Textron Inc. (TXT) Earnings Call Transcript & Summary

Okay. We'll move right along, and we're honored to have our next guest with us today, Mr. Frank Connor, the CFO of Textron. Textron is a world leader in business jet, general aviation, helicopter, tiltrotor aircraft. The company operates in 4 segments: Aviation, Bell Helicopter systems and industrial Textron, has 190 million shares. They trade at about $89 for a $17 billion market cap, $1.6 billion of net debt for an almost $19 billion enterprise value. Welcome, Frank. We'll have a nice discussion here. Thanks for coming here.

Great to be here.

Frank, it's always great having you here. Thank you for making the time to come back I think most people are familiar with Textron, but maybe you could just go in a little more depth and give us a little brief background in Textron.

Sure. A quick spin around the businesses. So our largest business is Textron Aviation. That's primarily the Cessna and Beechcraft brands of aircraft. Bell Helicopter, is our next Aviation business and obviously making both commercial and military helicopters and particularly in the military side, the tiltrotor aircraft. So the V-22 and now the FAR program, the V-280 aircraft. Our other defense-oriented business is Textron Systems. There, we play in a lot of different domains in that business. We are in the -- basically the air, sea and ground areas. We have a strong presence in unmanned air vehicles, increasingly in unmanned and robotic ground vehicles. As well as in the C domain historically, programs like the Ship-to-Shore connector for the Marines. So hovercraft, again, technically a flying aircraft. Our fourth manufacturing segment is our Industrial segment, which is comprised of Textron Specialized Vehicles. A number of brands there. E-Z-GO, Jacobsen, we're in the ground support equipment business through tug -- and so -- but primarily kind of be electric vehicles, more and more but also internal combustion vehicles there as well. And then Kautex, which historically has been a fuel system supplier to the automotive industry. And increasingly, we've been investing in the transition to battery vehicles as well. And so we've been investing in technologies and around battery enclosures for the electronic vehicle space. Our last manufacturing segment is relatively small. It's something that we formed about a year ago. It is Textron Aviation. And that segment is focused on the transition to alternative propulsion platforms in aviation. So we consolidated a number of our activities in and around battery technologies, hybrid, hydrogen, as well as some automation and autonomous systems. We bought a small company in Europe called Pipistrel, which had a presence in electric aviation with the only certified electric aircraft in the world and we are investing in that segment in these technologies, both in platforms as well as technologies that we would then push out to our other aviation businesses. And then lastly, we have a small finance business that supports our various products.

Frank, that's great over you. You guys are -- you have a lot of things going on at text, which is great. Maybe we'll just start off with the Aviation segment. Could you talk about order activity and backlog for your all forms of your business aircraft in turboprops?

Yes. So as you know, we -- coming out of the pandemic, we saw a really nice increase in the demand side for business aviation, frankly, both on the business jets, but also turboprop. So we have a very broad product line at our aviation business, everywhere, everything from our largest business aircraft to Longitude, down through M2, which is our smallest jets, but also on the turboprop side, the King Air brand name. We've recently introduced a Sky Courier, which is a 2-engine unpressurized turbo prop. So a very broad product set there. We reported at the end of the second quarter, $7.5 billion of backlog. That's up again very substantially from the pre-pandemic period. And it gives us great visibility on kind of our forward delivery activity. So pre-pandemic, we were basically manufacturing to a forecast post pandemic here with this type of backlog. Obviously, we know that represents about 2 years or so of aircraft OEM sales. So we have really nice visibility on what that manufacturing flow needs to be. Obviously, it creates a nice dynamic with the customers in terms of being able to forward plan their acquisition opportunities. And really kind of presents a very nice foundation in terms of a rational marketplace for the product.

This question has come up quite a bit on calls, but just managing a huge backlog and demand with production and not getting over your skis and overcapacitizing from '25 and beyond. Can you just talk about the dynamics there and how you think about it?

