Ladies and gentlemen, thank you for standing by. Welcome to the Textron Second Quarter 2024 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President, Investor Relations, Mr. David Rosenberg. Please go ahead.

Thanks, Greg, 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. Revenues in the quarter were $3.5 billion, up from $3.4 billion in last year's second quarter. During this year's second quarter, adjusted income from continuing operations was $1.54 per share, compared to $1.46 per share in last year's second quarter. Manufacturing cash flow before pension contributions totaled $320 million in the quarter, compared to $242 million in the second quarter of 2023. With that, I'll turn the call over to Scott.

Thanks, David, and good morning, everyone. Aviation has higher segment revenues of $1.5 billion, generating a profit of $195 million, up $24 million from the second quarter of 2023. We delivered 44 commercial turboprops, up from 37 last year and 42 jets down from 44 in last year's second quarter, while aftermarket revenues grew 13%. Aviation continued to see strong demand across all product lines. Backlog ended the quarter at $7.5 billion, up $118 million from the first quarter of this year. In the quarter, Aviation began deliveries of the King Air 260 under the multi-engine training systems contract for the US Navy. To-date, we've been awarded 35 aircraft to a possible 64 on the program. Also during the quarter, Aviation certified a third variant of the Cessna SkyCourier, the combi version allows operators to transport passengers and cargo simultaneously. Combined with the previously certified passenger and cargo variants, this latest variant continues to demonstrate the versatility of the aircraft to our customers. In June, Aviation completed the first flight of Cessna Citation Ascend. The aircraft is the first conforming production flight test aircraft and represents a significant milestone for the program. To-date, we have completed over 400 hours of flight testing. The Bell revenues and profit in the quarter were up as compared to the second quarter of last year. On the commercial side, Bell delivered 32 helicopters, down from 35 in last year's second quarter. Moving to military. Bell completed the FLRAA preliminary design review, while also continuing to release engineering drawings and place orders for long new material as the program continues to ramp. In the quarter, Bell was now selected as one of two companies for the next phase of DARPA's Speed and Runway Independent Technologies X-Plane program to create a prototype high-speed vertical takeoff and landing aircraft for the US military. This program builds on Bell's success as the leader in tiltrotor technology. Textron Systems realized higher revenues. We're continuing to pursue new program opportunities in the quarter. Systems was awarded Options 3 and 4 for the FTUAS program in the second quarter. This award includes the delivery of an Aerosonde Hybrid Quad System to the U.S. Army for test evaluation. As part of the army's robotic combat vehicle competition, we announced a collaboration with Kodiak Robotics. Kodiak will integrate its industry-leading autonomous system into a Textron Systems purpose-built uncrewed military vehicle to demonstrate the autonomous operations later in 2024. Moving to industrial. We experienced lower revenues and operating profit in the quarter. As expected, we continue to see softer demand in our consumer and automotive end markets. We continue to execute on our cost reduction plan to position the cost structure for lower volume environment. As a result, we saw sequential margin improvement in Q2 and expect to see this improvement in the second half of 2024. Moving to Aviation. During the quarter, we completed the acquisition of Amazilia Aerospace. The Amazilia team has expertise in digital flight controls, flight guidance, and vehicle management systems for manned and unmanned aircraft. We plan on integrating their products and capabilities into our new platforms, such as the Nuuva and Surveyor. The Nuuva program reached a significant milestone with the completion of vehicle one assembly. The prototype vehicle has entered ground testing, which supports anticipated hover flight later this year. 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 $1.5 billion were up $113 million from the second quarter of 2023, reflecting higher pricing of $57 million and higher volume and mix of $56 million. Segment profit was $195 million in the second quarter, up $24 million from a year ago, due to higher volume and mix of $35 million and favorable pricing net of inflation of $22 million, partially offset by an unfavorable impact from performance of $33 million. Backlog in the segment ended the quarter at $7.5 billion, up $118 million from the first quarter. Moving to Bell. Revenues were $794 million, up $93 million from last year, primarily due to higher military volume of $104 million as we continue to ramp the FLRAA program. Segment profit of $82 million was up $17 million from last year's second quarter, largely due to a favorable impact from performance of $39 million, which included lower research and development costs, partially offset by mix. Backlog in the segment ended the quarter at $4.2 billion. At Textron Systems, revenues were $323 million, up $17 million from last year's second quarter, largely due to higher volume of $14 million. Segment profit of $35 million was down $2 million from a year ago. Backlog in the segment ended the quarter at $1.7 billion. Industrial revenues were $914 million, down $112 million from last year's second quarter, mainly due to lower volume and mix of $119 million. Segment profit of $42 million was down $37 million from the second quarter of 2023, primarily due to lower volume and mix. Textron eAviation segment revenues were $9 million, and segment loss was $18 million in the second quarter of 2024, compared to a segment loss of $12 million in the second quarter of 2023. Finance segment revenues were $12 million, and profit was $7 million. Moving below segment profit. Corporate expenses were $17 million. Net interest expense for the manufacturing group was $20 million. LIFO inventory provision was $27 million. Intangible asset amortization was $9 million. Special charges related to the previously announced restructuring were $13 million, and the non-service components of pension and post-retirement income were $66 million. In the quarter, we repurchased approximately 4.1 million shares, returning $358 million in cash to shareholders. Year-to-date, we have repurchased approximately 7.7 million shares, returning $675 million in cash to shareholders. That concludes our prepared remarks. Greg, we can open the line for questions.

