Q2 2019 Earnings Call
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At Textron Q2 earnings call.
M. have your first and last name please.
And the problem.
Evan Lastly must go.
A.S.L.A. and E.
And also your company name.
Era A.I.E.R.A.
Please you on the call.
18 months following the OTI Award.
Also within FPL was among five defense contractors down selected by the US Army to progress to the next phase of the future tire costs our car program.
We're pleased the Ami recognizer competitive offering which will utilize advanced rotor technology and fly by wire flight control capabilities validated in our bell five to five program to create an innovative aircraft is well suited for the foreign mission.
At systems revenues were down largely due to lower volume at Tru simulation and training and unmanned systems.
During the second quarter, our true training business formed a new company with flight safety International conflicts safety Textron Aviation training.
The newly formed company, which is 30% owned by Textron provides training services for Textron Aviation is broad product line of general Aviation aircraft.
We expect the combination of the strengths and resources of these businesses will further enhance the training and services available to our customers.
While increasing efficiency and ensuring the extension of our high quality training for ramps new Textron aviation aircraft.
Also in the quarter Textron Airborne solutions. This analysis Eightx subsidiary received a one year 56 million contract modification to provide high subsonic and supersonic aircraft services to the US Navy extending our current contract through 2020.
Without advance within unmanned systems, our fee for service product line captured over $90 million of new wins in the quarter for the arrows on program.
Moving to industrial revenues were lower primarily reflecting the impact of the disposition of the tools and test product line in last years third quarter.
And specialized vehicles, we saw continued favorable performance, resulting from the cost reduction and manufacturing realignment actions that we initiated in the fourth quarter of last year.
Also in the quarter, we continue our on boarding bass pro and Cabelas stores as well as independent trucker Marine dealers and we're seeing momentum build in this new retail channel.
Our ground support business received multiyear contracts from both American and United Airlines for our equipment across our tug safer on Douglas brands to service their operations worldwide.
Moving to Textron aviation revenue was down largely due to lower volume on our commercial turboprop and defense product lines.
In the quarter, we delivered 46 jets down from 48 last year and 34 commercial to reprocess down from 47 last year second quarter.
Beginning in late May we experienced lower order activity across our product lines larger attributable to the uncertainties around tariffs and concerns about economic growth.
Which caused disruptions in both our domestic and foreign markets.
Since then we believe these uncertainties have largely diminished as we've seen the Mexico tariff issue resolved stronger economic indicators and a fed biased towards further interest rate cuts.
Which have improved customer outlook.
Our view going into third quarter remains positive and we expect deliveries in orders to ramp throughout the second half of the year driving revenue growth at aviation.
Moving to launch Twod, we continue to make good progress on the certification efforts. While this has been a much larger test and originally anticipated the documentation flow and review with FDA continues and we expect type certification deliveries of the aircraft in the third quarter.
Continuing with hemisphere, we determined that the engine is not yet demonstrated the performance required for the aircraft design and we have put the program on hold.
Any decision to revisit the program in the future will depend on the state of the market proven engine performance and a competitive landscape at that time.
Our engineered focus remains on the certification launched two in addition to the Sky Kerr and Denali programs, where we expect to complete first place later this year.
In summary, we continue to feel good about execution across our businesses and are well positioned for second half revenue growth from increased deliveries aviation driven by launched you'd entry to service as well as higher commercial deliveries at Bell.
We expect these developments drive strong earnings and cash generation throughout the balance of the year with that I will turn the call over to Frank.
Thank you Scott and good morning, everyone.
Segment profit in the quarter was $339 million down $7 million from the second quarter of 2018 with segment profit margin of 10.5%.
Up a 120 basis points from a year ago.
Let's review how each of the segments contributed starting with Textron aviation.
Revenues at Textron Aviation of 1.1 billion were down $153 million from last year's second quarter, primarily due to lower commercial turboprop in defense volume and mix.
Textron Aviation delivered 46 jets down for 48 last year and 34 commercial turboprops down from 47 last year segment profit was $105 million in the second quarter up $1 million from a year ago as favorable performance was offset by the lower volume and mix.
Textron aviation backlog at the end of the second quarter was $1.9 billion.
Revenues at Bell of $771 million were down 7% from last year, primarily on lower military volumes.
Bell delivered 53 commercial helicopters in the quarter down from 57 last year segment profit of 103 million was down 14 million, primarily due to lower military volumes.
Now backlog at the end of the second quarter was $6 billion.
Revenues at Textron systems, where $308 million down from $380 million last year, primarily reflecting lower volume at Tru simulation and training and unmanned systems.
Segment profit was up $9 million from last year's second quarter, primarily due to an 11 million dollar impact from performance, reflecting an $18 million gain related to the formation of our new training business with flight safety International.
Moving forward, we will continue to record our portion of the operating profit from the new training business.
Textron systems backlog at the end of the second quarter was $1.4 billion.
Industrial revenues of $1 billion decreased 213 million largely related to the impact from the disposition of our tools and test product line and lower volume segment profit was down $4 million from the second quarter of 2018, largely due to the impact from the product line disposition and lower volume, partially offset by favorable performance primarily related to the specialized vehicles product line.
Finance segment revenues were down $1 million and profit was up $1 million from last years second quarter.
Moving below segment profit corporate expenses were $24 million and interest expense was $36 million.
We also repurchased 3.1 million shares at an overall cost of $159 million through the first six months of the year, we've repurchased 7 million shares returning this 361 million in cash to shareholders.
