Ladies and gentlemen, thank you for standing by and welcome to the Textron Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. Now I would like to turn the conference over to our host, Vice President of Investor Relations, Mr. Eric Salander. Please go ahead, sir.

Thanks, Brad and good morning everyone. Before we begin, I would 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. Textron’s revenues in the quarter were $3.7 billion, up $122 million from last year’s second quarter. Income from continuing operations was $0.87 per share, up from $0.57 per share or $0.60 on an adjusted basis in last year’s second quarter. Manufacturing cash flow before pension contributions totaled $399 million compared to $341 million in last year’s second quarter. With that, I will turn the call over to Scott.

Thanks, Eric and good morning everybody. Segment revenue was up again in the quarter in Industrial, Aviation and Bell partially offset by lower revenues in Systems, consistent with our expectations. Operationally, we saw continued strength in our execution with margin improvements at Aviation, Systems and Bell. At Bell, revenues were up on higher commercial volumes for the quarter. On the commercial side, we delivered 57 helicopters, up from 21 in last year’s second quarter. We continue to see positive demand in the commercial space, with strong representation across all our models. In the quarter, we delivered 4 505s to the Japanese Coast Guard demonstrating the aircraft’s suitability as a basic helicopter trainer. The 505 received certification in China with the first 3 units being delivered in June as the aircraft continues to broaden its international presence. Moving to the military side of the business, we signed a third V-22 multiyear procurement contract with the DoD to deliver 58 units, beginning in 2020. The $4.2 billion multiyear contract, of which $2.2 billion represents Bell’s content, provides program production stability for at least 2024. The contract also has flexibility structured to allow for additional aircraft. We also gained Congressional approval in the quarter to provide 12 H-1 attack helicopters to Bahrain. On the new product front, the V-280 Valor is now flown in cruise mode, just 5 months after its first flight in December. It really reached 190 knots during the May demonstration and continues to expand its flight envelope to the flight test program, which is ongoing. Bell also opened its new Advanced Vertical Lift Center in May, located just down the street from the Pentagon. New office allows Bell’s military customers, partners and policymakers to interact with Bell’s technology for the future of Vertical Lift, including the V-280 and the…

Thank you, Scott and good morning everyone. Segment profit in the quarter was $346 million, up $51 million from the second quarter of 2017 on a $122 million increase in revenues. Let’s review how each of the segments contributed, starting with Textron Aviation. At Textron Aviation, revenues were up $105 million from this period last year, primarily due to higher volume and price. Segment profit was $104 million, up from $54 million a year ago due to the favorable volume, mix and price. Backlog in the segment ended the quarter at $1.6 billion. Moving to Bell, revenues were up $6 million, primarily on higher commercial volume partially offset by lower military revenues. Segment profit increased $5 million from the second quarter in 2017. Backlog in the segment was $5.5 billion at the end of the quarter. At Textron Systems, revenues were down $97 million, largely on lower volumes at Weapons and Sensors related to the discontinuance of the SFW production in 2017 and lower TAPV deliveries at Marine and Land Systems. Segment profit was down $2 million primarily reflecting the lower net volume partially offset by favorable performance. Backlog in the segment was $1.2 billion. Industrial revenues increased $109 million largely related to higher volumes across all our product lines and a favorable impact from foreign exchange. Segment profit was down $2 million, despite the increase in revenues from the second quarter of 2017 due to the mix of products sold. Finance segment revenues and profit were both flat compared to last year’s second quarter. Moving below segment profit, corporate expenses were $51 million compared to $31 million last year primarily due to the impact of the increase in share price in the quarter on compensation expense. Interest expense was $35 million, about flat with last year. We also repurchased 8.7 million shares, returning $571 million in cash to shareholders in the quarter. Through the first 6 months of the year, we have repurchased 14.6 million shares, returning $915 million in cash to shareholders. To wrap up with guidance, we are raising our expected full year earnings per share from continuing operations to a range of $3.15 to $3.35 a share, up $0.20 from our prior outlook. We expect a one-time gain of approximately $400 million from the tools and test divestiture in the third quarter of 2018, which is not reflected in this updated outlook. We are also raising cash flow from continuing operations of the manufacturing group before pension contributions to a range of $750 million to $850 million, up $50 million from our prior outlook. That concludes our prepared remarks. So Brad, we can open the line for questions.

[Operator Instructions] And our first question today comes from the line of Robert Stallard with Vertical Research. Please go ahead.

