Textron Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2024

There are 18 speakers on the call.

Operator

Thank you for standing by. Welcome to the Textron 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. This conference is being recorded for digital replay and will be available after 10 am Eastern Time today through January 24, 2025 at midnight.

Operator

You may access the replay service by dialing 8 6,627,101 and enter the access code 406,507. I would now like to turn the conference over to David Rosenberg, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thanks, Leah, 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 Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website.

Speaker 1

Revenues in the quarter were 3,900,000,000 up $3,600,000,000 in last year's 4th quarter. Segment profit in the quarter was $384,000,000 up $78,000,000 from the Q4 of 2022. During this year's Q4, adjusted income from continuing operations was $1.60 per share compared to $1.23 per share in last year's 4th quarter. Manufacturing cash flow before pension contributions totaled $380,000,000 in the quarter, up $12,000,000 from last year's 4th quarter. For the full year, revenues were $13,700,000,000 up $814,000,000 from last year.

Speaker 1

In 20 $23, segment profit was $1,300,000,000 up $191,000,000 from 20 22. Adjusted income from continuing operations was $5.59 per share as compared to $4.45 per share in 2022. Manufacturing cash flow before pension contributions was 931,000,000 down $247,000,000 from $22,000,000 With that, I'll turn the call over to Scott.

Speaker 2

Thanks, David, and good morning, everyone. Our businesses closed out the year with another solid quarter with strong margin performance and cash generation. Throughout the year, our teams work to mitigate supply chain challenges to deliver products to our customers. At Aviation, while we ended the year with an expectation of a book to bill 1 to 1, solid order flow and customer demand across our product portfolio resulted in year end backlog of 7,200,000,000 an increase of $782,000,000 Textron Aviation Defense delivered 13 T6 aircraft for the year, up 10 from a year ago. During 2023, solid aircraft utilization within the Textron Aviation product portfolio resulted in a 6.5% growth in aftermarket revenues.

Speaker 2

At Bell, revenues in the quarter were up driven by higher commercial and military revenues. On the commercial side of Bell, we delivered 91 helicopters 4th quarter up from 71 in last year's Q4. For the full year, we delivered 171 helicopters in 2023, down from 179 in 2022. Higher military revenues reflected the continued ramp on our FLAR program. On the FLAR program, Bell completed the installation of the ITEP engine on the 360 Invictus.

Speaker 2

The team continues to conduct integration activities and prepare the aircraft for initial ground runs in 2024. Moving to Textron Systems, revenue and margin Flat with last year's Q4. During the quarter, systems delivered the last detailed design and construction craft on the ship to shore connector program following its successful completion of acceptance trials. Moving to industrial, we saw higher revenues in the quarter driven by higher volume at Caltex and favorable pricing in specialized vehicles. Moving to aviation, Pipistrel delivered 135 aircraft during the year, up from 61 in 2022.

Speaker 2

Also at aviation during the quarter, the Pipistrel Velas Electro was selected to participate for a trial period to explore operational and training uses for this all electric aircraft as part of Agility Prime, the Air Force's vertical lift program. Summary, in 2023, the year we had a strong year across all of our businesses. We continue to execute on our growth strategy of ongoing investments in new products and programs to drive organic growth and margin expansion. During the year, Aviation announced new Cessna Citation Ascend at Ebase and the Cessna Citation CJ3 Gen 2 at NBAA. In May, Aviation delivered the 1st passenger variant of the Sussus Sky carrier to Lanai Airlines servicing the Hawaiian Islands.

Speaker 2

In the Q3, Aviation announced new fleet agreement with NetJets for up to 1500 aircraft over 15 years, including Longitude, Latitude and the newly announced Ascend, extending our 40 plus year relationship. In October, Aviation delivered the 100th assessment citation launch to. At Bell, we began work on the flower program in April. The team continues to increase activity on the program, ramping up engineering resources, contracting with key suppliers and ordering long lead materials. At Textron Systems, we advanced to the future tactical unmanned aircraft system competition and are now one of 2 remaining competitors down from the initial 5.

Speaker 2

Systems also continued to win on land vehicle programs advancing to the next phase of the Army's XM30 program as part of Team Links and was selected as 1 of 4 competitors to build RCV light prototypes for the Army. At Textron Specialized Vehicles, we introduced the new street legal EZ Go Liberty LSV powered by our Elite Lithium Ion Battery System. At Kaltex in 2023, we announced the 1st pentatonic order from an automotive OEM for thermoplastic composite underbody battery protection skid plate, establishing Caltex as a supplier to the expanding battery electric vehicle market. In the aviation during the year, we began system level integration of the first Nuva prototype, our harbored electric unmanned cargo VTOL aircraft in preparation for first flight in 2024. As we closed out 2023 manufacturing performance was trending positively with improvements in labor productivity and supplier deliveries.

Speaker 2

Looking to 2024 at Aviation, we projecting growth driven by increased deliveries across all product lines and higher aftermarket volume. At Bell, we're projecting revenue growth in 2024 on higher military revenues program and higher commercial revenues from increased deliveries. At systems, we're expecting slightly higher revenue as new programs continue to ramp. At Industrial, we're expecting flat revenues as growth in specialized vehicles is offset by lower than expected volume at Kaltex. Aviation, we plan to continue investments in development of technologies and products supporting sustainable flight solutions for unmanned cargo, next generation electric trainers, eVTOL and general aviation.