To wrap up with guidance, we are raising our expected full year earnings per share from continuing operations to a range of $3 and 65 to $3.85 per share up 10 cents from our prior outlook.
We are reiterating our outlook for cash flow from continuing operations of the manufacturing group before pension contributions of 700 $800 million that concludes our prepared remarks. So Kevin we can open the line for questions.
Thank you, ladies and gentlemen, do you wish to ask a question. Please press Star then one on you touched on falling sick time star one.
First question is from the line of David Strauss. Please go ahead.
Barclays.
Thanks, Thanks, good morning.
I guess first clarification can you tell us how much the gain was.
On the system side for the training Jamie.
Rose $18 million okay. Thanks.
And then Scott can you.
Can you maybe talk about the potential for a year or some 37 Maxs simulator business.
How many built there what's your ability to ramp that up given the potential training needs on the back of what's going on at Max.
So David to give you a whole lot of detail on I mean, obviously, we've been delivering maxims.
Boeing and several seven through seven Max customers.
I think a lot of that will depend on how all this plays out in terms of the recommendations or requirements that FDA and they also put on airlines around the need for some trading it looks like at this point to us like it's probably going to be a requirement that allows them to get back and flying.
In a transition course, and then would mandate actual Maxim training.
Later on so we certainly had quite a number of inquiries from customers who are interested in growing hitting getting.
Maxims on order.
We started to do some long lead.
Ordering already for to support those deliveries next year, but I couldn't give you affirmed that number yet I think we're still working on that and working with Boeing.
To understand their strategy on a on a go forward basis as well, but we really have to kind of wait and.
I think see where the where the affinity also end up in terms of what their training maned mandates are.
Okay. Thanks, I'll get back in the queue.
And our next question is from the line of Carter Copeland millions research. Please go ahead.
Hey, good morning, guys.
Alright.
Scott I wondered if you could just kind of expand a little bit on the <unk>.
The rationale.
Since the company set up with with slight safety and just.
Thats it tell us about.
The what the implications are for your.
What you've been trying to create organically there how much does this.
Change that growth expectations.
For those efforts.
Our next span.
How much more rapidly.
Greetings and with the profit as a result.
We're still there.
Detail on the rationale.
Sure Carter so as you know, we decided to get into that training business. Several years ago. We felt that was a very important part of.
I was sort of the service aftermarket.
Element of our business and we weren't really participating in that we had a lot of feedback from customers that they would be.
Interested in us participate in that space and so as you know we made a couple of fairly small acquisitions, obviously over the last few years, we've invested a fair bit.
In both our Erad and.
R&D as well as capex to start to build out that training capability.
The business is going very well with great customer feedback I think though training materials on the techniques and.
Although we were deploying we're working the challenge was that just the time frame of how long that would take to build out the number of training centers.
In number locations when it was.
A fairly daunting task and was going to take quite some period of time to do that we happened to.
Engage in discussions with with flight safety, whom we've had a relationship for many years, obviously in the training side.
And said look we ought to look together, let's take the technology and a lot of the tools and the capability that we developed.
Organically and put these businesses together in a joint venture and basically what that's allowing us to do is take what we think we're the advantages of that business and the positive feedback we're getting from customers.
And expanded much more rapidly. So this is now has the ability to much more quickly.
Accelerate.
The the returns for us.
I think for the customers that sort of taking the best of both worlds a combination of what we had invested in organically and this significant footprint that flight safety has around the world. So that we could.
Touch more customers.
And as time frame it was much shorter than doing this.
Just going training center by training center in terms of us, putting more and more capital out there and plus if you already have the capital out there so.
As we said the only the gain is a is a function of having invested in that business and having put those assets in the joint venture you got to look at sort of reevaluating. The those those assets and obviously, we created a very valuable business and so thats a good thing I think more importantly, what we'll see going forward.
Is the is the earnings as a result of our share of the joint venture, which was going to grow much faster.
Than and we had we stayed just on a pure organic path. So.
Annual and you'll see those earnings come through.
Systems as we go forward.
Just in general terms.
Correct.
Just any color on what your expectations.
We've accelerated.
Well I don't we don't break out the numbers on that level of detail Carter, but I'd say it's significantly.
Faster in terms of the rate of return what we would have had if we had played this out on a purely organic basis. Both the difference we have a new build out that capital infrastructure versus leveraging workplace safety already had on the ground on that becomes more of a technology play than a capex play.
Okay, great I'll get acute back as well thanks.
Our next question is from the line.
Sheila Jefferies. Please go ahead.
Hi, good morning. Thanks.
Is that just a big picture question organically sales were down 10% in the quarter, you've been focused on new products to gain share rightfully, so and relatively tough end markets. How do you kind of think about the levers from here.
And your decision.
Sure. So look I think the the for us in the quarter really in the first half of the of the year.
The big impacts it will it will change how the second half plays out here is one around bell commercial and we talked last year, we were seeing strong demand.
On the commercial side, we indicated that we need to turn up our production rates to meet that demand that takes a little bit longer for the.
From the time, you make that decision to the time, we have aircraft that are coming off the line. So when we increased the production rates on airclic, but like the four sevens in the four to nines.
We we didnt have those aircraft available coming off the line.
Until right about now so I think we'll see a significant impact in increases on the third and the fourth quarter. The demand is there. The orders are there it's been a matter of getting the production up and delivering at a higher rate and that's where we are now so you will see the benefits of that here in the.
In the third and fourth quarter already supported by orders that we have we just needed to meet the demand in terms of the production side.
On the aviation side obviously.
Launched you're getting into service such was up huge part of our gross story on non aviation for the year.
