Q3 2021 Textron Inc Earnings Call
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And ladies and gentlemen, thank you for standing by.
<unk> third quarter 2021 earnings conference call at this time all participants are in listen only mode. Later, we will conduct a question and answer session. If you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command once again, if you have a question. Please.
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As a reminder, today's conference is being recorded if you should require assistance during the call. Please press Star then zero.
I'd now like to turn the conference over to your host Eric Salander, Vice President of Investor Relations. Please go ahead.
Thanks, Brad and good morning, everyone before we begin I'd like to mention we will be discussing future estimates and expectations. During our call. Today. These forward looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release on the call today, we have Scott Donnelly, Textron's, Chairman and CEO and Frank Connor our chief.
<unk> officer, our earnings call presentation can be found in the Investor Relations section of our website.
Revenues in the quarter were $3 billion up from $2 7 billion in last year's third quarter. During this year's third quarter. We reported income from continuing operations of <unk> 82 per share adjusted income from continuing operations. A non-GAAP measure was 85 per share for the third quarter of 2021 compared to <unk> 53 per share in the third quarter.
2020 segment profit in the quarter was $279 million up $90 million from the third quarter of 2020 manufacturing cash flow before pension contributions totaled $271 million in the quarter and $851 million year to date with that I'll turn the call over to Scott.
Thanks, Eric and good morning, everyone.
We continue to execute.
Execute well across the company in the quarter at Aviation, we've continued to see a solid recovery in the general aviation market with strong commercial demand increased deliveries and citation jets and commercial turboprops.
Aftermarket volume.
<unk> delivered 49 jets up from 25 last year and 35 commercial turboprops up from 21 in last year's third quarter.
Order activity in the quarter remained very strong, resulting in backlog growth of $721 million, bringing us to $3 5 billion at quarter end.
Also in the third quarter, the Beechcraft King Air 360, and $2 60 achieved <unk> certification and began to deliver customers throughout the region.
Continuing with our product strategy of upgrading existing models at <unk>, We recently announced the citation <unk> Gen two and the <unk> Gen two product upgrades.
So on the new product front, social Sky Courier is continuing to progress through certification with over 600 hours of flight test activity and the Beechcraft and all he successfully completed its initial ground engine runs powered by Ge's new catalyst engine.
At Bell revenues were down 3% in the quarter largely on lower military revenues on the commercial side of Bell. We delivered 33 helicopters down from 41 in last year's third quarter.
Moving to future vertical lift in September Bell submitted its proposal for the Florida program a down select an award is expected in the second quarter of 2022.
<unk> does about 60% of the way through its below the 360 Invictus prototype and remains on schedule.
So in the quarter Bell inducted the first U S Air Force C V 22.
<unk> nacelle improvement modifications move.
Moving to systems, we saw another strong quarter of execution with operating margins of 15, 1% up 190 basis points from last year's third quarter.
<unk> continued to expand its fleet of certified up one aircraft with two additional aircraft entering service in the quarter.
Bringing the total fleet to 19 aircrafts during the quarter. The fleet continue to support higher customer demand for adversary Air services driving higher revenues in the quarter.
At Air systems, the team booked $25 million in new orders in the quarter, including both fee for service activities as well as new hardware.
Moving to industrial overall revenues were lower in the quarter as we continue experienced manufacturing disruptions related to supply chain challenges.
<unk>, we again saw order disruptions related to the global auto OEM supply chain shortages, which are directly impacted production scheduling and resulting intermittent line shutdowns of manufacturing inefficiencies.
Specialized vehicles, we saw continued strong demand in our end markets with higher pricing, which also production disruptions from part shortages.
To wrap up Textron delivered a solid quarter with increased aviation backlog improved manufacturing margins and <unk>.
Strong cash generation, while working to minimize the impact of supply chain disruptions.
I'll turn the call over to Frank.
Thanks, Scott and good morning, everyone, Let's review how each of the segments contributed starting with Textron aviation.
Revenues at Textron aviation of $1 2 billion were up $386 million from a year ago, largely due to higher citation jet volume of 290 million aftermarket volume of $62 million.