Okay. Your first question comes from the line of Peter Arment from Baird. Please go ahead.

Yeah. Good morning, Scott and Frank. Nice results. Scott, your book-to-bill over 1 in Aviation. Maybe you could just give us a little color, what you're seeing in the market environment and any color on pricing and what aftermarket also did in the quarter?

Sure, Peter. Yeah. Look, I think the end market continues to be robust. We're seeing strong demand in jets, turboprops. It's pretty much across all models and across the whole family of products, which is great. A strong response to a lot of the upgrades that we've done here recently in terms of existing models. And obviously, we'll expect as we go to the back half of the year to see continued strength in new launches like the Ascend and such. So I would say, again, as much as we've seen for the last couple of years, we're still sort of targeting that one-to-one area, but robust demand, which is great. Aircraft are flying. So we continue to see strength in the service business as well. 13% is particularly strong in the quarter, but we feel good about where that's been performing. So, yeah, across I think the whole portfolio is feeling pretty good in terms of the end market.

That's great. Frank, your capital expenditures were $140 million for the first half of the year, and your guidance is $425 million. Are you expecting to come in at a slower pace than your guidance, or do you plan to increase spending? Aside from maybe FLRAA, what are the main factors driving the increase? Thanks.

Well, we'll continue to see growth in the second half of the year. Obviously, as reflected in those numbers, we're a little slower in the first half than we expected. We tend to be a bit back end loaded in CapEx though. So we will see growth in the second half. There's probably a little opportunity in that kind of full year number given the pace, but for now, that's a number we'll stick with.

Appreciate the color. Thanks, guys.

Your next question comes from the line of David Strauss from Barclays. Please go ahead.

Thanks. Good morning.

Good morning, David.

Good morning, Scott. Can you provide us with an update on the supply chain for both Aviation and Bell?

Sure, David. Look, it's still problematic. There's fewer problems probably than we used to have, but there are still parts that are from suppliers that continue to give us some heartache with late deliveries and that does create some of these issues around holding the factory and rework and delays in sequences. But what we've been managing through that, unfortunately now for a number of years, it does continue to drag on our performance in the aviation business and particularly the performance numbers continue to see factory inefficiencies that we would like to get resolved. But I think the team all-in-all is working through that. We're still able to drive higher revenue and higher profit margins. So I think all-in-all, the business is performing well despite it's still a tough environment. I think you see most companies reporting and continue to see some challenges in the supply chain, still a lot of new people, a lot of training inefficiencies and things like that, but we're working our way through it. Same thing at Bell. We have a number of deliveries that we missed where we're missing some key components. We're working with those suppliers. And as I said, the number of them are getting smaller, but in this industry, every part is important. So we're continuing to have to work our way around some late deliveries of parts coming in. But as I said, I think all-in-all, our teams operationally are fighting through that and getting most of their deliveries done and continue to drive good margins. So we'll keep our heads down and keep fighting through that through the course of the year, I think.

Okay. Thanks for that. And your first half jet deliveries are relatively flat year-over-year. Are you still expecting higher jet deliveries for the year? And could you maybe comment on latitude and specifically the deliveries were lighter year-over-year there, which is a bit surprising. Thanks.

