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CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page1of 34
Textron(TXT)EarningsReport:Q32014ConferenceCallTranscriptThefollowingTextronconferencecalltookplaceonOctober17,2014,08:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
DougWilburne;Textron;VP,IRScottDonnelly;Textron;Chairman,CEOFrankConnor;Textron;CFO
OtherPart icipants
JoeNadol;JPMorgan;AnalystCarterCopeland;Barclays;AnalystNoahPoponak;GoldmanSachs;AnalystRobertStallard;RoyalBankofCanada;AnalystJohnGodyn;MorganStanley;AnalystJonathanWright;Nomura;AnalystPeteSkibitski;DrexelHamilton;AnalystCaivonRumohr;Cowen&Company;AnalystMylesWalton;DeutscheBank;AnalystJulianMitchell;CreditSuisse;AnalystJasonGreer;Citi;AnalystGeorgeShapiro;Shapiroresearch;AnalystSheilaKahyaoglu;Jeffries;AnalystRonEpstein;MerrillLynch;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
Ladiesandgentlemen,thankyouforstandingbyandwelcometotheTextronthirdquarterearningscall.
Atthistime,allparticipantsareinalisten-onlymode.
Later,wewillconductaquestion-and-answersession.
(OperatorInstructions).
Asareminder,thiscallisbeingrecorded.
I'dnowliketoturntheconferenceovertoourhost,VicePresidentofInvestorRelations,Mr.DougWilburne.
Pleasegoahead,sir.
DougWilburne (VP,IR):
Thanks,Bradandgoodmorningeveryone.
Beforewebegin,I'dliketomentionwewillbediscussingfutureestimatesandexpectationsduringourcall
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page2of 34
today.
Theseforward-lookingstatementsaresubjecttovariousriskfactorswhicharedetailedinourSECfilingsandalsointoday'spressrelease.
OnthecalltodaywehaveScottDonnelly,Textron'sChairmanandCEO,andFrankConnor,ourChiefFinancialOfficer.
OurearningscallpresentationcanbefoundintheInvestorRelationssectionofourWebsite.
Textron'srevenuesinthequarterwere$3.4billion,up$526millionfromlastyear'sthirdquarter.
TheBeechcraftacquisitioncompletedattheendofthefirstquartercontributed$398milliontotheincrease.
Incomefromcontinuingoperationswas$0.57pershare,comparedto$0.35inthethirdquarterof2013.Textronaviationoperatingresultsincludeda$10millionreductiontosegmentprofitfromfairvaluestep-upadjustmentstoacquiredBeechcraftinventoriessoldduringthequarter,plustherewasanadditional$3millionchargerelatedtoBeechcraftrestructuringcostswhichwererecordedonaseparatelineforacquisitionandrestructuringcosts.
Together,theseitemsreducedEPSby$0.03pershare.
Manufacturingcashflowbeforepensioncontributionswas$144million,comparedto$269millioninlastyear'sthirdquarter,bringingyear-to-datecashin-flowto$304millionlcomparedtoauseofcashof$518millionatthispointlastyear.
Thirdquarterpensionpcontributionswere$17million,andwiththatI' llturnthecallovertoScott.
Scot t Donnelly(Chairman,CEO):
Thanks,Dougandgoodmorningeverybody.
Revenueswereup18%inthequarterreflectingsuccessofnewproductinvestmentsandouracquisitionstrategies.
ForexampleatindustrialwesawgrowthacrossallourbusinessesreflectingtheimpactofnewproductintroductionsandrecentacquisitionsinthesegmentsuchasTUGTechnologies,DixiechopperandHDelectric.
Onthenewproductfront,TextronspecializedvehiclesweintroducedthenewrecoilIS.Withacargobedandtwoforwardfacingbenchseats.
Completelyrefreshedfrontrotarymotorfeaturingandallhydraulicdeck.
AndTextrontoolsandtestinAugustwemadeasmalltechnologyacquisitionthatresultedinthelaunchofanewproduct,thedatascout10GwhichfurtheraddstoourcurrentfamilyofEthernettransportnetworkanalyzers.
RevenuegrowthreflectedautomotivestrengthintheNorthAmericanmarket,whichdidovercomesomesoftnessinEurope.
Movingtosystems,revenuesweredowninpartduetodelayinthetapvehicleprogramforwhichwehadexpectedtobegindeliveriesinthequarter.
LreliabilitytestinginAugustweidentifiedtheneedforanumberofdurabilityimprovements.
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page3of 34
Incooperationwiththecustomerwedecidedthebestapproachwastosuspendthetestingtosupportanoptimalredesignandretestprocess.
Webeabletomeetthevehicledurabilityrequirementswithrelativelyminormodificationstooursteeringsystem.
Weexpecttheredesign.
Initialdeliveriesbyaboutoneyear.
Elsewhereatsystemswe'remakingprogressonanumberoffronts.
OurTCDLprogramthecustomersagreetobeginacceptingunits.
Ourunmannedsystemsbusinesswasrecentlyawardedacontracttoprovideanunmannednavalminedetectionsystemforuseinconjunctionwiththenavy's.
Thisworkvalidatestheinvestmentwe'vebeenmakingtoleverageourunmannedtechnologiesintoMarinebasedapplications.
Simulationandtrainingbusinesswe.WhichwillcomplementourWestCoastfacilityinCarlsbad,California,providingmoreconvenientaccessforourcustomers.
Earlierthisweekweannouncedwe'llbeopeningatrainingbcenterinSpainin2016withafullflightsimulatorasourinitialoffering.
WedeliveredaBoeing737NGsimulatorthatwillbeusedatBoeing'strainingcenterinSingapore.
ChinaexpressairlineswithaBombardierfullpointsimulatorforpilottraining.
ContracttoprovideAirbusfullflightsimulator.
Oneofthelargesttrainingoperators.
Wedelivered.
ComparedtoV-22sandsevenH-1.Downfrom54ayearago.
Wecontinuetoseesloworderflowacrossthecommercialhelicoptermarketcomparedtolastyearandatthispointwithonlyaquartertodidweexpect2014commercialdeliverieswillbedownfromlastyear's213units.
DespitethisenvironmentBell'swinrateremainsfavorableespeciallywithourmodel429wheredeliveriesareupyear-to-dateoverlastyear.
InChinawereceivedregulatoryapprovaltoconducthelicopterpilotandmaintenancetrainingtosupportourgrowingbusinessinthequarter.
Lduringthequarterwewerealsonamedthenumberoneproductsupportorganizationbyaviationinternationalnewsfortheninthconsecutiveyear.
Wecontinuetomakegreatprogressondevelopmentofourrelentlessprogram.
Ourfirsttwotestvehiclesareinfinalassemblyandthemanufacturingprocessisgoingsmoothlythanksinlargeparttotheuseof.We'vealsobegunsafetyflighttestingformostofthemajorcomponentsofthesystems.Inordertoaccumulatethehoursnecessaryto.Wenowanticipatefirstflightwilloccurduringthefirstquarteroftheyear.
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page4of 34
Developmentofour505JetRangerXprogramisalsoproceedingwellwithfirstflightstillexpectedbytheendofthisyear.
Wealsobrokegroundforournew505assemblyfacilityinLafayette,Louisiana.
Wecontinuetosignnewcustomerpurchaseagreementsreflectingsoliddemandfortheaircraftinthemarketplace.
MovingtoTextronaviationinthequarterwedelivered33jetsand30KingAirturboprops.
Lastyear'sthirdquarterwedelivered25jetsandBeechcraftdelivered26KingAirswe'reseeinganumberofencouragingtrendsatTextronaviation.
IntegrationofBeechcraftisgoingextremelywellwhichisevidentinourcostproductivitywithasignificant.
Anotherexampleofintegrationbenefitistherolloutofanewproductsupportprogramforourkingpropcustomers,basedonCessna'spro.
Onthemarketfrontwecontinuetoseetheavailabilityofusedaircraftcomedownandourownedusedtrade.
WehaveseenapickupinorderactivitysinceSeptember.
Withimprovingmarketdynamicswe'reencouragedaswepreparetoexhibitourfulllineofproductsatnextweek'sannualNBAAshowincludingthedebutofthefirstfullyconfigured.
Hadtheopportunitytoseethelatitudefirsthand.
It'sagreatlookingairplaneanditmakesanimpressivestatementaboutvalue,comfort,styleandperformance.
Infact,withover600accumulatedflighthoursanddevelopmentprogramwerecentlyannouncedtheaircraft'srangehasbeenincreasedto2,700nauticalmiles.
Towrapup,webelievewehadasolidthirdquarterwithoverallrevenuegrowth,improvedmanufacturingmarginsandsolidcashflowperformance.
Furthermore,ourstrategyofinvestinginnewproductsispayingoffandwe'reseeingsignificantcontributionsfromourM&Ainvestments.
Withthat,I' llturnthecallovertoFrank.
FrankConnor(CFO):
Thankyou,Scott.
Goodmorningeveryone.
Segmentprofitinthequarterwas$293million,up$85millionfromthethirdquarterof2013ona$526millionincreaseinrevenues.
Let'slookatyouhoweachofthesegmentscontinuedstartingwithTextronaviation.
AtpTextronaviationrevenueswereup$487millionfromthisperiodlastyearreflecting$398millionofacquiredBeechcraftrevenueandhighernewjetvolumes.