And we expect that clearly will be the the second half impact here, we continue frankly to see good demand on the on the historical aircraft.
Latitudes continue to sell very strongly we did again demand launched food side is very good I think across the whole portfolio.
Clearly we had a very strong first quarter for the second quarter, we felt pretty good things did get a little bit shake up there right towards the end and but they're mostly customers and so look I want to wait for the markets to settle out and I'm going to defer this in the second half so I think.
Our view of the business jet market is still very healthy and so I think between that and the launch two coming into service will see strong growth in the second half.
Thank you and then Frank one for you.
Working capital is.
In the first half primarily due to inventory how do you think about that roberson any potential risk.
Yes Sheila.
As Scott said with that growth in the second half we expect to.
Obviously sell off and liquidate that inventory that the bulk of that builds is it aviation.
It's kind of certainly impacted by the the longitude and moving into the second half of the year.
But it's also you know kind of bell commercial and.
Other volume that Scott indicated we were looking to to have come through in the second half of the year and feel good about where we're positioned to do that.
Thank you next question is from the line of.
Peter Ami Baird. Please go ahead.
Thanks, Good morning, Scott Frank.
Got me can you just give us a little more color on how things are going in terms of and within the industrial segment, particularly I guess aside vehicles format seem to be a little better than I think a lot of us were expecting.
Whats how is how is the bass pro kind of rollout going just maybe some color there I'm sure. There's a couple of things are Peter first of all obviously from an operational performance standpoint, the business is doing much better on historical businesses, where we've had a very strong position and good performance for long time in golf and ground support equipment and areas like that our sales performance is backward should be guys are doing very well the markets are healthy and again the teams operational execution is quite strong.
In the.
Off road World of were down in revenue Thats quite conscious right. We're working very very hard to make sure that we do have a much better job in terms of how we manage those retail channels.
Snow is a good example of position that we took this year as we said guys. We're we're only going to pre sell when you look at the North American market, which is obviously the vast majority of the market in the <unk>.
In the snow World.
And we went out with our program and say guys were only going to build what we've already sold so we went around and.
No.
Have deposits from customers. This product line is basically sold out and so we will.
Be here through the whole third quarter manufacturing, all those units and shipping them out, but unlike in previous years, where you'd be putting a lot of inventory out into the field and.
You know depending on how that sold through and then getting the rebating, if it's not selling through.
We said, we're just not going to do that so we're going to.
Dual neo a presale and that was a frankly, a very successful program, we saw pretty strong demand.
Across the product line, but were pre sold so.
On the direct side.
Obviously, that's a longer and sort of.
So a little bit of a different selling season. So you go through there, but again were being very very cautious about how we manage that channel how much inventory we allow it to be.
Out into that channel, we did an awful lot of hard work on looking at individual dealers and making sure that we have relationships where that relationship is a profitable relationship for both us and the dealer.
And as a result, we've dramatically reduced the number of deals we had out there because when we went back and looked at some of them.
By the time, you get through the Rebating.
No, it's not a profitable relationship and so weve taken the pains of.
Of terminating relationships with the vast majority of those folks.
Specifically on the tracker front, obviously you know.
The bass pro Cabelas and their independent marine dealers.
Is terrific channel extraordinarily well run very I would say delivered around what it does in terms of inventory. So in terms of how the how they manage is quite consistent with how we want to manage the business going forward. So we've been seeing a lot of activity in load ins across both stores and independent dealers here over the last.
Of six months that obviously will continue through the balance of the year.
We like the trajectory the momentum is building so.
I think when you look year over year, Peter we're much happier with that business is both in terms of its how it operates everyday health thinks about managing some of those channels. Some of the issues. We had last year with the late with some of the new products obviously that's.
On those products to get to market and until we have a great product lineup, we just have to be very.
Measured about how we manage the channels and how much inventory, we allow to be out there to reduce risk and make sure that we have a good profitable business.
Appreciate that and just a quick one on did Scott did you see any change in.
Is that pricing just given the softness in end market a little bit that you saw.
In may or or pricing still holding now Peter we're still seeing pricing holding you know look there is always a crazy deal or two and we choose not to participate in those right. So I think we make a great product it's fairly priced it's got a great service network behind it and.
There is no reason for us to to Chase a crazy price deal here and there so were maintaining that discipline and as we've said all along we will we will trade volume rather than.
Damaging the price in the industry. So I think Thats I think the pricing is is in a place where it should be and when we're going to hold the line and I think you'll see here in the quarter we had.
No.
Price net of inflation up a little bit which is healthy for the business and thats, where we need to continue to do.
Thanks for the call Scott.
Thank you next question is from the line of George Shapiro with Shapiro Research. Please go ahead.
Hi, yes.
Good morning.
Good morning.
Scott the implied ordering in the quarter were pretty weak.
And obviously the book to Bill is less than one given that you see things picking back up in the third quarter here, It's natural to expect that book to Bill over one in the current quarter recovering from the second quarter.
Well, George I would hope that Thats. The case I mean, clearly we had a very strong first quarter on the book to Bill front, we're still have our backlog number is that through the first half above where it was coming into the year. So I think.
We're not overly concerned by this as I said things did slowdown in.
In June given some of the gyrations in the market didn't talk for Antero, some things like that on but I think most of the discussions that we've had with customers, particularly in the us were.
Some things would push into the second half and those Dialogs continue with customer. So I think we're still in a.
In a pretty good in a pretty good place that respect.
Well, we were light on the turboprops, particularly in the international market and as you know George that's a little bit lumpy.