Speaker 2

We also expect higher aircraft deliveries at pedestal. With this overall backdrop, we're projecting revenues of about 14 $6,000,000,000 up 7% from 2023 for Textron's 2024 fiscal year. We're projecting adjusted EPS in the range of $6.20 to $0.40 Manufacturing cash flow before pension contributions is expected to be in the range of $900,000,000 to $1,000,000,000 With that, I'll turn the call over to Frank.

Speaker 3

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues Textron Aviation of CAD1.5 billion were down CAD58 1,000,000 from the Q4 of 2022 reflecting lower volume and mix of CAD158 1,000,000 partially offset by higher pricing of $100,000,000 Segment profit was $193,000,000 in the 4th quarter, up $23,000,000 from a year ago, reflecting a favorable impact from pricing net of inflation of CAD51 1,000,000 partially offset by lower volume and mix of CAD22 1,000,000 Backlog in the segment ended the quarter at $7,200,000,000 Moving to Bell, revenues were $1,100,000,000 up $255,000,000 from last year's 4th quarter, reflecting higher commercial revenues of $171,000,000 largely driven by increased deliveries and higher military revenues of $84,000,000 related to the FAR Segment profit of $118,000,000 was up $55,000,000 from a year ago, primarily driven by higher volume and mix of 39,000,000 Backlog in the segment ended the quarter at $4,800,000,000 At Textron Systems revenues were $314,000,000 flat with last year's 4th quarter. Segment profit of $35,000,000 was equal to last year's Q4. Backlog in the segment ended the quarter at 2,000,000,000 Industrial revenues were $961,000,000 up $54,000,000 from last year's Q4, largely reflecting higher volume and mix at Kautex and a favorable impact from pricing at Textron Specialized Vehicles.

Speaker 3

Segment profit of $57,000,000 was up $14,000,000 from the Q4 of 2022, primarily due to higher pricing net of inflation of $18,000,000 Textron E Aviation segment revenues were $10,000,000 and the segment loss was $23,000,000 in the Q4 of 2023, which reflected the research and development costs for the initiatives related to the development of sustainable aviation solutions. Finance segment revenues were $12,000,000 and profit was $4,000,000 Moving below segment profit, corporate expenses were $45,000,000 Net interest expense was $13,000,000 LIFO inventory provision was $21,000,000 intangible asset amortization was 9,000,000 And the non service components of pension and post retirement income was $60,000,000 In November, we announced a restructuring plan that resulted in pre tax special of $126,000,000 in the 4th quarter. We anticipate the restructuring plan will be substantially completed in the first half of twenty twenty four, resulting in annualized cost savings of approximately $75,000,000 Our manufacturing cash flow before pension contributions was $380,000,000 in the quarter. For the year, manufacturing cash flow before pension contributions totaled $931,000,000 down $247,000,000 from the prior year. In the quarter, we repurchased approximately 3,700,000 shares returning $283,000,000 in cash to shareholders.

Speaker 3

For the full year, we repurchased approximately 16,200,000 shares returning 1,200,000,000 in cash to shareholders. Turning now to our 2024 outlook on Slide 7. We're expecting adjusted earnings per share to be in the range of $6.20 to $6.40 per share. We're also expecting manufacturing cash flow before pension contributions to be about $900,000,000 to $1,000,000,000 Moving to segment outlook on slide 8 and beginning with Textron Aviation, we're expecting revenues of about $6,000,000,000 Segment margin is expected to be in the range of approximately 12% to 13%. Looking to Bell, we expect revenues of about CAD 3,500,000,000 We're forecasting a margin in the range of 9.5% to 10.5%.

Speaker 3

At systems, we're estimating revenues of about CAD1.25 billion with a margin in the range of about 11% to 12%. At Industrial, we're expecting segment revenues of about CAD 3,800,000,000 and a margin in a range of 6% to 7%. At e Aviation, we're expecting revenues of $50,000,000 and a segment loss of $25,000,000 reflecting our continued investment in sustainable aviation solutions. At Finance, we're forecasting segment profit of about 30,000,000 Looking to Slide 8, we're projecting about $160,000,000 of corporate expense. We're also projecting about $90,000,000 of net interest expense, $110,000,000 of LIFO inventory provision, dollars 35,000,000 of intangible asset amortization and $265,000,000 of non service pension We expect a full year effective tax rate of approximately 17.5%.

Speaker 3

Turning to Slide 10, R and D is expected to be about $550,000,000 down from $570,000,000 last year. We're estimating CapEx will be about $425,000,000 up from $402,000,000 in 2023. Our outlook assumes an average share count of about 191,000,000 shares in 2024. That concludes our prepared remarks. So Leah, we can open the line for questions.

Operator

Thank you.

Speaker 4

And I would now like

Operator

to start with Sheila Kahyaoglu with Jefferies. Please go ahead.