Thesegmenthadaprofitof$62millioncomparedtoalossof$23millionattheCessnasegmentayearago.
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page5of 34
ThisreflectedtheimpactoftheBeechcraftacquisition,highernewjetvolumeandfavorablepricingandinflation.
Backloginthesegmentendedthequarterat$1.4billion,approximatelyflatwiththeendofthesecondquarter.
MovingtoBell.
Revenueswereup$20million,reflectinghigherV-22programvolume,partiallyoffsetbylowerH-1andcommercialdeliveries.
Segmentprofitincreased$15millionfromthethirdquarterin2013,primarilyreflectingfavorableperformance.
AtTextronSystems,revenuesweredown$47millionreflectinglowerMarineandlandsystemsvolume,partiallyoffsetbytheimpactofacquisitions.
Segmentprofitwasdown$8millionreflectingthelowervolumes.
Industrialrevenuesincreased$74million,duetotheimpactofacquisitionsandhigheroverallvolumes.
Segmentprofitincreased$1million,reflectingtheimpactofhighervolumes,offsetbyanunfavorablemixofrevenuesinthequarter.
Financesegmentrevenuesdecreased$8million,primarilyduetogainsonfinancereceivabledispositionsduringthethirdquarterof2013.Segmentprofitdecreased$8million,primarilyduetoprioryearimpactsofloanlossreversalsandgainsassociatedwiththedispositions,partiallyoffsetbyloweradministrativeexpenses.
Non-accrualaccountsendedthequarterat$101million,up$13millionfromtheendofthesecondquarter,while60daydelinquencieswere$70million,down$26millioninthequarter.
Movingbelowthesegmentprofitline,corporateexpenseswere$22million,andourtaxratewas30.7%.
Interestexpensewas$37million,upfrom$29millionayearago,reflectingdebtcostrelatedtotheBeechcraftacquisitionfinancing.
Werecorded$3millionofrestructuringcostsinthequarter,ontheacquisitionandrestructuringline,andwestillexpectfullyearcostofabout$45million.
Duringthequarterwerepurchasedabout4.1millionsharesatanoverallcostofabout$152million.
Wealsorepaid$200millionofour$500millionfiveyearbankloanfromtheBeechcraftacquisition.
Finally,weareincreasingourfullyearearningspersharefromcontinuingoperationsguidancetoarangeof$2.05to$2.15ashare,andincreasingourestimatedmanufacturingcashflowfromcontinuingoperationsbeforepensioncontributionsto$700millionto$800million.
Thatconcludesourpreparedremarks.
Brad,wecanopenthelineforquestions.
QUESTIONS&ANSWERS
Operator:
Thankyou.
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page6of 34
OurfirstquestionwillcomefromJoeNadolwithJPMorgan.
JoeNadol(Analyst-JPMorgan):
Thanks.
Goodmorning.
Scot t Donnelly(Chairman,CEO):
Goodmorning.
JoeNadol(Analyst-JPMorgan):
Scott,justfirstofallonthesystemssideofthings,giventhatthere'ssomelargelumpyprogramshere,ifyoucouldjustmaybegiveusanupdateonwhatyouexpectrevenuetobefortheyearrelativetoyourearlierexpectations.
AndthenIknowyou'renotgoingtogive2015guidanceyetbutaswethinkabouttheyeardelayonthevehicleprogram,what'stheprofilesortofthequarterlyrunrateweshouldbethinkingaboutuntilyoustartthosedeliveries?
Scot t Donnelly(Chairman,CEO):
Firstofall,Joe,therevenueatsystemsisprobablygoingtobedownabout300fromwhatwewereoriginallyforecasting.
Andthat'sprincipallydrivenbyvehicleprograms.
JoeNadol(Analyst-JPMorgan):
Okay.
Andthenintonextyear?
Scot t Donnelly(Chairman,CEO):
Youknow,we'reprobablynotgoingtogointo2015guidanceyet,Joe.
Wehavealotofworktodohereatthebalanceoftheyear,makesurethatweknowwhereweareonthetapVprograminparticular.
We'rewellintotheanalysisphase.
Wefeelprettygoodwithoutwhereitis.We'rejustbasedonthatstartingtolayoutwhatthatrecoveryplanlookslike.
IthinkweprobablywouldprefertowaitandgiveyoutheguidanceonthatwhenwegetintotheJanuarycallfor2015.
JoeNadol(Analyst-JPMorgan):
Okay.
Overataviation,goodmarginthere.
WhenwethinkabouttheBeechcostsavesthatyoulaidoutatthetimeoftheacquisition,isthereawayof
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page7of 34
thinkingabouthowmuchofthatisnowembeddedin--onarunratebasisintheQ3number?
Scot t Donnelly(Chairman,CEO):
SoJoe,absolutely.
Imean,clearlywhat'shappeninghereisthatthenumberthatweguidedyouguys,we'regettingtherequickerisbasicallywhat'shappening.
Ithinkthespeedoftheintegration,ofthecosttake-out,theintegrationoftheorganizationsandwhatnothashappenedquickletterthanwelaidout.
Westillfeelprettygoodabouttheabsolutenumbersthatwegaveyoubutwe'regoingtogettheresooner.
Soobviouslythat'sgoingoftodrivesomemarginexpansionintheyear.
That'spartofwhat--thelargestpart,franklyofwhat'sdrivingourincreasetoourguidance.
Wehadsaidoriginallythattohelpyouguysthinkabout2015tothinkaboutacouplehundredbasispointimprovementoverwherewewouldbethisyear.
Obviously,that'snotgoingtobeasbiganumberbecausewe'regoingtoachievemoreofthatthisyear.
Sowhenyouthinkaboutgoingforward,it'snotgoingtobea200basispointbecausewe'resortofraisingthebarthisyear,onlybecausewe'regettingtherequicker.
JoeNadol(Analyst-JPMorgan):
Okay.
Andthenjustfinally,stickingwithaviationhere,youmentioned--IthinkyoumentionedthatordershavepickedupsinceSeptember.
Iwasn'tsureifyouweretalkingaboutcertainmodelsormaybeifcouldyoujustgivesomecontextthereandtalkaboutthemarketenvironment,demandenvironmentforCessnajetsinparticular.
Scot t Donnelly(Chairman,CEO):
Ithinkwehaveseenanoverallbetterdemandenvironment.
JulyandAugustarealwaystough.
Peopleareoutonholiday.
Butthere'snodoubtthataswetgotintosortoftheSeptemberandbeginningofOctobertimeframe,we'veseenaprettysignificantuptickintermsofthedemand,thelevelofactivityoutthereandit'sprettymuchacrosstheboard.
We'restilldoingverywellintheM-2thisyearasit'sanewproductandacrosstheCJlinewe'realittlebitlightonCJ-3isthisquarterbutthat'sdrivenbythefactitwasreallyatransitionfromtheoldCJ-3totheCJ-3pluswhichisnowcertified.
Wefeelgoodaboutdemandforthat.
Sovereignsaredoingverywell.
XL'saredoingwell.
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page8 of 34
ProbablyhaveseenoneofthestrongestSeptember,Octoberlevelsofactivitythatwe'veseeninquitesometime.
JoeNadol(Analyst-JPMorgan):
Okay.
I' llturnitovertosomeoneelse.
Thanks.
Operator:
AndournextquestioncomesfromCarterCopelandwithBarclays.
CarterCopeland(Analyst-Barclays):
Goodmorning.
Thanks.
Iwonderedifyouguyswouldexpandalittleonthemiximpactthatyoucalledoutinindustrialasunfavorable,andthenperhapsjusttellusiftherewasanythingintheBellmarginthatwasone-timeyinnature,perhapsrelatedtothe--gettingtotheendoftheV-22multiyearcontractaheadofthetransitiontothenextone.
Thanks.
Scot t Donnelly(Chairman,CEO):
Sure,Carter.
SoontheBellfront,firstofall,therewasnothingunusualinthere.
IthinkifyoulookatthetotalCompanyintermsofcumulativecatchadjustmentsitwasonly$10millionacrossallofTextron.
TherecertainlywassomepositivecontributionthereinBellbutnothingthat'sunusualforusinatypicalquarter.
Itwasreallydrivenbystrongperformanceinthebusiness.
Asyouknow,we'restillfightingourwaythroughalittlebitoftrappedinventorycostsfromlastyears'issuesandinefficienciesaroundsomeofthelaboractivities.
Westillfaceheadwind.
Ithinktheguysdidanicejobofperforminganddeliveringaprettygoodmarginrate.
Justcontinuetotrytodrivethecostbasedowninthebusiness.
Withrespecttotheindustrialsegment,themargin--thisisthefirsttimeinawhilewe'venothadamarginexpansiononaquarterbyquarterbasisinthatbusiness.
It'salittledisappointingbutIthinkwe'llcallthatbackhereaswegetintothefourthquarterandstillturnayearthathasmarginimprovementinthebusiness.
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page9of 34
Intermsofthemix,largelydrivenwithinourautomotivebusiness,we'reseeingsomesignificantgrowthinourSERbusiness.
Aswetalkedbefore,theSERsdocomewithalowerreturnonsalesbecausethere'slargecomponentofcostthat'slargelyapasscar-throughonthatsothatdoesprovidesomedilutionintermsofouroverallROSnumber.
