Q4 2020 Textron Inc Earnings Call
Yeah.
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Textron fourth 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 have a question. Please press one and then zero on your Touchtone phone.
You may remove yourself from Q&A anytime by repeating that one zero command, if you're using a speaker phone. We ask that you. Please pick up your handset before pressing the numbers.
As a reminder, if you need assistance from an operator, Please press star and then zero. This conference is being recorded and I would now like to turn the conference over to the Vice President of Investor Relations. Mr. Eric Salander. Please go ahead.
Thanks, Julian 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 on today's press release on.
On the call today, we have Scott Donnelly, Textron's, Chairman and CEO and Frank Connor, Our Chief Financial Officer, Our earnings call presentation can be found in the Investor Relations section of our website.
Textron's revenues in the quarter were $3 7 billion down $368 million from last year. During this year's fourth quarter. We recorded 23 million on pretax special charges largely related to restructuring activities on industrial and Textron aviation or <unk> <unk> per share after tax.
We also recognized a one time favorable tax benefit related to the sale of true, Canada or <unk> <unk> per share excluding special charges on the one time favorable benefit adjusted net income was $1 six per share compared to a $1 11 in last year's fourth quarter Manny.
Manufacturing cash flow before pension contributions was $467 million down to $183 million from last year's fourth quarter for the full year revenues were $11 7 billion down from $13 6 billion a year ago. Adjusted net income was $2 seven per share compared to $3 74 last year.
Year.
Manufacturing cash flow before pension contributions was $596 million as compared to $642 million last year with that I'll turn the call over to Scott.
Thanks, Eric and good morning, everyone. Our business is closed out the year with a strong operating performance from the fourth quarter as we saw margin improvement it systems industrial and Bell that drove an increase in textile manufacturing margin to eight 8% on lower revenues.
At Bell margins of 12, 6% were up 30 basis points as compared to the prior year, Despite lower military revenues in commercial volume we.
We delivered 57 commercial helicopters down from 76 in last year's fourth quarter.
On the military side the Japanese officially began on V 22 fleet operations in November this continuous growth of the worldwide fleet of operating aircraft, which has amassed over 560000 flight hours.
The future vertical lift on Mark a third anniversary of each weighted first flight in December with the aircraft, having now flown more than 200 hours Army leadership in Congress or adverse supportive of future vertical lift and we expect this will continue under the new administration.
In December the U S Army provided the draft RFP for the Florida program for review and comment.
The Army continues to anticipate a down select and floor program award in mid 2022.
At systems revenues were down primarily on lower volume at the true simulation and training business.
On November systems announced the sale of its commercial air transport simulator business to see this transaction closed on January.
In the quarter, a tack one on the Recompete of the U S Navy and Marine Corps flight Fighter Jet training services program. This contract expands the scope of the services. We currently provide under the program is worth up to $440 million over the next five years.
Also in the quarter on men's systems was awarded to $66 million contract for the U S. Army for 36 Chateau aircraft. The Shadow platform now has over $1 2 million flight hours globally.
Moving to industrial revenues were down primarily due to reduced demand and the ground support equipment business within specialized vehicles.
<unk> the automotive production outlook, just steadily improved since the low point in may and demand from our customers continues to ramp from the fourth quarter as revenues approach their prior year levels.
Moving to Textron aviation revenues were down on the quarter, primarily on lower jet deliveries on aftermarket volume.
We delivered 61 jets down from 71 last year and 61 on commercial turboprops up from 59 in last year's fourth quarter.
On the new product from aviation began deliveries of the new King Air 360, with eight units per quarter and announced new King Air 260.
Social Scott care program continues to progress with three aircraft flying and the certification program.
Just program has completed over 400 flight hours and the aircrafts are on track for entry into service in the second half of 2021.
In summary, 2020 was a difficult year with many challenges for our operations and I'm proud of the way our team has responded.
Through a focus on working capital management and cost control businesses generated a strong manufacturing cash flow performance for the year.
At our defense businesses, we were able to maintain our operations meeting our customer commitments and delivering strong results.
On the commercial side, we overcame temporary manufacturing shutdowns of disruptions on our end markets to deliver a strong fourth quarter results and.
And look forward to carrying that momentum into 2021.
With this backdrop, we're projecting revenues of about $12 5 billion for Textron is 'twenty to 'twenty, one financial guidance.
Aviation, we are projecting growth from increased aircraft deliveries on both jets and turboprops, including the entry into service of our new social Sky Courier.
At higher aftermarket revenues driven by increased fleet utilization.
At systems, we're expecting higher revenues and margin expansion, primarily driven by growth in APAC and marine and land systems.
At Bell, we expect solid margin performance, despite lower military and commercial revenues, while continuing to invest in future vertical lift.
Net industrial we're expecting revenue growth and margin improvement at Caltech as auto demand continues to recover from true.
To pre COVID-19 levels.