We've seen this before we're kind of goes in fits and starts so that's a little bit harder market to predict.
Generally reflects more the turboprops and at those the jet side of the business, but we'll see how it plays out but certainly my expectations would be that we would.
We continue to see good order flow through the balance of the year.
And.
Frank one for you just aviation aftermarket.
How did that compare to last year.
Yeah. It was it was fine it was down just a touch but continues to be a solid for us.
And the reason, it's down a touch as opposed to up a little bit.
Any color on that no I mean, no nothing significant in Ohio, we have seen some.
Variation in volume in the shops from time to time, where we are looking at solid or strong second half performance there and.
Continue to be feel good about how we're executing there.
Okay. Thanks very much.
And next we have Robert Stoller.
Medical Research. Please go ahead.
Thanks, so much good morning.
Mhm.
ABS Scott on the Bizjet side of things that a couple of your competitors have launched some new products as so far this year I was wondering if you could comment on whether this could impact your market share going forward.
Really nobody Roberts right in our.
We will house I mean, if you look at the I mean number earlier in the year, obviously announced creator or I think thats.
Largely those product lines from that particular competitor have been up against the latitude and obviously on longitude.
I think our products our outstanding performers and we continue to see strong demand on the latitude front and say look I think longitude is in a very good position I wouldn't expect to see.
You know a lot more activity to get through the certification I mean, there's there's plenty of customers that are in the process and many of whom I think are just waiting for the search to be done. So I think from a performance standpoint.
We continue to get Fabulous feedback from everybody the demo flights that aircraft. So.
It's a competitive marketplace I think it's always been one it will continue to be a competitor marketplace, but I think we're.
We stack up quite well with that so.
No every every transaction Scott.
The competitive nature to it but I think we're off.
We're we're winning our fair share and feel pretty good about where we stand.
Okay, and then maybe one for Frank.
Any change to your guidance has been to EPS by 10 cents I wondering if you could comment on whether you see at the halfway point in the year any changes to the divisional split for the full year.
So it's it's largely intact I'd say that.
Obviously, we've seen.
Good performance out of Bell so far this year, so kind of reflected in that 10 cents is some kind of continuing solid performance out of bell that probably kind of give some little bit of upside to our original margin guidance. There and then systems has done a nice job.
As well executing through the first half. So those are the two places where we're seeing some some better performance that are contributing to the 10 cents.
That's great thanks very much.
Next question is from the line of you have been removed.
Cowen and company. Please go ahead.
Yes, thanks, so much.
So yes, you mentioned, you know bell doing particularly well.
How much of.
The strong profit in the second quarter reflected favorable EA sees on Z 22, multi year, two and kind of as we go into next year are we still looking at 10 to 12 or can it be better.
Well Chi.
I'd say that we are we always I mean every quarter, we have already AC process and there is always some performance in there. It's certainly less than it was last year. So from a comparable place and then we kind of talked about this right I mean weve.
Kind of been winding down the multi year too.
Revenues in ramping up the multiyear three revenues and that certainly at a lower margin and.
A lot of that performance.
Sort of reserves that you keep around multi year to have largely played through so on a year over year basis that uses our or the gain associated that are down but they are still there and I would expect to always be there I mean, and we always try to continue to drive productivity and performance improvement and we recognize that we each time, we go through and you see there's always some puts and takes but I think the team executed quite well so.
But anyway, I would say along the lines of how they are performing that continues to be strong performance. So even though the.
The you see numbers might be lower.
Gains in the quarter were reflecting solid operating profit.
Across the whole business and I think we'll continue to see that next year I would still look we've had sort of that 10 to 12.
You know guide out there for some time on bell. They certainly have been overdriving that here as we worked our way through multi year too.
I would just I Wouldnt change my perspective, that's a business, that's well run and and we will continue to sit in that 10% to 12% range. There's a fair bit of R&D as you know going on I mean, five to five has been a big part of that between he has been a very large part of that.
But we will be transitioning into these.
Capes at one and keep set three okay programs and there is cost associated with those rights our R&D spending.
It needs to stay at a pretty high level to support.
What we think are some.
Really significant opportunities for the future as well so.
It's.
I think that 10 to 12 range is still how youre thinking about it.
Thank you very much and then Frank so you're.
Hey, maybe give us some numbers on where the net price.
Increase at aviation was it narrowed a bit.
In the first quarter, and so where was it in the second and also given that you have yet to certify launch into.
Is your full year delivery target fully intact or does it should we be looking at a slightly smaller number this year.
Cash on a price side Chi gross price is $13 million for the quarter and net price was three.
So continued good performance on that front.
And no I mean, we continue to.
The position to deliver on longitude once we achieve certification and kind of we feel that we're in the right place to meet the commitments that we have here for that and we obviously havent adjusted the aviation number kind of in any way.
Thank you.
Our next question is from the line of Seth.
JP Morgan. Please go ahead.
Okay, Thanks, very much and good morning.
Just a thought there on aviation I guess that you know the protection Youve given for the segment as for about $550 million of earnings for the year implies a pretty big second half and I think given the longitude deliveries that kind of may we can understand why the second half would be bigger in the second half is seasonally usually bigger anyway, but yes.
Even bigger this time it ends and so.
It can you walk us through I mean, do you expect a significant increase in any earnings for for aviation in the third quarter or does it kind of all come in the fourth quarter.
With.
With the longitude and to the extent that there was any temporary softness in demand or add some of those macro issues that you mentioned during the quarter. I mean have you already seen that start to come back in terms of orders are indications of interest in the first couple of weeks.
The third quarter here.