And commercial turboprop volume of $48 million segment profit was 90 million in the third quarter up $127 million from a year ago, largely due to the higher volume and mix of $96 million and favorable pricing net of inflation of $22 million.
Backlog in the segment ended the quarter at $3 5 billion.
Moving to Bell revenues were $769 million down $24 million from last year, largely reflecting lower military revenues.
Segment profit of 105 million was down $14 million, primarily due to lower military revenues.
Clog in the segment ended the quarter at $4 1 billion.
At Textron systems revenues were $299 million down $3 million from last year's third quarter due to lower volume of $39 million at air systems, which primarily reflected the impact from the U S Army's withdrawal from Afghanistan.
<unk> is fee for service contracts, partially offset by higher volume, primarily at APAC and electronic systems.
Profit of $45 million was up $5 million.
Due to a favorable impact from performance and other <unk>.
Backlog in the segment ended the quarter at $2 2 billion.
Industrial revenues were $730 million down $102 million from last year, reflecting lower volume and mix of $156 million, primarily at fuel systems and functional components, reflecting order disruptions related to the global auto OEM supply shortages, partially offset by favorable impact of $44 million from.
Pricing largely at specialized vehicles.
Segment profit of $23 million was down $35 million from the third quarter of 2020, primarily due to the lower volume and mix described above partially offset by higher pricing net of inflation at specialized vehicles.
Finance segment revenues of $11 million or were $11 million and profit was $8 million moving.
Moving below segment profit corporate expenses were $23 million in interest expense was $28 million.
With respect to our 2020 restructuring plan, we recorded pre tax charges of $10 million on the special charges line.
Our manufacturing cash flow before pension contributions was $271 million in the quarter and $851 million year to date as compared to $129 million for the corresponding nine month period in 2020.
Year to date, our cash generation reflects improved working capital management, which includes more linearity and quarterly our craft deliveries and higher customer deposits at aviation from an increased backlog.
In the quarter, we repurchased approximately $4 2 million shares returning $299 million in cash to shareholders. We're raising our expected full year guidance for adjusted EPS to a range of $3 20 to $3 30 per share.
This includes revised tax guidance, an effective rate of 15, 5% for the full year. We're also raising our outlook for manufacturing cash flow before pension contributions to a range of a $1 billion to $1 billion, one up $200 million from our prior outlook with planned pension contributions of $50 million that concludes our prepared remarks.
So we can open the line for questions.
And our first question goes to the line of Sheila <unk>.
<unk> with Jefferies. Please go ahead.
Hi, Thank you good morning, Scott Frank Eric.
Backlog at aviation was that three five I think an all time high since 2010. So maybe can you guys talk about who these customers are they know what's the rationale for buying a new $20 million, Jeff Byers disclose all this in both Bell if you could share that with us.
Sure I think the backlog is as fairly broad in terms of the makeup of those customers.
It still remains more U S centric I think and when we look at order activity.
The quarter on the jet side, it's probably roughly 70% or so.
So domestic versus 30% international so I think <unk>.
You need to see the shift so a little bit more international as Europe is starting to pick up in South America, starting to pick up but it is still more North America centric.
It's probably closer to 50 50 on the turboprops, that's usually been a market words, the turboprops King airs and such caravans are usually end up being more international.
It will continue to shift that way, but right now is closer to 50 50.
Obviously, there was a mix of over the next year or so deliveries of what we have coming up with net jets.
But we have very strong retail individual customers in there.
If I looked at the number of new customers I know folks are coming in and buying a judge we've not owned to Jeff before that number probably somewhere around the 20% or so kind of a range. So which is encouraging we do see a lot of people buying.
Buying a jet when you've not had an aircraft before us.
A little bit of a daunting task one of the things we do on our businesses. We have a whole dedicated team that helps someone who's not owned an aircraft like that before it wants to to do that we help them with the complex issues of pilots and hangers and insurance and all the things that you have to look at to to do that to successfully place that aircraft with a brand new customer but for sure we're seeing.
A lot more interest and demand from from those first time buyers than we would historically.