At Textron specialized vehicles, we're also expecting revenue growth and margin improvement as we continue to grow our power sports business with bass pro shops.
We're projecting adjusted EPS from a range of $2 $72 90 per share.
Manufacturing cash flow before pension contributions is expected to be in the range of $6 million to $700 million.
With that I'll turn the call over to Frank.
Thanks, Scott and good morning, everyone.
Segment profit in the quarter was $324 million down $16 million from the fourth quarter of 2019 on a $368 million decrease in revenues.
Let's review how each of the segments contributed starting with Textron aviation.
Revenue is at Textron aviation of $1 6 billion were down 10%, primarily due to lower citation jet volume at lower aftermarket volume.
Segment profit was $108 million in the fourth quarter down from $134 million a year ago, primarily due to the impact from lower volume and mix.
Backlog in the segment ended the quarter at $1 6 billion.
Moving to Bell revenues were $871 million down from $961 million last year, primarily on lower military revenues and commercial volume.
Segment profit of $110 million was down $8 million largely on the lower volume, partially offset by a favorable impact from performance, primarily reflecting higher favorable program adjustments.
Backlog on the segment ended the quarter at $5 3 billion.
At Textron systems revenues were $357 million down from $399 million, a year ago, primarily due to lower volume at true simulation and training.
Segment profit of $49 million was up $16 million, primarily due to favorable performance.
Backlog on the segment ended the quarter at $2 6 billion.
Industrial revenues were $866 million, a decrease of $61 million from last year, primarily due to reduced demand in the ground support equipment business within specialized vehicles.
Segment profit was $55 million up 25% from the fourth quarter of 2019, largely due to a favorable impact from pricing and inflation and favorable performance, partially offset by the impact of lower volume index.
Finance segment revenues were $13 million and profit was $2 million.
Moving below segment profit corporate expenses were $50 million in interest expense was $36 million, we recorded pre.
Pre tax special charges of $23 million in the quarter related to restructuring activities.
Following the strong cash performance in the quarter. We ended the year with approximately $2 3 billion of cash on the balance sheet.
$2 3 billion represents a higher than normal level of cash on hand, reflecting a pre funding of $500 million of 2021 debt maturities.
During the quarter, we repaid $350 million of floating rate notes that matured in November and $362 million on outstanding borrowings on corporate owned life insurance policies that were drawn in the first quarter for additional liquidity.
In the quarter, we also reactivated our share repurchase program, our repurchase of approximately $120 million to $129 million of shares.
Turning to our 2021 outlook I'll begin with our segments on slide nine of the earnings call presentation at.
At Textron aviation, we're expecting higher revenues of about $4 5 billion, reflecting higher aircraft deliveries for both jets and turboprops as well as higher aftermarket revenues.
Segment margin is expected to be approximately five 5%, reflecting the higher volume and increased production.
Looking to Bell, we expect slightly lower revenues of about $3 1 billion, reflecting lower military revenue is from a lower H, one production and aftermarket volume and lower commercial deliveries.
We're forecasting a margin of about 12, 5% largely reflecting on.
The lower military and commercial revenues and increased R&D investments related to flora in pharma.
At systems, we're estimating higher 2021, who were revenues of about $1 4 billion.
Segment margin is expected to be about 12, 5%.
At industrial we're expecting segment revenues of about $3 4 billion, reflecting higher revenues at <unk> and Textron specialized vehicles.
Segment margin is expected to be about 6%.
And finance, we're forecasting segment profit of about $10 million.
Turning to slide 10, our estimating 2021 pension income of about $30 million versus.
The pension cost of $33 million last year or 2021 pension.
Flex the strong return on our pension assets for 2020 of 17, 4% and a change to the amortization period for accumulated actuarial losses for one of our domestic plans, resulting in those losses being amortized over a longer period.
Offsetting these favorable changes are a 75 basis point decrease in our discount rate to two 7% and a decrease in our estimated long term asset return of 50 basis points to seven 5%.
Turning to slide 11, R&D is expected to be about $600 million up from $545 million in 2020.
We're estimating capex will be about $400 million up from $317 million last year.
Moving below the segment line and looking at Slide 12, we're projecting about $120 million of corporate expense $135 million of interest expense and a full year effective tax rate of approximately 18%.
Our full year 2021, adjusted EPS guidance is $2 70 to $2 90 per share, which excludes $20 million to $30 million of pre tax special charges for the completion of our previously announced restructuring plan and a pretax gain of about $10 million from the sale of true Canada.
Our outlook assumes an average share count of about 227 million shares as we continue to deploy the majority of our free cash towards share repurchases in 2021.
That concludes our prepared remarks, so operator, we can open the lines for questions.
Thank you and our first question will come from the line of Robert Stallard of vertical research. Please go ahead.
Thanks, so much good morning, good morning.
First question on the Aviation Division and in the release, you said that you'd see net continued good order momentum I was wondering if you could maybe give us a little bit more clarity on.