Speaker 5

Good morning, Scott, Frank, and welcome, David. Scott, maybe first one for you. How do we think about 2024 Aviation deliveries and Just book to bill in the context of your guidance.

Speaker 2

Sure, Sheila. Look, I think we'll continue to see a ramp on the production As I noted, I think we did in the 4th quarter start to see some improved productivity in the line. There are still some supplier issues, but Number of parts coming into PO are improving somewhat. So I think that will help us continue to increase volume here as we go through into 2024. So I certainly see unit deliveries being up on a year over year basis.

Speaker 2

The market is still strong. I mean, obviously, our book to bill covers 24 deliveries quite well, but I think our expectation, as we said, coming into the year was kind of targeting a one to one book to bill. We did better than that obviously in 20 23, but our assumption as we go into 2024 is that we'll see a one to one book to bill. So the market is still good. I think we're seeing nice stimulation and some of the new products coming out like CJ3 Gen2 has been really well received.

Speaker 2

Ascend, I think we'll start to also drive strong demand and overall the product lineup is in good shape. So I think market wise we're good and we will see Obviously, to get to the guide of around $6,000,000,000 on the aviation side, we will see continued volume on both aircraft production as well as aftermarket growth.

Speaker 5

Can we get to about 200 deliveries in 2024? Do you think that's reasonable?

Speaker 2

We are as you know, we don't put a number out there, but it will be increased from 2023.

Speaker 5

Got it. And if I could ask one on FLARA, just good progress on the program with ITEP. But I think revenues were about $175,000,000 in 2023, fell short of our expectations. And How do we think about 2024? We have about $850,000,000 of FLRAA according to the budget.

Speaker 5

So how is that going?

Speaker 2

For sure, Sheila. I think our revenues were higher than that on FLORA probably for the year. We won't break out all the details, It was certainly just south of a few $100,000,000 but we do expect as we go into 'twenty four, the program is ramping very nicely. As you know, the number was lighter than we originally expected just because of the delay with the protest in the early part of the year, but the ramp As we've ramped after the contract award, it's going really well. So I would expect a number closer to the $900,000,000 range in 2024 on the flower program.

Speaker 5

Thank you.

Operator

Sure. Next, we go to a question from Peter Arment with Baird. Please go ahead.

Speaker 6

Yes. Good morning, Scott, Frank, David. Just maybe just circle back just on How are you thinking about kind of the margin leverage in Aviation, Scott? When you think about just because you called out some of the pricing that you continue to get, How are we thinking about just kind of that flowing through? I mean, just given the margin outlook at 12% to 13%, kind of at the low end of the range Flat, but at the upper end, obviously, 100 basis points.

Speaker 6

Just how are you thinking about that?

Speaker 2

Sure. Look, Peter, I think we definitely expect to continue to see price Net of inflation is a positive for us. It won't be as significant as it was in 2023, but we still have good pricing in the backlog. And I think it will be a tailwind for us. So if you look at the guide and the numbers, Peter, you're right.

Speaker 2

Look, I mean, we're I just said, I think we saw some improved performance in Q4 On the manufacturing conversion side, so we're bringing we're certainly baking some of that in as we go into 2024. But as you move towards the high side of the guidance, you get up into that 20 plus percent conversion, which is where we historically like the business to be. So it's something we got to work on obviously. We still have some of those headwinds that we faced all this year on the operating side. But the combination of improved performance and continued price over inflation is positive, whilst not as big a positive, I think will help us get towards that 20 range.

Speaker 6

Got it. That's helpful. And then just frankly quickly, the interest expense increase, just maybe what's going on there specifically? Thanks.

Speaker 2

Well, yes, go

Speaker 3

ahead. Yes, little, we've got slightly higher borrowing costs from the bond deal that we did last year. So that's a little bit of the rollover on the financing. It assumes slightly lower cash balances And a little bit of conservatism around the interest rate that we earn on that excess cash.

Speaker 6

Thanks again. Thanks, Rick.

Operator

And next we go to David Strauss with Barclays. Please go ahead.

Speaker 7

Thanks. Good morning everyone.

Speaker 2

Good morning, Doug. Good morning.

Speaker 7

Scott, I wanted to ask about the V-twenty two grounding. Does that impact Bell at all? I know you have a pretty big aftermarket business on the V-twenty 2?

Speaker 2

No, David, I don't think it's a material impact. The services, Frankly, are using the opportunity of the grounding to continue to do their maintenance activities and get aircraft ready to fly. So we probably can't say much more about that situation than that, but no, I don't expect it to be a material impact.

Speaker 7

Okay. And Frank, free cash flow, the guidance were flat. I know you had a pretty big inventory build in In 2023, but you also had positive advances. What are you assuming for working capital? And in terms of the adjust the UPS guide, what are you baking And as far as share count and share repo in 2024?

Speaker 7

Thanks.

Speaker 3

Yes. From a cash standpoint, We obviously are anticipating volume growth in the year. So, that's going to put a little continued pressure on inventory levels As we look kind of to 2024 and 2025 volume growth, not a lot. There is a little bit of working capital pressure with timing of some customer payment activity, particularly on the military side. Bell in particular had a very good year in 2023 in terms of the of payment activity that puts a little bit of headwind on cash flow and then as you heard a little higher CapEx guidance kind of in terms of the spend there.