I think we are still expecting to have higher unit deliveries in 2024 compared to 2023. I would say we are a bit behind where we would like to be on a couple of these models, particularly the Latitude. We had a few deliveries at the end of the quarter that were delayed, but those have now been completed. We are working hard on these lines to address some issues. Specifically, Latitude had one challenge that we needed to navigate, and I believe we will see improved performance on that line for the remainder of the year. In summary, we are still projecting higher unit deliveries, and overall, we anticipate a good mix and performance for the business. Despite these challenges, we expect strong margin performance year-over-year.

Great. Thanks very much.

Sure.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, guys. Thank you so much. Scott, maybe to start on Aviation. Aviation profitability has been really good, 13.2 in the quarter, I think 150 basis points of net price. So how do we think about the puts and takes as we go into the second half? And is this sort of low teens a new level for Aviation profitability?

Look, Sheila, I do think the team is performing well, right? I mean, we've got revenues up, margin is up, backlog is up. So we feel pretty good about where the business is. As I said in my answer to David's question, it's not always easy. We're still dealing with challenges in the supply chain and things of that nature. But I do think that we'll see continued strong margins on a year-over-year basis as we go through the balance of the year. And again, we're feeling good about where the business is. I wish it was easier, it's not, but the guys are working through it. And I do think that we'll see strong margins. I think we still feel good about our guidance. We still think this is probably a $6 billion business this year. I think we'll be well within the guide on the margin front. As we said earlier in the year, I think the price inflation spread, you'll see that getting smaller as the year goes on. But again, I think that will be in part offset by the fact that we'll continue to drive better efficiencies and performance of the factory.

Great. And then maybe one on Bell and just the military portfolio there outside of FLRAA. How do you think about V-22 and opportunities there elsewhere in the military side?

I believe the military business outside of FLRAA is performing well. We've added the H-1s from Nigeria, bringing in 12 aircraft, and we are beginning to ramp that up this year, which we have already started to see benefits from in this quarter. V-22 production is ongoing, and we have now included the five aircraft planned for fiscal year 2024, contributing to our base. The Nacelle Improvement Program is also progressing, and I anticipate a broader acceptance of that as we move forward. There are efforts being made in the fiscal year 2025 budget and beyond that will provide upgrade opportunities for both the V-22 and H-1. Although production volumes will continue to decline, we can expect a good flow of upgrade and modernization work for both the H-1 and V-22, which will help maintain stability as we transition more into the production phase of the FLRAA program.

Great. Thank you.

Your next question comes from the line of Myles Walton from Wolfe Research. Please go ahead.

Thanks. Good morning. I was wondering, Scott, if you could talk about the aftermarket growth, you mentioned 13%, which is a pretty good acceleration given utilization is decelerating. Was there anything or is there anything that's driving that, whether that's non-typical on the military side or mandates or anything of that nature?

Overall, we are seeing good growth in the aftermarket business. Demand remains strong as aircraft are actively flying. We had a particularly strong military quarter, especially as we expand the spares pool for the METS program related to the Navy contract. Generally, the aftermarket side is performing well. The demand is evident, as more people are flying, leading to increased consumption and more shop visits. We feel very positive about the current state of the aftermarket.

Okay. And then I guess on the performance disclosure, the $33 million drag, I know this can get a little bit apples to oranges comparison, but does that imply that performance actually deteriorated sequentially or didn't improve as much as you had in your baseline plan?

Yeah. Myles, look, the performance category is a messy one as you know, right? So there's a lot of stuff in there. For sure, some of it is just some of those inefficiencies that we talked about, right? I mean, we're still not at our standard costs where we would like to be. So part of that number for sure reflects some manufacturing variance. But as you know, there's also a lot of other stuff in there, right? I mean, the business continues to grow. So if you look at on a year-over-year basis, SG&A, IRAD, these numbers, which are in line on a percent of sales basis, but those actual dollar values on a year-over-year basis also go through that performance line. So there's natural growth in SG&A, there's natural growth in IRAD. Look, there was a legal settlement in there this quarter. So there's always lots of $3 million, $4 million, $5 million things that go through there, most of which you would kind of expect in a business that's growing and continuing to invest.

Okay. Got it. Thanks so much.

Sure.

Your next question comes from the line of Doug Harned from Bernstein. Please go ahead.

Good morning. Thank you.

Good morning.