Almost going on out there in the market and in particular, giving you a forecast for 2021 had the availability of slots is looking.
Well I think Robert.
For additional on murder updates, obviously, we've seen sequentially from.
Challenges in Q2, Q3 improved Q4 improved and we expect to see that momentum continue just based on the dialogues that are going on with our.
Our sales teams. So I think people are feeling like things are recovering and.
Demand remains there obviously you see the data around used aircraft per sale is at record lows. If you look at citations that are less than 10 years old it's only about 1% of the fleet. So.
I think the market has been strong not just as we've seen increased.
Interest in orders on the new side, but also very strong on the on the used side.
Flight activity has rebounded quite strongly in November and December in the U S were actually up for our aircraft over.
A year ago, So I think the demand.
We recognize that's primarily leisure travel at this point they are still pretty muted amount of what we think is straight.
Business travel so as things continue to return to normal we think we'll see.
Ongoing improvements in utilization as well so at a macro level considering the.
The level of interest we're seeing the momentum that we've seen through the course of the year and the very low levels of used aircrafts that are within that 10 year window in terms of age are all kind of pointing to continued momentum and strength in the worst out of the business.
Great. Thanks, Scott and Frank just cash.
Verification I missed what you said debt on the share count for 2021, I wasn't typing quick enough to.
$227 million.
That's great. Okay. Thanks, so much guys.
Sure.
Thank you and next we'll go to the line of Carter Copeland of Melius Research. Please go ahead.
Hey, good morning Gents.
Good morning, Scott I wanted to just a clarification on the comment you made on the Bell margin and the continued investment in future vertical lift does that mean that the investment sustains at the same level or does is there a headwind related to that as we look at 'twenty one.
Yes, there was a headwind in 'twenty one Carter. So obviously, we started those programs in the latter part of the year they've been ramping through the Q4, and we expect to see that continue to ramp through the course of this year as we're obviously working on both Florida and Florida.
So far we've talked about a little bit that's going into its phase two of the risk.
<unk> phase so that's fully ramped and on the far program we've actually.
Begun component manufacturing and some of the initial assembly work on the on the flight test aircraft to get it ready for flight late next year.
Okay, and so does that peak in 'twenty, one or will we continue to trend upward to 'twenty two.
It's probably kind of flattish going into 'twenty two would be my guess, we're probably not quite ready to guide 22, but yes understood.
Okay. Okay. Thanks for that and then Frank just a quick clarification on the pension piece, how much longer to the amortization period get on.
On the on the losses.
Yes, the one plan it went from it would've been in seven years and it moved out to 20 years.
Okay.
And was that a large portion of the plan or it's.
It's our largest planets.
Our strong cash flow.
Textron Master plan and a reason for that is that we move below 10% of the participants in that plan being actives.
Tired and so when you when you do that you change to the remaining life expectation for remaining life, rather than the remaining service period.
Yes, exactly alright, great. Thanks, that's very clear.
Yes.
Thank you and next we'll go up from the line of Sheila <unk> of Jefferies. Please go ahead hi.
Good morning, Scott Thank you Eric.
Great.
You previously talked about recovering half of the delivery decline in aviation in 2021 that implies deliveries about 165 units how do we think about that given orders fell mid teen corner.
Yes, I think that's still what we're thinking Sheila and Thats, what we have laid out in terms of our assumptions in the guide that we gave you guys were expecting to get about halfway back.
In terms of both new aircraft as well as our aftermarket volume. So again the flight activity has picked up and we've been seeing steady improvement in.
And the.
The amount of activity is going on on the aftermarket so it won't get all the way back to two.
To <unk> 19 in one year, but we're assuming that's also about about halfway there sort of a step.
Okay Cool and then on just the Bell revenue guide I think it's down about 10%.
What are the moving pieces to that I think be 'twenty, two should be fairly stable is that in each one drop or is it on the military aftermarket.
On the military side, it's primarily driven by H. One so we're starting to ramp down on number rich H one deliveries and also we do expect at this point commercial will be down as well so.
No I think the end market will start to recover there, but as you know a lot of our so much of our commercial helicopter.
Market is international it's just been tough to get deals closed here in.
In 2020, so I think we'll start to see that pick back up again, but it will leave a little bit of a.
A decline in 'twenty, one for commercial orders as well.
Okay Awesome. Thank you could go day sure. Thank you.
Thank you next we'll go up from the line of George Shapiro of Shapiro Research. Please go ahead.
Yes.
Scott I wanted to pursue.
The book to Bill was like pulling eight six in the quarter.
Orders were certainly better than they were in the third quarter, but.
Down from last year's fourth quarter I was just wondering did you see any slowing in the quarter as people rush to try and get deliveries by the ended last year to beat the potential change in the bonus depreciation with the new administration.
No I don't think we saw any change and as you know, Georgia is always ended the year.