Speaker 3

So it's not any one item. It's kind of a little bit of headwinds on working capital associated with the things I mentioned in a little bit higher levels of investment. But we still think we're still very solid cash flow performance for the year. In terms of the share count, we talked about 191,000,000 average shares. So kind of roughly 5% or so reduction in average share count for the year.

Speaker 8

Thank you.

Operator

Next, we go to Jason Gerske with Citi. Please go ahead.

Speaker 9

Yes. Good morning, everybody.

Speaker 10

Scott, I was wondering if you

Speaker 9

could just spend a few more minutes on systems and talk about the pipeline of opportunities there And the timing of potential awards, kind of with the backdrop of what's going on with the budget in mind and whether Things like continuing resolutions to go out half a year have any impact on kind of your expectations around this?

Speaker 2

So the CR situation right now doesn't really worry me very much on the systems side of things. As we indicated, Jason, we're going to be relatively flattish On the revenue in 2024, I'd say the pipeline is very strong. You look at some of these down selects on FTOS, the ARV program, what used to be the OMFV program, Nexon 30 program, a lot of these things are significant opportunities for us. They're really important down selects that we achieved last year. We'll execute on those and they're not big growth programs, so they don't really have a CR impact that I'm too concerned about and there are virtually all programs that will have their next significant contractual award down select in 2025.

Speaker 2

That's why you see us kind of flattish. We had I think 2023 was a hugely important year for the down selects on those really important programs, Execute this year and you start to see the revenue growth driven by ultimately being the final selection awards, EMD programs that award in 2020

Speaker 9

Okay, great. Thank you. And then just quickly on E Aviation. We've got widening profitability losses there projected for 2024 on higher revenue. I was wondering if you could just kind of give us a broad brush Just for an update on the plans for that business and at what point does the revenue potentially pick up here and we begin to see those profitability losses begin to contract and kind of your overall vision for that business over the next, I don't know, 3 to 5 years?

Speaker 2

Sure, absolutely. Look, keep in mind, there's 2 things going on in that e aviation segment, right? There's Pipistrel, which is our current It's a real business, real sales, roughly doubling the volume of aircraft sales from 2022 to 2023, roughly doubling 20 20 3 to 24. So I think the product lineup at Pipistrel is doing quite well. We're expanding distribution channels.

Speaker 2

Look, it's a relatively small business, but it's doing well. What's driving the losses is these investments in R and D, particularly around the Nexus program. That's something that won't generate revenue probably for several years and investment on say the NUVA 300, which is our hybrid unmanned cargo, which again, this is a few years from revenue. And so that's part of why Jason, we broke this thing out, right? So you guys see these investments, which are frankly not dependent or tied to the revenue within that segment.

Speaker 2

So the 2 big moving pieces in there in terms of the investment side or the Nuva on the unmanned cargo and the Nexus on the sort of the eVTOL side, which I don't think that has to be necessarily dependent to urban air mobility, but just GA in general. Both those teams are making great shape. I think we'll see first flight of the Nuva In 2024, we've also begun the assembly and wings and fuselage build On the Nexus program, in Wichita, so both programs are making very good progress, but they're both technology investment programs.

Speaker 9

Okay, great. Thanks.

Operator

Sure. Next we go to the line of Noah Poponak with Goldman Sachs. Please go ahead.

Speaker 2

Hey, good morning, everyone. Good morning, Noah. Hey.

Speaker 11

Scott, we've heard some discussion in the business jet end market that even though 2023 was a decent order year that there's actually maybe some pent up demand because it was so consensus There was going to be a recession or something like it. And that in 2024, If we're having an inflation decel and rate cuts and some version of a soft landing that you could have your normal underlying demand plus anybody that deferred from 23. And so I'm curious if you hear that from your customers or your sales force and There's an upside case for bookings or is that too aggressive and just stick with book to bill upon?

Speaker 2

Well, look, no, I think as I said at the beginning, we feel good about the end market. Customer dialogues are robust. Frankly, the only headwind I see we run to is just on availability, right? People would like to get aircraft sooner. So we're think our sales folks are out there working hard.

Speaker 2

There's no doubt there's demand. I think that's, as I said earlier, helped by the fact that we've got some new models that are coming out that are going to be really well received in the market. So, look, all in all, as we talked about, the book to bill number can change a little bit quarter to quarter, but I think We feel very good about the end market. I think we'll stick at this point with our kind of 1 to 1 in our base assumption as we did in 20 23% and if the market remains that robust, we can exceed that number, which would be great. So look, I think the market remains strong.

Speaker 2

We feel good about it.

Speaker 11

Okay. And I wondered if you could just maybe discuss a little more, just how much better is Supply chain, labor, your ability to get airplanes out the door, the delivery number was down in 23 despite all the demand Kind of to your point there on availability, whatever the 24 delivery plan is, it's got to be up a lot to get to that Revenue guidance, do you feel like you really have that hitting the ground running in January here? And then as that pertains to the margin, Why would price net of inflation not be better if that If pricing is still good, I know the rate of change matters, but if that if the cost inflation and disruption piece settles down significantly for you?