On the Ascend, you introduced the Ascend at EBACE and I thought that was interesting. Europe is only about, I think about 7% of aviation revenues. How are you looking at international markets, particularly Europe, Asia. Do you see those for aviation as potentially offering a bigger share of your total revenues?

So Doug, I don't know if it will change dramatically that overall share of revenue. The Jet business has always been more focused on North America, with South America typically being our second biggest market and Europe third. As you look at the Ascend, I think we will see a similar distribution of share, similar to what we've observed over many years with the XLS family. The Ascend essentially modernizes that historical product, which has been incredibly successful and is likely the most popular business jet globally. It features upgraded cockpits, improved thrust in the engine, and a better cabin design with a flat floor and larger windows. I believe customers will appreciate all aspects of this aircraft, from crew experience to passenger comfort and performance. However, I would expect to see a similar share since it is a strong product in the mid-sized business jet market, which is still primarily North American, followed by South American and European markets. Therefore, I anticipate we will maintain that same share position across those key segments with the Ascend, just as we did with the XLS family.

And then on SkyCourier, it seems you are expanding the capabilities of this aircraft. What is your outlook on the potential scale of that market? How large could the SkyCourier fleet eventually grow?

Well, I think it's going to be a very big market. I mean, if you look at the acceptance of that product, I mean, right now, we're just trying to make them as fast as we can make them. The demand has been really strong. And I mean, it's been great to see, Doug, it's everything from the pure cargo version. I mean, this thing is a beast in terms of moving cargo around the world. We're seeing a lot of acceptance on sort of small regional airlines, 19 PAX seating and then obviously, what we did here most recently with the combi is you have a lot of markets where they need to move passengers, but they also need to move cargo and that's exactly what the combi was aimed at. So right now, I think both domestic, international markets, cargo PAX, now the combi, the issue for us with SkyCourier is just continue to ramp up on the production volumes. The demand is there across all those segments and in a lot of different geographies.

Okay. Very good. Thank you.

Your next question comes from the line of Seth Seifman from J.P. Morgan. Please go ahead.

Hey. Thanks very much, and good morning.

Good morning, Seth.

I was wondering if you could talk a little bit more about the potential where the margin can go in the Industrial segment in the second half, kind of how much of the benefit of the cost cutting program that you felt like we saw in the second quarter and how much is still on the come?

We expect to see continued growth as we progress through the year. However, we're not anticipating a sudden turnaround in market demand, which we are monitoring closely. Looking at the numbers Frank outlined, we've incurred about a third of the restructuring costs in Q2, with another significant portion expected in the latter half of the year as we continue to reduce costs to match our volume. Currently, we’re likely operating about 100 basis points below where we should be, but the cost measures we are implementing should address that. Our strategy is to keep taking cost actions, remain cautious about any immediate improvement in consumer demand, and drive sequentially improved margins.

Okay. Great. And then maybe just as a quick follow-up. Very good order activity year-to-date in aviation. Is there anything you'd say to distinguish where the order activity is coming from with regard to either fleet customers versus individual customers?

We are still observing strong demand across our entire customer base for both jets and turboprops. This trend is consistent regardless of how we analyze the data, indicating sustained strong demand.

Excellent. Well, thanks very much.

Sure.

Your next question comes from the line of Noah Poponak from Goldman Sachs. Please go ahead.

Hey. Good morning, everyone.

Good morning, Noah.

Good morning, Noah.

The business jet output just remains, I guess, low relative to how strong demand is and where the backlog is. Are lead times getting long enough that it's an issue for some customers and you're losing some sales on that or do you sort of just not care about that because you're managing to price and the margins are good and you're okay on that front?

Well, I think this is mainly an industry-wide issue. If someone had significantly different lead times, they might be at a disadvantage, but everyone is facing the same challenge. We're still actively engaged in sales, as indicated by our book-to-bill ratio being above one, and while we are delivering aircraft, we are also continuing to receive orders for the future. Currently, the situation is fairly balanced, and we don't have a competitive edge or disadvantage regarding availability. Everyone is competing equally, but the backlog shows that timelines can be one and a half to two years in many instances.

Okay. The additional H-1 orders at Bell, can you speak to roughly what that adds annually and how far out in the future that will go?