Sure. It's been a continuing dialogue, but let's put it in context. Pre-financial crisis, the Cessna and Beechcraft platforms delivered well over 400 business jets a year, right? Last year, we delivered about 170 business jets. So you're talking about an order of magnitude change in terms of the volume that we are producing in this environment relative to some of those historical environments where arguably the market got oversupply. And as people know who have watched us for a long time, we took a long time to work our way through that where those aircraft aged and basically got removed from competing consistently with new aircraft from a demand standpoint. I think we're in a very -- we're under supplying the market right now. I would suggest, by kind of the consistently strong book-to-bill. We would like to build more aircraft. But as we've talked about consistently, the industry has seen supply chain challenges. That's gotten better, but you need 100% of the parts in order to deliver an aircraft. And so we continue to work through that. We've seen some labor shortages as we've looked to ramp production. It has been hard to attract and mostly retain very early career people coming into a manufacturing environment. We've talked about we've had attrition levels of upwards of 50% for those new hires in the factory environment. I think we're seeing a better trend there. We're doing a lot in terms of trying to better screen from a selection standpoint, we've invested in new training facilities and new training programs. We've increased our mentoring activity. And so we're doing a lot of things to kind of alleviate that. But if anything, we have underperformed what we would like to do in terms of our increase in manufacturing activity. So I think at least in the near term, we would look to continue to kind of grow our manufacturing activity. But certainly, if we saw a significant change in the marketplace, we have plenty of visibility to adjust kind of our manufacturing activity and that ramp to reflect that change in the marketplace. And kind of there's every quarter, everyone is waiting for the book-to-bill number. And people are waiting for book-to-bill to be below 1:1 and kind of that's a sign that the market has turned over, and the fundamentals have changed and everything else. We will have a quarter where it's below 1:1, right? But if you just do the math on a 0.8 book-to-bill, you could have a 0.8 book-to-bill for a couple of years and still have pretty good visibility into what your near-term delivery activity is. So there's plenty of time to adjust. Having said all that, I'd say we talked about on the second quarter call, we continue to see very good customer engagement, order activity. The summer is typically a slower period, but that engagement level remains consistent. So still seeing good demand, good engagement, continuing to book orders.

What are sort of the -- could you maybe talk about -- you talked about -- you briefly went over to supply chain and labor, but what are the sort of the long poles in the tent on the supply chain? Are there specific items? Or is it sort of spread loaded or...

The frustration is it just moves around. So again, you don't know. We spend a tremendous amount of time out with the supply base, trying to kind of ascertain -- are they having problems? Are the lead times expanding and everything else, but then you get surprised. And again, the way airplanes are assembled and they come down the production line, there's a certain sequence of things, right? So as soon as you don't have that part, you start working around, you're doing things out of order, you're increasing cost, introducing inefficiency. Very importantly, you're creating more of a demand on oversight because you're creating nonstandard work, which we've seen in the industry is a big time problem. And so all of those things kind of cascade themselves. It's been everything from for a while, it was aluminum spars, where you can't really even start an airplane until you have that spar. So that alleviated itself. People have talked about there's been shortages of aviation glass recently. So cockpits, right? So we're having kind of trouble getting enough windshields, which we need, obviously, for production, but windshields crack from time to time. So you have aircraft on the ground unable to fly because you're not able to supply windshields. But it's -- I wish it was consistent because then we could effectively deal with it through some better planning, but it tends to be sporadic.

And then maybe on the order side, are there parts of the demand where there's just more -- what is seeing the most demand right now? Where is the...

Yes. It really is consistent. And if you just step back, again, I've kind of talked about -- a little bit about the product portfolio. But we made the decision to continue to invest through a very difficult period of time in the business. And so our product, when you look at it, I mentioned before the Longitude, which is our largest aircraft is a relatively new aircraft from an introductory into service. The Latitude on down through the CJ line as well as through the Beechcraft line. We have done upgrades or introduced new product in really all of those various categories. So going into this cycle, I think we were very well positioned from a product standpoint to do very effectively in the market. and we continue to do that. And it's -- that's paying off for good demand across all of the various product platforms. business jets tend to be more American Americas-centric. So North America, South America are very good markets. U.S. is by far the biggest and best market, that continues and we're seeing that same trend. Turboprop tends to be more broadly distributed with international probably being 50% over time of that business. And we're seeing -- we continue to see that as well in terms of various customer segments. The fractional players continue to do quite well in the marketplace. We're seeing good demand from traditional customers. We're seeing new people entering the marketplace, and we're seeing the typical demand out of all the other areas that use aircraft, governments, agencies, kind of -- you name it, it's there. So there's no real kind of change in any of those areas for us.