Historically see.
And we do have a question from the line of David Strauss with Barclays. Please go ahead.
Okay.
Thanks, Good morning.
Sure.
Scott with the.
Backlog at the at Aviation now and your delivery easier today I wanted to see if you could offer an update on how youre thinking about the production plan I think you had said.
Covering half.
Half of the 2020 drop it looks like you're tracking well ahead of that and then your.
Your thoughts about going above 2019 levels, just given given how extended your your backlogs becoming thanks.
Sure David I mean, I think as we've given color all year long our expectation was that we would just kind of halfway there this year and get back to the nineties levels.
In 2022, I think thats still good color to how on it obviously, we won't guide.
Until we get into the January timeframe, but for sure the order activity.
Which has been.
We're getting stronger.
We've worked our way through the year and remains strong.
Ports that number and we will we'll be looking hard at that backlog and that order rate as we finalize our production.
Perhaps at aviation I mean, clearly right now we are we are in the process ramping up production with the goals as we stated to get up to about 2019 level.
There's probably room for a little bit beyond that but we'll.
We'll give you the final guys when we get to January.
And we do have a question from the line of Robert Stallard with vertical research. Please go ahead.
Thanks, so much good morning.
Thanks Mark.
Scott on the aviation side, maybe following up from <unk> question have you seen any differences in the order intake between the various to aircraft models you have and also on the aircraft.
What's the sort of lead time looking at it you are getting to the point, where some of these planes you have to wait more than 12 months to get them.
So the strength is really across the whole segment. Robert I mean every model is I would say doing very well right now order activity and interest in all of US is quite strong and part of that is we've been putting updates and upgrades I mean as I said in <unk>, we put them too.
Gen. Two version of that Ginger version of <unk>, which has been a fabulous aircraft for us for a long time and it's a really nice update that I think is.
As our sparking even greater new interest in that aircraft as well so it's really across the board.
Look I mean, we're not going to get into details on the mark.
Model by model on the on the backlog, but as we've said before I think this business this industry frankly.
Operator, better if it's sort of looking at a nine to 12 months sort of backlog and that gives you. It gives a customer who has an aircraft time to sell the aircraft. It gives them time to specify the interiors and colors and paints.
Obviously, it makes it much easier for us in terms of our production forecasting and smooth a production line.
And as you know that historically, that's how that this industry works. This last decade has been unusual where you're actually having to try to build to a forecast in steps. So I do think one of the things that we certainly keep in mind as we look at production rates.
We want this business.
To be out there is sort of a nine to 12 months.
Have a backlog business, it's a much healthier way.
To run the business I think it's better for the customers again for their planning perspective, and marketing of a used aircraft. If they already have an aircraft, which is the majority of our customers. So I think that.
That's a healthy place for the business to be and Thats kind of where I feel like we are right now.
And we do have a question from the line of Ronald Epstein with Bank of America. Please go ahead.
Yes, good morning, good morning, guys.
Good morning.
So Scott what are you what are you seeing on the on the pricing front, meaning.
And there is demand right that's clear but.
But are your competitors behaving themselves I mean, how is the broader pricing environment right now.
Well look it's always a competitive market, but for sure I think we're seeing a positive pricing environment as you would expect right.
Very strong demand.
All of the dynamics that we looked at in terms of the macro level of the market are extremely favorable right. You've got used aircraft available for sale at record low numbers, particularly if you look at something thats sort of less than a 10 year old aircraft.
As you know that was an issue for this business for a long time, and that's down to kind of below 1% of the.
Of the fleet and we're seeing the used aircraft valuations going up right. So the dynamic overall in pricing is much better than it's been for a very long time.
Flight activity is obviously very strong so.
We just we see the demand from everything from charter.
Memberships to fractional to whole aircraft. So I think you have a very very strong demand environment, you would expect to see better pricing in that environment.
And we do have a question from the line of George Shapiro with Shapiro Research. Please go ahead.
Good morning.
Thanks Scott.
On that you mentioned, you added $22 million and benefit in the quarter from pricing the incremental margin was 33%, which is very high number do you expect that kind of trend to continue.
