Thank you for standing by. Welcome to the Textron First Quarter 2024 Earnings Call. This conference is being recorded for digitized replay and will be available after 10 a.m. Eastern Time today through April 25, 2025. You may access the replay by dialing (866) 207-1041 and entering the access code 8546032. I would now like to turn the conference over to David Rosenberg, Vice President, Investor Relations. Please go ahead.

Thanks, Leah, and good morning, everyone. Before we begin, I'd like to mention that 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. Revenue in the quarter was $3.1 billion, up from $3 billion in last year's first quarter. Segment profit in the quarter was $290 million, up $31 million from the first quarter of 2023. During this year's first quarter, adjusted income from continuing operations was $1.20 per share compared to $1.05 per share in last year's first quarter. Manufacturing cash flow before pension contributions reflected a use of cash of $81 million in the quarter compared to $104 million of cash provided in last year's first quarter. With that, I'll turn the call over to Scott.

Thanks, David, and good morning, everyone. In the first quarter, we saw higher segment profit at Aviation, Bell, and Systems. At Aviation in the quarter, we delivered 36 jets, up from 35 last year, and 20 commercial turboprops, down from 34 last year's first quarter. Aviation continues to see strong demand across our product lines that resulted in backlog growth of $177 million and in the first quarter at $7.3 billion. Textron's innovations in fleet utilization remained strong in the quarter, contributing to aftermarket revenue growth of 6% as compared to last year's first quarter. Throughout Q1, we saw continued improvements in our supply chain and hours attained in the factory, supporting delivery growth throughout the remainder of the year. At Bell, revenues in the quarter were up, driven by higher military volume, reflecting the continued ramp of the FLRAA program. On the FLRAA program, we continue to progress through preliminary design reviews and expect to complete milestone B, which allows for the entrance into the engineering and manufacturing development phase of the program later this summer. Also during the quarter, Bell received an award for the production delivery in Nigeria of 12 AH-1Z helicopters. The recently enacted FY '24 budget includes five additional aircraft scheduled for delivery in 2027. On the commercial side of Bell, we delivered 18 helicopters, down from 22 in last year's first quarter. During the quarter, we continued to progress toward FAA certification on the 525, expected later this year. Bell recently received its first order for 10 525 helicopters from Equinor, a Norwegian state energy company. Moving to Textron Systems, revenue was flat, and margin was up versus last year's first quarter. During the quarter, we received notification from our government customer of the termination of the shadow program. We're currently working with the Army on winding this program down. This decision reflects the Army's transition from Shadow to the Future Tactical UAS system to fulfill the need for organic intelligence, surveillance, and reconnaissance. Earlier this month, we received notification that we were awarded options 3 and 4 of the FTUAS program, and we remain one of two competitors for this next-generation program. Also in the quarter, Systems was down-selected with one other competitor to design, develop, and manufacture a 30-millimeter Autocannon Advanced Reconnaissance Vehicle prototype for the U.S. Marine Corps. This two-year effort will develop an innovative combat vehicle that provides mobile protective firepower for the Marines. In addition, the Army's FY '25 budget request funds the design of the XM30 ground combat vehicle in preparation for the prototype build and testing portion of Phase 3 and 4 in the program's development. Moving to Industrial, we saw lower revenues in the quarter, largely driven by lower volume and mix in specialized vehicles. Kautex revenues were flat in the quarter. We are encouraged by recent trends in the hybrid space where the industry is experiencing increased customer demand and OEM investments in hybrid platforms. Aviation, Pipistrel delivered 30 aircraft in the quarter, up from 13 in 2023. Also during the quarter, Pipistrel was granted an airworthiness exemption by the FAA for its Velis Electro trainer, which will allow U.S. flight schools to use this all-electric aircraft in their pilot training programs. With that, I'll turn the call over to Frank.