<unk>, driven regardless of administrations or tax policies, it's always best to get that but first year tax on.
Regardless of what the depreciation schedules are so we've always seen that.
A certain amount of that activity as we get into Q4, and that's why Q4 has always been our our strongest delivery quarter, but with respect to the order stuff I think what we saw.
2020 was an extraordinary year, obviously, but we did see that incremental strengthening in order flow.
Through for through Q4, and again, just based on dialogues in the level of interest and activity Thats out there.
We're feeling pretty good towards that revenue guide that we gave you in terms of jet deliveries for the year. So.
Scott as you know Q4 is always our highest delivery and so book to Bill was always a challenge on there, but I think order activities certainly supports our view on what the revenue guidance for this year.
And just on your projection for aviation implies about a 35% incremental margin, which is a pretty strong incremental I mean is that reflecting better pricing that you're seeing or if you could give a little more color on why it's a strong well.
We certainly do expect to see better pricing, we had better pricing in Q4 as well.
So given the demand environment, we would certainly expect to see some continued price improvement.
But it's also true when you look at the year over year stores, you've got a lot of idle facility.
Costs. It was in there in 2020 and so we're we certainly expect to rebound back to the kind of levels that we had in 2019 with.
Considerably better leverage than you would normally expect to see in that kind of 20% or so range.
Okay very good. Thank you very much sure. Thank you.
Thank you next we'll go up from the line of David Strauss of Barclays. Please go ahead.
Thanks, Good morning.
Right.
Scott just just back on the assessment plan 165, or so deliveries could you could you talk about how I.
I guess not in absolute terms, but relative to prior years kind of household you are on that plan entering the year as compared to what you've seen in the past.
No I mean, we don't usually provided on the backlog number is pretty comparable right. So I don't think it's a.
On a very different situation than we're used to seeing too.
Okay.
And then latitude longitude looks like.
<unk> been running about 30%, 35% of pulled deliveries would you expect a similar mix in.
Maybe if you could just update us on longitude I think for a while it was.
Diluted was seen as dilutive to margins, where where that where that sits today relative to kind of the overall aviation average.
Well I don't think I'm going to get into margins on particular aircraft, but David there is no doubt that we had some dilution obviously when you see the initial aircraft builds those are.
Are always more expensive I think the guys have done a pretty nice job of working through that obviously, there's some interruption. This year as we shut down the plant and brought it back up but I think launched shoes on on a good track to be a <unk>.
On gross margin.
For Us I think demand has been good as you know this thing is and we have quite a few retail aircraft out there that sell operating and the net jet fleet and doing really really well so.
Promo grow into gross margin by aircraft, but.
We're very happy with where the launch students.
Okay and then just.
Mix mix within deliveries latitude longitude you thinking a similar kind of range as what we see in the past around yes, I would I would expect so I mean, it's it should be about the same.
Okay, alright, thanks, very much sure.
Thank you and next we'll go up from the line of Pete Kubicki.
Alembic Global please go ahead.
Hey, good morning, guys.
Morning.
I think I might have missed it if you mentioned what drove the big increase in systems backlog was that GBS day, primarily.
Then.
If it was in terms of converting that to revenue is it just going to be kind of a very slow ramp through kind of 'twenty one 'twenty two.
So the backlog as it systems were kind of across most of the segments feet. So absolutely GBS do you win in there which is several hundred million dollars plus kind of business. We just started really to recognize any revenue on that.
In Q4, and so that's kind of a five year window. So it'll ramp here as we go through 'twenty one to 'twenty two.
We had some nice adds to the backlog.
What about some of the APAC wins, both the Recompete with the Navy as well as the ongoing cap cash.
Task Order awards, and we had some obviously the shadow.
Program on block three so it was across most of the segments, but.
Okay, that's great.
The margin there the guidance of 12, 5%.
Should we be thinking that that's kind of the new kind of steady state for that business or just 21 kind of benefit from from somewhat unusual dynamic.
I think it's again this is probably it's a very defense oriented.
Business segment, so 10% to 12% margins as sort of where we would expect that business to be.
Okay. Thanks, guys sure.
Thank you next we'll go to the line of Jon Raviv of Citi. Please go ahead.
Hey, Thanks, Hey, good.
Morning, Scott you, just said that 12% I thought I'd ask about bell margin.
Hello margin opportunity understood the guidance for this year and that you still have a lot of FPL on any sort of thoughts on the opportunity for margin on the other side of that for you.
Versus the normalized rate so to speak.
Okay.
It's going to depend so much on on where volume goes right I mean the.
What can it be 20, twos and H ones in Fms opportunities are.
So I don't think we're ready to guide that one of our challenges the share obviously as you know these OTC.
Programs and even the government cost share doesn't come through revenue right. So it's.
There is.
If the swings into a full blown A&D program at least you'll start to see some revenue growth associated with the <unk>.
