air family.

Okay, and just as a follow up in staying in aviation just the lower aftermarket demand I guess still seems a little surprising to us given what we've heard about biz jet flight activity.

What do you what are you seeing there and do you expect that actually starts to turn the corner, where we see deliveries pick up.

Well I mean, it sequentially is certainly is improving Peter so.

Still down in the sort of low to mid twentys on a on a year over year basis, but as we've seen the flight activity.

Continue to grow the services coming back with that so it's not surprising that it would trail a little bit but.

We don't think Youll get back to.

Comparable and fourth quarter, but we certainly expect to see it continue to sequentially improve.

Okay. Appreciate the color thanks, guys sure sure.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, guys and thank you.

The Shin.

Realized with a tough slug from the losses in Q2, but how do we think about the path to breakeven and music pieces that you saw in Q3 and going forward.

Well I think given the backlog that we've seen and deliveries that are scheduled now for Q4 she'll I definitely think that we'll see profitability at aviation in Q4.

What we're trying to get that to call me back to kind of break even on the year, whether we get there or not it's it'll it'll probably be close depending on how the demand and service activity and whatnot happens in the quarter, but certainly we're expecting a.

A profitable Q4 in.

The business back to.

To break even.

Okay and then.

Switching over to Bell I think there's been a lot of noise from third parties on Barra and Laura.

The future of the program, which I disagree with but perhaps you could provide us your that Scott and how you're thinking about that and if there was any change.

Ministration next week.

About the future of that program.

Okay. Then we we continue to have a lot of dialogue from working level all the way to a very senior members and the army.

There is no question that they are very committed to the to the field programs. It's one of the highest priority programs. We have in monetization in the army. They realize it's absolutely critical to their capability and the role that they play.

Whether that's in your pure competition or just in general the annual they recognize that they are operating aircraft that are.

40, going on 50 years old technology and for sure they've been upgraded over the years, but the capability that they're looking for in EPS yellow something they need.

As I said, it's a very high priority there look there.

The rational people they understand budgetary pressures and they know that we will be budgetary pressures.

Regardless of whether there's a change in administration or not I would say over time.

But look these are very long cycle programs and they're committed to the programs and they've worked hard to make sure that they have the ability to budget and fund. These programs obviously from our standpoint, we're very focused on continuing to execute on it.

No as I said in the in the prepared remarks of each way to continue to fly. It's is going great. As you know we've been over 300 knots flight level.

We've demonstrated a little one maneuverability. So that you know the most critical things that they're looking for in speed and range maneuverability. We've demonstrated now hard to believe it but we've been the flight test program almost three years into in December So I'd and on the far front, we're making great progress.

Starting to build initial critical components of the.

Of the aircraft so I think our teams from both.

Good process continue to make great progress and work hard at demonstrating the.

The capability of the products that we have.

Designed and built for the army so.

We feel very good about the program. Thank you.

Sure.

Your next question comes from the line of Carter Copeland from Meli US Research. Please go ahead.

Hey, good morning, guys.

Just.

Wondering if you could speak about the the margin performance at Bell in the quarter.

Activity commentary, there and just.

You encountered any recovered related costs and.

How you anticipate.

If there's reimbursement of those are going to just.

What it was that you saw that drove that thanks.

So look on the cost front I mean, you know for sure. There are some costs that are directly incurred we had some disruptions here and there but.

I have to say that.

That business and this has been true in several of our businesses continue to operate through the whole covered.

Process and obviously, we had to put all its proper safety protocols in place and I think those have been very successful, but our guys.

Have continued to execute although we are getting the output we're delivering what the customer needs. Obviously one of the things were benefited from is weve seen a significant uptick in the amount of activity on the installed base Contra.

Contracts on V 22 in each one and that's driven some additional volume through some.

Some critical parts of the factory, which has yielded good productivity so.

I think that for sure there have been some minor.