Well look I think we're going to continue to see.
Good pricing in the industry based on all the dynamics that I just.
I just talked about incremental leverage on volume in this business has typically been sort of in that 25% kind of range. So I think thats a reasonable expectation.
And we do have a question from the line of Noah <unk> with Goldman Sachs. Please go ahead.
Hi, good morning, everybody.
Alright.
Scott I guess, what is what is in aviation and what is the.
Absolute dollar backlog level or or backlog to production ratio.
Or that you feel you want to maintain sustainably in the business, where do you want to keep that.
Well no as I said I think that.
The place wed like to see this as kind of out in that nine to 12 months I think if you get beyond 12, you have too much beyond 12 months.
I mean customers are interested in new aircraft right I mean, so I think theres, a theres a limit to how far out someone's willing to say, okay I'm going to wait.
For a year, it's probably on the on that shorter side on maybe a smaller aircraft where theres not as much customization is a little quicker turn but I think on the larger aircraft youll see it move out of that.
And more of that 12 months or so so.
It's not an absolute dollar number we look at but we do look at demand model by model and where we think that backlog that cycle time is reasonable in terms of where how it fits with our production planning how it fits with our customers' expectations and as I said I think thats.
Ideally somewhere in that nine to 12 months with again some variability on the models largely.
Smaller aircraft.
Probably being on the shorter side of that in things like a longitude being in that.
Grew more than 12 months or so kind of timeline.
And we do have a question from the line of Seth <unk> with J P. Morgan. Please go ahead.
Hey, good morning, it's Tyler on for Paul.
Good morning, good morning.
Yeah.
Just on Florida can you just provide an update just maybe where things stand today.
Thanks, Sean as being in the meantime in Wilmington makes that decision.
Sure. So the Florida program. The proposal went in back at the beginning of September.
Which was consistent with the army schedules.
What they are.
The analysis that they expect to have.
An announcement the decision and contract with that by the.
Second quarter of next year. So by by the end of next June is kind of our expectations.
Expectations.
Remember that the Florida program.
<unk> is a little unique in that.
He put an enormous amount of work into getting the proposal submitted but in parallel with that we still under our under contract.
And Otas. So we are continuing.
The design development activity towards PDR.
Of course that work is going on in parallel with the.
Army doing their proposal evaluation so.
The team obviously.
Kind of.
Worked a lot on the proposal and now they are all back hard at work working towards the next milestone for the program, which will then dovetail into.
Hopefully.
<unk> record.
And we do have a question from the line of Cai von <unk> with Cowen. Please go ahead.
Yes, thanks, so much so Scott.
Obviously demand is strong in aviation what are you seeing in terms of commodity price hikes and supplier disruptions that might limit your ability to kind of boost production next year.
Well we're not.
Theres, a theres always a pop up problem, even in the best of times with managing our supply chain I would say, we're not seeing big issues right now and are in the supply chain associated with the A&D businesses.
My view is most of these suppliers also do defense work much like our company and so most of them didn't go through it entirely hard shutdown as you saw a lot of the commercial world.
Doing also as you know a lot of these suppliers also have a lot of business that goes into the commercial aviation space with the Airbus and the Boeing to the world and those guys are not back anywhere near the <unk>.
Demand that they used to have so there's capacity available.
On the supply chain so.
We work.
Our way through this thing most of our critical suppliers in the A&D space are.
We are able to meet our demand and I'm not suggesting there is never an issue or a problem, but those things pop up here and there it.
It's also a longer cycle supply chain. So if you do have a problem or a challenge you've got more time to to.
To work on it and we'll manage it and look for alternatives and work with supplier around that was in the industrial and commercial world.
You tend to find out about a problem that's going to hurt you on Tuesday, the previous Friday, So we don't see as much of that in the A&D side. So.
Don't think when we look at this that we feel like we're gonna be supplier constrained at this stage of the game, it's more around managing and making sure that we're doing the right thing here in terms of production rates versus long term demand and again managing.
<unk> backlog that worked for us and works for our customers.