Thatwasprobablythebiggestmovingpartinthere.
It'sbeenatoughyear,frankly,intheGulf,intheturfbusiness.
IthinkyouprobablyhearthatfromeverybodyintheturfsidesoJakeishavingalittletougheryearthanusual.
ButtheCaltechpiece.
Lowmoldingtanksideistheprimarydriver.
CarterCopeland(Analyst-Barclays):
Great.
JustperhapsaoneortwoforFrank,justclarification.
OntheBeechinventorystep-upimpact,Ithinkyousaidlastquarteryou'dbeenthrough45of65youcalledout.
Yousaidanother10thisquarter.
Arewestillexpectingakindof$10millioninthefourthquarter?
Andthenwithrespecttothecorporateexpense,itlookslikegiventhepatternofthefirstthreequartersyoumightbeunder-runningthatfullyearexpectationslightly.
Isthatthecase?
Anddidthatcontributeatalltotheincreaseintheguidanceaswell?
Thanks.
FrankConnor(CFO):
Onthestep-up,yes,we'reat55nowasyoupointoutandweexpectabout10forthefourthquarterandthenwe'llcarryoverprobablyabout15intonextyearaswellintermsofadditionalstep-up.
Sothere'snochangethere.
Oncorporateexpense,no.Wealwayshavequarterlyvolatility.
Itrevolvesaroundkindofsharepriceactivityandjustlevelsofspend.
Sowe'restilllookingatabout$150millionfortheyear.
CarterCopeland(Analyst-Barclays):
Okay.
Great.
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page10of 34
Thanks,gentlemen.
Operator:
AndournextquestionwillcomefromNoahPoponakwithGoldmanSachs.
NoahPoponak(Analyst-GoldmanSachs):
Hi.Goodmorningeveryone.
Scot t Donnelly(Chairman,CEO):
Goodmorning.
NoahPoponak(Analyst-GoldmanSachs):
Scott,IwantedtoaskaboutBellcommercialandIguesswhatI'mwonderingisyouhadthisbigstep-upthepasttwoyearsinaprettystrongmarkettothiskindof180to215aircraft,callit,peryear.
Eachofthenexttwoyearsasyouseeitnow,doesthisbusinessstayupinthatkindofannualdeliveryrange?
Orwastheresomuchdemandfromaparticularendmarketoraparticularproductcyclerecentlythatthisbusinessneedstorevertbacktothe150to170kindofrangethatithadinalotofgoodyears,butnotquiteasgoodas2012and2013wereinthepast?
Scot t Donnelly(Chairman,CEO):
Ithinkwe'llstayintherangethatyoutalkedaboutatthebeginninghere.
Predictingtheendmarketobviouslyisabitofawildcardandweareseeingsomeslownessrightnow.
ButIthinkwhat'simportantisthatoursharehasincreasedoverthelastcoupleyearsasaresultofalotofwhatwedon't.
Eveninamarketthatwouldbelikethemarkethadbeenbackwhenwewereinthosecallit115to150days,Ithinkoursharehasimprovedandwouldkeepusinthatkindof180plusrange.
Lastyearwas213.Idothinkwe'llbedownsomewhatfromthataswelookatthebalanceofthisyear,justbecauseofwhat'shappeninghereinsoftness.
Idon'tseeusgoingbacktotheolddays,primariliesbecauseourshare'sinaupmuchbetterposition.
Aswegetinto2016andbeyondasyouaddinthe505andthe525.Wherewe'llbefromatotalnumberofdeliveriesofhelicopters.
I'mtryingtoisolatealittlebitfromthemarketpauseIcan'treallypredictthatbutIcertainlyhaveseenaaswetalkedaboutbeforeourshareincreaseandIthinktheproductinvestmentsarecertainlypayingoffand505,25willonlyhelpthatgoingforward.
NoahPoponak(Analyst-GoldmanSachs):
Onthemarket,canyouelaborateonwhereyou'veseensomeincrementalsoftness?
Isthatinoilandgasbecauseofoilpricesorelsewhere?
Anycoloryoucangiveusthere?
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
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Scot t Donnelly(Chairman,CEO):
Ithinksomeoftheoilandgashaswithinbeensofter.
We'reseeingslowdownsinEMS.Certainlythingsaroundtourism.
It'sreallykindofacrosstheboard.
AndIthinkit'sjustalotofpeopleconcernedaboutwhat'sgoingonaroundtheworldeconomically.
SoIdon'tknowthatwe'veseen--it'sprobablytoosoontoseewhatthereactionoftheoilandgasmarketistothedropsinthepriceofoil.
Butthat'savariableIthinkstillneedstoplayout.
Mostofwhatwe'veseenthisyearversuswhereweexpectedwasaroundthingslikeEMSandcertainlysomeoilandgashasbeenalittlesofterevenbeforewe'veseenthesechangesinoilprice.
NoahPoponak(Analyst-GoldmanSachs):
Okay.
Andyoucalledoutfavorablepricinginaviation.
Anyadditionaldetailyoucanprovidethereonwhereandtowhatdegreeyousawthat?
Scot t Donnelly(Chairman,CEO):
Intermsoftheaviationbusiness?
NoahPoponak(Analyst-GoldmanSachs):
Yeah,yeah.
Scot t Donnelly(Chairman,CEO):
Youknow,it'smoreorlessfirmedupacrosstheboardonourproducts.
Ithinkpartofthatagainisdrivenbynewproducts,havingtheM-2outthere,havingthesovereignoutthere,theCJ-3plusupgradeIthinkcertainlyhelpsus.Importantly,ontheusedside,we'veseenpricesarenotgoingupbutthey'refirmingandnotcontinuingtodropandthatresidualimpactcertainlyhasaknock-oneffectintonewaircraftpricingaswell.
NoahPoponak(Analyst-GoldmanSachs):
Andtheinflationcommentthat'sseparatefrompricing,canyoujustexplainwhatthatisandwhyit'sdifferent?
Youcalledoutpricingandinflationseparatelyinthepressrelease,Ithink.
FrankConnor(CFO):
We'veseendeflationataviation,justkindofdueto--inparttoourscaleandkindofpurchasingactivityandthings.
Sowe'vekindofbenefitedfromsomegoodcostproductivityonthesupplysideataviation.
Scot t Donnelly(Chairman,CEO):
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page12of 34
Ithinkthat'sjustinthegeneralcategoryofproductivity.
We'reseeingsomegoodproductivityintermsoflaborintheplants.
We'reseeinggoodproductivityintermsofsupplierpurchasing.
It'sreallyacrosstheboard.
NoahPoponak(Analyst-GoldmanSachs):
Okay.
Allright.
Thanksalot.
Operator:
AndournextquestionwillcomefromRobertStallardwithRoyalBankofCanada.
Robert Stallard(Analyst-RoyalBankofCanada):
Goodmorning.
IthoughtI'dactuallystartontheindustrialdivisionandwhetheryou'veseenanysignsofweakeninginsomeoftheseEuropeanmarketsoverthelastquarterandwhatyourexpectationsmightbeforthefinalquarterhere,includingforeignexchange.
Scot t Donnelly(Chairman,CEO):
Soforeignexchangehasn'tbeenabigissueforus.It'skindofanimmaterialnumberfortheCompanyandevenforwithintheautomotivebusiness.
ButIwouldsay,Robert,thatthere'snodoubtthatwehaveseenweaknessintheEuropeanautomarketandsoourEuropeansaleshavebeendownandthat'slargelybeenoffsetbythefactthatNorthAmericanmarketcontinuestobeupandtheAsianmarket'sbeenupslightly.
Sothecombinationofthoseothermarkets,andagain,alotofexpansioninnewproducts,particularlydrivenbySCRisoffsettingjustvolumedemandoftheEuropeanmodelsofcars.
Robert Stallard(Analyst-RoyalBankofCanada):
AndthenmaybeswitchingovertoBell.
YoutalkedinthepastaboutsomeofthepropectsforV-22exports.
Waswonderingifanything'sprogressedoverthelastquarter,whetherwe'vefirmedupsomeofthesepropects.
Scot t Donnelly(Chairman,CEO):
Iwouldsayno.
Robert Stallard(Analyst-RoyalBankofCanada):
Okay.
Scot t Donnelly(Chairman,CEO):
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
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Look,Robert,there'sagreatdealoffrustrationonourpart.
ThedealwithIsraelwhichhasbeentalkedaboutalotisstillmovingforwardbutit'smovingforwardataslowpace.
Therehasbeenprogress.
TheFMScasesareworkingtheirwaythroughthisprocess.
SoIthinkJapanhasbebeentalkedaboutalot.
Itcontinuestoprogress.
Itjustprogressesveryslowly.
IwishIcouldtellyouthatinonequarter'stimeIseealothappened,butittakestime.
Robert Stallard(Analyst-RoyalBankofCanada):
AndthenmaybejustafinaloneforFrank.
Anycommentonpensionandwhatthechangeinthediscountratecouldmeanfornextyear?
FrankConnor(CFO):
Obviouslythere'stremendousvolatilityinratesandreturnsandeverythingelserightnow.
I'dsaykindofoverallwedon'tbelieveitwillbeaheadwind.
Wethoughtitwouldbeatailwind.