Speaker 2

Well, look, I'd say I don't know how to quantify the exact number for you, Noah, but there's a couple of dynamics here that make us feel good about it. Again, we saw better labor productivity, All of the metrics we track in terms of training hours, direct charging to interact, all those sorts of things, applied hours We're positive in the quarter. We do track number of parts that are late to PO. These numbers are getting better. I think as you look at the 2023 to 2024, we have net less hiring we need to do to hit the ramp.

Speaker 2

Last year was a big year in terms of onboarding new people. As you can imagine, that's very disruptive. It's a lot of training that takes not just the new people, but it takes a lot of our capable people to help train and develop them. We made a lot of investments in 2023 around new training facilities. So with the absolute number, We still need to onboard new people for sure, but on the number of them is less than what it was in 2023 and that should be Helpful.

Speaker 2

The supply chain thing, as I said, look, it is getting better, but it's still susceptible to the wrong part not being available, right? I mean, I think it's going to help us do less out of station work, but we still have suppliers we're keeping a close eye on because the lack of delivery on their part can hold up an aircraft. We're still being cautious about how we work through that, but it is improving. Like I said, there is less hiring. I think most of our lines are flowing better as a result of all the things I just talked about.

Speaker 2

So that we do factor that into our ability to hit that larger number of aircraft deliveries in 24. And I think we'll get

Speaker 11

Okay, that's good. I'm just going to ask one more. The Bell margin, pretty strong in the quarter, Closed 'twenty three well ahead of the initial plan. This 'twenty four guide, 9.5 to 10.5 kind of flat year over year. There was a view that this was going to 7%, 8% as you ramped Flora.

Speaker 11

You're ramping Florida, it's not happening. Can you talk about how you're outperforming there and absorbing the Florida ramp? 24% the trough? Or does that still need to go down some number of 100 of basis points before then going back up?

Speaker 2

Look, I think the team is doing everything they can to manage costs, control, do the right cost actions here as we See the ramp down on some of these military production programs and we continue to do that. Those were certainly better mix than A big cost plus EMD program. So we still we'll have some pressure around the margin rate. But as we talked about that the growth benefit of seeing this program ramp up, we believe we'll still generate accretive not dollars. So even if we see some pressure on the margin rate, the business will still be contributing positively to the overall dollars and therefore EPS for the business.

Speaker 11

Okay. All right. Thanks.

Operator

Next we go to the line of Myles Walton with Wolfe Research. Please go ahead.

Speaker 10

Thanks. Good morning. I was hoping to circle on Aviation. In the last few quarters, there's been more discussion of this performance as a negative variance to the profit walk that wasn't part of the conversation. It was clearly price offset by a little bit of volume.

Speaker 10

So is it fair to think that that bucket of performance that you all cite has materially become nonmaterial?

Speaker 2

Well, I wouldn't say non material, but I would say Miles, look, in 2023, we had pretty significant price over inflation benefits. And I think we did talk through the course of the year that, that did help to offset some of the performance issues that were by these labor inefficiencies and supplier impacts and stuff like that. So I think as you look at 2024, we're expecting improved margins. We're absolutely expecting significantly improved revenue and therefore operating profit in the business. But the trade you're going to see is there's probably still positive price over inflation, but not as big a number.

Speaker 2

But you're going to have less performance issue to have to cover with that number because we do expect to see better efficiencies in the factories and lesser impact from the supply. So net of all this stuff, I mean, there's a different dynamic, I believe, in 24, that's how we're going to get there than 2023, but the bottom line is you're going to see significant revenue growth and significant operating profit, including margin in 2024.

Speaker 10

Okay. And then on the restructuring program you executed, I think about 60% maybe was directed at Bell. Of the 75 gross savings you talked about, how much net savings is Bell getting in 2024? And also is Bell getting most of the lower R and D benefit?

Speaker 2

Well, look, I mean, we don't we're probably not going to break that all the way down. But certainly, part of why the discussion I just had with Noel around why are we seeing some Better margins and holding in there on the margin rates at Bell is this is part of why we took that restructuring action to control cost and manage our way as we reduce the volume in some of these historic military production programs. And so that's part of what's helping to sustain A better margin rate even as we see those programs ramped out. We just have to take the cost out of the business in the areas that we're largely supporting these big military production programs. So I won't put the exact number in there, but that's the dynamic that's helping to improve that margin.

Speaker 10

And is R and D dropped there mostly in Bell?

Speaker 2

Yes, it is. I mean, as you know, we don't break that all the way out. But look, we still had, as you recall, the delay of the flower program in 2023, we had more of our own costs Still sustaining and supporting that program in the earlier part of the year, obviously, as that has ramped and become a full blown contract, That's helping to reduce that number. The overall gross R and D, the business is still growing significantly as FLRAA ramps, But the net number in terms of the IRAD side is certainly shifted from that IRAD into the contract program.