And we do have a question from the line of Peter Arment with Baird. Please go ahead.
Yeah. Thanks, Good morning, Scott and Frank Hey, Scott just a quick one on I guess aviation.
I always kind of talked about.
Getting back to crossing over on the double digit margins on.
It seems like you've got everything in place in terms of the overall demand and potentially higher production and what what's key for us to see margins.
Cross over that 10% level is it just volume or is there other things you need to see.
Well, Peter obviously volume is a huge contributor to that we've talked about that for very long time, and I think we'll see.
As you remember we were getting close to that level prepay.
Pre pandemic and I think as our volumes are recovering.
Back on track to where we were <unk> 19 in and move beyond that we clearly have been working to drive to get double digit margins and I think we are on track to be doing that we will obviously give you more specifics in January but I feel pretty good about our path to get there.
And we do have a question from the line of Pete's Kubicki with Alembic Global. Please go ahead.
Hey, good morning, guys nice quarter.
Maybe to piggyback off <unk> question, a little bit.
Scott can you can you talk about kind of how you managed.
Kind of the two businesses in industrial in this environment do you have much visibility at Cal tax.
What would you guide us in any way.
Over the next couple of quarters.
And that is it kind of you know.
It seems like the market is very strong in specialized vehicles, but then as you mentioned some supply chain issues there as well. So I was just wondering if you could give us more color on how to think about that segment over the next couple of quarters sure well look obviously, it's a bit different right in the case of <unk>, where tier one guy.
We're sort of following the OEM path right. So we don't we don't independently setback.
It's one of the challenges frankly this year is.
There's been a lot of disruption that the Oems are felt in changing model types and volumes through the course of the year as a result of other supply chain issues. Fortunately the caltex guys have done nice job.
Being the problem right.
We've been able to fulfill whatever demand is placed on us and certainly we don't want to be the reason they can't they can't run a line. So I think our guys have done a really nice job of that.
But we look really at the IHS data peaked in terms of how it.
How we forecast I mean, we obviously have to go down a model by model, but.
When you listen to what the Oems are saying.
They're starting to indicate that a lot of their other issues in their supply chain, which semiconductor is the one that's obviously you've talked about the most.
So that's going to start to abate and I think if you look at IHS data right now they are talking about probably.
At 10, 1% increase in global auto volumes as you go from 'twenty one to 'twenty two so that's how we think about our business right. We look at the IHS data, we don't really have an independent view I suppose of of what's going on in that market in the case of our vehicle business, where the OEM where the.
And market Guy so we.
There are a lot closer and having to make that call and as you indicated the good news is demand is very strong I mean, everything we can build.
Is going out in the channel and selling inventory levels are at had frankly unhealthy low levels, we're working hard with our suppliers to get parts in and everything we can we can build and get out there.
It tends to be selling through strongly so.
I think our guys in.
In the vehicle business, frankly look we would love to have seen revenue growth in the quarter from year over year, we couldnt get that just because we can't get the parts to do it but I think the team has managed price inflation disruption and all that sort of stuff. So that at least we've we've been able to hold onto the margin rates, where we were and obviously as we can get the supply chain.
Slowing better and get the revenue top line growing we think the margins will improve with our our.
Now mix in that business in terms of pricing.
And the performance of the business was able to at least at a margin level overcome a lot of the interruptions and inefficiencies that we've seen in the factories. So I think the business is being well run it just needs to be able to start to generate.
More top line and Thats, a supply issue and the demand is quite strong we've got great products out there.
As a result, we're getting good pricing for them, but we would.
Love to get higher revenues and I think we will we just got to work through the <unk> margins.
And we do have a question from the line.
<unk> <unk> from Morgan Stanley. Please go ahead.
Hey, good morning, guys.
Scott you mentioned how longer lead time nature in aviation provides more visibility for the supply chain and right that makes sense in a normal environment.
The vaccine executive order effective December 8th is a little different than what we've seen before.
How are you anticipating this executive order to affect labor your supply chain and ability to raise production in aviation and what mitigating actions can you take.