Maybe we can shift to the Bell business and sort of the [indiscernible], the FLRAA, you just completed a milestone B, what's the outlook now for the V-280 program now that you're sort of into the more of the engineering phase and increasing?

So we feel really good about, one, having won the program, obviously, and secondly, the important move into the milestone B. So we're moving officially into the EMD phase of that program. That is a big step for the program. We feel very good about the progress that we're making. We are continuing to work with the customer on releasing engineering drawings, getting supply chain in place, all the things that go with this phase of the program. There's a tremendous amount of interaction. There has been since the award and up until EMD phase with elements of the customer that we hadn't interacted with during the OTA phase. So just stepping back, we've been investing in this program for over a decade. We were competing against Sikorsky. We built and flew a prototype. We demonstrated the capability of the tiltrotor technology and then we won the program. So from a design standpoint and everything else, the program was quite mature when we won the program relative to a lot of new starts. But there's a lot that changes as you get kind of all these other constituencies involved. So we're working through that. The digital models, the MOSA compliance, all of those types of things. We're now -- as I said, we're working through that EMD phase. The next big step is first flight in 2026. So we expect to kind of deliver that initial aircraft or initial aircraft to the Army for first flight in 2026, and the team is hard at work executing on that.

You have other obviously, programs in Bell, more legacy ones. Could you walk us through maybe the phasing and transition of the V-22 and H-1 production over the next few years?

Sure. So both of those programs are in the later stages of their manufacturing cycle. The V-22 has been a tremendous program for us. I think it's been a tremendous asset for the military. It's utilized by the marines very extensively, the Air Force and the Navy. We just saw 5 additional units added to that program. So that takes manufacturing out through 2027 in terms of new aircraft deliveries. And we would expect that over time, there'll be upgrade activity on the V-22. There has been a lot of press recently about the V-22's reliability. The V-22 safety record is very consistent with lots of other military aircraft and rotorcraft. It is a -- these aircraft operate in difficult, harsh environments. Every mishap, an accident is absolutely tragic. But the V-22 has been used extensively for decades and continues to be flown as I said, by those 3 military services. We'll continue to work with them on continuing to upgrade the safety and reliability of the aircraft. There's always things that can continue to be invested in. And I would expect that the customers will look to continue to invest in those platforms. So there's upgrade programs associated with the V-22 that over time, like a program that we've been doing for the Air Force, where we've been improving them to sell on the V-22 from a liability standpoint. I would expect that, that will continue to kind of flow through our factory over time once the OEM units are fully delivered. On the H1, H1, again, is used by the Marines, both in utility version, the Yankee and a combat version to Zulu. Those lines had gone cold for the U.S. military program. but we recently received an order for 12 additional Zulu aircraft from -- for military sale to Nigeria. So we are beginning to execute on that. And so we actually are restarting the production line of Zulus. Those are flowing -- beginning to flow through purchasing activity and those sorts of things, early stages of that activity. Those would be delivered in the latter half of the decade, 2027, '28 type time frame. So that brings that line back online, does allow for other opportunities in the foreign military environment. So we continue to work that. But likewise, I think that the Marines are looking to absolutely continue to upgrade and support that H1 platform. And so there are upgrade discussions going on, and there's a program called SIEPU, I can't tell you what the naming is behind that acronym, but it's basically looking at systems, electronics and other upgrades to the H1 program that is an opportunity for us as well.

With all that being said, from the FLRAA down to the H1 and what's going to be going on over the next few years. Could you sort of walk us through how that's going to impact margins at Bell going forward?