Good morning. Scott, this might be one for you. On Aviation, the backlog was flat sequentially. I was wondering if you could shed a bit of color on that, what the various parts of the division saw over the last 3 months, because that would seem to be rather contrary to the commentary about the strengthening in business jets, for example?

Well, Robert, I think the market feels the same way that it did, it’s pretty strong. I think we are pleased with the order flow. Obviously, deliveries were up as well in the quarter and I think the flow of our orders matches up pretty well. So in terms of the dynamic, it has stayed robust. Obviously, we continue to push on the pricing side in the trade for volume, because we still think we got to continue to work that, but end markets are still strong and we are seeing that in both the jet and the turboprop lines.

Okay. And then as a follow-up separately, Textron Systems in Bell, very strong margins in the quarter. How sustainable do you think these levels of profitability are particularly if you are obviously having a V-22 step down rolling through the system at some point?

Well, look I think Bell had an extremely strong margin rate here in the second quarter. I wouldn’t expect that to sustain, but we have talked about that business over the long-term being a 10%, 12% margin business and I think that’s still how we feel about it. The team has done a nice job. I think the contract in terms of multi-year 3 landed about where we expected in terms of our long range thinking. As I said, the contract allows for some increases of a couple aircraft here or there. I am optimistic that we will see that both in terms of U.S. demand and as well as ultimately some foreign military opportunities. So, it’s fully within our expectations and around where we thought and obviously we are glad to have it done and so it’s a good contract and one that gives us some stability going forward.

And similar situation with Systems as well, that had very strong margin too?

Yes, so I think we certainly expect Systems to be a little bit lighter in the back half of the year. They had a very strong start to the year. We are still seeing very good performance in most of businesses. Obviously, we will see ongoing reductions in a number of Cap D deliveries. As that program winds down through the course of the year, we will still see SSC obviously is still in its development and test phase, so that will dominate towards the back half of the year as well. And you won’t really see the revenues and the margins pickup on that until we start into the production program in 2019. So, I guess, let’s say, Rob, we expect a lighter second half, but still strong performance for the total year in that business.

That’s great. Thank you very much.

And we do have a question from the line of Carter Copeland with Melius. Please go ahead.

Hey, good morning guys or good afternoon I should say. Just a quick follow-up on Rob’s question, Frank, I wonder could you tell us what the net favorable items must have been in Bell and Systems? And then just a second one for Scott, can you just give us some color you called out price and mix in the Aviation margin strength in the quarter. Was it one over the other and was aftermarket a notable contributor there that we should know, just any kind of expanded color on which of those was more important will be helpful? Thanks, guys.

Well, I can give you the color part first, I guess. I think that Aviation, it was strong pretty much across the board. Obviously, we had some pricing power in there. The aftermarket, you know we have this – an accounting change in terms of the revenue, so it will look a little flatter. The reality is on an apples-to-apples basis it was up high single-digit, which is good for us. The turboprop deliveries were obviously quite a bit stronger than in the second quarter last year, which we expected. I mean that market, particularly the international side of turboprop has been stronger. And on the Aviation front, it looks like we are up a couple of jets. The reality is as you guys know we ceased production of the Mustang. There were about 5 of those deliveries last year. So on a like-to-like basis, the mix was actually better, because we discontinued a model that was not a very profitable model for us. And those 5 aircraft turned into 5 other aircraft that are more in our – say, in our margin region. So I think the mix was positive as well. So it’s both price, mix and I’d say strength across all the product lines.

So on the program side, we saw as the numbers would indicate good performance out of both Bell and Systems on the program side and we had $64 million of program adjustments for the quarter.

In net?

That’s right. Net on a consolidated basis.

Awesome. Thanks, guys.

And we do have a question from the line of Peter Arment with Baird. Please go ahead.

Yes, thanks. Good morning, guys. Nice quarter. Scott, just asking regarding on the Longitude you made some comments regarding the kind of the FAA certification process is taking longer. You are not the only one really that’s been affected by this, but maybe you could just give us a little more color as you are kind of looking at the timeline for introduction of Longitude?

Well, Peter, look I think it’s within the next couple of months. The guys are working really hard at this. The good news here is there is no issue, it’s not that there is a conflict between us and the FAA over anything technical or programmatic or the aircraft itself it’s just – this new process involves the creation of thousands of pages of documentation, which we just haven’t done in the past and it’s a result of the implementation of this new process and it’s just an enormous amount of work that we haven’t had on previous certifications that was a bit unplanned. I mean, how this is being interpreted and implemented is just a lot of paperwork that wasn’t really anticipated. So, again, the good news here is there is not a problem, it’s not like we are in any form of disagreement over something to do with the aircraft or anything. It’s just a lot of paperwork. So we are working our way through it. The FAA is working through it with us. You have to create all these things and review them and sign them off.