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.2 billion were up $39 million from the first quarter of 2023, reflecting higher pricing of $48 million and lower volume and mix of $9 million. Segment profit was $143 million in the first quarter, up $18 million from a year ago, reflecting a favorable impact from pricing net of inflation of $14 million. Backlog in the segment ended the quarter at $7.3 billion. Moving to Bell. Revenues were $727 million, up $106 million from last year's first quarter, reflecting higher military volume of $95 million, primarily related to the FLRAA program. This was partially offset by lower volume on the V-22 and H-1 programs. Segment profit of $80 million was up $20 million from a year ago, primarily driven by a favorable impact from performance of $30 million, which includes $13 million of lower research and development costs. Backlog in the segment ended the quarter at $4.5 billion. At Textron Systems, revenues were $306 million, flat with last year's first quarter. Segment profit was $38 million, up $4 million from last year's first quarter. Backlog in the segment ended the quarter at $1.8 billion. Industrial revenues were $892 million, down $40 million from last year's first quarter, largely reflecting lower volume and mix of $51 million, principally in the Specialized Vehicles product line, partially offset by higher pricing of $16 million in the segment. Segment profit of $29 million was down $12 million from the first quarter of 2023, primarily due to lower volume and mix at specialized vehicles. Textron eAviation segment revenues were $7 million, and segment loss was $18 million in the first quarter of 2024, compared with a segment loss of $9 million in the first quarter of 2023, primarily related to higher research and development costs. Finance segment revenues were $15 million, and profit was $18 million. Moving below segment profit, corporate expenses were $62 million. Net interest expense was $15 million. LIFO inventory provision was $20 million. Intangible asset amortization was $8 million, and the non-service component of pension and postretirement income was $66 million. In the first quarter of 2024, we incurred $14 million in special charges under the 2023 restructuring plan, largely related to head count reductions to improve the cost structures of the Textron Systems and Bell segments in light of the cancellations of the shadow and FARA programs in the quarter. We expect to incur additional severance costs in the second quarter in the range of $25 million to $30 million, largely related to head count reductions in the Industrial segment. As a result, Textron has expanded its 2023 restructuring plan from a previously announced range of $115 million to $135 million in pretax special charges to a range of $165 million to $170 million. In the quarter, we repurchased approximately 3.6 million shares, returning $317 million in cash to shareholders. To wrap up with guidance, we are reiterating our expected full year adjusted earnings per share to be in a range of $6.20 to $6.40 per share. We also expect full year manufacturing cash flow before pension contributions of $900 million to $1 billion.

That concludes our prepared remarks. Leah, we can open up the line for questions.

Scott, maybe if you could just dig in a little bit on the deliveries in the quarter. I think the mix was pretty strong but relatively flat year-over-year, and you built a lot of inventory. So maybe just how is the supply chain doing? Did you want to deliver more airplanes than you ended up doing? And how do we think about how much deliveries could grow this year off of 168 last year?

Sure. David, look, I think that we certainly expect to see nice growth on a year-over-year basis. The supply chain does continue to improve. The number of hours that we're able to get in the factory in terms of labor hours that are productive, post training and whatnot, continues to improve. So I think we feel pretty good about how things progressed through the quarter. Look, we always have a few aircraft that we would like to have gotten delivered. We definitely had some things that got late in the quarter or just didn't get to where they could transfer in time. But for sure, the trend in terms of productivity and efficiency and throughput in the factory improved as we worked our way through the quarter. So a little bit lighter than we probably would have liked, but not a big number. Again, the momentum is good, and we certainly are still feeling very positive about our guide in terms of a nice increase in volume on a year-over-year basis.

Thanks, Scott, maybe we'll start with Industrial. A bit of softness there in Q1. I know this is a tough division to forecast given its short-cycle nature. But are we finally seeing the U.S. consumer rolling over here?

We discussed last year that we anticipated a decline in high-end consumer spending, particularly in recreational personal transportation, and we are indeed observing that trend. It appears to be softer than we initially thought. The automotive sector remains fairly stable, which is acceptable, and there are certain areas in the vehicle market that are performing well. However, those higher-cost discretionary items have certainly declined. As is common, many of these purchases are financed, and financing costs have definitely risen. So, a softer performance was expected. Our personal transportation vehicle business, which has been strong for us, is not performing as well as we had hoped, and we will need to implement additional restructuring beyond our initial plan to manage it effectively and prevent excess inventory in the market.

Right. And then maybe one for Frank. On the revised restructuring plan, how do you expect the cash impact of that to flow through? And do you expect the savings to be roughly equivalent to the restructuring charge?

I believe the savings will ultimately reach around $185 million on a run rate basis, and we expect to realize a significant portion of that by the end of 2024, with some continuing into 2025. We anticipate an additional cash impact of about $20 million in 2024 for the extra restructuring, which will be included in our cash guidance. The total cash allocation for the restructuring in 2024 is projected to be between $60 million and $65 million, reflecting an increase of $20 million compared to our previous estimates.

Can we start off with maybe Bell, Scott? If we look at margins, they expanded up 130 basis points at Bell to 11% despite maybe $180 million of large contribution on the top line. So how do we think about the moving pieces to profitability for the year to get to 9.5% to 10.5%?