On R&D side, which is not going to be very high margin obviously so.
It will depend a lot on what that mix looks like so I think until we have a lot more insight into where the contract award are where they are on FPL and some fms opportunities, it's pretty hard to.
To give you that that mix.
Out in 'twenty, two and beyond.
Sure understood and then on just on aviation fully appreciate you're still looking at getting half of the.
Drop from last year back this year, but just given the conversation with your customers, including the fleet operators.
Is there still an idea that this could be a structurally larger market going forward and therefore, when do you feel like you can get back to the 2019.
On production and delivery levels and whats the margin opportunity be around that Dmitry, we still feel that double digit is in the cards.
In the medium term.
No I would say that we still feel like from a macro standpoint from a structural standpoint, how you want to refer to it debt.
The.
Business Jets, particularly that light mid size.
It is going to very much be in favorable we're seeing a lot of new customers coming into the market. We certainly have dialogues on new customers on new aircraft sales, we know that's happening in charter and fractional and club, it's really across the board I think that's part of why you see the reflection of so much used aircraft activity as the demand out there supports.
Part 135 operators charter operators all these guys are seeing.
Very strong demand and that's just really driven by leisure because we haven't seen much rebound yet on the business side.
Travel, but we certainly expect to see that same dynamic as businesses start to travel again, so I think structurally at a macro level. It will drive a larger end market, which is good for everyone as a participant in this on.
The Biz jet World and Thats, why we feel like when we get there is still an overhang obviously of the COVID-19 impacts and not seeing a lot of business demand, yet which is why we think we will see half of that recovery back to 19. This year and I think we feel pretty good about that and then we would certainly expect to see back.
Back to that 19 level when you get into the 2022 timeframe.
And just on the margin opportunity to still a double digit margin business when you get back to those levels.
And again I think we will see very strong.
Conversion.
Leverage as we get back to those levels that we were and then back.
Back to more probably are more normalized 2025% on the growth beyond that.
Many thanks.
Sure.
Thank you next year, that's from the line of Ron Epstein of Bank of America. Please go ahead.
Yeah. Good morning, guys. Thanks for the question.
Scott, What's your sense on the support for future vertical lift with the change in administration and the possibility of a flattening budget environment.
So theres a lot of components, but how are you thinking about <unk> versus <unk> that kind of thing.
Well look on everything we have heard and I think the army has been very very public about this is that modernization remains a very very very important part of their strategy and they continue to be <unk>.
Emitted to.
Putting these things forward obviously the.
The focus on modernizing versus spending a lot of money on their legacy platforms is what they've talked about now for a couple several years and they continue to talk about that as the primary.
Funding source and they even talk about end strength.
In a challenging budget environment, they know that they need to modernize a lot of these <unk>.
Important platforms, obviously, you're <unk> is one of those and that remains one of their top priorities.
The general cargo has been very clear urgent or emergent very clear they are going full speed ahead. The fact that the draft RFP came.
Came out when they said on on flora.
And their expectations to have an RFP out here in the not too distant future and are still committing to a down select it's out on that.
On middle of 2022.
Everything we see is still 100% full commitment full speed ahead.
Okay, Great and then maybe a topic that nobody brings up anymore, but just curious what's going on with it if anything if it's parked on the garage collect investor what's up with the Scorpion like is it just over or are you guys still trying to market it or.
Well look we stood still fly the aircraft on occasion and do certain things with it we had the government still has some interest but I would tell you for the last year or so our primary focus on the military side of the business has been getting the 86, so rich certification.
As you know the Air Force did.
Do a program when we first of all number of aircraft obviously, but.
But it did give us a certification pathway we've delivered the first aircraft.
On to them. So we hope to get the type surgery are wrapped up pretty soon and we have international customers that are have already acquired and proposals that are going on for that aircraft. So I think we will get through that first.
And so where we go from there.
Okay, great. Thank you very much Scott.
Sure.
Thank you next we'll go from the line of statesman of J P. Morgan. Please go ahead.
Yes.
Sir Your line is open please on mute your phone if it's needed or pick up your handset if you're on a speakerphone.
Mr Heitmann.
We'll move on we will go next to the line of Peter Arment of.
Baird. Please go ahead.
Yes, good morning, Scott and Frank.
Yes.
Scott.
Question regarding liquidity you guys have continued to generate a lot of cash and it looks like you're going to continue to moderate cash going forward. What do you guys have a target liquidity ratio of when you would start to be more aggressive in terms of deploying it.
Well look at it we're still being a little bit conservative around the cash side, but recall part of what the cash that's sitting on the balance sheet right. Now is that we pre funded this year's maturities, which is about $500 million so that.
Net cash will come out of our balance sheet to pay off the debt on those two tranches that are due this year on that.
So that we don't have another one until 2024. So I think we're in very good position on cash as we said we have re initiated our our buyback program and so certainly we will allocate capital to doing that.