Okay. And then just as a follow-up unrelated on the AT-6, it sounds like you have had some good flight performance. How is your thinking on just kind of the discussions with your potential customer there?

Well, we think it’s gone well. I mean, an awful lot was accumulated. A lot of flight testing was done obviously before the accident that resulted in sort of the discontinuance of the flight test piece of the program. But I think the Air Force has been very open about the fact that they are continuing to work this program. They have got the data they need. They felt that the flight testing that had been accomplished was sufficient. If there is more information they can certainly reach out to us and to our competitors and they are continuing with their process as described. So, we would be hopeful to see activity continue and hopefully get to some form of an RFP if we are going forward with the program in kind of the latter part of this year, but we felt the aircraft did well. We clearly – I mean, the customer is very open publicly about the interest in this area and the demand for a product like this and we feel like the guys did a great job performing and we will just continue work with the customer as they work through the next steps of the process.

Great. Thanks, Scott.

And we do have a question from the line of David Strauss with Barclays. Please go ahead.

Thanks. Good morning or good afternoon.

Hi, David.

Hi, can you hear me?

Yes.

Okay. One that’s about book-to-bill assessment, ex the aftermarket in the quarter, is it fair to say the book-to-bill was about 1.2 and if so, is that a fair kind of number for what you saw on the jet side specifically?

Well, I think when we look at the book-to-bill number, it’s – I mean I think the one-to-one is a fair representation. Obviously we are always going to have a little bit of mix within that between different models within the line in jets and turboprops and military, but it’s all consolidated in there, but I think the one-to-one is a fair representation of where we are in the jet side. And again as the deliveries were up, revenue was up and which means commensurately order activity was up. So, I think particularly when we think about where Q2 is, I mean, order rates were better than they were in Q1. So even though the book-to-bill number may not be what it was in Q1, the reality is that the activity in the market continues at a good pace.

Okay. And to follow-up in terms of your guidance for each through the year, I apologize if I missed this earlier. Are you seeing higher Cessna, higher deliveries out of Aviation, specifically on the jet side [indiscernible] today as compared to what you said a year ahead and also the 8% margin guidance for Cessna for the year, looks like you will come in better than that?

Yes, I think David mostly as we look at our revised guidance it’s reflecting the stronger margin performance in Aviation and in Bell and in Systems, obviously I think it will be slightly probably below where we were thinking just because of the tools and test disposition, which is a strong margin business at Industrial, I am sorry, but the guidance increase on EPS is really driven by better margin performance in those three segments.

Okay. Thanks, guys. Appreciate it.

And we do have question from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Hey, good morning everyone.

Hi, Sheila.

Scott, I was wondering can you comment on the competitive landscape and maybe the changes you are seeing given Bombardier and Embraer might be focused elsewhere? So, just on the competitive landscape, both in the bizjet market, but also maybe on the commercial helicopter market as well? Thank you.

Sure. Well, I mean we haven’t seen a big change. I mean, it’s still obviously a very competitive market. There haven’t been obviously here through the first couple of quarters, the competitive dynamic of the model-to-model comparisons are the same as they have been. So, it’s still quite competitive. But like I said, we will and have continued to sort of trade price over volume to try to put some discipline into that marketplace, but the competitive dynamic, I would say is largely unchanged and the same is true I think on the helicopter side. The good news is the market particularly in the lighter end of the market is as competitive as it’s been. Obviously, we are seeing a lot of growth around the 505 as the new model coming in and as that thing is ramping up its production and a lot of deliveries coming out, we feel great about where that product is. It competes very, very well given its performance and capabilities, but we are also seeing very strong performance on the 407. There are some nice upgrades to the product, but it’s a competitive marketplace, but it’s a very strong product. Even 429s, which as you guys know, we are expecting a little lighter deliveries this year, but 429 order activity has stepped up pretty significantly. So again I think the market is very competitive and we have got a great set of products that are doing very well.

Then on R&D, if you could just comment you have gone through a phase of high R&D, what are you focusing on over the next 18 to 24 months?