Well, so I would say that our our progression as you know I mean this is usually a business that has a backend loaded a lot of that is driven by tax folks wanting to get their aircraft deliveries done by the end of the year I don't see any change in that I think the progression that we normally see we would expect to see.
Arguably it's going to be a little more accentuated than that just because you have the longitude coming in to service. So.
Yes that will be more of a pickup in the back half associated with that in terms of just the normal order flow yet I think things appear to be normal and we actually did see customers that had said all are going to wait and see what happens after everything kind of got a little shaken up in the late may into June timeframe and to take delivery in the second quarter, but more of them were so look I just want to sort of put this aside and think about this is the second half.
Of activity, so and again from.
I talked to our sales teams of those dialogs are ongoing and so I would expect that we will build we'll see most of that come back and turn into.
Third fourth quarter deals.
Right.
I think there's some around aircraft that are deliveries would be out into next year.
Right.
And then on the longitude and given I think it's probably just a handful of the initial units that are.
Either.
Marginally profitable or or not profitable and so on that basis is it is it possible for longitude to contribute to earnings in Q3 or is the.
Q3 earnings that were going to see basically all from.
Non longitude platform well look as you know typically the initial deliveries are going to be at a lower margin there will be some contribution but certainly from a from a margin rate.
There is no question third quarter, they would be dilutive so.
Now that being said I think the performance you've seen very strong performance in the business here in the first half SAR.
Relative profitability on like revenue is stronger.
That has been so it's offsetting against what is a very strong performance. So it's still going to be respectable margins, but it will be if you just looked at launched it on a standalone basis, it would certainly be dilutive.
Okay excellent okay. Thanks very much.
Our next question is from the line of Pete Skibitski Alembic Global. Please go ahead.
Good morning, guys.
Hey, Scott can you update us on ship to shore in terms of that initial con.
I think you are expecting.
If and when that comes through here in the second half is going to kind of return to growth.
On that basis or maybe.
Headwinds still too tough right now can you just update us.
So Pete I definitely think that well first of all ship to shore is moving along well the first crafters and builders trials that was a huge milestone so we're about halfway.
On through that process, we are expecting delivery, the first craft or this quarter.
On the rest of the initial of developmental units or are moving along well behind that we do continue to get long lead funding for that.
Next production lot of aircraft was actually three of three fiscal years that are are in there.
We are in negotiation in that process I would expect here in the third quarter or fourth quarter. The latest obviously, we would get that under contract so but the amount of revenue that we will see this year is largely associated with.
Those long lead materials, we do have some of the initial assembly or initial welding activity going on the first on the first craft, but really where you'll see the the impact of that as it starts to ramp up and generate revenue rural through 2020 story. So.
Clearly from our perspective systems here is sort of bottoming in 2000.
And 19, and you'll see the growth in 2020 in large part driven by.
The transition of ship to shore from development program to the.
Production program.
Can I just ask one follow up Scott I haven't asked about this marine Corps.
Next program.
They are doing a lot of interesting things I think with the acquisition strategy.
You guys kind of comfortable on that program right now is an opportunity for you or.
Some of the things that they're doing or are they kind of.
Making tougher to bid on just your thoughts.
Well I think look I think the Marine Corps. He is doing a lot of work right now and then you'll see these these is small levels of activity and prices, where they're just they're basically soliciting ideas, which I think is a very healthy thing to do obviously.
No. We've we have done a lot of work on on the concept of the marks and how we would approach that program. The Marine Corps, obviously is well aware of everything that weve.
And we have done there on we have participated in some of these other smaller projects, where there other sort of growing industry and said hey give us your ideas around.
Different mission systems and.
Different concepts of operation. So it's I think there are sort of in a fact finding mode. Obviously, we have put a lot of information in front of them over the last couple of years and.
At this point I think most of the work that we feel like we need to do in advance. This thing we've largely done that.
And.
I think here in the next couple of years, you'll see that the transition from sort of the solicitation of ideas to help them formulate their final.
Specifications, if you will around that program and then it will turn into a hopefully into a funded.
Development program, obviously, we.
With.
Participate in that we think we have a great solution to to what Theyre looking for but it'll it'll ramp over the next couple of years I think.
Thank you.
And next we have the line of Angie.
The launch of Morgan Stanley . Please go ahead.
Hi, Thanks, Good morning, Frank.
Right.
First just a question on on have is for can you talk more about the decision to put that on hold some of how much of it was engine versus.
Simply what you are seeing any overall market signals you're getting there.
Oh It was it's it was drilled the engine as we've talked about for the last year. So we we think that the that the initiative or the area that we intended to fit with that aircraft.
Obviously, you had the share feeling with.
With such as our launch customer was an area that would be.
Great product and a great price point performance point to go into the marketplace.
But the challenge was there was really only one engine in development that woods was suitable to meet that.
Performance point and as I said in the prepared comments that.
That engine hasn't yet demonstrated.
On the performance are required for for the aircraft. So.
If that.
At some point in the future in there that engine or.
Whatever is demonstrated that can meet it.
We would certainly revisited it's just it's interesting too much time has gone by here and we can't sort of hold this thing in a.
We expect our customers to kind of weak and uncertain here any longer so.
There's still potential forward out there we have to evaluate and understand what's the competitive dynamic what's going on in the marketplace, what's going on with customers to determine at that later time weather, whether that product would makes sense or not we'd be certainly happy to evaluate and look at that.
But in the meantime, clearly we need to take our engineering resource and focus on those things that are going to drive our growth in the in the mid to near term here, which is not just getting launched to dawn, but getting sky Courier and Denali.