Well look it's a good question in all of our our business as well as obviously all of our key suppliers are tend to have that defense component and therefore are subject to the.
To the mandate.
Frankly, it's a curve ball, we wish we didn't have but we're managing our way through it I think we and all of our.
Piers and suppliers or are all sort of in the same and.
In the same place here gets created a lot of noise, it's not been terribly well received by a pretty sizable portion of our employees.
But people were working our way through it.
It's the nature I think people have accepted the fact of what they've got to go do and in the end. There is no question that we're going to loosen employees because of this.
What we're trying to ramp up our hiring in expectations of that and we'll manage our way through it it's not the first challenge we've ever seen so.
And we do have a question from the line of David Strauss with Barclays. Please go ahead.
Great. Thanks for taking the follow up I guess.
Frank a question for you I E on working capital it looks like.
You're assuming for the full year, a couple of hundred million dollars benefiting from working capital I assume that's mainly.
They are predominantly.
Aviation advances how should we think about working capital as we move into.
Next year. That's my first question and then any initial thoughts on.
On pension.
<unk> income for next year as compared to I think youre doing like $30 million or Sony and pension income this year. Thanks.
Yes, so on the outlook on the working capital front I think as we said we've had a strong year from an inventory management standpoint in the aviation business being far more linear obviously is.
It's a really good thing there so we've had kind of better seasonality of cash flow and good customer.
<unk> to.
The cash flow for the fourth quarter implied in the guide is guide continues to be in the area of one to one or a little over one.
Net relative to net income.
So we saw a lot of benefit this year kind of debt.
We will continue I think to see very strong working capital management next year I'm not ready to guide on it a lot of it will depend on order activity.
On the inventory side and the linearity of the business.
We will continue to see strong performance it will depend on kind of customer deposit activity to some degree to how that ultimately works out.
Look on the on the pension side, we're not ready to kind of.
Lay out numbers there.
We've we've had a goodyear so far on return on assets interest rates are up a little bit. So as you sit here today I don't think that we would expect to be we would expect pension is to continue to be a benefit as we go into 'twenty two.
But we're not ready to quantify things.
And we do have a question from the line of Robert Stallard with vertical research. Please go ahead.
Yes. Thanks, just a follow up from me I was wondering if there's any changes on the divisional guidance to 2021 with one quarter to go.
I don't think Robert we're doing a formal update to.
To the guide at the segment level, but clearly aviation and in.
And bell or are <unk>.
Strong performers and I think youll see that versus the original guide, obviously industrial with particularly with the auto Oems.
Volume down in challenging supply chain mill that will be the.
So a bit of a mix shift I suppose between what we originally guided and where we will end the year.
And our last question comes from the line of Noah <unk> with Goldman Sachs. Please go ahead.
Hey.
Frank Frank do you expect to be able to grow free cash flow from the manufacturing group next year versus the.
Good performance this year.
And then if.
If you could just maybe touch on the systems margin since that seems to have just kind of stepped up to a new level with all of the.
Programmatic and mix changes you've had there I mean is that just now a sustainably high 14 low 15%.
Thank you.
Yes look we're not going to guide 22 as I said.
I believe we will continue to see.
Solid and strong working capital management.
Next year, we had a lot of benefit this year of particularly the aviation again of getting the business kind of running the way Scott described which is kind of with some visibility on delivery and order activity and run it far more linear so I would expect that to continue as I said into 'twenty two.
But im not going to start kind of guiding to.
Cash flow and profitability here.
For 2002.
Well Im sorry, the second piece of that was margins caused by the systems margins look on our systems, we've talked about this kind of systems.
<unk> has had a very strong year.
Defense businesses generally.
Assistant with how we've talked about bell or kind of 10% to 12%. We have made some investments in systems, where we're seeing solid return on those investments. There are a number of businesses there where we have invested in assets to drive higher margin like the APAC business. So we expect to see good.
Execution on a go forward basis out of the systems business.
Kind of these levels of performance. This year are kind of a strong relative to the general mix of those businesses. So we expect solid execution on a go forward basis, but we've had a very good year this year.
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