I think it will be a little conservative maybe here at the beginning just to make sure we understand where the end markets whats going on with the economy, but I think it gives us plenty of degrees of.
Flexibility going forward.
And just a clarification on the kind of the.
Aviation plan for deliveries just kind of first half versus second half assuming I assume it's kind of your normal second half weighted when we think about delivery the delivery cadence.
Yes, I would say that I mean, I think it's bill look like.
On a normal year for us.
That's great for me and I'll leave it there thanks.
Sure.
Thank you and we'll revisit Mr statements line with Jpmorgan. Please go ahead.
Great. Thanks, very much good morning, I think I've figured out how to work my thought.
Yes.
So.
Just real quick I apologize if I missed it at the beginning but.
If you talk about the expectations for the industrial business this year.
And sort of.
Early nice profitability, where that stacks out between <unk> and vehicles, even if it's not a number that kind of qualitatively and then sort of.
Where you are on that path.
Where you think profitability can be.
In vehicles.
Sure. So I think we will see nice rebounds in both businesses as we go into 2021 the trajectory on the Capex side.
And again, because we use we use IHS data and kind of.
Like everybody does so I think expectations for a continued recovery in the automotive market.
Is.
Is what we're expecting we certainly saw that that volume driving into Q4.
As always as all the other guys have been ramping back up some supply chain issues and shortages here on there, but I think largely they're working through those.
I think our deliveries will be.
Much improved here in 2021.
Lot of hybrid which is good mix for us we have a really good position on that segment of the market. So I think we feel pretty good about the trajectory of the Texas on.
And frankly back if they're sort of strong.
Margins on the vehicle side.
Ex the ground support equipment business, because I think that's going to be continue to be challenged share is until we start to see the commercial aviation business coming back on.
We certainly expect to see another solid year in.
In golf.
On the pay TV business, which was very strong.
For us.
Half last year, we expect to see that continued momentum.
<unk> when you look at the.
Everything from the Atvs and side by sides and.
Moving through the snowmobiles retail has been very strong.
To be honest, we've been struggling to keep up just because we've got our own supply chain challenges based on smaller suppliers on COVID-19 and whatnot. So I think that business will see growth in.
Part by continued growth in on the demand on the retail side and in part we know.
Average talking to do so I think the inventory I'd, rather see the inventory on a very low level on a high level. Obviously, so I think we're in a good place.
But we definitely feel like we will see growth based on both end market retail demand as well as.
Our need to restock dealers out there.
Okay, Okay, and then longer term thoughts on profitability in that business, Yes, I think it will.
To see that business growing.
Growing the margins in historical businesses are good on the on the off road side, we need to see more volume in that business, obviously the capability of manufacturing capacities.
Is considerably greater than what we've been seeing the last couple of years here in terms of our manufacturing rates and as we continue to grow those which includes 2021.
There is no question, we will see improved profitability in that segment of the business.
Okay, and then just one follow up on aviation you mentioned.
Strength and usage.
Fractional and charter aircraft.
Do you think about that mix in terms of your customer base.
Evolving significantly in that direction, though as we look out over the course of the next couple of years.
Well I think that we've always seen that mix on the issue is usually a balance where companies.
Sure.
And most of our customers are they own their own companies.
They have the asset they use the asset for both business and.
And leisure travel so I think the only dynamic right now on the marketplace and you are seeing so many using it.
More for leisure and business just because of the lack of the number of business trips, but when we see new customers coming into the market.
Those customers are kind of come in and I think those assets will be deployed much like our historical customer base as they will use it for both business and.
And leisure travel.
Alright.
So you see the.
That mix between sort of retail and fractional charter looking fairly similar over the next few years as it has.
In the past in terms of your deliveries Oh, yes, I'm sorry. So you are talking about how many are being sold and kind of what we would call retail versus through the net chips in the world.
I think that the mix is going to look.
Much like it has it.
Just wanted to go through these cycles it stays.
About that same ratio.
Obviously with latitude and longitude out there thats that has helped us get back to a more normal share in the in the in the fractional world. So, but no I don't think youre going to see any structural change between those who choose to operate by owning a fraction of on aircraft versus.
Flying a charter versus owning whole aircraft.
Great. Thanks.
Thanks, very much sure.
Thank you we'll go next to the line of Noah <unk> of Goldman Sachs. Please go ahead.
Hey, good morning, everybody.
Alright.
Scott what is happening with shadow replacement.
Is that happening when is it happening and how how big is on an annual revenue for you at this point.
So the the shadow replacement, which is the FTE UAS program.
Is ongoing as you probably know there were several of different platforms, which were deployed to different army.
<unk> to do their own soldier evaluations there is.
Another <unk>.
Step in that process here coming up in a few months with the army refers to the rodeo will they'll bring each of the platforms all one base.
And the soldiers will operate those different systems.
That will help them to inform them in terms of what other requirements. So I think the army current plan on.