No, I don't think so. The Nigerian order was for 12 aircraft, and similar upgrade programs like SIEPU will continue for several years, but not all of that funding has been secured. Therefore, I wouldn't want to go into detail about it. The same applies to the V-22 program; we believe there are opportunities for missile improvements, and we are discussing various enhancements with our V-22 customers. It's widely understood that this aircraft will be in service for a very long time. As with any military platform, ongoing investment in upgrades and enhancements is expected, but these discussions and programs will develop over time, so I wouldn't provide a multiyear forecast on those.

Okay. And then just last one, does it make sense to walk through the math on the shadow decommission just so that's modeled correctly, how much comes out? What does it do to the margins? Did that affect the second quarter? Any clarity you can provide there?

From a modeling perspective, this is roughly a $50 million business. We've already worked through most of this year's revenue as we transitioned from Q1 to Q2. I would say the impact moving forward is minimal. The team has handled the unexpected loss from the shadow program, and we've seen sufficient growth in other areas of our business to compensate for that revenue while maintaining strong margins. The shadow issue is mostly behind us, and the team has successfully navigated through it, positioning us to continue operating effectively. Importantly, in systems, we're focusing on new programs like the FTUAS, RCVs, and the ARV XM30, which present significant opportunities. Overall, we've effectively absorbed the loss of the shadow program in our model.

Okay. Yeah. That looked mathematically a little tough to do at least in the very near-term. So, yeah, that's impressive. Okay. Thank you.

Your next question comes from the line of Cai von Rumohr from Cowen & Company. Please go ahead.

Yes. Thanks so much. So, Scott, you guys have been kind of warning about margins. Don't get ahead of yourself because the inefficiencies that you experienced in the second half of last year are going to flow through inventory into the P&L and that will restrain margins. It looks like that didn't really occur. I know although I know mix was a plus. Should we be looking for a good improvement in the second half from diminishing flow through of kind of inefficiencies so that even though I assume the mix is negative given you got more latitudes, but so you could basically sustain this 13% type margin?

I believe that a 13% margin is very impressive. However, I'm not certain we will sustain that level for the rest of the year. Instead, I anticipate we will remain in the mid-12% range. We will likely experience less price inflation than we did previously, partly due to our mix. We have many latitude deliveries, particularly in Q3, which are mostly on the fractional side and typically have lower margins than retail latitude deliveries. There will always be some challenges, but there are also positive developments occurring. I believe our business is still performing within the guidance we provided, despite ongoing inefficiencies. With a mid-12% margin, we are generating strong margins, good revenue growth, and a robust backlog. Therefore, I am confident that we are on track to meet our guidance, indicating that our business is in a solid position.

Terrific. And then secondly, you continue to be aggressive actually even more aggressive in terms of share repurchase. You bought $358 million, 4.1 million shares. So you're basically whacking away at a 5% rate. What should we expect in terms of the Repo in the second half?

I think we'll continue to focus on that Repo, Cai. What we're generating, we're getting good strong cash flow. We feel very good about where the business is on a cash standpoint. What we do some small acquisitions of Amazilia relatively small dollars that adds some real capability to the eAviation business. Frankly, technology that will help us not just the aviation, but I think also at Textron Aviation as well as future opportunities at Bell. So, but these are small dollars. Clearly, the bulk of the strong cash flow generation that we have right now. We're allocated to the buyback and I think we'll continue to do that.

Thank you very much.

Your next question comes from the line of Ron Epstein from Bank of America. Please go ahead.

Yeah. Hello. Can you hear me?

Good morning, Ron. We can hear you.

Yeah. Great. Perfect. Sorry. Yeah. Maybe just a couple of quick ones. Could you do a bigger version of SkyCourier? Like is there any demand for that from your customers?

I don't think we need to create a larger version of it. It's already a sizable aircraft, especially when compared to other models. From a regulatory perspective, it fits very well in the short haul cargo market. We have collaborated closely with FedEx in its design, specifically to accommodate the LD-3 container space where it excels. On the passenger side, it meets the regulatory requirement for 19 passengers, and it comfortably accommodates that number. Going beyond that size would likely push us into a different category, like the ATR, which isn't really our focus. The significant gap in the market was between our Caravan, which has performed exceptionally in the smaller cargo and passenger market, and the light air transport segment. We believe the SkyCourier is perfectly positioned within that gap, and we're observing strong market demand for it.

Got it. And then on Aviation, I mean, how do I frame this? It seems like we're in a unique environment where for you guys, I don't want to put words in your mouth, but everybody that you have no white tails. Everything going down lines is owned. Have you ever experienced that before, if that's okay?