Relatively speaking I would say minor costs incurred in the process of working through a difficult time, but.

Really what you're seeing in terms of margin performance is just good solid performance by our teams and executing well on some increased volume going through the shops.

Okay, Great and then just a quick follow up on.

On aviation just with respect to Q4.

Deliveries, what you're looking for there I mean, I know it's been there have been some.

Sounds is.

Getting some aircraft delivered and whatnot due to restrictions are you thinking about that.

Remainder of the year, it's important to think about the 21 commentary you gave us earlier.

Well I would say there look there's a there's risk here or there on a on a couple of aircraft as our customers are able to show up or get the take the delivery again, we're still living in a bit of a dynamic world. Obviously in terms of restrictions around travel and things like that but.

At least as we see it right now it's sort of one offs here and there is not we don't expect it to be a material number obviously that could change if there is a real the change in terms of travel restriction, but.

And again there are much like a bell. The teams are working we have occasional disruptions on supply base issues and things like that but in general or are working our way through it. So I think we feel pretty confident that we will be able to deliver on the.

Volume that we're expecting to see in Q4, obviously.

I'd like to see the same in that assumption in terms of how we recovered and decreased volume in 2021.

Okay, great. Thanks for the color Scott.

Your next question comes from the line of George Shapiro from Shapiro Research. Please go ahead.

Yes, good morning.

Got you avoid you avoid answering Carter's question about specific deliveries in the fourth quarter I mean, you expecting somewhere around 50 deliveries in the in the fourth quarter.

I didn't think progress for a specific number.

Of course, if he had I would have evaded the question.

[laughter].

Okay. Thank you innovate my question as well.

Yes.

Well if you are as you know, we don't give a forecast of the exact numbers and look at it.

It's not environment, probably we would we would do that but certainly we feel like the.

Order book coming through Q3, we're pleased with the amount of activity were pleased with the amount of activity that we're still seeing out.

Out there in the marketplace and.

I think.

Our expectations are that we'll see a decent recovery coming out of this is this is as you know very different environment than maybe what we've seen before where you had challenges in this end market used market continues to be robust.

If you look at activity in that light to mid sized jet market in the U.S side is quite strong I mean, you are brokers talking about that all the time, we certainly see that.

In selling our own used aircraft.

Business.

So ill again. These as you know these things are all sort of subject to something crazy happening from a from an overall market environment, but right now.

We think the demand is looking pretty good the fundamentals are good and we ought to be able to deliver a good fourth quarter.

In terms of orders in the fourth quarter, Scott you expect orders to be.

Significantly better than Q3, I mean, usually your fourth quarter is the biggest order quarter.

Well Q4 can be a decent quarter, Georgia as you know usually the book to Bill is not there because usually our strongest delivery quarter is in Q4, so but as I said I think right now we are continuing to see good activity.

You know what some of those aircraft are things that will deliver in Q4, but for sure. We are starting to see bookings and things that are aircraft deliveries are out in 2021 as well.

What I mean like last year, the implied orders in Q4 billion five versus a billion. Two in Q3. So you did almost a day into this Q3 would you expect to see a billion five in orders in Q4.

Yes, George I I don't honestly don't know I mean, I think that trying to dial in on that number is something we probably won't.

Won't do industry, because we just don't know right I mean look our sales teams are out there selling I'm encouraged by the amount of activity were seeing deals close.

Aircraft are moving at a good pace so.

I mean, we never guided that number but we certainly feel good about what's going on in the end market.

And the percentage of orders in the quarter from net Jets can you disclose that.

We do not.

Let's suffice to say there are orders in the quarter and I expect that the orders in the quarter for Q4. So now again look the encouraging part about what's going on in the market is that were seeing increased activity in flight hours and we're seeing increased demand. When we talked to guys that are frankly that are our charter operators of our aircraft from companies that are.

Guys like wheels up at our membership oriented companies and from net Jets, who as you know is a very important part.