Well, we are probably looking at guiding too much beyond this year, but as you know, I think our overall R&D number, we do expect to see some modest reduction on the fixed wing aviation side largely as we scale back things like Scorpion, but we continue to invest obviously in Longitude. We got Denali coming down. We have SkyCourier coming along. So there is still as strong R&D spending at Aviation just probably not as much as we have seen in the last couple of years. Bell, on the other hand, has stepped up a little bit and we have 525 in the flight test program, we have V-280 flying. So there is obviously still spending there, but we will largely see sort of a shifting in somewhat of the R&D around some of the businesses, but obviously what’s important for us I think going forward is that as we see these revenue increases and we see the benefit frankly of some better end-markets in some of these new product launches, it does become a bit of a tailwind for us in terms of overall margin rates.

Great. Thank you.

And we have a question for the line of Seth Seifman with JPMorgan. Please go ahead.

Thanks very much and good afternoon. Following up on the V-22 and understanding that you don’t want to give very much guidance beyond this year, I think one thing that might be helpful for people just to level set is the amount of our earnings headwind even if it’s just some qualitative commentary that we can expect as the V-22 starts to ramp down next year we all know it’s happening, little over $400 million of EBIT at Bell this year, how can we think about the headwind there?

Well, you really won’t see much impact to this lower rate really until late next year, right as you start to get into the next fiscal year funding. And I need to be careful here, because given this 606 Bell, so it doesn’t play out specifically to delivers anymore, so it’s really more of a cost accumulation, I think it was kind of hard for me to – I am not exactly sure how to articulate that to you beyond. I mean, you guys kind of know obviously its public in terms of what the contract delivery dates are. As I said, I think there will probably be some additional unit volumes added into each year. So I think of the new contract as sort of a floor, if you will, but I wouldn’t expect a big impact in 2019, it starts to become more material into 2020.

Great. Thanks very much.

Yes. We can probably help you guys by the way just in terms of the contract stuff probably offline.

Great. Thank you.

And we do have a question from the line of George Shapiro with Shapiro Research. Please go ahead.

Yes, couple of quick questions. Back on the book-to-bill being one, can you separate it out into how the turboprop was versus the new jets or how the defense was versus the new jets?

No George, I don’t think we are going to give – I mean we are not going to start kind of breaking out the book-to-bill by the individual product models and whatnot, but just again, from a color standpoint, it’s been pretty strong. We are very, very happy with the order flow in both the jets and the turboprop side. Military deliveries were up in the quarter, right you will see that on the T-6s. So, there is obviously some impact of strong sales on T-6, but despite the one-to-one – you say, well, one-to-one that’s okay, it’s okay the facts are their order flow was stronger than second quarter than it was in the first quarter and we continue to feel good about where the market is heading on both turboprop and the commercial jet business.

And R&D in the quarter at Aviation, Scott, sequentially was it down a little bit year-over-year, can you give those two qualitative comments?

Well, look, I mean, again from a color standpoint, George, as we have indicated, I think the quarter was consistent with kind of the color that we have been providing, which is that we will see some reduction at Aviation offset by some increases largely at Bell with the flight activity going on and the quarter was difficult there.

And one for you, Frank, that the tax rate was pretty low again, have you changed your outlook for the year and why was it low?

Yes. We had some benefits from some discrete items in the quarter. So our revised guidance assumes a tax rate of about 19.5% for the year, but this actually reflects the first couple of quarters of discrete items that we benefited from.

Okay. Thanks very much and I will get back into queue.

And we do have a question from the line of Sam Pearlstein with Wells Fargo. Please go ahead.

Good afternoon. Just on the guidance, the $50 million increase in the cash flow, it looks like about half of that is a CapEx reduction. Can you just talk is it straight net income improvement and then on the CapEx, is it related to the adversary air, can you just talk about how you are viewing adversary air spend this year and next compared to before?

Yes, Sam. So there is a couple of things going on here. Obviously, expectations for a little stronger margin rate therefore better earnings is obviously falling through in the cash flow. There is a debit that we had to take out of that with the second half of tools and test not being in there both from the free cash flow generation, but obviously some of that CapEx reduction is reflective of not having CapEx in that business in the second half of the year. And there is some benefit on the aggressor work, so given where we are on those contracts and timelines we are deferring some of that. Obviously, we are still comfortable that we have everything lined up in support of future Air Force programs, but we have been able to defer some of that CapEx in 2018. So, those are all sort of contributing to that net benefit of $50 million taking all that into consideration.