I think you need to look back to 2007, Ron, to truly understand this. We've discussed this business for years, and it shouldn't be considered a white tail operation. Historically, business jets have not operated that way. The financial crisis altered how this business functions. Ideally, there should be a backlog of around 12 to 24 months depending on the model types, so that we know where each aircraft is headed as it comes off the production line. That's the current situation, and I believe it's essential for the industry to maintain that standard. This is not a new concept; it's been the way this industry has functioned for decades, and it's encouraging to see it returning to that model.

Yeah. That's great. And then if I can, just one last quick one. Just curious, you mentioned that aviation, some of the technology investments you might make inorganically could flow back to out just broader Textron Aviation. Can you highlight anything that you're learning in that business that could actually help outside of the aviation, just broader aviation?

Sure. The nature of our work, especially with unmanned systems like Nuuva, and the automation levels we envision for products like Nexus, involves highly automated fly-by-wire and digital flight control systems that are almost autonomous. Even with a pilot in the cockpit in the Nexus case, the aircraft's capabilities are fundamentally autonomous. Our partners at Amazilia bring valuable expertise, but we have extensive experience with fly-by-wire technology, as seen in our V-22 program, the V-280, and the 525, the world’s first commercial fly-by-wire helicopter. Our company has the capability to advance this technology. Moving forward, we expect to integrate more fly-by-wire and digital control features, along with quasi-autonomous capabilities, into future product families or product enhancements, making it accessible at a significantly lower price point than current high-end systems. This technology, which we are developing through acquisitions and implementation in Nuuva and Nexus, will play a key role in making affordable solutions available in both the fixed wing and rotorcraft markets in the future.

Okay, cool. Thank you very much.

Sure.

Your next question comes from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

Hey, good morning, everyone. Scott and Frank, I mean, the strength in aviation is clear. Scott, you mentioned on Ron's question that, look, we're kind of almost back at that pre-financial crisis levels regarding the backlog. If you take out the performance headwind that you highlighted in the quarter, margins at aviation would have been 15.5%. I mean, this is also back to pre-financial crisis levels margin. So I guess when the performance headwinds tail off and the backlog continues to hold secure, is the mid-teens margin kind of the new normal in aviation?

Well, Kristine, I would say that some of the performance issues are definitely linked to factory inefficiencies, and we anticipate these will improve over time as our supply chain delivers better and our workforce becomes more experienced. I believe there will be ongoing improvements in these areas. However, some of the performance factors are also inherently related to our business growth. For instance, as our sales increase, we will incur more sales commissions. Additionally, while R&D expenses may not pose a challenge relative to sales percentage, we will see higher R&D figures as we invest further in the business. To answer your question directly, Kristine, we're not providing specific numbers at this moment, but we have observed improvements in our margin performance over the past few years, and it seems reasonable to expect this trend to continue.

Thank you. That's really helpful context. And then maybe pivoting to a defense question. The European defense budget seems to be moving higher, a little faster and steeper than the U.S. defense budget. I guess, how do you think about opportunities for European sales? It hasn't been a huge part of your portfolio historically. But with the leverage of the business pretty low, what's also your interest in expanding European capabilities either organically or inorganically?

Well, I mean, we do have a number of sales campaigns that go on in Europe. It's not, as you noted, has not been a huge part of our business in the past. I do think as you look at farm military sales opportunity, things like the FLRAA program, clearly that's a big part of where the army is focused is looking at partner countries around the world. And just as we saw for many, many decades, things like the Black Hawk become really important parts of those businesses from an international sales perspective, including Europe. We obviously will expect that to happen over time. And there's also some organic things. So again, if you look at rotorcraft again, I guess right now we've we did announce sort of a teaming relationship with Leonardo around pursuit of the European next generation rotorcraft opportunity. So that's kind of organic, but that would be a product that's tailored to that European market. So I do think there are opportunities out there and we are pursuing those and we'll compete for those going forward.

Great. Thank you.

Your next question comes from the line of George Shapiro from Shapiro Research. Please go ahead.

Hi, good morning.

Good morning, George.

Scott, year-to-date orders have been about $3 billion in aviation, about the same as last year's first half. Do you think you can reach the $1.86 billion of orders that you had in last year's third quarter, which was particularly strong?