Partner for us and that fractional market the demand in all those areas appears to be quite strong which is encouraging not only for deliveries. This year, but also for building some order book in giving us some visibility into 2021.

Okay. Thanks, very much I'll get back into queue for some more okay.

Your next question comes from the line of David Strauss from Barclays. Please go ahead.

Okay.

Hey, Thanks, good morning.

Morning.

Hi, Good afternoon, George question another way.

Jets are as Matt said Holy books, what the de booked in Q1.

No because we're we're we've never given backlog by aircraft and certainly not by customer. So I don't think we would provide that guidance.

I would say from a color standpoint.

We feel good about where net jets is I think they feel good about where the market is and they're seeing strong demand.

A lot of it is new customers coming to market, which is good for business aviation overall.

Okay and.

Roughly 18.

Scott the deliveries now forecast that you're talking about for 2021 it looks like.

Last time, you were at similar kind of volatile assessment was mid single digit margin business is that the right place to think about for for next year.

Yes, given that given the cost cutting that you've done maybe.

Maybe a bit of a different mix in terms of bigger airplanes come through.

No look I mean, obviously, we're not doing 2021 guidance at this point, but when we get to the call.

Call in January we would expect at this point that we'll get back to providing you that kind of revenue and margin expectations for the year.

Okay, I guess last one then.

Looking industrial Caltex versus vehicles was was Caltech is actually up year over year in the quarter I think you comment special.

Vehicle side would be up in Q4 is that sequentially or year over year, you're talking about guidance.

Well from a revenue standpoint, we weren't back to where it was on a year over year basis, and obviously the same is true in the specialized vehicles business, but.

We did see a recovery and frankly that was stronger than we expected, particularly in North America and Asia.

Look strong Europe still a little bit soft.

So revenue was not up on a year over year basis, but it was up significantly obviously from where we were in in.

In Q3 and into.

And delivered good margins.

Okay. Thanks very much.

Sure.

Your next question comes from the line of Cai von Rumohr from Cowen. Please go ahead.

Yes, Thanks, a lot and good good results so.

I was kind of surprised by how good numbers, where the industrial and and Bell and.

As well as the extent of the drop that aviation could you maybe walk us through any favorable adjustments are unfavorable adjustments, particularly a season, where there any sort of catch ups or anything in the profit because those numbers at industrial or kind of better than anything I can say.

Got that you've done in a long time.

Sure.

Industrial we don't that's not the kind of kind of so we don't do the Caesar or catch ups or things like that I think that obviously as we went through.

Over the last six months, there was a lot of focus on efficiencies and cost reductions and trying to optimize the operation. So as volume came back into those businesses. They performed well and delivered good margin. We expected in for instance in the Celtic side, we are we're anticipating along getting.

Some fairly good mix a lot of the newer technology, particularly around hybrid vehicles and things like that where we have a good position and a strong product line.

Our our contributing there as well so.

Also front it was just delivering converting well on volume starting to come back into those businesses.

I don't think there's anything particularly notable on the X. I think the best color to give you on.

On Bell is that we really have seen nice growth in the aftermarket side, particularly on the on the military programs in each ones and.

20, twos and Thats driven additional.

Volume in critical technologies for as far as that's a lot of our gearboxes rotating thing and blades and things of that nature, which.

Helped to drive good productivity and efficiency in terms of utilization of the factories and so.

Falls through is good margin business.

Thanks, and then.

So bell you consistently talk of the drop in margins to 10% to 12% in the margins pretty consistently go up how should we think about.

Where your margins might be next year, I mean does tend to 12 assume kind of the level of military aftermarket you were seeing and therefore thats now too low.

Or are we going to see a steep drop off and if so why is it because it looks like you would be headed for a cliff maybe talk a little bit about the trend we should expect in 21.

Well, Okay, I think that will obviously get the guidance and 21 at a later time, but overall, we work again on these and in some cases multiyear contracts we've had additional volume come in.