Itwilldependalotobviouslyonwhathappensbetweennowandyear-end.
Butkindofasofaswelookatthesensitivityarounditrightnow,wethinkthatkindofitwillbenoworsethanflattishtypearea.
Robert Stallard(Analyst-RoyalBankofCanada):
Anddoesthemap21legislationhaveanychangeonyourcontribution?
FrankConnor(CFO):
Itpushesoutsome2016,2017requiredcontributions.
Itdoesn'thaveanyimpacton2015.
Robert Stallard(Analyst-RoyalBankofCanada):
Thankyouverymuch.
FrankConnor(CFO):
You'rewelcome.
Operator:
Andournextcall,questionwillcomefromJohnGodynwithMorganStanley.
JohnGodyn(Analyst-MorganStanley):
CompanyName:TextronIncCompanyTicker:TXTSector:Indust rialGoods
Industry:Aerospace/DefenseEventDescription:Q32014 EarningsCall
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Thanksfortakingmyquestion.
Scott,Iwasjusthopingtogopacktoyourcommentsonbisjetdemand.
Ithinkonthelastcalltheviewwaslegacyproductcontinuestobeunexcitingandnewproductissortofdrivingalltheorderactivity.
Nowyoubroadenedupthatcommentarywhichsoundsexciting.
Itsoundslikethelegacyproductisdoingbetter.
I'mjustcurioussortoftakingastepback,we'veseenalotofheadfakesinbisjetupticks.
AndyouguyshavedoneagoodjobkindofmoderatingexpectationsbutIcan'thelpbutinterpretyourcommentaryasverypositive.
What'sdifferentthistime?
Isthisnotjustseasonality?
Whyisthis--whyarethesedatapointsthatyou'reseeingnowmaybestrongerandmaybehavemoresignalvaluethanwhatwe'veseeninthepast?
Scot t Donnelly(Chairman,CEO):
Weprobablyfeelbetteraboutwherewearerightnow.
Again,partlyduetonewproduct.
We'vegottheM-2whichhasbeenverywellreceived.
We'vegotthesovereignthat'sdoingwell.
The10'sdoingfine.
It'sjustnota.Onemorenewproductoffering,sortofthemiddleoftheproductrange.
Butaswe'vesaidallyear,Ithinkthatthedemandhasbeen--weexpectittobefairlyconstantandinthetotalmarketplace,butmostdemandcreationwouldbeassociatedwithnewproductsandthat'swhatwe'vebeenseeinghappenthroughtheyearandthegoodnewswiththatobviouslyiswe'vehadafullyearofsomeofthosenewproductsliketheM-2sandsovereignand10iswe'vebeenabitmorelevelloaded.
Wedon'thavethishugefourthquarterrun-uptogettowhereweweretargetingintermsofthetotalyear.
Andthedemandisthereandsowefeelprettygoodaboutourabilityaswelookoutoverthequarterorsotofeelgoodaboutwhatthedemandlookslikeandwhatourproductionratelookslikeandwhatouravailableforsalelookslike.
Sothetoneofthemarketiscertainlyimproved.
ThebetterLinearityofbeingabletorun.
HelpingtodrivesomeofourcostandperformanceandsoIthinkthat'swhywefeelprettygoodaboutwhereweare.
Obviouslyaswelookinto2015onthebasictheorythatthenewproductsarewhathelpsdriveyourgrowthwiththelatitudeperformingaswellasit'sperforming,thewaytheaircraftlooks,thewayitflies,we'refeeling
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prettygoodaboutthedemandforthataircraft.
Wehavethefirstoneouttherenow.
It'salreadydoingabunchofdemoflights.
It'sgoingtobeoutthereat.It'sabeautifulaircraftanditwillhelpusinthe2015asthatthingcomesintorevenuegeneration.
JohnGodyn(Analyst-MorganStanley):
That'shelpful.
Andwhenwethinkaboutaviationmargins,youhadsomecommentaryaboutsynergiesandpricing.
ButifIjustsortofputI' llalltogether,asasimplepointcanweusethisquarter'smarginasabaseforforecastinggoingforward?
It'sverystrong.
Oraretherethingsinthenumberthatyouwouldhighlightassortofbeingirregularforwhateverreasonforthepurposeofforecastinggoingforward?
Scot t Donnelly(Chairman,CEO):
Idon'tthinkthere'sanythingirregularinthere.
It'sjuststraightperformance.
Andsothatkindofmarginratewiththatkindofvolumeiscertainlyexpected.
JohnGodyn(Analyst-MorganStanley):
Great.
Andthenjustlastoneoncapitalallocation.
AboutayearagowhentheBeechsituationIthinkwasabithotter,weweretalkingaboutbuybacks.
ButobviouslytheBeechdealIthinktookthatoffthetableforabit.
You'vebeenverysuccessfulandinfactacceleratingsomeofthesynergiesonBeech.
Atwhatpointandisittimenowtohavetheconversationaboutbuybacksagain?
Thanks.
Scot t Donnelly(Chairman,CEO):
Sowe've--ourpositionofficiallyonbuybacksasyouknowisthatwe'lldoenoughtooffsetdilutionofemployeeprogramsandthatwewouldlookatsortofadditionalbuybacksonanopportunisticbasisandsowediddointhequarterabout$4million--I'msorry,4MiltI4millionsharesofbuybackinQ3.
JohnGodyn(Analyst-MorganStanley):
IguessImeanmoreofalargerscalebuybackwithcashflow.
Scot t Donnelly(Chairman,CEO):
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Well,Ithinkatthispointwe'realsostilldoingthingslikepayingdownourbanklinesassociatedwiththeacquisitionofBeechcraft.
Sowehavetosortofhaveabalancehereintermsofwhatwe'reallocatingintopayingdownthedebtassociatedwithBeechaswellastryingtocontinueabuyback.
SoIwouldn'texpectustocomeoutandannouncesomecommittednumber.
Ithinkwe'llstayonthecommitmentofavoidingdilutionandopportunisticallyexecutingbuybackprogramsasweseefit.
Andthegoodnewsis,ourcashflowgenerationandstrengthofthebalancesheetallowsustobeabletodoboththosethings,aswe'vebeendoing.
JohnGodyn(Analyst-MorganStanley):
Thanksalot.
Operator:
AndournextquestioncomesfromJonathanWrightwithNomura.
JonathanWright (Analyst-Nomura):
Acouplequestionsfromme.Firstly,probablyforFrank,backingintoyourrevisedcashflowguidanceIthinkyou'relookingforsomethinglike$650millioninoperatingcashflowin4Qonnetincomeofaround$200million.
Soyougetsay$100millionofthatfromdepreciationbutthere'sstill$350milliongap.
Canyoujustmaybetalkthroughthat.
Isthatabigworkingcapitalswingoristhereanythingelseunusualinthat4Qcashflow.
FrankConnor(CFO):
There'snothingunusual.
Ifyoulookatkindofourseasonalityandquarterlyprogression,Q4isalwaysaverystrongquarter,bothfromaprofitabilitystandpointbutalsofromaworkingcapitalperformancejustgiventheseasonalityofthebusiness.
Sothere'snothingunusualinthere.
JonathanWright (Analyst-Nomura):
Forthefullyearyouexpecttohaveapositiveworkingcapitalmovement,somethinglike$100millionto$200million,isthatfair?
FrankConnor(CFO):
Ihaven'tworkedthroughwhatthatmeansintermsoftheoverallworkingcapital.
Butifyoulookatthefourthquarterthisyear,thisyear'sfourthquarterprogression,basedonthatguidance,isactuallydownsignificantlyfromlastyear.
Soagain,there'snothingunusualintheworkingcapitalside.
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JonathanWright (Analyst-Nomura):
Okay.
Great.
AndthenyoutalkedaboutChinaandhelicoptermarketinyourpreparedremarks,bothofthosehadagoodorderthisquarterfromChina.
Obviouslyalotofpotentialthere.
Isthereanythingchanginginthatmarket?
DoyouseeanypropectsforactuallysomedemandfromChinacomingthrough?
Scot t Donnelly(Chairman,CEO):
We'vehadgooddemandfromChinaoverthelastcoupleyears.
Ithinkpartofthatisjusttheeconomyisgenerallydoingwell.
There'sbeenalotofliberalizationofairspaceintheloweraltitudeswhichiswherehelicoptersfly.
SoeverythingfromcorporatetoEMStoparapublic,inspection,utility,infrastructure,surveillance,thingslikethat,whichdrivesalotofthehelicoptermarketaroundtheworld,we'rejustcontinuingtoseethatmarketgrowinChinaandwe'vebeendoingverywelloverthere,actually.
We'repleasedwithourpositioninChinaandbeingableto--it'sgettingtobeabigenoughmarketandabigenoughdemandwhichiswhat'sdrivingustostarttodomoretraining,maintenancetrainingaswellasairtrainingovertheretohelpsupportthedeploymentofouraircraft.
JonathanWright (Analyst-Nomura):
Okay.
Great.
Andthenjustonefinaloneonlatitude.
Youtalkedaboutincreasingtherangeofthataircraft.
Isthereanypotentialtogettheexistinglatitudemodeltoa3000nauticalmilerangeorwouldthatneedabiggerredesignoranewaircraft?