Yes. So we've been talking about this for quite a while that as we continue to ramp the engineering activities on the FLRAA program, which is largely a cost-plus program. There are some fixed price elements in it, but it's largely a cost-plus program. That would have lower margins than some of the revenue that it is replacing in terms of overall Bell revenue coming out of these manufacturing programs for the V-22 and the H1. So Bell has consistently executed at above 10% margins. We have been warning investors for a number of years now that there is going to be pressure on Bell's margins as we move forward with this transition. The Bell team has done a nice job of executing. We are replacing some IRAD spending, with essentially paid for government engineering spending through the flower program. So we went from having to invest our own money to now the government paying for that. So this year, you're seeing a benefit to margins of that we're outperforming our margin expectations. But as we move forward, there's going to be margin pressure. Now, the key is we're challenging the team to offset that margin pressure with revenue growth and other opportunities to be able to grow EBIT or not in the face of that margin pressure. And we'll see over time how things progress on various programs of our ability to achieve that. But certainly, we expect revenue growth will partially offset or hopefully largely or more than offset that margin pressure.

Maybe switching to systems. You have a lot of irons in the fire systems, a lot of programs and potential. Could you talk about some of those opportunities, so maybe some of the larger ones?

Yes. Systems is, as I said, a portfolio of different businesses where we have a lot of very strong technologies. Systems has been frustrating. We've been investing in growing systems, top line and not for many years now. And it seems like kind of we'll make progress over here. And then we have a setback over here. And the latest one this year was in the unmanned air vehicle space, the Shadow program, where we are -- have provided that unmanned air vehicle to the Army for decades, the Shadow was unexpectedly taken out of service. And frankly, it's left a big gap in the unmanned air capabilities at the Brigade level in the Army. So there are -- that that's been a headwind. But I think the '25 is going to be a big year for systems from the investment that we've been making. So just to kind of go through that quickly, in the unmanned air space, we've been investing in future tactical UAS, so FTUAS. That is essentially the replacement program for the shadow. We are 1 of 2 competitors in that. The other competitor is Griffin Aerospace, a relatively small company. And we think that we're continuing to show competitively very well there. We've been recently awarded a couple of additional options, option 3 and 4 in that program. And we -- that program is scheduled to go to a full rate production position during 2025. So there'll continue to be developments there. and kind of we're working hard at winning that opportunity. The land business, the land business for us has been relatively small in the recent past. But we've been investing significantly in a bunch of land programs that, again, are kind of making good progress and where there's going to be important decision points in '25. The ARV program for the Marines, the arm reconnaissance vehicle. We are 1 of 2 competitors that are building prototypes in that program. We expect a down-select to an EMD phase for that program in 2025. And so that's an opportunity that we've been investing in. The Army's robotic combat vehicle program. That is -- again, we've been competing in that. We bought a company up in Maine called Howe & Howe a number of years ago that has been really good with creating tracked in robotic vehicles. And so we've been investing again for many years in these types of technologies, but there'll be a down-select the down select for the RCV program in 2025. And then I'd say lastly, in the vehicle space a little longer term is the replacement for the Bradley Fighting Vehicle, the XM30, which is an Army program where we're teamed with Rheinmetall. And again, are one of a couple of competitors in that program and making progress there. So lots of opportunity in the vehicle space. Two other quick ones, Sentinel in the -- in our weapons business. So there's been a lot of press about Sentinel and the Sentinel program and overruns on the Sentinel program. We are not involved in that part of the program. We are expert at the front end of the missile. So as we look at upgrading and modernizing our ground-based nuclear deterrent, we historically have had a strong position in that space, and it's been a long time since the U.S. has invested in that area. But we've reinvigorated that business. We're -- and we're working on that program, and we continue to see more content coming to us in that program. And then in the Marine side Ship-to-Shore Connector, we recently saw the -- an award or we're in discussions with the Navy about an award of additional 9 vessels there. So there's a lot of good things going on in Systems. Kind of this year is going to be another year of relatively flat top line, but very strong margin performance. But I think '25, you're going to see a lot of important things happen kind of that we're -- we've been investing for.

You've done a lot of good stuff there. Maybe I'll open the floor up to the audience.