But as you know as you do future contracts. These are negotiated deals and you expect to see some pressure on some of those margins once that higher volume is.

Isn't there and goes into your base numbers, but a lot of it will depend frankly for us on.

What level of R&D, we continue to spend around these foreign these far programs, which will certainly pressure as you as you know those are cost share program. So the government's funding a lot of that but there is still a contribution for us to to have to make in support of those programs and there's still.

Still still lot of work to do there. So those that will put some margin pressure on a go forward basis as well.

And over the long term it will depend a lot on how we do on volume of bringing in additional Fms cases, and things of that nature. So.

I still think this is a.

A low double digit margin business. We've always said that 10 to 12 number region and people didn't believe us. So no it's going to be eight to nine out people don't believe assays can be 13 to 14. So on the average it sounds like 10 to 12 is probably about right.

Could you last one could you give us any.

Sizing of the seas, you've been seeing there at Bell as you come down the end on the V 22.

Well not at Bell I mean, the program adjustments for the quarter was 22, and a half million compared to 21.

Last year, so on a year over year basis total total textron, yes. There is no big thing Theres no change on a year over year basis really and so look I think we had we had good margins in the in the system side as well and I think part of that is what were sort of turning the corner I would say on the ship to shore development program, we started get more craft deliveries.

Yes.

Production lines are starting to run better we are starting to get supplied parts coming in at the right time.

Obviously, we've got the initial units now from the definitive as production contract or are starting to enter into production. So that's.

Thats a program that obviously is going to start to be.

Contributor.

To the profit in the rest of the business frankly continues to perform well and we expect that.

As we see some of these new things like the Comcast program start to roll in again that will generate revenue and good margin. So I think that.

Systems.

He is also going to run in that low double digit margin.

Area.

Great. Thank you very much.

Your next question comes from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

Hi, good morning, guys.

I just wanted to circle back on Textron aviation, where the bookings that you've had so far can you provide more color on the pricing environment and competitive dynamics.

No.

No what Greg when we we had we had slight positive pricing in the quarter, you will see that but I'll get the market I think again it's.

It it benefits from not having this huge number of used aircraft out there, particularly not new young used aircraft that puts pricing on customers considering do they buy a used aircraft or new aircrafts, so thats a positive.

For Us I think look I think we all know in general piece.

People were planning higher production rates this year than what the demand has turned out to be in the market. So you do occasionally see deals were someone's trying to move aircraft and we're trying to be much more disciplined about that and instead read in our production volumes and and maintain reasonable pricing and I think that's what you'll you'll see in the quarter is that we had.

Slightly positive pricing.

Thanks.

Like departments plan out their fleets.

Thank you our commercial airline that affected their buying decision so far.

When you think about customers who are in the cops.

Ordering aircraft has been quite.

Slide the dotted line.

What's the variable that they're looking at that would make them more confident and then ordering you know mark.

Our visibility with the economy is it a vaccine.

It is border restrictions can you just provide more color in terms of big decisions.

You know, it's hard to say I mean, it'd be anecdotal I guess I mean every customer is a bit different but there is no doubt that as an industry. I mean, we're seeing it on new aircraft I believe that you know.

In charters and clubs in fractional owners are also seeing this that you have people that are coming into business evaluation that have not historically been.

In business aviation are owned an.

An equity piece of an aircraft.

And clearly them.

Again, the macro environment out there right now is.

Is there some help dynamic to it there probably is also the fact that for per a lots of companies and individuals that aren't around.

Around hub airports, we all know that when you see the dramatic reduction in the number of commercial flights, particularly if you have to connect through some place to the reduction in the number of flights is making it very difficult for people to.

You don't get from point to point B in the country without taking a whole day doing it. So I think the convenience factor, which a lot of customers. Obviously have enjoyed for many many years.

Is becoming more appealing to a lot of other folks as it becomes harder to travel come.