Okay. And then can you talk a little bit about just the distribution inventory levels with Arctic Cat now that you have kind of ended the winter season just where did you end up and how is that looking?

So Sam, I am afraid I don’t have those numbers at my fingertips here, but I mean we are continuing to make progress and I would say most importantly when we look at what’s in the inventories it’s pressure stuff, right. So, I mean a lot of the stuff that was really older inventory has been moved off their books. I mean, obviously these guys are taking re-stockings of current model year product, probably not a lot of change in snow. I mean, we are at that time of the year obviously where we are producing all the snow product for next year and we will start those load-ins here as we get into the latter part of the year. I’d say the good news is demand from the dealers, what we are seeing is up and we have got a couple of great new products. I mean, last year it was great in terms of burning down a lot of the inventory. We had some new stuff that came out last year that helped. We have got a couple of pretty exciting 2019 models that are driving some pretty strong pre-season order demand, which we are building now, we will start to load in here in the next couple of months.

Okay, great. Thank you.

And we do have a question from the line of Ronald Epstein with Bank of America/Merrill Lynch. Please go ahead.

Hi, guys. This is Caitlin on for Ron today. Just wanted to touch on orders a little bit, what’s driving – what do you see is really driving the incremental orders at Textron Aviation? Are you seeing more interest from individuals or corporates? And then are the orders really more for replacement aircraft up-gauging or just new purchases? Thanks so much.

So, it’s I would say that the order activity continues to be across virtually all the models, so it’s not isolated in one area or the next. We always have a lot of – the bulk of our customers are current aircraft owners of one type or the other and most of them are up-gauging, although a lot are simply replacing older aircraft, they have had now for probably longer than they would like to have them. So Cait, it’s across the board. There is no particular dynamic which is changing it one way or the other. I would say the one thing that we did see in the quarter which is encouraging is an uptick in the international order. So, this has been pretty U.S. centric here for the last number of years and obviously it was great to see the U.S. market getting stronger over the last say 6, 9 months, but we are also now seeing more strength in the order rate in Europe and in Latin America, some Asian activity. So we are seeing more participation in internationally as well. So it’s broad based in terms of the models, the segments, be it jet, turboprop and also now starting to see some broadening of the strength internationally.

Great, thank you. Thank you so much.

And we do have a question from the line of Jon Raviv with Citi. Please go ahead.

Hey, everyone. Thanks for taking the questions. Scott, when it comes to Aviation production rates, how are you balancing that decision-making process with the pricing you want to hold on to and drive with backlog growth? And then also how much pricing you get to see before you kind of start storing up the supply chain? And I guess a related question is have you actually had any discussions with your suppliers on potentially raising production rates?

I always felt that this is something we look at it on a really a real time basis, right. So depending on what activity we are seeing whether we can get the – meet the pricing targets that we have out there, we are looking at this on a week-to-week basis. So there are certainly suppliers that we know and have had all discussions and know where they stand, if we need to just even without a whole lot of supply work, if we need to flex a couple aircraft here and there we can do that. So I am not sure are we going to do anything further than that. I mean we feel like, right now we are well matched to meet the demand based on the price levels where we are. And if things continue strengthening and we decide that we need to take it up and well obviously we have the flexibility to do that.

And then going forward some of the margin drivers that we should think about turboprop is getting better, that’s accretive, but anyhow is there something done in your production process on the jet side which could enable the typical incremental margin targets you talked about or is it perhaps enable us to exceed those?

Well, I think part of why we are feeling good about the margin and incorporating that as part of our guidance increase is that the team is executing well. I mean, obviously, as I said, well, it’s not that we are seeing a big change in – versus our plan on the volume side, but the guys are executing well, we are getting good volumes through the shop, we are getting good productivity and of course we are continuing to drive the pricing. So the combination of those is giving us an incremental margin.

Would you be able to quantify what the new margin guidance is for the year?

No, we won’t go back segment by segment, but I think just from a color standpoint, Jon, you expect – versus the kind of the aggregate numbers that we gave you guys, you expect that we will finish the year a little stronger in Aviation, Bell and Systems and probably just a little bit lighter on the industrial side.

Got it. Thank you, Scott.

And we do have a question from the line of Cai von Rumohr with Cowen & Company. Please go ahead.

Yes, thank you very much. Could you give us a little more color at Aviation in terms of how much of the gain was price, how did the pre-own do, did you book a profit or a loss and maybe how much was the kind of aftermarket business? Thank you.