On <unk>. They will go through all of those evaluations this year, including that rodeo in by the end of the year.
Have come up with what they have is their requirements.
Document, which they would then turnaround and issue.
As an RFP, so I would expect that would probably be sometime early in <unk>.
In 2022.
Okay and can you give us a sense for how much annual revenue that contributes to systems at this point.
I don't know I don't think so we don't breakout revenue within the individual.
Segment line, but as you saw we just got an order for $66 million, which is building more aircrafts on the block III configuration. So you don't Shadow operations. Obviously continue upgrades continue and I expect we'll see that sort of activity up until the army decides what they're going to do in terms of their next generation platform.
Okay.
And then.
Following up on the on the Bell margin discussion.
Yeah.
I guess any way to size the.
Future vertical lift investment incremental investment, you're making and I guess.
You've started the year forecasting that segment margin to be about 12, 5% as you've done for this year and then have exceeded that.
And I guess I'm wondering if you hang on.
If maybe if theres just less upside this year as you're definitively, making an investment or if you still have some of the mature program upside drivers that you would normally have.
Well, we definitely have headwind on the increased R&D on the <unk> program. So we've got both Florida and far going on.
At the same time.
In Florida are far Oh, I'm, sorry, as you know is reaching a point here were incurring a fair bit of cost around building flight test.
Article So I think it largely reflects first of all we are going to see somewhat lower revenue.
In the year, driven by those lower deliveries around H ones in commercial offset with some higher R&D.
On the on the ICL programming.
While we are guiding somewhat lower revenue.
Fairly modest margin compression based on that additional R&D.
Can you size, how much higher the R&D is no.
Okay, and then just one last one on the question of the.
Quarterly progression through the year at aviation.
I know, it's always seasonally.
Heavier in the back half versus the first half but.
I am assuming is it correct to assume that it will be significantly less.
Back half loaded than it was in 2020, given the pressures that were there on the first half of the year.
Well Youre looking on all I would say that it's it's going to be characteristically heavier on Q4 is always R.
Our biggest quarter Q1 wasn't.
Yes.
It wasn't hurt that badly frankly in Q1 last year as things kind of just happened in March so I think that the.
Q1, and on a year over year basis will look very different than.
And then Q1 in 2020 as 2020 was fine the real Big difference is going to be that our deliveries in Q2 and Q3.
Are going to be.
A more normal, whereas Q2 and Q3 of 2020 were.
Extraordinary low.
Okay. Okay. That's helpful. Okay. Thanks, so much sure.
Thank you we'll go next to the line of Cristina <unk> of Morgan Stanley. Please go ahead.
Hey, good morning, Scott with fewer commercial flight on city pairs available.
Commercial airlines still recover one would think that demand for business jets and recover at a steeper rate than overall overall return on business travel are there other items or dynamics there we should consider.
And why that may not be the case, because I would think debt.
With fewer options and commercial flights, especially when you get to that.
You know this.
On the smaller hub.
U S manufacturing.
That should really be recovering at a faster rate than the overall market.
Yes, and I do think we're seeing that so the dynamic is.
Business aviation flight hours have.
Recovered much faster than commercial obviously I mean, they were up over then to about 85% again in November and December in the U S. They were actually up above what they had been.
In prior year, so, but the dynamic that I think.
Just a moderate debt a little bit is that all that recovery really is driven by leisure travel so.
Normal world.
We probably and again the data is not collected exactly this way. So it's it's hard to get the exact numbers around it but I mean, you'd certainly say that most Eric most business jet flying.
Our business trips and then there is no invitation of utilization of those aircraft for leisure travel.
I think what we're seeing right now is almost exclusively leisure travel so you've got almost back to where you were on.
On a more normalized basis in terms of flight hours, but all of them flying.
Almost all the flying is leisure so as you start to see the economy recover urgency travel restrictions come down you see more business flying you know again, you start to see conferences coming back in business trips.
Meetings. These sorts of things that when you add that on top of what we're already seeing on strong demand on the leisure side debt.
Debt you will see very strong demand.
On the business side dramatically over what we've seen in the past and it is because of the dynamic that you're talking about which is with the fewer flights.
For someone to go from a small small airport area to a trip that is going to land them in another small airport area with fewer flights to get through hubs.
It's a day I mean, it's very challenging with those those those lower schedule. Then I think health is also part of it people feel more comfortable in getting into an aircraft with just themselves or family versus.
Getting on to commercial aircraft so.
The issue is that this rebound which has been much more pronounced than what we've seen in commercial is always are and so our belief is when you add business travel back on top of that debt.
You will see this.
And a very strong recovery, but again today, even though we're seeing and very good feel very good about the rebound in travel. It really is only on the leisure side, because you still have very little business travel and Thats whats muting, it a little bit, but I expect that will change again as the economy starts to come back and people start to travel on business trips.