Well, I think we'll probably still end up in that range, Sheila. We had a strong Q1, obviously. We did have, as we noted there, a settlement on an initial property-related lawsuit that gave us a little bit of a boost in the quarter. But I would say the team is performing well. As you know, we did restructuring actions to try to deal with the loss of the FARA program. We were able in a number of cases to take some of the appropriate engineering count and move that over to the FARA program, which helped us ramp that program up. But we also had to take some cost actions, both as a result of the loss of the FARA program as well as some of the lower production quantities. Obviously, it will certainly help us as we start to see some flow of the Nigerian H1 where that gets that line back up and going again, and the extra five on the V-22, which is above the original program of record, is certainly a nice add, and we'll start to see some of that flow through in the latter part of the year. So I think Bell had a strong quarter. We're continuing to focus very much on cost to deal with the mix issues there. But I think we'll clearly end up towards the high side of the guidance on Bell; I think they're performing well.

Great. And then if I could ask one on Aviation, orders held up pretty well, book-to-bill above 1x. Maybe if you could provide any color on what you're seeing from your customers. One of your competitors noted interest rates are potentially prohibiting orders. If you could just comment on that?

Sheila, we continue to experience strong demand across nearly all product lines in the business. We're feeling optimistic about the order flow. Many of these aircraft will be delivered a couple of years from now. From a financing perspective, it's not a major concern, but the order activity remains very strong and positive.

Scott, I was wondering if you could touch on the supply chain within Bell. Obviously, Q1 is seasonally light usually for the commercial helos but down year-on-year. And then also the comment you made on the 525 certification at year-end. I know that, I wonder if your business heads had been quoted as getting more confident on that into the year-end. Could you also comment on your confidence level of that certification?

Sure. Look, the Bell supply chain continues to, I would say, improve. We always have a number of parts that are sort of problem children. We're continuing to work that. But in general, I think we are able to manage our way through that. And I don't think there's anything new or surprising that would have, in any way, affect our guide as we think about Bell commercial volumes through the course of the year. We did have a very strong Q4, obviously, on the commercial deliveries and so a little lighter maybe than we expected in Q1. But I think we're in good shape. The order activity also remains very healthy. So I think Bell is in a good place. The 525 flight test is going very well. The FAA flight testing portion, we're well into that. We have a few more performance flight tests, and then we go through sort of what they call FNR, which is about 150 hours of just durability reliability flying. And obviously, as you guys know, we've been flying that aircraft for a long time. It's proven to be a very durable, reliable aircraft. So I don't think we'll have any issues going through there. We should wrap up flight testing this year as we get to midyear. As you know, there's a fair bit of paperwork processing and final documents that have to be completed before the final certification. But I'd say at this point, we feel pretty good about where it is.

Scott, nice results. Did you quantify what the settlement was in the Bell that affected the margins this quarter?

No, we didn't. I mean, it's not a huge number, Peter, but it's not that helped the margin rate a little bit in the quarter.

Yes. As you know, that bounces around depending on where the share price is, but kind of we expected it certainly will not be as volatile or may not be as volatile for the rest of the year. So we'll see. But yes, we're still sticking with the same target for the full year.

Yes. So your competitors, Gulfstream and Embraer basically had higher biz jet deliveries and were kind of closer to where they expected to be. And yet you guys continue to struggle. Is part of that related to geography, that you guys are in Wichita and you have to fight with Spirit to get people because they're trying to ramp too? And therefore, this is going to be a longer slog than maybe others are going to see?

Cai, I mean, I thought we feel pretty good about our deliveries. We always would like to get another couple of jets here and there, but I think we're doing pretty good and feeling good about where we are. On the labor front, we expect it to be. So I don't see a problem with our labor situation. I think everybody has been challenged by higher turnover rates just in terms of the amount of churn. And that's really been one of the biggest impacts to us on the productivity efficiency side is the number of people that come in and rotate back out. But I think most companies in all industries, frankly, are seeing that. But no, I don't think we have a macro unsolvable problem. It's improved significantly. The number of employees is where we needed to be. And I expect we'll continue to see a ramp on deliveries as we go through the year.

Great. And sort of maybe going back to Myles' question. So energy prices are up; 525 is clearly targeting that market. You've got an order for 10, do deliveries start relatively early next year? So could we start to see some pretty good build on that program?

Well, we're already ramping up the production side of the program to start to meet deliveries, but I suspect those deliveries will be in the late '25 sort of timeframe. I think we're in a very good place in terms of the cycle, as you alluded to. Obviously, Equinor is an energy company, and those are for oil and gas offshore applications, and we have several other customers who are in, I'd say, positive latter-stage negotiations that are primarily aimed at the oil and gas market right now. So it's certainly a favorable time to be getting these things through certification. I think it fits a nice place in that end market.