You mentioned that you have maybe insufficient demand or scale in some of your manufacturing operations. And I'm wondering whether, overall, a company such as Textron, you have sufficient scale and manufacturing to do advanced manufacturing to a meaningful extent? Or do you feel maybe you're falling behind in that?

No, not at all. I didn't mean to suggest in any way that we were subscale in manufacturing. We've been having issues around attracting labor because when we -- certain of our products are difficult to automate in certain areas. But we're absolutely investing in advanced manufacturing technologies. Two quick examples. One is certainly in the aviation space, we are investing in robotics. And as robotics get more agile, as costs come down and as importantly, as imaging systems continue to improve, we're seeing a lot of utility for that. I was out at our Aviation business the other day and we're making a big investment in, for instance, airplane prep for paint with using robotics for sanding and those preparations for systems. So there are absolutely places where you can automate. But there are places where you still need individuals, kind of stuffing cables, crawling through airplanes, doing kind of various assembly activities. But we are automating in that area. I'd say the other big area of manufacturing investment that we're making, and I think this was important in our winning the FLRAA program is down at Bell, we invested in a manufacturing technology center to demonstrate the manufacturing readiness of all the new things that we're going to be doing on the FLRAA program to improve manufacturability, improve cost and improve reliability. And so a lot of new manufacturing, grinding technologies, heat treat technologies, kind of other metal-based technologies, composites and other things that we demonstrated the Army will be part of the FLRAA program when we ran production for that. So there's been a significant investment in the manufacturing base.

Let's jump to industrial. Maybe just a very brief overview on the state of the industrial business and you can maybe talk about a little more -- you went into a little bit about with Kautex and the shift to EVs, but talk a little bit more about that and what that means for your market.

Yes. So look, businesses, again, our TSB business in Kautex. So let me touch on -- I'll touch on both of them as you asked. I'd say, first of all, from an industrial standpoint, as we talked about on the second quarter call, I'd say industrial is where we are seeing heavier headwinds this year than we would have expected. So we are seeing a tougher demand environment in both of those businesses for similar but different reasons and we are responding accordingly and looking at our production levels and our cost structure and making sure that we respond to that environment. At TSB, TSB is a very good business. The biggest business there is easy go which makes golf cars and golf car derivatives, both for golf courses as well as lots of other locations like personal transportation vehicles that you see at retirement communities, increasingly in low-speed public road environments and those sorts of things. The golf business remains very good. Golf rounds are up, post pandemic significantly. But we are seeing pressure on the PTV side as well as the powersports side, where we have tracker off-road and Arctic Cat as brands. I think associated with one, the economic uncertainty and higher interest rate environment for that type of buyer, which has been a headwind. But also on the electric vehicle side, we are seeing increased competition from Chinese competitors. And there's been a lot of discussion in the press about the overcapacitization of Chinese automotive EV makers, those same folks are increasingly moving into this lower speed, smaller wheeled vehicle base and competing at a price point that is not consistent with our historical price points in the marketplace. The industry filed an antidumping claim against the Chinese. That is in review. It is moving forward. We'll see what happens there. But we are needing to respond to that, obviously, on the demand side and kind of maintaining competitiveness there. So I'd say, overall, kind of TSB is facing some headwinds, but executing well in other of the businesses such as the turf business and the ground supported business. At Kautex, a little bit of a similar story. We serve the global automotive markets in all regions. Europe has been softer than expected this year. And we're really a victim or kind of subject to what's going on at the automotive OEMs and what they're seeing from their demand cycle, we tend to have plants that are relatively close from a proximity standpoint, to their plants and respond to their production changes. And Europe, again, has been softer than everyone had forecasted initially. North America and China have been relatively flat to expectations so that we've seen some headwinds there as well. I think this -- the whole debate about the transition to electric vehicles is kind of moving a bit our way in terms of -- we have always had a very strong presence in hybrid technologies, in the automotive space. And so we're seeing increased demand on the hybrid side that is a benefit to the business.

Frank, you have a lot of great businesses and it was a great overview today, and a lot of opportunities looks like coming down the road. Congratulations on all your success. Thank you for making the time and hopefully get you back next year.

Thanks, Tony. Great to be here.