Scot t Donnelly(Chairman,CEO):
Thatwouldbeabiggeraircraft,forsure.
JonathanWright (Analyst-Nomura):
Okay.
AndIguessprobablytooearlytotalkaboutthisbutanyplanstocompeteinthatsortofcoasttocoastmarketwithaflatbodyjet?
Scot t Donnelly(Chairman,CEO):
Probablynotgoingtomakeanynewproductannouncements.
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JonathanWright (Analyst-Nomura):
Thanks,guys.
Scot t Donnelly(Chairman,CEO):
Ifwedid,couldIsignyouuptheywouldthatbeacommitmentofanykind?
JonathanWright (Analyst-Nomura):
Sure.
Operator:
AndournextquestioncomesfromPeteSkibitskiwithDrexelHamilton.
PeteSkibitski(Analyst-DrexelHamilton):
Goodmorning,guys.
Scot t Donnelly(Chairman,CEO):
Hey,Pete.
PeteSkibitski(Analyst-DrexelHamilton):
Imighthavemisseditguys.
Areyoustillexpecting$4.8billionataviationsthisyearincluding1.5atBeech?
FrankConnor(CFO):
It'sclosetothat,Peter.
Mightbejustabitlower,notonjetdeliveriesbutlittlebitlessonusedandaupcouplefewerCaravansbutinthatrange.
PeteSkibitski(Analyst-DrexelHamilton):
AndIguessScott,obviouslyjusttryingtofigureoutthecyclehereonbisjetstosomedegree.
HowdoyouthinkaboutBeechbeing--revenuebeingdownsequentiallyandthenIthoughtSovereignPluses,youmadesomepositivecommentsbutIthinkunitdeliveriesweredownsequentiallyalso.
I'mjustwonderinghowyouthinkaboutthatandmaybeyoucangiveusalsokindofwhatbook-to-billwasinthequarterforCitations.
Scot t Donnelly(Chairman,CEO):
Let'ssee,Pete.
Wedon'treallykeepveryclosetrackofyear-over-yearcompsontherevenuenumberwithBeechjustbecauseBeechwasn'tpartofusandwe'regenerallyreluctanttotrytolooktoomuchatthefinancials.
Butsequentially,it'saquestionofsequential,I'msorry.
We'redownbutPresidentbutit'sonlyacoupleofaircraft.
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We'vebeenprettylinearabouttheKingAirproductline.
Ithinkwecontinuetofeelgoodaboutwhereweareandthedemand'saboutwhatweexpected,plusorminusacoupleofaircraft,it'saboutwhereweexpectedandfairlylinearfromquartertoquarter,whichisgood.
OntheSovereignPlusside,again,anaircraftortwo,demandisstillverygood.
Ithinkwe'regoingtobewhereweexpectedtobeonthetotalyear.
Sothebook-to-billintheseareasisprettyclosetoonetoone.
We'renotreallyseeingawholelotofchangefromwhatweexpected.
Again,onasequentialbasis,wemightbeplusorminusacoupleaircraftbutit'saboutwherewewouldhaveexpectedtobe.
PeteSkibitski(Analyst-DrexelHamilton):
Kindofstillsortofaspottishmarketbutyoujustintuitivelyfeelalittlebitbetterthanyoudidthelastquarter,isthatafairstatement.
Scot t Donnelly(Chairman,CEO):
Yeah,wedo,Pete.
Look,theQ3isusuallyprettysoft.
YoulookattheamountoforderactivityintermsofwhatflowsinJulyandAugustisgenerallyprettylightandasyouknow,Q4usuallytendsbealittlestronger.
Peoplearebackonholiday.
They'relookingatstuff.
Ofcoursethere'salwaysfolksthathavecapitalattheendoftheyearandfromataxstandpointwouldjustassoontakedeliveryinQ4.Partofthis,again,they'resmallnumberssequentiallyfromQ2toQ3,butIthinkeasilywithinthenormalcycleofhowweseethatmarketworking.
PeteSkibitski(Analyst-DrexelHamilton):
Okay.
Andthenjustlastquestiononlatitude.
Canyoureminduswhatquarternextyearyou'reexpectingthefirstlatitudedeliveryandhaveyoubuiltanybacklogyetandhowshouldwethinkabouttheslopeoftheproductionramponthatprogram?
Scot t Donnelly(Chairman,CEO):
Sowehavebuiltsomebacklog.
We'restillexpectingtohavecertificationinQ2.Asyouknow,wedon'tfullycontrolsthatprocess.
Soifit'searlyinQ2,we'llgetsomesalesinQ2.ButcertainlythevastmajorityofthelatitudesalesIwouldexpecttoseeinQ3andQ4.
PeteSkibitski(Analyst-DrexelHamilton):
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Andisthatgoingtobeafastrampor--
Scot t Donnelly(Chairman,CEO):
Yes.
PeteSkibitski(Analyst-DrexelHamilton):
Okay.
Scot t Donnelly(Chairman,CEO):
It'salreadybeingramped.
Thebeautifulthingaboutthisaircraftisalotoftheaircraftintermsofthewings,allthecockpitsystemsarecommontowhatwejustdidontheSovereignPlus.
Soobviouslyit'saverynewfuselage,muchlargercrosssectioncabin,butanawfullotofthekeycomponentsandtechnologywedevelopedaspartoftheSovereignPlusprogram.
Soweactuallyrunthesethingsassortofamixedmodelline,ifyouwill.
Ifyougointothefactory,wecanrunthingsdownthelineandwhetherit'salatitudeorasovereignitflowstogetherquitenicely.
Fromaproductionrampperspective,it'sonethatdropsintoourlineverynicely.
PeteSkibitski(Analyst-DrexelHamilton):
Thankyou.
Operator:
AndournextquestioncomesfromCaivonRumohrwithCowen&Company.
CaivonRumohr(Analyst-Cowen&Company):
Yes,thankssomuch.
SoyourguidancefortheyearasIrecallyouwereat$2billiononsystems.Soifyou'redown300,it's$1.7billion,andsoyou'rebasicallysayingvolumewilldoubleinthefourthquarterfromthethird.
Howcome?
Andthatseemslikeahugejump.
Scot t Donnelly(Chairman,CEO):
Well,Cai,it'sdrivenbytheTCDLprogram.
We'vebeenworkingonthisprogramforwhatseemslikeaverylongtime,goingthroughallthedevelopmentwork.
AsIdsaidinthepreparedremarks,wenowhavereceivedapprovalfromthecustomertoaccepttheunitsinthefourthquarter.
Thoseunitshavetogoyouthroughtheirfinalacceptancetest.
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There'saflighttestinvolvedwiththeairvehiclesandsuch.
Thatwillhappenhereoverthecourseofthefourthquarter.
Butwedonowhavetheirapprovaltogoyouaheadandcommencetheproductionshipmentsandsothat'swhythefourthquarterwillbedisproportionatelyhigherinrevenuethanwhatwe'veseen.
Becausewebuilttheseunits,Cai.
They'vebeenmanufacturedandthey'rereadytogo.Nowthatwehaveapprovalwecangoaheadandgoyouthroughtheformalitiesofthefinalproductiontest,flighttestandacceptanceandweexpectthattobehappeninghereinthefourthquarter.
CaivonRumohr(Analyst-Cowen&Company):
Istheresortofadisproportionatedeliveryinthefourthquarter.
Ifweannualizethatrate.
Evendon'thaveanyvehiclesinthefourthquarter.
Scot t Donnelly(Chairman,CEO):
Right,correct.
We'vehadnosalesassociatedwiththatprograminanyoftheprecedingquarters.
Soit'sgoingtobeabigspikeindeliverieshereinQ4andagain,theonlyreasonthat'spossibleisthesethingshavebeenbuilt.
We'vebeenbuildingthemforthebetterpartofthelastyearorsoandit'sjustamatternowofhavingtodidthroughtheproductiontestandacceptanceasopposedtonormalproductionflow.
Sowithoutadoubt,Q4ismuchheavierandasyougothrough2015,you'llseeanormalflowofdeliveriesofthoseunits.
Notallofthecontractunitsallinonequarter.
CaivonRumohr(Analyst-Cowen&Company):
Gotit.AndsoifwegotoBell,youdid12V-22s.
AsIrecall,you'relookingfor36fortheyear.
Lookslikeyougodowntosixinthefourthquarter.
Sothemixwhichlooksveryfavorableinthethirdwouldlookprettyleaninthefourth.
Isthatcorrect?
Oristhefullyearnumberchanged?
Scot t Donnelly(Chairman,CEO):
No,thefullyearnumberhasn'treallychanged,Cai.
Lthefourthquarteristhebeginningofthenextcontractyearandsowe'renowsteppingdownfromthemultiyeardeliverytothenextmultiyear.
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TherunrateofV-22sisnowgoingtostepdownandstaydownatthatlevelaswegothroughthenextfewyears.
CaivonRumohr(Analyst-Cowen&Company):
Giventhatyouknowyou'regettingastep-offandyouhavesuchagreatmixinthethirdquarter,doyoustillfeelcomfortableasyoulookatnextyearthatyoucanholdBell'sMarch’senginesMarchmarginsabove10%?
Scot t Donnelly(Chairman,CEO):
Absolutely.
We'restilltargetingthe12%number.