Commercially and look our view on the over the long term is maybe some of that as people that my charter may maybe they go back to commercial airline someday, but we think a lot of people once they've experienced the convenience and the productivity and efficiency of the traveling private they'll stick with it.

Thanks for the color.

Your next question comes from the line of Jon Raviv from Citi. Please go ahead.

Nice turning in the performance of that business. So.

I think those guys are fairly straightforward.

If you looked in the industrial businesses Cal Tex.

Generally convert well and and and performs well and they I think are showing that as we come back through the auto cycle.

And I expect them to continue.

Continue to perform well as you know the volume is usually lighter in the automotive industry in queue for.

But I think that again, they're getting back into their normal stride and will do well. We know we had things to do in the industrial side around child development in particular in and.

And I think that we're seeing.

The benefits of our relationship with bass pro on the tracker side or Arctic Cat Channel is also performing well and we're seeing good retail volume through those channels. So.

I think cost structures, we've talked about before we were consolidating some.

Some facilities and reducing footprints and as a result of those restructuring activities I think we come out of the cycle and TSV and Ah.

And a much better place so that should drive improved performance.

Versus what we've seen in the past like aviation is very much a volume game. Obviously you had to go through some very difficult restructuring here just.

Just in terms of adjusting for a lower volume than where we were.

In 2018, 19 timeframe as I said I think we'll we'll we'll probably get half of that back is kind of how we think about 2021, and then get back to the road that we were on.

When we get into the future years, I think our product lineup has never been better right. When you look at where we are with latitude and longitude skycars coming along very nicely. So it's been a rough year for sure for that team.

But they continue to make the kind of progress in terms of the positioning of the of the products in the business and the cost that we should be able to get back on our contractors will go into 2021 and beyond.

Thanks are full tour continent, following up on aviation comedy talked about getting back to the previous road we were on.

And the double digit margin that segment.

Type cream at that at this point or is that a realistic goal and also I'd just say I'm thinking about production rate as a function of that you talk about getting half deliveries back in 21, what does it say about production right in 21. Thank you.

Well guys I mean, obviously, we've already always been trying to target getting back to the double digit we we're making good progress I think towards getting there, but as I said you do need to have volume right. I mean, we have to have have a market that has got enough demand that we can get volumes.

Back there to do that and I think we're getting there a big part of it was obviously this year, having a full year of longitude.

And obviously that I.

I mean, we have a full year of lunch do but overall the businesses.

Dramatic reduction in demand so.

As I said I think we'll get about half of that back. So when we think about the production run rates.

Four 2021, it's targeting delivery that's going to be.

So we're somewhere in between where we are this year and where we were in 2019. So we're setting production run rates to achieve that obviously run rates increase through the course of the year because we expect again when you think about 2022.

That you're back up maybe to where you are 19, but this is.

This is a plan guys right I mean.

That we have that kind of visibility in this market.

We haven't had that kind of visibility this market in a very very long time so.

And I feel very good about the macro environment.

And the fact that there's not used aircraft out there. The fact that we have a very nice product line up with.

It makes it feel comfortable that we should be thinking that way and planning that way, but obviously.

Obviously, we will make production line.

Salim decisions as as things play out.

Oh I appreciate that thank you so much.

Yeah.

Your next question comes from the line of Ron Epstein from Bank of America. Please go ahead.

Hey, yeah.

Good morning guidance.

One.

Maybe on the on the business side is piling up on.

The whole stringer questions that we've had.

When the time comes to ramp back up right.

<unk>.

Too far out how.

How difficult would that be alright, I mean, given the restriction that's going on.

How is your workforce and which time do you have a sense on how your supply chain soon.

Well look I don't think it's a difficult to ramp back around I mean, we're not we're certainly not straining our supply chain. Obviously, so we have to do we have to work very closely with guys like pratham.

And Williams and Honeywell around volumes on engines, which obviously are are pretty long lead.