So I will go backwards. Aftermarket, Cai on a – again, there was a change in the accounting of how the revenue is showing on some of these engine programs, but if you look at sort of net that out, the aftermarket growth was strong with a high single-digit number. Now, on a percent basis, aftermarket did shrink somewhat as a percent of the total, because we had strong deliveries on the original equipment side. So I would say a strong contribution from aftermarket, but still somewhat smaller percentage of the total given the strength on the front end of the business, which is good. So the margin improvement obviously the price is a strong contributor in there, but we are also seeing our ability to convert some of these higher volumes into better gross margin on the products. So, the guys are doing a good job on cost and overhead control and so the intersection of those two things is what’s driving that probability. We always had, it’s not a big material number, there is a little bit of noise always around from quarter-to-quarter how much – due to aircraft valuation and whatnot is in there, but it’s not something that’s going to swing it one way or the other. Now, one thing to keep in mind, Cai, as we go through the balance of the year is we are going to have the first Longitudes coming out and as you would expect, there will be some margin pressure associated with those, but we still feel like given the performance overall of the business and how it’s doing, we are still going to see, net better margin than we originally guided despite some of the overhang of the new product launch on Longitude.

Okay. And my question on price in the first quarter your 10-Q indicated you got $9 million benefit from price. Could you tell us how much was that benefit in the second quarter? And you had mentioned also a couple of months to certification on the Longitude, I mean, do you expect to deliver any in the third quarter and how many can you deliver given it looks like it’s taking longer to get it certified?

So, the price number in the quarter will be about $29 million. The Longitude look I am hedging a little on the date, Cai and obviously I don’t want to be doing that, but we are working through a process that we haven’t gone through before. So, that’s why I am trying to give us a little bit of room here, but yes we certainly expect to deliver the first Longitudes in Q3, but we have to get through the process and it’s proving to be a little more difficult than we thought, but we certainly still expect to make initial delivery in Q3. And I don’t know that we have ever guided the total number of Longitudes we will have for the balance of the year, but I don’t see us coming off of our original expectations. It just means we have all deliveries in sort of late Q3 into Q4 or even if for some reason this thing doesn’t get across the goal line here for the first one, then they would all deliver in Q4. I feel good. I mean our production activity – again, there is nothing with the aircraft, there is nothing that causes us to have to go back and make changes to the aircraft. We have been building the aircraft. They are going to be ready to go. It’s a matter of getting all the certification work complete. So, I don’t foresee at this point a risk to what our plan was in terms of the 2018 Longitude deliveries.

Thank you very much.

And we do have a question from the line of Drew Lipke with Stephens Inc. Please go ahead.

And congrats on a good quarter. Just first question on industrial, can you maybe elaborate a little bit more on the driver of the negative mix impact there and what you are seeing there?

Well, tools and test is a good margin business. So that margin obviously won’t be there in the second half of the year. So, when we look at the total mix across the industrial segment, I would expect to see some reduction in there. Now that’s the operating profit level. Obviously, we are in the process of doing buybacks, we try to mitigate what that means in terms of EPS, but as we indicated when we did the transaction, we expect we will see a few cents of dilution in 2018. That’s factored into what we gave you guys in terms of the revised guidance, so that takes that into consideration. But as we said, with the buyback programs and as we look into 2019, we expect that dilution goes away, but from a mix standpoint we are taking a good margin business out of the second half of the year.

Okay. And then with Arctic Cat, can you talk about ORV and its newer retail trends? I know April was tough with weather, it sounds like the ORV industry really rebounded in May and June, what are you seeing in terms of industry trends and can you comment on kind of your market share and just the overall profit improvement in Arctic Cat?

Well, I think we are seeing profit improvement in Arctic Cat and we would continue to expect to see incremental margins frankly overall in our industrial segment improving as the year goes on, I mean despite that we are taking out tools and test. So, the total year guidance was down a little bit, but we will certainly expect to see a positive progression here through the balance of the year. Look, the snow is obviously not in a retail phase right now right, we are kind of in the production side of that and the stocking. So, that’s – which again I think is quite favorable for us. We feel really good about where that business is and what the stocking orders look like. On the dirt side of the business, we are seeing improvements. Having the XX out there is it’s later than was expected when we did the acquisition, but it is fully in the market and we are frankly struggling to meet demand of producing them and we have just launched the Prowler Pro, which launches into the – really the largest segment of that market. We think we have got a great product, but again, that’s one that’s just barely starting to run through the production line and get deliveries out to the dealer, so again a model that we are seeing strong demand. We just got to produce as quickly as we can. So, I think the end market of all the data I see is positive here in the last couple of months. We are certainly seeing strong demand on the products that we have launched into the marketplace and obviously expect to see the revenue and the margin continue to expand through the balance of the year.