Thank you very much. Good morning, everyone. Scott, you mentioned the contribution to EBIT growth from pricing in Aviation, and we will learn more about the other components shortly. It seems that pricing comparisons will become a bit more challenging moving forward. Considering the backlog, should we view the $14 million year-on-year pricing as relatively high compared to what we might experience for the remainder of the year since those comparisons become tougher?

Yes, I believe it remains quite stable throughout the year. We have good visibility regarding pricing since it is all reflected in the backlog. Our main focus is to sustain the difference between net pricing and inflation. Therefore, much of our effort this year will involve managing inflation figures related to the supply base. However, I anticipate that we will experience positive pricing relative to inflation for the remainder of the year.

Okay. And then just a follow-up, I think you talked earlier about potentially some upside at Bell. I talked about being in good shape at Aviation. I mean when we think about where industrial came in the first quarter and where the guidance is, it looks like they're going to probably have a tough time getting to that guidance and then maintaining the overall guidance for the company of Aviation and Bell to fill in those gaps?

I believe that the industrial business will likely see revenue that is somewhat lower than our initial projections. However, I think we will manage to stay within the margin range. We have enough upside in our performance in both aviation and Bell, which is why we feel confident in maintaining our overall company guidance.

Scott, Frank. Just staying on the Aviation margin, I mean, it's a pretty good incremental in the quarter. I think it was a little bit of an easier compare. We kind of a sense of what units and price are doing. I think you've had cost input inflation, but you've also cited just kind of supply chain and some internal operating performance, maybe that's been a hurdle. Is that behind you now? Is that no longer an issue as you move through 2024? And is that a tailwind year-over-year?

I think you'll still see some pressure in the second quarter. Remember, a lot of these aircraft are inventories; a lot of that cost is inventory. So it usually takes the first half of the year to bleed out in the performance levels and productivity levels that we saw in the back half of the previous year in 2023 in this case. So I still think we see some pressure for that. But I'd say the good news is that when we look at the metrics in the factory and the efficiencies, productivity and things of that nature, we are starting to see some of the benefits that we expect to see in a more stable production environment, with less supplier disruption and fewer onboarding issues, so less impact on the training. There's a lot of things the business is doing to try to address some of those issues. So I do think that we'll have margin rates that continue to improve over the course of the year, but you're still going to have some drag of that inventory release, particularly as you get through Q2.

Okay. That makes sense. And then I guess just a follow-up on the Bell margin. I know the FLRAA is still ramping, and it will kind of exit the year at a different revenue run rate than it achieved in the first quarter. But it's also ramped a decent amount. And I think this year, you'll get pretty close to what the run rate is in the sort of medium term. And this Bell margin just keeps outperforming. I mean the amount of margin compression that was discussed out there in the market, I guess, in the medium term? Is that kind of off the table? Or I guess, how do you see this dollar margin hanging in '24, '25, or '26 just in the medium term as you continue to ramp FLRAA?

The team is performing well, and we are doing everything possible to manage costs in response to lower production levels, including factors like the Nigerian order and the additional five V-22s, which are all beneficial. I would also point out that if you look at the fiscal year 2025 budget request, there is an allocation of over $200 million for FLRAA that exceeds what was originally planned. This indicates that we are ramping up nicely on FLRAA, and we expect to see an increase in revenues from it as we move into 2025, beyond our initial budget expectations. We will remain focused on cost management and will execute effectively across all programs. I believe this will position us favorably regarding our revenue guidance, and we will provide updates on the fiscal year 2025 guidance in January or February.

I believe that finance will align with our expectations. We previously discussed corporate expenses, which were notably higher in the first quarter due to share price performance. We will maintain our forecast within that range. Although we didn’t specifically provide guidance on interest expense, it appears we are likely doing better than anticipated in this area compared to the $90 million mark, depending on the movement of interest rates over the year. Our cash investment is also performing better than we initially expected due to ongoing higher interest rates, which should provide some benefits. However, other aspects are generally consistent with our previous discussions.

I wanted to go back to your discussion around pricing at aviation. This has been a great story with continuing to be able to get pricing ahead of inflation. But when you look at this, and I'd say outside of what you have in the order book right now. When you try and plan longer term, is this something you can expect to continue? Or do you have to look at this as eventually pricing is going to come back and kind of converge with inflation rates?

I don't really know. At a macro level, I believe that over very long periods, price inflation tends to balance out. There were several years in our industry when prices were below where they should have been, and we've seen a significant price adjustment to get them closer to the correct levels. We expect continued inflation moving forward and anticipate pricing will also rise. Currently, market prices are strong. However, I'm uncertain about long-term forecasts. We still see robust demand and a healthy price environment. When we provided guidance, we mentioned that the price increases moving forward wouldn't be as substantial as those in the past few years, and we expect some inflation to decrease. Ultimately, what matters to us is maintaining net pricing that exceeds inflation.