George, I don't know. As we indicated, we believe this will end up being a one-to-one year, which is still our perspective. If you examine last year's order activities, they were stronger than that. However, we expect to be in a more normalized situation where a one-to-one book-to-bill ratio is a reasonable target. We are progressing through the first half of the year strongly, which is encouraging. I would certainly like to see that continue, but I don't necessarily think achieving $1.6 billion in the quarter is realistic.

So we'll certainly expect to liquidate inventory in the back half of the year. Yeah. But in order to kind of grow the business for next year, we need inventory in order to sell products. So we expect we'll see some inventory growth on a year-over-year basis at year end, but not at the levels you've seen to date. I'd say overall, obviously, that offsets from working capital in other areas. So we think working capital is kind of flattish type number for the year. But obviously, there are offsets and payables and other things associated with that, but we do need some inventory growth in order to grow the business.

In the first quarter, you mentioned that the weakness in Industrial was mainly due to special vehicles. This quarter, you didn't indicate that. Should we take it to mean that both Kautex and special vehicles were somewhat weak this quarter?

Kautex experienced a decline compared to last year, but it wasn't significantly weak. The comparison is tough because we had a very strong second quarter last year in both specialized vehicles and Kautex. This created challenges in terms of both volume and margin comparisons. However, Kautex showed improvement on a quarter-over-quarter basis, even though it was slightly down year-over-year. Specialized vehicles saw a more pronounced decline year-over-year, following a strong second quarter last year.

Okay. Thanks very much.

Yeah.

Your next question comes from the line of Peter Skibitski from Alembic Global. Please go ahead.

Hey, good morning, guys.

Good morning, Peter.

Hey, Scott. Considering the softness in consumer demand that you're noticing at TSV, and to some extent your Kautex comments, it seems that this trend isn’t impacting any of your aviation customers, including those in pistons or turboprops. I'm particularly curious about this because it appears that deliveries of your lighter jets, like the Citation, were somewhat lower in the first half compared to the previous year, especially against the larger jets. I would like to understand how you perceive the health of your customers in that sector. They naturally have more significant financial resources, but I just want to get a clearer picture.

When we look at our lighter aircraft like the M2, CJ3, and CJ4, we're experiencing strong demand. The book-to-bill ratio for these models is positive. Even in the piston aircraft category, we're working on improving speed, and the demand for piston aircraft training remains very high. It’s challenging to find a 172 available. Overall, the piston and light jet segments are performing well, supported by customers with strong financial positions and a substantial backlog. Orders are expected to take up to 18 months for delivery on some of these lighter jets. However, we are noticing a decline in the discretionary consumer market, which is more sensitive to financing. We are managing costs accordingly, as this quarter has been challenging compared to last year's strong performance for many of these products. While we have adjusted our cost and production volumes, light jets and models like the Bell 505 and Bell 407 are still showing robust market performance, especially at lower price points.

Okay. Interesting. Last one for me, just on GBSD. It looks like sentinel , it looks like it passed its review. Any change that you guys expect in the program profile for you guys?

No, I don't. We're continuing to work very closely with Northrop. I think the program is progressing well. We've had several factors that have added scope to our original bid on the program. We have a strong relationship with them, and that segment of the program is advancing positively. As you may know, the media has highlighted numerous cost issues related to the infrastructure rather than the missile itself. There are indeed scheduled challenges that are well-documented, and both Northrop and their customer discuss them. However, we believe we are executing well on the program, experiencing scope increases, and making solid progress with our portion of the overall weapon system.

Okay. Thank you.

And your final question today comes from the line of Gavin Parsons from UBS. Please go ahead.

Thank you. Good morning.

Good morning.

It sounded like aviation guide in-line with the initial thoughts, industrial margin maybe a little below, but can you just kind of go around the horn a little bit and update what's tracking above or below to allow you to stay in the guidance range?

I think you did a good job. The aviation team is on track with their guidance and having a strong year. I expect Bell Systems to exceed their guidance slightly. Both of these businesses are performing well. However, as we've mentioned, we may fall a bit short on the industrial segment due to lower volumes, especially in the consumer area. Overall, we feel positive about our current standing, as most businesses are doing really well.

Okay. Appreciate it. And then maybe just on pricing on orders, it seems like you're still getting maybe mid-single digits on deliveries. Is it a similar level what's going into the backlog today?

Yeah. Well, I mean, we're probably not going to give price forecasting, but I would certainly say price continues to be strong in the marketplace, so.

Okay. Thank you.

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