And do you think you are holding a third of our market share?

Yes. No, I expect – we are feeling very good about snow. I think our market share is going to be up, which will be quite strong and again on the sort of the backs of a couple of launches here around XX and Prowler Pro, we certainly are seeing an uptick and expect to see a continued uptick in our share through the balance of the year.

Thanks, guys.

And we do have a question from the line of Rajeev Lalwani with Morgan Stanley. Please go ahead.

Hi, Scott. Hi, Frank.

Hi.

Just I wanted to come back on the Aviation side, you touched on this a bit before, but as you think about just trying to get margins up and before you start pushing volumes, where are you trying to get back to? I mean, are we looking at just sort of historical average going back to historical peaks kind of a thing is that guiding you at all? And then unrelated to that, as far as maybe delays around product development with the FAA certification and all, how does that impact some of the other products you’re working on; SkyCourier, Denali, maybe even the Hemisphere, if at all?

Alright Rajeev I will guide, I don’t want to go out and make a like some target number or a target around historical numbers, I mean because the revenues, the mix of product, the volumes are just fully different than where those were, but our objective is to just keep improving this thing every year, driving cost, driving price, and push up but this clearly needs to be a double-digit margin business I fully expect that it’s going to get back up in the double digit margin business and that’s the team is pretty focused on working to get there and that’s sort of all of the above, right, it’s costs, it’s new products, it’s pricing and I think that the march we are on here, as we go from last year, through this year, into next year, is all moving in the right direction in terms of the FAA question, look, I think as these new processes are different for different models and different [indiscernible] classes and things like that, so I don’t know that we’ll we have to understand how each model is going to go but the difficult thing, obviously, is the first time you go through this, we’re learning, frankly, that our local FAA office is learning and implementing this and understanding what it really means and so, I think obviously we would be in a better position to anticipate how this needs to go, what kind of documentation needs to be created, how does the changes as changes happen through the development program so I would be, maybe, cautiously optimistic that we can execute through it better in the future, but right now it’s sort of a bit of a discovery process in terms of all this documentation so it’s certainly not an efficient way to go through it and I’d like to think that as we and the FAA get through this process, and we’ll be able to look back at it, maybe make some modification to the process to make sure those are all value-added, but then also as you go through it a second, and a third time, you’re going to be better at doing it, more efficient at doing it I’m sure I was not as clear as you may like, but I don’t know how to make it any clear because we’re just trying to figure it out, right.

And we do have a follow-up question from the line of Seth Seifman with JPMorgan. Please go ahead.

Thanks. And I just wanted to follow-up, appreciate the color on industrial a couple of years ago in the middle of the decade, this was like a mid-8s business margin wise, without tools and test it seems like it should still be able to be an 8% margin business, I just want to verify that, that you think that’s correct and kind of how long does it take to get there and what are the what sort of the key factor, is it execution on the specialized vehicle side, is it reaching a certain volume on the specialized vehicle side, what sort of needs to happen to get to that level?

Well, look, Seth, I think there’s no question this should be an 8% or better margin business we are just sort of caught in a position here where we disposed of something that was accretive to that margin rate and had just acquired something that was quite dilutive to that margin rate so you are sort of catching us here in the middle of this thing so, there’s no question that we need to be at or north of that historical kind of margin rate, and I am confident that we’re going to get there I think that there’s the vehicle business is the critical one to drive that and clearly we need to see increased volumes we have every expectation that we can continue to gain share in that area we have got some great new products that are going into it, but we also have to do a great job on driving cost in that as well so I’d say, we’ve taken a business that was losing money and turning that around, that’s making positive steps in the right direction and like I say, I think you should see us expanding those incremental margins through the balance of the year, all the way through next year now this is a business that needs to be a good healthy margin business, and I think we will get there.

Okay. Thank you.

And we do have a question a follow-up question from the line of George Shapiro with Shapiro Research. Please go ahead.

Yes. Frank, if I look sequentially, inventories dropped like $165 million now is that partly due to taking out tools and putting it as assets for sale, or is it more due to the delivery of the high delivery of the Aviation planes? And I would expect maybe it comes down some more in the second half as you actually make some Longitude deliveries so can you give some color on that?