Speaker 6

Makes sense. Thank you.

Operator

And the next question we have is from Kristine Liwag with Morgan Stanley. Please go ahead. She has disconnected. We will move on to the next line of Robert Stallard with Vertical Research. Please go ahead.

Speaker 12

Thanks so much. Good morning.

Speaker 2

Good morning, Robert.

Speaker 12

Scott, I just wanted to follow-up on Noah's question about supply chain and the parts that are behind at the moment. Are there any specific areas where you're seeing any problems like interiors that are holding things up?

Speaker 2

Nothing that I would comment on, on a call. There's we all have our problem children, Rob.

Speaker 12

Yes, understood. And then secondly, there's been some press reports that Textron has been looking at some M and A competitions in recent months. I don't expect you to But I was wondering if you could maybe reiterate your priorities for capital deployment as we start 2024.

Speaker 2

Sure. No, we definitely would not comment on that. And look, I think what we've talked about and Frank's indication on the share count at 191,000,000 Obviously indicates that our priority continues to be share buyback and that makes we think at this point a pretty significant benefit for our shareholders and that's what we expect to continue to do in 2024.

Speaker 12

Okay, that's great. Thanks, Scott.

Operator

And our next question is from Seth Seifman with JPMorgan. Please go ahead.

Speaker 13

Thanks very much. Good morning, everyone. I guess, just asking about the performance at Aviation and The improvement in productivity and parts availability that you started to see in the Q4, does that mean that in the Q1, We can expect to see kind of a nice increase in deliveries and something that would kind of affirm the notion of being on track for the revenue guide for the year?

Speaker 2

Well, we're not going to get into quarterly guidance for sure. So I mean, you certainly should expect to see A nice progression in terms of the revenue on a quarter to quarter basis over 2023 consistent with The guide of $6,000,000,000 of revenue for the total year.

Speaker 13

Okay, great. And then Maybe just following up a little bit different twist on Rob's question. I know you probably won't comment on specific M and A reports, But the reports that we have read tend to deal mainly with the space end market. I wonder if you comment on Do you view that as an important and or attractive end market into which to expand?

Speaker 2

I wouldn't comment.

Speaker 13

Fair enough. All right.

Speaker 12

I'll stick this up. Thank you very much. Thanks, Steve.

Operator

And next we go to the line of Christine Leewag with Morgan Stanley. Please go ahead.

Speaker 4

Hey guys, can you hear me okay?

Speaker 2

Yes, we can hear you fine.

Speaker 4

Okay, great. Hey, Scott, Frank, Dave, thanks. On your restructuring actions, Can you provide more details on what you're doing and what your expectations are for the timing and the size of the payback from your investments?

Speaker 2

Well, Christina, as we kind of put out there, there's a sizable piece that's going into Bell and that's really aligning our cost structure with the lower Production rates on some of the historic military programs like H1 and V-twenty 2, that's a very in terms of cost and the mix Of people within the business, the ramp obviously is net positive, but it's largely in the engineering on program side of the flower program, so that's a necessary action to align cost with the old historic production programs. As we also indicated, we're just we're aligning some of our plants on the auto side to understand where's demand around the world and rationalizing where we think appropriate to keep that business healthy with a high return and strong cash flow. So it's just Daniel, there's bits in a number of other places. But we believe on a run rate basis, it's going to be about a $75,000,000 a year positive impact to the business. And so that's, I think, a good return and why we decided to proceed with the program.

Speaker 4

Great. Thanks for the color. And maybe on aviation, if I could do a follow-up, dollars 100,000,000 in pricing power for new aircraft is very healthy. And so if we're seeing if you're continuing to see bottlenecks in new aircraft production, can you talk about the demand environment for aircraft services then? And what's the pricing power in services, especially with the lack of new airplanes coming into the market?

Speaker 2

Look, I think what we saw this year, which was strong growth, 6.5% on the services side. Obviously, that's a mixture between volume and pricing. I expect we'll continue to see good demand. On that side, we certainly have that baked into our forecast. Aircraft are flying.

Speaker 2

Our customers are running the aircraft. They're doing the necessary maintenance. I think it will continue to be a healthy part. Certainly, what we've incorporated in the guide for next year is good growth in the service business, both our service centers well as the parts. And as always, that's going to be a function of both volume increases as well as annual expected pricing in the aftermarket side.

Speaker 4

Great. Thanks, Scott.

Operator

Next, we go to the line of George Shapiro with Shapiro Research.

Speaker 14

Scott, I was just Curious,

Speaker 8

you were saying that the supply chain seems better, yet the deliveries in the Q4 were a lot lighter than what most of us were looking So if you could kind of just connect the 2 dots there?

Speaker 2

George, as you know, it takes many months to build an aircraft. The improvements in both the labor side and the parts side takes a while to push through the system. So the higher cost A lot of the impacts that we kind of saw through the course of the year are were full year impacts. So but I do feel like as we look at the numbers And what we experienced on a day to day basis, we did see improvements and I think that's as a result, you'll start to see that improvement as you get into 2024.