Into the queue and as you know, we're always kind of looking at other concepts and opportunities within our portfolio that you don't need refreshes updates and things like that which is what we normally do so we're simply going to take all that engineering resource that.
That would have gone into the hemisphere program and deploy that into our current portfolio of programs.
Okay on the Bell side, yes, I see are pretty well positioned on on the long range and.
And now that.
Constance program, how important are those for the.
Feature doll, and assuming that you're not successful there.
Should we start thinking about an overall restructuring.
Of the military side of the business. There do you feel like there's enough other things going on to sort of sustain what you're seeing today or add to it.
Well I think if you look at the military side of Bell. We have we have good visibility on each one production out into the 2022 timeframe. There's a number of Fms opportunities that are out there that were pursuing as you know there's always take time to get those to closure.
B 22 are already running at that lower rate associated with multi year. Three again, there is some fms opportunity here.
Other things that could increase that over time and I.
I think there are certainly some possibilities there and of course this has become a very large installed base. So there is a ton of service business associated with this there's upgrades and enhancement programs, which are typical of any.
On large on.
Defense platform, which we expect will continue to see into the future. So I think bill on the military side.
Just around the 22 and H, one can sustain and be a nice healthy business.
But clearly the good from a growth standpoint.
The opportunities are out there around far around Florida versus the between the of course.
The monks program, which we just talked about and some other opportunities around 'til tilt rotor.
Is what's going to drive the growth in the future I think we're very well positioned on on several of those programs when we win them all probably not.
But these are these are very large programs and so winning one or two of those.
Is what would drive significant growth for bell on top of the ongoing sustaining of the V 22, and H one programs.
All right helpful. Thank you Scott.
And next question is from the line of John .
Of Citi. Please go ahead.
Hi, Thanks, good morning.
Can you just level set us a bit more on systems margin going forward post the flight safety deal, but then also with the shore connector ramping up I understand that sales bottoms and from 19, but how about the margin rates and then I guess overall hospital earnings dollars growth going forward here with those two big moving pieces.
Now we will shut guys I think the systems business should be target around that 10% margin.
Weve returned that last year were on track to be in that neighborhood. This year. Obviously as you know there has been a bit of a drag.
On associated with those.
The fixed price development on ship to shore, but again as that transitions into a.
Production program. This is a business that we should expect to see a 10% margin business.
Okay. Thanks, and then just going back to aviation.
And you've got it seems like something really kind of scared customers in May June even though the market has been through some other gyrations, especially through 2018, but is kind of through that period.
You typically sounded quite positive so what do you think with different about the nature of this may June move and look and not to beat a dead horse really what gives you confidence that this is going to come back I mean, the feds cutting rates because that can have an economy slowing that's probably not a good thing.
For customers.
Well look I think people when you looked at the combination of you again, we had some market gyrations, but to your point this happens periodically right I mean it.
But you have this concern over Mexico tariffs I mean that.
We had a couple of customers that just flat out.
To do a lot of business in Mexico, and this is about was a big problem for them. So that created some of that uncertainty.
Like a lot of people are talking down so hey, the economy is really going to slow down dramatically and look I think the numbers that actually came out would indicate that's that's not the case I mean unemployment numbers are still quite good.
The GDP numbers were actually better than most economists were forecasting so as the market on fire no, but as it is a healthy and steady I think thats more of the case of where we are so.
On customers that are interested in upgrading and buy new aircraft. They didnt go so hey, I'm I'm done they were let me see what happens when things settle down a little bit so I like the timing of it when we get one of these perturbations in the in the first month of quarter.
That gives you time for customers to kind of you know.
Understand where they are and get comfortable and move forward when that happened in the last month or quarter, It's a little.
More challenging because they come back to the table, but it's it's now past the end of the quarter. So I think that had not happened, we probably would have over driven a few jets just given the number of things that were in the pipeline, but I think at least at our view right. Now is those were largely just activities at deferred into the third quarter.
Got you thanks with respect to that.
Next question is from the line of Robert Spingarn.
Credit Suisse. Please go ahead.
Good morning, just a couple of things.
On the industrial business, you're guiding I think so pro forma for the divestiture about flat this year and that seem to track in the first half, but I'm wondering about some of the moving pieces in there for example.
How did the channel still work with the tracker product against streamlining your other distributors and how do you think about automotive in the second half given some of the macro weakness.
That would that were expecting so thats that on cash tax can you essentially can HQ be flat with each one is what I'm asking.
So I think if you look at let me talk the automotive side first clearly volumes around most of the world are down.
But frankly the comparisons on Q3 Q4 are going to be easier than Q1, Q2, because you really saw that slowdown.
Hit in the latter part of last year. So.
I think our businesses is performing well I mean, we're happy with performance and operations and margins and how the guys are doing but theres no doubt. It is on a on a lower volume basis, but more or less consistent with where we thought it would be and as I said. The Q3 Q4 comps are certainly easier than than what we saw in Q1 Q2, just given the global automotive slowdown so.
I think we're comfortable with where we are again the team is executing quite well and delivering.
Based on where that end market is so.
We continue to be feel good about new programs, and new nominations, which obviously our growth and opportunities in the future as well.
On the on the off road side, we have.
Ill tell you the tracker.
The way that the.
Inventory and stocking model works in and bass pro and Cabelas and their dealers is a very disciplined process.
It's a very healthy processing and.
We feel very good about how thats going and the way.
The way the team there manages that it's a it's a great partnership. We're we're we're pleased with how it's going.
And very comfortable with just how they do business and how they manage that business.