Sure, yes. So part of the reduction in the quarter on a sequential basis was tools and test, that was about $100 million of it, as we moved the tools and test assets from liabilities to held for sale so we had about $65 million of other inventory reduction and certainly yes, given our seasonal pattern and higher deliveries in the second half of the year, we would expect for inventory levels to come down as we move through the year.

And then one follow-up on Bell if you take out the $2.2 billion V-22 backlog, sequentially the Bell backlog was down a little bit now is that from military, because it would seem like commercial is getting better and then also, Scott, I think on the first quarter you expected a pick-up in the medium helicopters we didn’t see it in the second quarter, we see it in the second half? Thanks.

Sure. So, absolutely, George, the 22 went in from the multi-year obviously we continued to deliver V-22s and H-1s, which takes out of the backlog commercial side of the business quarter four continues to be strong so, again, we don’t get in and break down all these pieces, but from a color standpoint that’s a fair representation of what’s going on in terms of the business and the order rates and the backlog at Bell on the medium side, as I said, we’ve seen 412 orders, we’ve seen strong 429 orders and there’s still a number or 412 campaigns that are out there so I think we see practically strong order flow and activity across all the models, which is encouraging.

Okay. And then just last in Aviation what’s the lead time if you want to increase production rates; three months, six months?

Well, it depends on model, George we usually would say it’s more like [indiscernible] the six to nine months there you’ve got the long lead items like engines for instance that kind of gate that and again, I try to be careful with an exact number, because all of our suppliers have their own flow of activity and they have flexibility within their own systems so if we want to go in and make a change to our plans that are shorter than that there are cases where we can do that so we can flex volumes by a few units but if you’re really talking about a dramatic change, then yes, it takes a long time but guys, we are never going to be what you see in the media, where we’re going to come out and say we’re going from 40 to 50 over the next two years I mean that’s not the nature of our business, obviously it’s more of a flow activity and obviously we are communicating and talking to our suppliers all the time and looking at order rates all the time so I’m just not worried about the market and order and getting out of line with what we can do in terms of demand it’s just not an issue it’s asked about a lot, it’s not something we worry about a lot, we work it everyday.

Okay. Thanks again very much.

And we do have a question, a follow-up question from the line of Jon Raviv with Citi. Please go ahead.

Hi, thanks for taking this follow-up, I am appreciating in Aviation, appreciating that Denali and SkyCourier are certainly important for the portfolio but just after Longitude launches, what are those engineers going to do where do you think they’ll move to as long as Hemisphere is still on hold? Is there any interesting looking back at the lower end of the portfolio, considering there is relatively less new product from your competitors down there?

I missed the engineer question Jon.

What are the engineers that have been working on Longitude do?

They are already on other programs most of them have moved already to the Denali program and the SkyCourier program that’s where most of the activity is right now I mean, obviously, there’s still a good size testing that’s working and on the certification process for Longitude but we’ve sort of worked through a lot of the design phase in Denali, we’re building the first flight test articles, as we speak so a lot of the detailed design activity really now is in the SkyCourier side of things we don’t have anything to announce today in terms of the rest of the portfolio I mean, obviously, we’re always looking at upgrades and what we need to do to make the whole rest of the product line stay fresh, but there is nothing that I would announce at this point.

Okay. And then just on Longitude, just the short availability, can you just comment on how sold you are at that point? And then my related question is, how have you adjusted or how are you adjusting just selling a larger aircraft given Textron Aviation’s historical focus on more of the owner-operator?

Well, we have been working in the sales side of the Longitude for a while now. I think our teams have done a good job out there. We have a great set of prospects. A lot of folks have been in this aircraft. I mean, there is no shortage of customers that are interested in it and our sales folks are talking with those folks, a lot of demonstration flights have been going on, continue to go on and we feel very good about our prospect list. So, I mean, obviously some more activity is going on and there is a pretty strong pipeline of people that are very interested in the aircraft that are watching and waiting for the certification process, but in terms of our ability to go out and sell this aircraft, I am not concerned about that. We seem to be reaching the customers that have interest in an aircraft of this class.

Thank you.

And that does conclude our question-and-answer-session. And I would like to turn the conference back to your host for closing comments. Please go ahead.

Okay. Ladies and gentlemen, that concludes our call for today. Thank you for joining us and we will talk again next quarter.