Item.

Avionics it kind of looks I mean look at it there's nothing magic about it right I mean, you work with food our supply chain all the time to to do these forecasts and kind of line things up frankly, I looked at some of the things that have been.

The longest lead times in the most constraining things and supply bass are typically.

As you know around bearings, and castings and forgings and.

To be honest right now there's a lot of capacity that's been freed up I.

I mean these are these are common suppliers too commercial aviation and so as those volumes have.

Have dropped the supply chain frankly, our biggest struggles over the last.

Four or five years I mean, the team works through it and obviously.

Been a problem in the end, but there's a lot of work that goes into ensuring that we get the right.

Supply and source of supply for a lot of those critical items and that was strained because of the.

Very very strong demand in the commercial side, obviously, that's not the case today so.

We still have to do a good job of forecasting and working with suppliers, but I'd say solving those issues is easier than it has been for the last 10 years.

And then.

Maybe another question on radiation question, if I may.

If you look at the <unk>.

Utilization today do you guys have a sense on.

How many citations are being used just for personal leisure.

As opposed to business travel I guess my question to this right when we get to a post covid world.

And you have people flying for business and for all the other reasons I fly.

One of the one of the things that kind of seems to me that could happen is business aviation postcode it could be actually far more robust and it was brikho that because of what happened during covid. So my questions is do you see any evidence of that.

Something you guys talk about are completely opposite no look around I think that's the macro environment that I think is a positive alright.

First of all to answer your question I mean, we don't have the data right. It I mean, we don't we know all of our citations flying we are very very good information on all that stuff.

But nobody checks a block it says hey, this is a.

A personal trip or a business trip. So I mean, we don't we don't have that data obviously to to break it out but I think we know when you see the the market coming back in you got 85% of the flight hours.

We all know that.

This is conventions are happening.

You guys aren't having.

Conferences are I mean, they're just as we all know there is nowhere near as much business travel happening today is there was a year ago and so we know that therefore that that gap and that increase.

Has a lot of personal use going on of aircraft and certainly we know this from discussions with.

Our charter operators to help guys are fractional you guys you know everybody knows.

That there is a lot more personal travel going on than you would normally see I mean, we look at Europe in August it was over 100% of a year ago, that's not business travel in Europe in August right. So you see a a much higher utilization of these aircraft for personal reasons right now and so the case.

He would make and certainly is how we think about it is.

When you think about business travel coming back and it is starting to come back right and there's no question more people are traveling and moving around.

But not anywhere near the scale of what you would have seen a year ago.

That just as you're seeing more people opt to use business aviation for personal reasons, you're going to see more people choose to use business aviation for business reasons, and so you're going to have both higher utilization and personal and higher utilization in in business and therefore, that's what I say drives a better macro environment and we've seen.

Seen in a long time and.

Yeah, and as we as we look at orders of the customers. It is that kind of a mix in anticipation of people like already using it personally and anticipating using it more on.

On the business front. So that's the reason frankly for us to feel bullish about why this will recover.

In a positive way and again also or shoved this dynamic of not having this.

Large used market out there so I think we'll we'll see.

Demand increase in.

And it will look to the new aircraft demand because you don't have.

A lot of new used aircraft out there to compete with it.

Yeah that makes sense.

One last one is kind of changing subjects completely before the before the pandemic in kind of the whole world got turned upside down.

Guys have made a bunch of progress on reshaping industrial portfolio.

Are you comfortable with where it ends or they're still.

Work to do there.

There's always work to do but we're comfortable with where we are and what we're very focused obviously at this point on executing an operating the businesses and that's what we're doing and I think it's working.

Okay, great. Thanks.

Your next question comes from the line of Noah Popinac from Goldman Sachs. Please go ahead.

Hi, good morning, everyone.

Scott last quarter, you had provided the forecast that 2020, Cessna jet deliveries would decline.