Speaker 8

And then one other one, the book to bill in the quarter was $900,000,000 and the orders were like only $1,400,000,000 So that was really down a lot from last year as well as from the Q3. Now I guess you're just looking at as timing or it have anything to do with Noah's comment that people concerned about a recession in the Q4 and we get a pickup this year, but if you could just comment on that as well?

Speaker 2

George, I think it's largely timing. We always have a little bit of lumpiness in terms of when deposits are coming in on some of our larger customers, but there's don't think there's anything concerning there. We've said all along, we expect there's going to be some quarters where it's going to be below 1 to 1, probably some quarters where it's above 1 to 1. But again, our assumption Full year going all the way back to 'twenty three was 1 to 1. We did better than that.

Speaker 2

Our assumption in 2024 is it's going to be 1 to 1. And obviously, we'll see how the market plays out. But I I think we feel good about the end market. We feel good about demand and I think it's healthy.

Speaker 8

And one last one, the strong Bell margin in the quarter, I mean, does that just really reflect the commercial delivery strength, which has much higher margins more than setting the drag from the lower margin Flora program. And if that would continue next year, the margins would probably be somewhat higher than what you've guided to?

Speaker 2

George, I think we're continuing to see good margins On our military business, obviously, outside of the Florida side, it certainly helps to have higher commercial deliveries. I think we'll get some benefit of higher commercial deliveries as we talked about in 2024. But look, there is going to continue to be some pressure on the margin just because we are seeing significant growth in the flower program. The reason we did the cost actions and did the restructuring was to try to shore up the profitability of the business on the legacy production programs. And so part of the guide is obviously we continue to see some benefit of that.

Speaker 2

But Again, there will be overall margin rate pressure going into the future. But I think as we talked about, even with that the growth of the HAR program, we're going to see significant revenue growth and we're going to see absolute profit increases and accretion EPS for the business. So I think As we work through a transition from legacy production to a new EMD program, I think we can manage our way through that well. And obviously long term, it's going to be a great story for Bell.

Speaker 8

Okay. Thanks very much.

Speaker 12

Sure.

Operator

Next, we move to Pete Skibitski with Alembic Global. Please go ahead.

Speaker 15

Yes. Hi. Good morning, guys. Scott, can you expand on your opening comments regarding Kautex and your expectations there in 2024? It sounds like you think you Might be a little bit weak there.

Speaker 15

Just wondering what the drivers were.

Speaker 2

Sure, please. Look, that's one business where we really It depends on sort of industry customer forecasts. So our guide reflects that. We don't really apply a whole lot of our own judgment to that. We really go with where the industry tells us they're going.

Speaker 2

And we've got to see how the year plays out. I think we feel good about the business. Again, some of the restructuring we did was reflective of Where the volume growth is and where the volume growth isn't, but the business is in a healthy place and the margins have been doing better as we've come out of all the sort of the post COVID world and the volumes will be obviously consistent with global auto OEM numbers.

Speaker 15

Okay. Got it. And then I had a couple of questions on Aviation. Are you expecting Caravan sales deliveries to be up in 24? I know you deliver a lot of them to Asia and we're seeing some softness in China.

Speaker 15

So just wondering what you're seeing there?

Speaker 2

Look, Pete, I mean, we're not going to get into model by model. But I would say net of everything, the turboprop market is doing really, really well. As you know, that does tend to be a little bit more international. I think we usually give the numbers roughly 60% international versus the jet side is 80%. But I think our turboprop business is in a really good place.

Speaker 2

I think Caravans will do well. I think King Airs are going to be strong. We continue to ramp on the Sky carrier. We tend to get most of the questions around Jeff. But look, I think the turboprop business is in a very good place and we certainly net expect to see that business continue to grow in 2024.

Speaker 15

Okay, great. Thank you.

Operator

Next, we go to a question from Hi, Von Rumohr with TD Cohen. Please go ahead.

Speaker 14

Yes. Thanks so much. So Scott, at Bell, are you looking for Is part of the profit strength this year 2024 coming from closeouts on the V-twenty two and the H1? And secondly, is there any risk to FLARA volume from an extended CER?

Speaker 2

So Cai, look, I think the 2024, we'll we obviously will see some contracts come to an end and there will MR release when you do that. But look, I think we can execute well on that pro form a. I mean, I think Q4 is a good example, Cai. We had about $8,000,000 Total in the company of EACs, that's not a particularly material number and it's flat on a year over year basis. So, do I think we'll have Some reserve release next year, sure we will.

Speaker 2

I mean, we normally do as we perform through these programs. But I think the cost out activity that we've been driving, The absorption and growth on both the commercial revenue side as well as the FLRA revenue side will all help to contribute to preserving and getting a good margin rate for 2024. I'm sorry. In terms of the CR, okay. I think we're okay.

Speaker 2

I mean, as we've talked about before, if the CR goes all the way through a full year, That could put some pressure for sure. I think the Army probably has backup plans they're trying to work in terms of how they would move money around. Obviously, FLOR It's a very high priority, very important program to them as well. So whole thing would be a heck of a lot easier if Congress would just pass a budget for sure. But right now, I think we're okay.