Ithinkthereasonyou'reseeingthekindofmarginnumbersyou'reseeingandcertainlyourexpectationsformarginsinthefourthquarterisbecausewe'vebeentakingalotofcostactionstopreparethebusinessforthatlowerrunrateofV-22sandIfeelprettygoodaboutwhereweareonthat.
Theteam'sdoneanicejobofgettinguswhereweneedtobe.Obviouslywe'renotgoingtotalkaboutaguideto2015yet.
Atthispoint,thenumberwehaven'tdeterminediswhatourexpectationshouldbeonthecommercialsideofthemarket.
Wecertainlyknowwhereweareonthemilitarizedsideofmarket.
Weknowwhatwe'vedoneintermsofcosts.
We'restilltargetingthe12.Whereweendupwillhavelargelytodowhat'sourperspectiveonvolumeinthecommercialmarketthey2015.
CaivonRumohr(Analyst-Cowen&Company):
IfwegoovertoCessna,you'veseenapick-upindemandinSeptemberandOctober.
Normally,youkindofsetyourproductiontargetsinthefourthquarterfornextyear.
What'syourstrategygoingtobeinkindofaestablishingtheproductiontargetsforCessna?
Scot t Donnelly(Chairman,CEO):
They'velargelybeensetbecausetheleadtime,thecycletimeIshouldsayonmanufacturinginthejetworldisdependingonthemodelandobviouslywehavesomedegreesofflexibilityfrommodeltomodel,butyou'reanywherefromsick,nine,12months.
Sowe'realreadyrunningtheproductionlineswiththevolumesthatwewouldexpecttoseein2015includingnewthingslikethelatitude.
Now,wecanmakeandalwayshavetheabilitytomakeadjustmenttossthatandaswegoquartertoquarterwedothat.
Butforthenextcouplequarters,it'sprettywellset.
CaivonRumohr(Analyst-Cowen&Company):
Ifitisprettywellset,whatkindofflexibilitydoyouhavetotakeitupandtowhatextentareyoumoreinclined
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toleaveitandjustbasicallygetstrongerpricing?
Scot t Donnelly(Chairman,CEO):
Ithinkagain,atthispointweare--ourstrategyiswhatweseeinthemarketplace,whatwestillbelieveisgoingtohappeninthemarketplaceisrelativestabilityintermsofoverallmarketdemandandmostgrowthorupsidedrivenbynewproducts.
Soaswethinkaboutourproductionratesfornextyearaswe'vebeenthinkingaboutourproductionratesnextyear,that'skindofwhatweforecastedthisyearandwhatwe'rethinkingaboutfornextyear.
Sowe'llkeepmostofthevolumesofproductsaboutwherethey'vebeenandwewouldexpecttoseesomeupsidefromgrowthdrivenbytheintroductionoflatitude.
CaivonRumohr(Analyst-Cowen&Company):
Andthenintermsofcashdeployment,Imean,withthishugestep-upindeliveriesonTCDLs,yourcashflow'sgoingtobeverystronginthefourthquart,kindofasyou'veindicated.
Howcomeyoudon'tbuymorestock?
What'sthecashbeingsavedfor?
Scot t Donnelly(Chairman,CEO):
Cai,asyouknow,asFranksaid,we'reapitbitseasonalintermsofcashsowedogeneratealotofcashtypicallyinthefourthquarter.
Thatismostlycomingoutofworkingcapital.
Usuallyinventoriesprincipallyaroundtheaviationandhelicopterbusiness.
We'llcontinuetodeploycashaswe'vetalkedaboutinthepastandthatislargelyaroundthepaydownondebt.
WedidtakeonafairbitofdebtassociatedwiththeBeechcraftdeal.
We'vealreadypaiddownacouplehundredmillionofthat.
We'llcontinuetopaythatdown.
We'llcontinuetobeopportunisticaboutstockbuybacks.
Wetookout4millionshareshereinQ3andwe'llcontinuetolookforopportunitiestobuybackadditionalaswethinkitmakessense.
CaivonRumohr(Analyst-Cowen&Company):
Thanksalotandgoodjob.
Operator:
AndournextquestionwillcomefromMylesWaltonwithDeutscheBank.
MylesWalton(Analyst-DeutscheBank):
Thanks,goodmorning.
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FirstoneisaclarificationonthemarginsguidanceforCessna.
Iimagineifthat'swheremostoftheguidanceuptick'scomingfromyoumustbelookingatsomewhereinthemid-4s.
Isthataboutright.
Scot t Donnelly(Chairman,CEO):
Idon'tthinkwe're--wereallydon'twanttogetintoguidingoneachindividualsegmentbutyou'recertainlycorrect.
Theupsideofwhat'sdrivingtheraiseiscertainlybettermarginsintheaviationsegment,largelyoffsettinglowerinthesystemsbusinessasaresultofsomeofthevehicledelaysandagainwefactorinsomesoftnessontheBellcommercialsidewhichwe'vealreadyfactoredintoournumbersmanyitisdrivenbytheaviationbeatbutIdon'tthinkwe'regoingtoreviseanykindofguidanceonasegmentbysegment.
MylesWalton(Analyst-DeutscheBank):
Allright.
Itried.
AndthenaftermarketcommentarywithinCessnaandBell,ifyoucancommentonthetrendsyou'reseeingthere.
IguessDougalludedtomaybethatwasmaybealittlebitonthetoplinepressureforthefullyear,butjusttheoveralltrendinthequarterthatyousawinthetwosegmentswouldbegreat.
Scot t Donnelly(Chairman,CEO):
We'restillseeingmidsingledigitgrowthinourservicefranchisesinboththeaviationandtheBellhelicoptermarketsandthat's--there'salittlevolatilityfromquartertoquarterbutit'sbeenprettysteadyandaboutwherewewouldexpectkindofatopline,midsingledigitsortofnumbers.
It'sobviouslyfromarecordedbasisalothigherthanthatbecauseoftheBeechintegrationforthisyear.
Butintermsofactualgrowth,it'sprobablymidsingledigit.
MylesWalton(Analyst-DeutscheBank):
Andtheonelastone,maybeforyou,Scott.
Asyourolloutthenewproductsobviouslythere'saninitialbuzz,andinitialpent-updemandandthenoftentimesthere'sabitofahoneymoonwhereitfades.
SawitontheCJ-4.You'veseenitonotherprograms.HowdoyouthinkaboutkindofthetimingoflaunchingobviouslytheM-2'sgotagreatreception.
Thesovereignlikewise.
Isitaoneyearkindofphenomenonandthenyounormalizetowherethedemandis?
Howdoyouthinkaboutthat?
Scot t Donnelly(Chairman,CEO):
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Ithinkinthismarketit'sreallycertainlyourexpectationwoesbethatdeliveriesonthingslikeM-2sandsovereignwillmoreorlessstabilizewheretheyare.
Idon'tthinkthatthere'sa--therewerecertainlybackinearlierphasesofthecyclewhereyouhadahugeuptakeandthenkindofwentbacktoanormalizedlevel.
We'renotexpectingbigchangesgoingforwardaswelookatthingslikeanM-2orasovereign.
Sothat'swhyIsay.
Ithinkourexpectationisforthosethingswhicharesortofintransitiontobeingalegacyproductifyouwillisthey'lljustfollowgeneralmarketdemand.
MylesWalton(Analyst-DeutscheBank):
Okay.
Gotit.Thanks.
Operator:
AndournextquestioncomesfromJulianMitchellwithCreditSuisse.
JulianMitchell(Analyst-CreditSuisse):
Hey,guys,it'sCharlieforJulian.
Iknowthatyouguyssaidyouwouldn'tcommentonthekindofsegmentmarginsbutjustwascuriousifyoucouldmaybejustcommentatsystems,justgiventhebigkindofswinginrevenueguidancefortheyear,ifthat'spositiveforthemarginsornegativeornegligible.
Scot t Donnelly(Chairman,CEO):
Idon'tthinkwewanttogetintosegmentmarginguidance.
Sorry.
JulianMitchell(Analyst-CreditSuisse):
Okay.
Thanks.
Operator:
AndournextquestioncomesfromJasonGreerwithCiti.
JasonGreer(Analyst-Citi):
Iknowyoutouchedonthisbrieflybeforebutmaybejustalittlebitmorecolorifyoudonnedmindontheorderactivityyou'veseenhereinSeptemberandOctobertotheextentthatresultsindeliveriliesinthefourthquarterandwhetherwe'rebeginningtotakeordersforperiodsfurtherout,andnowactuallystarting.
Buildsomebacklog.
Scot t Donnelly(Chairman,CEO):
Absolutely,Jason.
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Ithinkthat'swhereweare.
Thisisprobablythepartofthepositivefeelingthatwehaverightnowisthatweclearlyseeafourthquarterwheretheamountofaircraftwehavelefttosellisnotasmanyasthatweprobablycouldsellorthatthisamarketdemand.
ThatwouldleadustostartmovingdeliveriesintothefirstquarterofnextyearwhichIthinkisaveryhealthythingforthebusiness.
Gettingoutofhavingsortofanegativeoronetoonebook-to-bill,Idon'tthink--andwe'vetalkedearlier,Jason.
Ithinkthatthedaysoftwoyears--crazynumbersofbacklogarenotsensecall.