Great. Thank you and if I could add another question on a separate topic.
A lot of new entrants in the urban air mobility market. How are you thinking about this.
On the air taxi.
On the street could really gained traction.
And also on what's your progress on your next day.
Aircrafts.
So look I think that the we've as you know we've made investments in our Nexus platform. We continue to to work on that program, but we are being a little cautious here to gate, how much we spend.
On where we invest to understand what the regulatory environment's going to look like because there are two issues here one is.
These are aircraft that are going to have human beings on them and therefore, they will have to go through a full regulatory approval process. Those standards are evolving and trying to understand with certainty what it will take to certify such an aircraft and.
And the other is the air taxi model and again, we don't operate their taxi model, but obviously the business case of how much you invest and what the volume looks like it will depend on.
How are these business is going to operate and again there is I believe a real a lot of regulatory uncertainty as to getting approval for the rulings and where are these things going to fly in on what attitudes and what kind of controlled airspace.
The for the sort of the vision that people have around their taxi theres still a lot of uncertainty around what that regulatory environment looks like so I would say that I think when you think about the technology thats involved and the ability to design and certify on aircraft that can meet that mission our team and Bill is absolutely qualified.
Capable to do that I would say far much more so than a lot of the other hyped that you hear out there, but I do think we have to be cautious here in terms of not getting too far out in front of <unk>.
A regulatory environment that is very uncertain in order to allow that business model to be successful.
Great. Thank you.
Thank you and we will go next from the line of Cai von Rumor. Please go ahead.
Yes, thanks, so much so.
If you Havent said it already roughly where is the tax rate guide for 'twenty, one and on the pension you have got a swing of 63 million that adds it looks like 50 bps to your margin 18 cents to earnings is that mostly centered at bell and aviation. Thanks.
The tax rate is 18% we.
We had we had mentioned that.
On the on the pension side.
The impact is does not impact bell because bell has a separate plan. So the impact is otherwise spread across the rest of the businesses as well as any corporate employees.
Got it and then R&D at Bell I assume you know that you mentioned that the.
The big lift in R&D.
How long does that continue into next year, because I would assume on.
<unk> on <unk>.
V 280, you know your R&D is at a lower level predominantly at Fireeye and how far in the future you know does that level of R&D continue roughly.
That's absolutely right Cai so on the flora activity, which is the lesser active right now really because remember we're sort of in a phase here, where you're finishing the.
The phase two of the CJR program on flora that goes until.
March of 'twenty, two alright, so that level of activity is.
That timeframe on it and it becomes the lesser of the two the one that's really going to drive a lot of the R&D here for the next two years as the far program because right now you're in the middle of all of the detailed design Youre, starting component manufacturing and assembly.
As you go into 2022 first flight as at the end of 2022. So you have all of the cost in 2022 is really driven by the far program and completing all design and getting ready for flight test program.
When you go into 2023, that's really the flight test program through the course of that year. So thats the program schedule and so the relative level of R&D is highly driven by far off.
Particularly as you get into 'twenty two 'twenty three this year, it's a little more balance.
The significant increase in <unk> spending as you go through this year.
Terrific and then one last one cash.
Cash deployment.
You know you've basically taken care of your of your near term maturities. It looks like you're focused totally on share repurchase.
To what extent do you think.
M&A and or dividend.
Well I don't think we're at a point right now where we're going to have a lot of dialogue around the dividend I think the.
That strategy has served us well as we went through a challenging year this year.
M&A would have to be opportunistic if something came along that we thought made a lot of sense, but for the.
The time being our view is it is primarily going to be focused around share buyback and again, we'll kind of.
That is where do you see what's going on with the economy and.
How the businesses are performing.
Got it I mean, if you look at your business, you've got lots of different.
Businesses and systems.
Any thought about rationalizing your portfolio. So that it's more concentrated obviously aviation and bell on concentrated but if you look at systems It really isn't.
Any thoughts about that.
Well Youre right systems has been a series of smaller business again, primarily defense oriented and our strategy in that area has been largely to invest through.
Primarily organic activity and if you look I think that where we are today on things like ship to shore, which is going to turn into a very nice program for us we did make a small investment obviously in the on.
On the <unk> side and that has then been augmented by investments and bringing new aircraft on an <unk>.
Last year was a huge year for us in terms of winning.
That Air Force Cafcass program some of the important task orders, which was our strategy towards obviously.
Winning the Recompete on the.
On the Navy side, the weapons business too.
Be a major player on the Gvhd program.
If you look at some other things we're doing around the land vehicle side.
I'll start the first deliveries of the RCV medium here.
Here in the quarter. So what goes on we're very nice businesses I think that can generate very nice margins.
Other frankly going to be benefiting here from the end of last year and going through this year from a lot of.
The investment that we made and a lot of new programs that we want so I think it's going to be a nice growing in.
Very successful business force.
Terrific. Thanks, so much sure.
Thank you.
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