30% to 40% for the year and the first three quarters are $40 down 40 to 50.

Is the fourth quarter decline less than that 30 to 40 to still pull you into that range for the year or does the fourth quarter year over year decline look more like what it's been year to date.

I expect that we will see some recovery on the on those percentage basis as we go into the queue for based on the order book, an a level of activity, we're seeing in the market.

Got it okay.

So that 30 to 40 for the year stance.

That's still how we're thinking about the year correct.

Got it.

And then maybe.

Looking at Bell commercial somewhat similarly.

The unit change year over year, there you know.

Improved a nicely in the third quarter versus the first half of the year, maybe you could just elaborate on what you are seeing from your customers in that market and how you're thinking about.

2021 at this point.

Well look I think that we've certainly seen some softness on the commercial side and it's largely driven by the fact that it's like.

Aviation in Lafayette, it's hard to get.

A lot of face time with customers, it's hard to kind of just get deals.

Done as you know our bell commercial businesses is heavy on foreign.

Foreign customers a lot of fleet operators a lot of our bigger aircraft are international and it's it's still a challenge too.

To sell and do demos and frankly, they're a lot of these or our government or power public kind of things and and a lot of the world It's hard for.

Hard to get deals done. So I think we'll continue to see that and does that how does that change into 2021 I wish I could tell you the answer that I mean, it depends on how how the virus is progressing and what different countries do around.

Governments really getting back to work and.

I mean deals done.

So it's been a challenge through the course of the year and I think it will it will continue to be one as as we go forward.

Do you feel like you have less of visibility on that on sort of awareness at production. There for next year than than you do with how you're speaking to the Cessna jet business.

No I think we're pretty well set on what we think the production levels need to be.

Again, these are relatively long cycle of production, especially when you're getting a customization and things like that so.

We've made the adjustments that we think we need to make in terms of production.

But like I said I think the only difference it's a little more challenging maybe no is the fact that a lot of them are international customers. So yeah.

Okay and Frank.

On cash flow.

Working capital has been a not insignificant use of cash for pretty long time and.

And the nice casually number you're having a quarter. It's it's a it's a it looks to be a source.

Are you at a at a pivot point, where you know with all the new jazz and Sesnon.

<unk> churn and some of the other businesses, you've you've had to use working capital where you can now have that as a source of cash sustainably for awhile moving forward or is that.

A bad read.

No I mean.

It moves around no obviously, depending on seasonality of the business and other factors, 18% teams have done a really nice job.

In decelerating.

As we went into the pandemic and very being very focused on working capital utilization and cash generation.

And that's reflected in the numbers as we mentioned earlier in the call will continue to.

Let's see I think some liquidation of inventory in the fourth quarter just on the higher volumes that we typically see in that fourth quarter, but then.

Would expect working capital to kind of.

Seasonally move around as we move into the 21 so we.

We've been very focused on I think we're doing a better job of managing it.

But there's always going to be some quarter to quarter volatility to it but.

Seems you've been very focused on it and done a nice job of it.

Okay. Thanks very much.

Your next question comes from the line of Seth salesman from J P. Morgan. Please go ahead.

Oh, Thank you very much and good morning.

I was wondering.

The payroll tax holidays than a benefit on the cash flow this year and if so if you could quantify it.

It's been a benefit.

We won't quantify it but it has been a a bit of a benefit but it hasn't been a kind of.

Significantly material number on cash.

Okay, and then if we were to end the year today.

What kind of changing pension expense, what you'd be looking at for 21.

And have you have you given any more thought to mark to market accounting.

Yeah, I looked at there's lots of things that go into the pension calculation. So I can't really kind of snap aligned today, because we haven't done all of that analysis.

From a discount rates standpoint.

Interest rates are down a bit so that probably create some headwind.

There's a little bit of tailwind associated with just the averaging of various gains an amortization and things like that over time. So.