Talk a little bit about the other pieces the channel around snow were just guys, where we have some very very good deals out there, particularly a lot of our dealers who have a long history with that brand in the in the snow side.
As I said, we're being extraordinarily disciplined with how we do that and how we manage that and we will do that on the on the dealer side as well who is largely those same dealers of guys that are historical.
Snowmobile dealers that are carrying that Arctic cat brand of of dirt and by the way they are very complementary channels right. Its a.
The strength of that channel under that Arctic cat brand tends to be in the in the northern parts of the U.S and Canada, where the snowmobile country exists and in most of the rest of the country happens to be where the bass pro cabelas and their independent marine dealers are very strong. So it gives us a.
So in total I think a very strong distribution network.
Do you find that weather is as big a factor for dirt as it is for now and then one last thing I wanted to ask you is similar and Hell in commercial helicopter similar my first question about each too.
How do you get optimistic we're as optimistic for a bounce back when the rig counts have been fairly soft, especially in the second quarter well. So on the helicopter front keep in mind that our share in those deepwater rigs, we really don't address that market today, that's part of what the five to five is about you know for the future but.
Where our market is and where we have frankly seen strength in very strong order flow here in the last.
Almost going on in the couple of years now is really around the near end stuff in oil and gas and frankly, a lot of emergency medical services executive VIP.
Customs and border patrol I mean, it's a much broader market police.
Really what really drives the for all seven in the four to nine.
Markets is not.
On the oil and gas market. So there's there's a real contracts right now between the big machines that are large oriented serving that offshore oil and gas market.
It's just not a market. We've we've had a very big position as a market. That's as quite strong is again around more of that.
The light twins singles.
So its volume around five or 5474 to nine.
And for 12, which is not bad.
Deepwater offshore oil and gas market.
Okay, and then just that weather question on dirt versus now wells like food I'd say, it's it's all a lot less dependent on snow is.
He is very dependent on the snow season again. This is part of why we.
I want to sort of insulate ourselves from that by saying guys. We're going to we're going to presell. So those those snowmobiles are going to be built in there will be shipped in.
And they are paid for.
And that will happen before there is that we can get into the snow season. So.
Slide by design, we were trying to insulate ourselves from from that one way or the other and of course, we've looked very hard at what's out there in the inventory the inventory levels of our products.
Frankly ended up at a very low level last year, well below where we originally targeted and that was because it did seem a relatively in most parts of good snow strong snow season, and so our dealers.
Did retail through a lot of products. So I think it puts us in a very healthy position, we have a fairly low level of inventory out there and we've already pre sold all of our 2020 models that are going out.
Third is more difficult I mean, essentially more difficult I mean, it's not as as weather dependent right you've got to spring seasonal fall season at that you know.
It's not it's it really doesn't.
Isn't driven by a particular weather cycle on the dirt side.
Okay.
Thank you Scott.
Sure.
And next we have fun Noah Poponak Goldman Sachs. Please go ahead.
Hey, good morning, everyone.
Good morning.
Scott did you actually specifically have.
I live in the process kind of ready to rock business jet customers.
That then specifically cited the Mexico tariff situation as a reason to hold off.
So those two years as opposed to just you were talking broad macro and giving an example, no no absolutely no I mean, there were as a couple specific transactions.
With customers that do a lot of business, Mexico and.
Their business is dependent on that and maybe they've got pretty rattled.
Now will they come back I would expect so I think I think that whole issue. Let me look at part of it knows that came out of nowhere right. I mean this was.
More of a diplomatic issue than of tariff.
They thought that the the new free trade agreement that all that had all the dust settled on all that sort of stuff and so this kind of came as quite a surprise but of course now. It's also going away. So I think I'm hopeful that those.
Things will come back, but I think there's there were very specific.
Transactions that literally.
Stop because of that and in a bigger way contributed to a level of uncertainty economically in people don't spend big Capex.
Items when there is uncertainty.
Yes.
Yes, it's interesting.
Not to diminish the how meaningful that specific thing is but it's just a pretty specific thing and so I guess just in trying to we all keep I think trying to ascertain where we are on the spectrum of.
A weak market too, okay market, but still kind of touch and go and skittish to strong market and it.
I had interpreted some of your commentary year to date to suggest we had.
We are really moving towards stronger market.
And I.
I guess, how how concerned are you that you just what will never be able to get a fully firmed up tight market until we just have inventories out of the cycle and we're in a new cycle as long as everyone's.
Yes, because there is always going to be some headline not dissimilar to that right, but no. There's all always and I can't predict tomorrow, either right. I mean look we've been playing us avenues for over 10 years now and so.
Yes things get.
Curveballs thrown in there of one flavor or the other whether its markets are international tensions are currency I mean look this is the nature of the world that we live in but.
Some things are very specific localized problems some are more broad based.
But as I said I think when you look at where the market was through two really two through 2018 into the beginning of 19.
Still feel very good I think we still feel like we have a very good list of of customers I do think that the cycle that you want to talk about that way that was of the overhang of a lot of the used aircraft and all these sorts of things is largely behind us and so that.
That gives us a little more stability I think in a just a general better feeling on the new side. When you don't have a big overhang on the on the used side, which is clearly as the case right now.
Most used aircraft that are out there are quite older used aircraft I mean, those transact typically at us at a slower rate.
Every indication on the on the used aircraft market, which obviously were a big participant in that in that market is that you've got newer aircraft the kind of people to do trade in and do buy aircraft. There, it's still very liquid and there's there's good demand you come out there with a good used aircraft.