Butwe'dsurebeabletorunamuchmoreefficientoperationandhaveamuchhealthierindustryifwehadsixmonthstoninemonthsofvisibilitysothatwe'renothavingtosortofdoforecastingaroundourproductionlinesandcustomizationsandthingslikethat.
Sothere'snoquestionthatifwecangettoapointherewherewe'reatleastthreetosixmonthsoutthat'samuchhealthierbusiness.
AndIthinkwe'relookingatthefourthquarterasthefirsttimewe'veseeninawhilewhereweclearlyseemoredemandoutthereinthemarketthanwhatwethinkwehaveaircraftavailabletosellinthefourthquarterandthatwillnecessarilypushsomethingsintothefourthquarter,orintothefirstquarter,I'msorry,whichisgood.
JasonGreer(Analyst-Citi):
Okay.
That'sgreat.
Andthenasyoulookatthetwobusinessestogether,BeechandCessnaandthentheacquisitionswhichyoubroughtinhereoflate,canyoujusthelpusorexplaintoushowyou'rethinkingaboutseasonalityinthat--intheaviationbusinessgoingforward.
Historicallyobviouslyseensome.
Isthatbecomingmoremuted?
Diditgoawayalltogetherorarewestillgoingtocontinuetoseeseasonalityinthesecondhalfoftheyear?
Scot t Donnelly(Chairman,CEO):
Ibelievethere'salwaysgoingtobeaseasonalityaroundthefourthquarterandthat.
Youhavealotofcustomersouttherethatgiventheirdruthersthey'drathertakedeliveryofanassetwheretheycantakeayeardepreciationinthecurrentyearratherthanbuyingthataircraftinthefirsthalfofthefollowingyear.
Isthatahugenumber?
Idon'tthinkit'sahugenumberbutIdon'tthinkthatthe--someseasonalityaroundfourthquarterwillevergoawayinthisindustrybecauseofthat.
Thegoodnewsis,again,aswelookedatbothofourKingAirbusinessandtheCitationjetbusiness,ithasbeenmorelevelloadedthisyearandthatpartlyreflectssomebetterdemandcomingbackintothe
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marketplaceandobviouslyweprefertoseethat.
Wewouldbemuchbetterrunningtheseoperationsonamorelinearbasis.
We'veseenmorelinearbehaviorintermsofcustomersthisyearbutIstillthinkyou'realwaysgoingtoseesomefourthquarterdemanddrivenaroundtax.
JasonGreer(Analyst-Citi):
Okay.
Andthenthelastonefrommeisontheindustrialside.
Arethereanynewproductsorprogramsthatyou'vebeendesignedintoandanyofthosebusinessesontheindustrialsidethatwillleadtoanaccelerationofrevenuesoverthenextseveralquartersinto2015?
Scot t Donnelly(Chairman,CEO):
Look,IthinkifyoulookedatourCaltechsontheautomotivesideofthings,we'vehadalotofnewvehicle,newplatformwinsinboththefueltanksideaswellasalotaroundourselectivecatalyticreductionbusiness.
Therewasdemandforthatvehicle,thatfamilyofvehiclegrowsinthemarketplace,that'sgoingtodrivenicerevenuegrowthforourbusiness.
AsIsaidearlier,theonlychallengeforusthereisitdoesusuallyhavealowerROSbecausepartofthatsystemisanacquiredpartwhichwepassthroughatalowerROSthanwouldbetypicalofwhatwemanufacturejustbecauseit'sahighdollarsourcedcomponent.
Butclearly,revenuegrowthandoverallnotgrowthwillbedrivenbythatbusinessandsoit'salotofnewplatformswhichwe'vewonandnewproductaroundtheSERsystem.
Westillseenicegrowthbothorganicallyandthroughacquisitionsinthevehiclebusinessaswellasourtoolandtestbusiness.
SoIthinkgenerallyspeakingtheindustrialsegmentIthinkwillprovidenicegrowthnextyear.
JasonGreer(Analyst-Citi):
Okay.
That'shelpful.
Thankyou.
Operator:
AndournextquestionwillcomefromGeorgeShapirowithShapiroresearch.
GeorgeShapiro (Analyst-Shapiroresearch):
Goodmorning.
Scott,givenhowstrongyousaidSeptemberandOctoberhasbeen,isitfairtoassumethatthepricingmightevenbesomewhatbetterintheSeptember,Octoberquartersthanwhatwesawinthestrongmarginsinthecurrentquarter?
Scot t Donnelly(Chairman,CEO):
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George,Iwouldn'tbetoobullishonthepricingside.
Ithinkthegoodnewsisit'sfirmedup.Andagain,thisisamarketdynamic.
Asyou'vegotmorecustomersoutthere,itgivesustheabilitytoholdthelineonpricing.
SoIdon'tknowthatweseeastepfunctionbyanymeanshere.
Idon'twanttomisleadanybody.
It'snotlikethemarketisstrongenoughtodemandthekindofpricingthatwasinthelastcycle.
Butcertainlyithasallowedustofirmuppricingandatleastbestable,maybewithsomesmallgainsbecausethemarketdynamicisstronger.
It'sjustsupplyanddemandworkingalittlemoreinourfavor.
GeorgeShapiro (Analyst-Shapiroresearch):
Andthestrengthyoutalkabout,wasthatsimilarinternational,domesticorweakerinternational,givenwhatweallreadabout?
Scot t Donnelly(Chairman,CEO):
Youknow,George,ourorderintakeinQ3IthinkwasstillslightlybiasedtotheAmericas,butit'sprobably60/40,somewhereinthere.
Itbouncesaroundalittlebitfromquartertoquarter.
It'snotwayoutofline.
GeorgeShapiro (Analyst-Shapiroresearch):
Okay.
Andjustsomeclarification.
Giventherevenuesyou'resuggestingforCessnainthefourthquarter,lookslikewe'llprobablyget70plusdeliveriesinthefourthquarter.
Scot t Donnelly(Chairman,CEO):
No.70wouldbe--I'dlovetohave70.That'sanawfullybignumbermanyIdon'tknowifwewanttogetintoexactunits,George,butImean,again,Ithinkwe'veusuallyseenaverageaircraftrevenuesIthinkkindofhowweusuallythinkaboutitbeingsomewhereintheeighttoninerange.
So70somethingwouldbeaprettyhugenumber.
GeorgeShapiro (Analyst-Shapiroresearch):
Okay.
Scot t Donnelly(Chairman,CEO):
Therevenuenumberwillbehigherthanthenumberwetalkedabout.
GeorgeShapiro (Analyst-Shapiroresearch):
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Okay.
Andthenonelastone.
Doyouhaveanycoloronwhetherthebook-to-billofoneforaviationwassimilaratbothBeechandCessna?
Scot t Donnelly(Chairman,CEO):
Itwasprettyclose,George,prettycloseonbothBeech,Cessna,militaryversuscommercial.
It'sbeenprettyclosetoonetooneacrosseveryway--everydimensionthatwewouldlookat.
GeorgeShapiro (Analyst-Shapiroresearch):
Andyouhowaboutusedmeansalesusedplanesalesinthequarterversuslastyear'squarter?
Muchdifferent?
Scot t Donnelly(Chairman,CEO):
I'dhavetolook,checktherevenuenumber.
Weusuallyhavebeenlookingatthatonesequentially,George,soI'msorryIdon'thavethatnumberonthetipofmytonguehere.
Certainlyonasequentialbasisitwasbetter,butwe'llhaveto--
FrankConnor(CFO):
We'llgetbacktoyou.
Wasaboutflatfromarevenuestandpoint.
Scot t Donnelly(Chairman,CEO):
Onayeartoyear?
FrankConnor(CFO):
Onayeartoyear,yes.
GeorgeShapiro (Analyst-Shapiroresearch):
Andupalittlebitsequentiallyyoujustsaid,Scott?
DougWilburne (VP,IR):
HewassayingIthinkwasaveragesellingpricewasupalittlebit.
GeorgeShapiro (Analyst-Shapiroresearch):
Okay.
Icancallyouoffline,Doug.
Scot t Donnelly(Chairman,CEO):
Wecangetthoseforyou,George.
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Wejustdon'thaveit.
GeorgeShapiro (Analyst-Shapiroresearch):
Thanksalot.
Goodnumbers.
Operator:
AndournextquestionwillcomefromSheilaKahyaogluwithJeffries.
SheilaKahyaoglu(Analyst-Jeffries):
Thanksfortakingmyquestion.
IguesshowdoyouthinkabouttheunderlyingprofitabilityfortheBeechcraftbusinessasitstandstodayandwhereyouseetherunrate,doyouthinkyouneedadditionalinvestmentsintheKingAirportfolioandwhatabouttheservicebusiness,isthereadditionalcapitalrequiredtoincreasethelevelofservicethere?
Scot t Donnelly(Chairman,CEO):
Sheila,wedon'ttrackorreportseparatelytheBeechnumberandpartofthatisbecausewe'vecompletelymergedtheseenpatmergedentities.
Alltheoverheadpools,alltheengineering,R&D,whatnotisalltreatedasonething.
Iwouldn'tevenhavetheabilitytobreakoutoverallprofitabilityof,say,historicallyBeechversushistoricalCessna.
ButIthinkwe'reatapointwherewefeelprettygoodabouttheproductivitythatisbeendrivenandthat'sbenefitingobviouslyacrossalltheproductlines.