It's ultimately kind of hard to tell where that will fall out we we wouldn't expect it to be a big headwind as we look at 21, but it it may be some headwind.

And I'm not going to kind of comment around looking at different kind of accounting policies vis-a-vis pension.

Hello.

Well, let's say that for if and when we went to do anything in that regard.

Thanks, and then maybe one take a picture of Scott.

I feel like discussions of the business that demand environment of often revolved around politics and elections tax rates and all that stuff and you know we're potentially looking at a change in administration and.

Higher corporate tax rate is all that stuff kind of irrelevant. This time given the the other demand drivers that I talked to that or maybe we've just made too much of it in the past.

Oh I don't know so that's a good question I mean, this probably yesterday.

Say normally when you see uncertainty or a question and for sure we've seen that before right where people were kind of waiting to understand a tax policy or the document election.

No markets like uncertainty obviously.

It's kind of interesting obviously.

This year because of the pandemic, there's just so much other swirling around out there that.

Maybe it's hard to to see what role.

The politics is playing I mean, generally speaking I'd say, we've seen that in the past right where people kind of hold off until they have visibility and then they.

And then they kind of like it's kind of interesting because in the end everybody says goes coming back to where they were right. It's just rigged.

Regardless of what the answer is in terms of Ah political.

Outcome.

It just seems like this year because of all the other noise around the the pandemic gets doesn't seem to be playing as prominent role in discussions, but I'm sure. There's some of it out there.

But I think in the end so can we as we know we've seen this before an election years, even when we see it in election years. Once you get past the election people kind of.

Get back to life.

I suspect that would be a dynamic here as well.

Great. Thanks very much.

Your next question comes from the line of George Shapiro from Shapiro Research. Please go ahead.

Yes, I just wanted to follow up on the margin at scale systems any.

The Bell Margene was the highest from my records and stuff.

Fourth quarter of 2012 and assistance was the highest since the third quarter of 2009. So I guess my question is I mean, obviously, Scott <unk> said to bell margins not sustainable yet, but the system's margins still seems to be sustainable or it's a little bit abnormally high this quarter.

Well, it's probably a little on the high side George.

Think as I said, we've been.

Seeing steady improvement in a lot of that is self help around getting the ship. The short connector program squared away I do think the teams made really good progress on that and that will continue to be.

Contributor we've we have had.

Things like the calf cash program, which again as I said has required an investment which is now converting in the.

Revenue in margin, which will help us on a.

On a go forward basis.

There's also a lot of new programs are a lot of R&D programs that are in there around monetization, which.

All that will balance out I think to be as I said, I think kind of a low double digit margin.

Business.

And what gets the margin at bell down to the ranking it talked about I mean.

And some expectation that this year would be weaker because you had the new Vicente too bye on the obviously getting some benefit by growing after a support for that program, but so what happens to get the margin of drop as much as it seems to have to drop to get to your guy.

Yeah, and I think we are ramping up R&D activity and we will see that continue into next year as we got more and more resource coming in particularly on the far program.

I expect as we continue to make progress on flora we've seen a lot of requirements work here in this early phase of the of the next phase of that program and you'll start to see more engineering R&D as we sort of head towards a kind of a PDR capability on that platform.

And I think we're we are getting benefits of having more volume going through a lot of these shops, and obviously as you renegotiate and do future contracts. It up volume goes in there and we'll get negotiated down to two or more nominal marginal and some of those things.

But why don't we are certainly.

I'm sorry go ahead George.

Sorry about that.

This is kind of a trivial question, but you deliver one citation 10, and a quarter I think the last time you delivered one was the first COVID-19. So is there anything unique with that one was that once you're sitting in inventory if you've had any color on that yeah.

It's just I mean.

We've obviously.

That program out so just the last couple of aircraft, which we've been using for other reasons are are just finally someone out of inventory.

Okay. Thanks, again very much.

Okay Greg.

That concludes.

Call it.

Erin.

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