Speaker 2

And unless it really goes to a full year, I think we'll collectively between ourselves and the Army be able to manage through it.

Speaker 14

Got it. And last one, at Aviation, can you give us some color in terms of where the order strength is in terms of fractionals versus High net worth versus corporate?

Speaker 2

It's pretty stable, Cai. We aren't really seeing a change From where we were, we don't break all that out, obviously, but it's the demand has been Pretty strong in terms of mix. The jet stuff tends to be more domestic, roughly eighty-twenty. The turboprop is more like sixty-forty international. We haven't seen big changes in that.

Speaker 2

We haven't seen big changes in the mix between what goes through the fractional world and what goes through the Whole aircraft side, end demand continues to be, we think, pretty strong across the board.

Speaker 14

Thank you very much.

Operator

Next, we go to a question from Doug Harned with Bernstein. Please go ahead.

Speaker 16

Good morning. Thank you. Scott, in the past you commented on the supply chain that you'd actually seen more challenges at Bell than you had in Aviation. And given the strong margins at Bell, I mean, can you comment on where that stands today?

Speaker 2

Okay. This is the challenge of the world we're looking at, right? I mean, we had some pretty significant impacts at Bell in the earlier part of the year Around a very small number of suppliers, a couple of those suppliers either got healthier or in some cases we brought stuff inside and exited those suppliers. So when you do that, we had a situation in Bell with a couple of the aircraft models where we had very specific supply issues that we're able to resolve. And as a result, Q4 had a pretty strong delivery number on a year over year basis.

Speaker 2

So Again, this is the challenge. So while the absolute number of parts might be getting less, you can still have part problem that has a significant impact. So that's just the nature of the beast and what our guys work through every day. So think we did resolve a couple of critical issues in the latter part of the year at Bell that enabled those higher deliveries and obviously we got to keep working.

Speaker 16

And then if I go back to the aviation side and the end market, one of the things we've seen is more pre owned airplanes out there for sale higher We're still not back at kind of historical norms, but you were commenting that you're seeing a little bit less pricing benefit relative to inflation. Are you seeing any potential pressure here from pre owned and as you look at your market?

Speaker 2

No, we're not. Look, I think it's a look, first of all, as you noted, it's up versus where it was, which was at ridiculously low levels. It's still a historically lower levels than normal. And look, we keep a very close eye on this. They're mostly much older aircraft, Right.

Speaker 2

So the phenomenon that people kind of refer back to says, jeez, do you have aircraft competing with new aircraft sales? Obviously, there was a time going back a number of years ago now where you had relatively new aircraft that were coming onto the market and not seeing that dynamic. When we look at what's out there, what's available for sale in the used market, the number is increasing, but they are considerably older and in large part out of production aircraft. So no, we're not really seeing an impact of used aircraft out there that are competing with new aircraft sales.

Speaker 16

Okay, very good. Thank you.

Operator

And next we go to Gavin Parsons with UBS. Please go ahead.

Speaker 2

Thank you. Good morning.

Speaker 12

Good morning. Good morning.

Speaker 17

I just wanted to circle back to industrial margins and just get a better sense for what's driving that, given I think Kontex Then the section segment underperforming and then just thoughts on it seems like in TSV some of your recreational vehicle competitors are having headwinds. What's driving the margins and growth there?

Speaker 2

Well, look, I mean, Look, we look at those end markets, be it in the auto side or in the vehicle side. And Our view is, as I said, I think overall the industrial will be pretty flat, but with improved margins. And that's largely, again, based on just industry forecast, we think Altex volumes will be down somewhat, although we think margins will continue to improve in that business. On the vehicle side, I think we'll see modest growth That is because we do factor in some of these higher dollar discretionary items. We don't expect growth in that area, but net of all of that, the business probably still see some modest growth and again, continued performance on the margin line.

Speaker 2

Those things that you guys might aggregate and look at in terms of other guys in that market are completely consistent with what we're seeing. But again, that is Absolutely factored into our guide.

Speaker 17

Okay. That's helpful. And maybe just circling back to the NetJets 1500 over 15 years. I think typically they firm up about a year out, but on average that would be 100 deliveries a year. Is that something you need more visibility from them on Over that decade of orders or?

Speaker 2

Well, we don't and you're right. So we the way we treat the backlog is When those firm up and that is roughly 12 months, where they actually put deposits down, that's the point at which we move those aircraft into actual backlog. In terms of looking out beyond that, we do absolutely work closely with them on forecasting what that demand is to look like even outside of that 1 year firm up period. So we certainly have very, very good dialogue and Working with them to collectively anticipate what that demand is going to be on the fractional side. But then we don't firm up and put into that actual backlog number until roughly, as you said, that 1 year window.

Speaker 17

That's helpful. That makes sense.

Speaker 2

Thank you.

Speaker 12

Sure.

Operator

And ladies and gentlemen, as a reminder, this conference is available for digitized replay and will be available after 10 am Eastern Time today Through January 24, 2025. You may access the replay by dialing 866-207-1041 and enter the access code of 406-5507. And that does conclude your conference for today. Thank you for your participation.

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Earnings Conference Call
Textron Q4 2023
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