IntermsofR&D,wewillnowandwealreadyarelookingattheturbopropproductlinethesamewelookatthejetproductlineandlayingoutyounewproductroadmapplans,upgrades,enhancements,allthekindofthingspeoplehaveexpectedustodointhejetbusiness.
AbsolutelytherewillbeinvestmentontheR&DsideintotheKingAirandotherhistoricalBeechproductsaswegoforward.
Wethinkjustaswedoonthejetsidewe'llhavesomegoodthingscomingoutinthemarketastimegoeson.Intermsofcapital,Idon'tseeanybigcapitaloutlays.
We'vegotIthinkaverystrongservicenetworknowaroundtheworldandIthinkwe'recapcapitalizingonthat.
We'retryingtotakemostofoursitesnowandmakeitsothey'recapableofdoingnotjustBeechcraftbutalsodoingCitationjetsoriftheywereCitationjetsnowtheycanalsodoBeechcraft.
Thereissometoolinginthatjusttomakesureeachofthesiteshascapabilitytodobothbutit'snotamaterialnumber.
Similarlyontheoverallaviationbusinesssideofthings,whatCapExisinthereisreallydrivenprimarilybynewproductintroductions.
AndsoIdon'tseeanyappreciablesortofchange,ifyouwill,overwhatwe'veseeninthelastcoupleyearsbecausetheflowofthenewproductswillbeprettyconsistentwithwhatwe'veseeninthepast.
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SheilaKahyaoglu(Analyst-Jeffries):
Okay.
Thankyou.
Andsojustisthereanywayyoucouldprovidearangeofwherethe--whetherit'sKingAirortheCessnapistonportfolioisa.Isthatataboutabreakeven?
Scot t Donnelly(Chairman,CEO):
We'renotgoingtogointomarginlevelsbytheindividualproductlines.
SheilaKahyaoglu(Analyst-Jeffries):
AndthenjustlastquestionintermsofBeechcraftsynergies,youmentionedyou'reahead.
I'mguessing2014haslargelybeenfocusedonheadcount.
Intermsofwhat'sleftfor2015,isitsupplychain?
Isitadditionalfootprintconsolidation?
Howcouldwethinkaboutthat?
Scot t Donnelly(Chairman,CEO):
Mostlywhat'soutin2015reallyisaroundsomefootprintconsolidation.
Wehavesomewarehousingandsites,largelytodowithourdistributionofsparepartsandserviceswherewe'regoingtoconsolidatesomeofthat.
Andthentherearesomeopportunitiestodosomeconsolidationsinsomeofthebackshops,ifyouwill.
Sowedon'tenvisionanysignificantchangestofinalassemblyoperations.
Thosearerunningprettywellandareprettyfocusedaroundthedifferentmodeltypesbutthereisanawfullotofstuffwedotodaywherewehavetwoseparatecompositeoperations,wehavetwoseparatemachiningandmetalbondingandalotoffabricationsortofstuffandwewillcontinueaswegoforwardtoseeconsolidationofthose,toagaindrivebettercostefficienciesandbetterutilizationofthosefacilities.
SheilaKahyaoglu(Analyst-Jeffries):
Gotit.Thankyou.
DougWilburne (VP,IR):
Ithinkwe'lltakeourlastcallnow,operator.
Operator:
ThatwillcomefromRonEpsteinwithMerrillLynch.
RonEpstein(Analyst-MerrillLynch):
Goodmorning.
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Sojustwanttofollowuponkindofoneofmyfavoritesubjectswithyouguys.
What'sgoingonwiththeScorpion?
Areweanyclosertoacustomerorifyoucouldjustgiveusanupdatethere.
Scot t Donnelly(Chairman,CEO):
Look,Ron,I'dsaywe'regettingcloserallthetime.
Wehaveabunchofcustomers,frankly,thatwe'retalkingto.There'salotofactivityinthemarket.
There'sanumberofcountriesthataregoingtobeputtingoutRFPsforhowtheythinkaboutreplacingsomeoftheiraircraftandpartofthat,frankly,isdrivenbythefactthatthere'ssomethinglikethisouttherenowthattheyseeasaviable,affordableproducttomeettheirmission.
Sowecontinueinprettyseriousdiscussionsonanumberoffrontsandfeelprettygoodaboutwhereweare.
WedidhavetheaircraftoutattheAirForceassociationmeetinginWashingtonafewweeksback.
Wehadatonofcustomerscomingthroughandlookingatit.Wecontinuetogetverygoodfeedback.
We'vehadalotofcustomersthathavecomeouttoseetheaircraftandgothroughprettydetailedbriefingsinWichitaaswell.
SoIdon'twantto--Idon'thaveanythingtoannouncetoyouparticularlytodaybutIthinkwefeelprettygoodaboutwhereit'sgoingandwe'reinprettyseriousdiscussionswithanumberoffolks.
RonEpstein(Analyst-MerrillLynch):
Onthatone,doyouguysseeitasapotentialormaybesomemodificationtoitasapotentialbidfortheupcomingtrainerprogram?
Scot t Donnelly(Chairman,CEO):
Absolutely,Ron.
We'vebeenparticipatingintheTXprogram.
There'sbeenindustrydays.
There'salotofworkgoingoninthe.
Wearecertainlyinterestedintheprogram.
We'refollowingitquitecloselyasareanumberofothercompetitors.
Look,Idon'tthinktheAirForceisinterestedinabigdevelopmentprogramsoIthinkclearlyoneofthethingsthey'regoingtohavetodoislookatwhataircraftplatformsareouttherethatareavailablethatwithsomeminorapadaptationswillfitwhattheyneedforTX.Wewouldlovetoparticipateintheprogram.
We'reworkingtheprogram.
Andhowcompetitiveweareorwhetherouraircraftistherightaircraftornotwilldependonwheretherequirementdocumentsendup.That'ssomethingIdon'tthinkwe'llseeprobablyuntillatethisyear,beginningofnextyeartoknowwhethertheScorpionoraminoradaptationtotheScorpionistherightanswerforthem.
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We'recertainlyinterestedandfollowingitveryclosely.
RonEpstein(Analyst-MerrillLynch):
Maybejustonelastone.
Youguysdelivered33Cessnaaircraftinthequarter.
ThemixwasclearlyskewedmoretowardsM-2s.
Clearlyit'sbeenwellreceived.
Butrelativetohistoriclevels,it'sstillprettyanemic.
Whenwethinkabout--andagain,IguessI'msortofthinkingabout2015,2016,itisokaytowalkawayfromthiscallthinkingwe'reinamarketrecoveryorisitmorewalkingawayfromthiscallthatit'sstabilized?
Scot t Donnelly(Chairman,CEO):
Youknow,Ron,Istillthinkthewaywethinkaboutitisitestablishstabilized.
MostofthegrowthdrivenbyM-2andsovereign.
Myplanwouldberightnowmostofthegrowthnextyearwouldbedrivenbythelatitudeintroduction.
RonEpstein(Analyst-MerrillLynch):
Gotyou.
Scot t Donnelly(Chairman,CEO):
Wefeelgoodaboutwherethemarketis.Certainlyappearstohavebeenstabilized.
Welikethelevelofdemandthatwe'reseeing.
ButIdon'twanttosaythatwethinkthere'sbeensomesignificantinflectioninthemarket.
Juststabilityoncurrentaircraftprogramsandnewprogramsdrivinggrowthisstillhowweseeit.
RonEpstein(Analyst-MerrillLynch):
Okay.
Andthenmaybejustonelastone.
Anotherfavoritetopicofmine.
WithMedtronics.
HaveyoupickedupshareyouthinkbyofferingatrainingpackagewiththeCessnaproduct?
Doyouthinkyou'vepickedupsharefromthelikesofCAEandflightsafetyinthatmarket?
Scot t Donnelly(Chairman,CEO):
Ithink,Ron,it'sstilltooearlytosay.
Idothinkthat--we'vehadgreatfeedbackfromalotofofourcustomers,particularlyourCJcustomersasweacquiredProFlight,whichgaveusthatCJtrainingcapabilityoutintheWestCoast.
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AsIsaid,we'venowannouncedthatprobablybythesecondsquarterwe'llhavethatsametrainingcapabilityupandrunninginTampa,thatwedohavealotofourCJcustomersthathavegivenusgreattankk.Takecareofalltheirservicesoftheaircraftandtheirpersonaltrainingintheaircraft.
Idothinkitwillhelpus.Notsomuchashareshiftoftheequipmentsideofthebusiness,butsomeshareshiftinthetrainingsideoftheequation.
RonEpstein(Analyst-MerrillLynch):
Okay.
Great.
Thankyousomuch.
Scot t Donnelly(Chairman,CEO):
Sure.
DougWilburne (VP,IR):
Thankyou,ladiesandgentlemen.
Operator:
Andladiesandgentlemen,thisconferencewillbemadeavailableforreplayafter10todayandrunningthroughTuesday,January27thatmidnight.
YoucanaccesstheAT&Texecutiveplaybackserviceatanytimebydialing1-800-475-6701,andenteringtheaccesscode307263.Specialpartiesmaydial1-320-36365-3844.800-475-6701,and1-320-365-3844,withanaccesscode307263.Thatconcludesourcallfortoday.
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