Okay. Let’s shift our focus to Bell for a moment regarding margins. You've mentioned before that, as anticipated, FLRAA is initially dilutive. However, considering the trajectory as you progress towards Milestone B, I believe this will ultimately become a highly beneficial program once you reach full rate production. Can you provide some insight into your expectations for FLRAA's impact on margins over time?

Well, I mean, I think that as you described, that's kind of what you would nominally expect for any of these large defense contract programs. FLRAA is a very big program, right? So the EMD phase of this thing goes out through into 2030. Now, you'll start to see, I would suspect, initial production lots. We have LRIP deliveries that happen out in 2028, but you'll start to see some of the follow-on production lots being negotiated in that timeframe. But certainly, the next several years are very much dominated by the EMD program.

Good morning, everybody. I was wondering if you could spend a little time on eAviation. Maybe provide us a little bit of an update on how things are going in that business and the development that you've got going on there? And kind of what the next couple of years look like for you all on product development revenue and how EBIT is going to trend for us here over the next few years given that backdrop?

Sure. I think there are a few important points to discuss. The Pivotal business is performing well, and we've seen a notable increase in deliveries in Q1. Demand for those products remains strong, which gives us confidence. We received an FAA exemption that allows us to conduct flight training on Bell's electro, a training aircraft, which should boost our sales in the U.S. domestic market. We've already accepted it and are experiencing good growth internationally. There are a few new products in that lineup that we believe will perform well, and overall, we are pleased with the progress from the Pipistrel team. Regarding our R&D, which is the main driver of our financials in that segment, the Nexus program is advancing nicely. We’re engaging in full integration and testing of the first craft, with ground testing and evaluations already underway. We anticipate flight testing will occur later this year. The program is moving forward as most supplier selections are completed, parts are arriving, and we're beginning to construct the first airframe, with the expectation of flight next year. Investment levels in these programs are likely to stabilize. As previously stated, there's been a substantial increase in spending from 2022 to 2023, and again from 2023 to 2024, but this is expected to plateau moving forward. This should lead to improved EBIT contributions from Pipistrel product sales. Although we will continue to incur losses due to investments in Nexus and other new programs, we expect stability over the next few years.

And as you think about the size of the market that you're going after, you're putting investment dollars against what you expect to be volumes. And so I'm just kind of curious, when do you expect the payback period to start on these investments that you're making?

Okay. So I think this is very much an unknown. There's plenty of studies out there and a lot of other noise in this industry that when you look at the eVTOL side of things, that it's a mega market. The exact timing of that, I think, is still a little bit to be determined. There's still plenty of work to do on the technical front from our perspective, technical work, and regulatory work to make sure that there's viable products to meet that mission. So again, I think there's plenty of independent third-party data out there that has perspectives about how huge that market could be. Keep in mind as our spending here is relatively modest. I think we're taking advantage of a lot of cost and cost structure and talent and capability that we already have in the company. So if the market proves to be what third parties would say the market would prove to be, it's going to be a massive return on investment.

Scott, the incremental margin in Aviation, as people were talking about was, I mean, like 46%. And I recognize that revenue differences are small, so the numbers can get somewhat distorted. But given that you said inflation will probably pretty much be somewhat similar to the price benefit that you got this quarter. Why won't those incrementals for the rest of the year run somewhat higher than your objective of 20%?

Well, George, look, I mean, I think when we look at the cost, and what's going to come out of inventory and what the margin rates are going to look like, I do think you're right. We did have a higher conversion in Q1, but that's certainly higher than we would expect for the course of the year. So I think at this point, as we look at it, our expectations in terms of what inflation is going to look like, what plant performance is going to look like, which, as I said, is for sure improving through the course of the year as we get towards the high side of guide there, it's that 20% kind of range, which is generally what we've guided as a long-term measurement for the business. And I think that's where we'll be.

Well, we talked about 5% being in our guidance, but we also talked about the fact that we have a strong liquidity position, and we're going to return excess capital. So I think that, kind of, we did a fair amount in the first quarter. We'll continue to buy from here. We'll probably be on the higher side of that 5% for the year.

This conference is being recorded for digitized replay and will be available after 10 a.m. Eastern Time today through April 25, 2025. You may access the replay by dialing (866) 207-1041 and entering the access code 8546032. This does conclude our conference for today. Thank you for your participation. You may now disconnect.