They transact.
So okay. So as healthy as it's as healthy the underlying market is as healthy as it's been in a very long time.
Does that make it immune to something sort of permitting it like we saw here.
No absolutely not but I still think in general we feel good about where it is the dynamics of.
Again used of pricing of new products coming into the market that I think will help.
I will drive a lot of our growth again, we as you know we've taken an approach that says if the markets are just sort of flattish we need to drive growth.
Bye.
Bringing things like Alaska into the market by bringing a launched into the market by bringing to the knowledge and the skycars in the market. Those are the things that are the investments that we make.
To try to drive growth in the business, even if you have a flattish overall market.
Yes.
Okay, that's really helpful.
I appreciate that.
On the on the aviation margin do we need to.
Be aware of.
US a substantial variance between the third quarter in the fourth quarter margin just as you bring the longitude in in the third quarter.
Yes look I think you're going to you would expect to see a somewhat lower margin in Q3 because of that dilution of the initial longitude orders.
Going out there.
And then you would expect to see stronger Q4 margin I mean, as you know we always that's sort of.
Just the volume and the dynamic of our business is always kind of plays out a little bit like that anyway between Q3, and Q4 Q3 tends to be.
No.
Although a lower margin than Q4, largely driven by volume, but you probably a little bit of differentiation here based upon.
That.
The dilution of launches, but again I think that the underlying performance of the business, how they're executing the productivity the efficiencies that has been driving.
So a pretty significant improvement on a on a year over year basis. I mean, you are where you run a couple of hundred basis points, so better and that'll that'll be there will be tough to do in Q3, given the launch to dilution.
But I think we will you will see continued strong performance.
From a business.
Got it.
And then last one on the cash flow.
The year needs to be.
Meaningfully more backend loaded than the normal historical seasonality to get to the guidance.
I'm, assuming that's primarily or entirely longitude and anything else and.
Well the biggest our longitude is probably the deepwater is certainly the single biggest driver we were build these aircraft right. The demand is there the customers are there we just got to get certification done so we're.
We've got we've got plenty of aircraft set up and ready to go.
I talked a little about bell, obviously, we've been ramping up production rate up here. So thats all sitting in working capital right now and you will see considerably higher volumes here in Q3 Q4 on the.
On the commercial side of Bell and then you know I mean, they're smaller numbers, but as you look at for instance, the snow stuff right. I mean, we've got all that stuff going in working capital right now will produce all that stuff and sell that through mostly here in the third quarter.
The dirt side, we're always going to have a little bit of.
Some higher inventory carrying there because we we need to be able to run the factory and do nothing but snowfall third quarter. So we build up enough inventory to make sure that we can satisfy the demand in that channel.
As well, so but again most of that.
The significant dollars are associated with longitudes Nobel ramp.
Things like a snowball going out I mean, I think thats why we still feel quite comfortable with our our initial guidance range, albeit for sure that is more back end loaded than we would like.
Okay.
Thank you.
Sure.
And next we have a line of Ronald Epstein Bank of America. Please go ahead.
Hi, Good morning, guys, its kristine liwag, calling in for Ron.
Good morning.
Scott just put out a press release that there is no financial impact for both of you.
The contract termination on the hemisphere.
Since the issue seems to be largely from engine performance.
I was wondering why there isn't more recourse for you from Safran.
How is your contract different from your competitor that got.
$800 million and penalties from them.
Well I.
Because we don't have we have a few hundred million dollars.
Associated with it.
There was we do on a much smaller scale do R&D sharing you know with some of our key suppliers and largely we have had a again a very small.
Relatively speaking number that's in there that's been supporting some of the R&D is a shared.
You know program. So we've had R&D in that they've had R&D in it.
Ill or.
Understanding is they are going to look to continue to go to work the engine I mean, if they can get that engine towards.
Specifications to be a great engines. So I can appreciate.
They would continue to make some investment as well but.
Well, we just we don't we don't deal in these kinds of massive.
Programs to offset these things and frankly, because theres not I mean, just to size the market, there's not a volume that anybody would ever invest or put up that kind of a.
Have a.
A front end loaded payment or obligation so.
And when you think about that size aircraft in the market I mean, the hemisphere, we're supposed to.
James Service.
Sometime next year when you first initially rolled it out.
Can you describe what's going on in that market environment today and is there demand for replacement of a hemisphere type aircraft.
Well the decision point was to be to launch it. This year. So the entry into service would have been out probably five years away before that would go into the market but.
No. It was intended to be an aircraft that we go into fleets like net jets and obviously other retail customers.
That had a requirement to do that.
Longer range again, I mean, the the theory of where we were in that in that business was most of the large cabin manufacturers are.
Going to the cultural long haul and even longer range aircraft and Theres still was a demand than a right place at the right price for the right performance capability.
Or in aircraft that was more in that 4040, 500 nautical mile range and there really hasn't been a clean sheet new airplane in that space in a long time.
And that was what we thought the opportunity was for US. The challenge. There is others you need to have the right engine airplane combination and so thats was always predicated on.
Having that that engine, there and as I said, there's been a lot of hard work has been a lot of progress frankly that the strong team has made it just was not yet able to demonstrate and we just had a timeline as we need to to step back here and commit resources in other places for now and.
The engine.
Guess, there than we can revisit that.
Thank you for the color.
Sure.
Okay, operator that does it for this call. Thank you everyone and.
You can reach me if you have any follow up questions and we'll see you next quarter.
Thank you.
Ladies and gentlemen that does conclude your conference. We do thank you for joining you may now disconnect have a good day.
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