Ladies and gentlemen, thank you for standing by. And welcome to the Textron First Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder today’s conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, 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 C. 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 revenues in the quarter were $3.1 billion, down $187 million from last years first quarter largely driven by the impact of Tools and Test disposition in the prior year. Net income was $0.76 per share up from $0.72 per share in last year's first quarter. Manufacturing cash flow before pension contributions reflected a use of cash of $291 million compared to the use of cash of $158 million in last year's first quarter. With that, I'll turn the call over to Scott.

Thanks Eric and good morning everybody. Q1 was a strong quarter for Textron. Segment margins were up 100 basis points in the quarter driven by strong execution in Aviation, and Bell as well as improved performance in Specialized Vehicles. At Bell revenues were slightly lower due to commercial volume in the quarter where we delivered 30 helicopters down from 46 last year. We saw solid order activity in the quarter with multi aircraft orders across all our commercial models and we expect to ramp commercial deliveries throughout the balance of the year. In the quarter we achieved certification of the 407GXi from the Civil Aviation Administration of China, which allowed us to deliver the first unit to Shaanxi as part of their effort to establish an air medical services and public safety network in China. On the military side, the Bell-Boeing program office was awarded at $143 million contract for additional performance based logistics and engineering support on the V-22 with options for four additional years. With more than 375 V-22 aircraft accumulating in excess of 450,000 flight hours a day we expect to see continued opportunities to strengthen our military aftermarket business from the V-22 fleet. The V-22 recently celebrated the 30th anniversary of its first flight demonstrating the reliability of tiltrotor technology and the variety of missions capabilities for the most in demand aircraft in the U.S. military. And we're continuing our tiltrotor innovation with the V-280, which recently achieved a cruising speed of 300 knots as part of its continued successful flight test program. We believe the success of the V-280 to-date has helped accelerate interest in the future long-range assault aircraft program leading to the army's requests for information, which will initiate a competitive acquisition phase. Also with an FVL Bell responded to the future attack…

Thank you Scott and good morning, everyone. Segment profit in the quarter was $294 million up $15 million from the first quarter of 2018 with segment profit margin of 9.5% up 100 basis points from a year ago. Let's review how each of the segments contributed starting with Textron Aviation. At Textron Aviation revenues of $1.1 billion we're up 12% from this period last year due to higher volume and mix across the jet and commercial turboprop product lines. Segment profit was $106 million up from $72 million, a year ago due to the higher volume and favorable performance. Operating margin at the segment was 9.3% up 220 basis points from last year. Backlog in the segment ended the quarter at $2 billion up $204 million from the end of the fourth quarter. Moving to Bell, revenues were $739 million down from $752 million last year, primarily on lower commercial volume. Segment profit of $104 million was up $17 million primarily due to favorable performance. Operating margin at the segment was 14.1% up 250 basis points from last year. Backlog in this segment was $6.3 billion at the end of the quarter, up $459 million from the end of the fourth quarter. At Textron systems revenues were $307 million down from $387 million a year ago reflecting lower TAPV deliveries at Textron Marine & Land Systems and lower Unmanned Systems volume. Segment profit of $28 million was down $22 million from last year's first quarter, primarily reflecting lower volume and lower net favorable program adjustments. Operating margin at the segment was 9.1% in the quarter. Backlog in the segment was $1.4 billion down $62 million from the end of the fourth quarter. Industrial revenues were $912 million down 19% largely related to the impact from the disposition of our tools and test product line at lower volumes. Segment profit was $50 million down $14 million from the first quarter of last year, largely due to the impact from the product line disposition and lower volume partially offset by favorable performance related to this specialized vehicles product line. Operating margin at the segment was 5.5%. Finance segment revenues were up $1 million and profit was flat with last year's first quarter. Moving below segment profit corporate expenses were $47 million and interest expense was $35 million. We also repurchased approximately 4 million shares at an overall cost of about $202 million. To wrap up with guidance, we are reiterating our expected full your EPS from continuing operations of $3.55 to $3.75 per share. We also continue to expect cash flow from continuing operations of the manufacturing group before pension contributions of $700 million to $800 million. That concludes our prepared remarks. So Brad, we can open the line for questions

Of course and we have a question from the line of Seth Seifman with JPMorgan. Please go ahead.

Thanks very much and good morning. Scott. So you mentioned what was in the [indiscernible] and in the budget for a future vertical lift. I wonder if you could talk a little bit more about what you saw in there, for FLRAA and how that met your expectations with regard to you continuing to test and to do work on the V-280 given some of the past comments that you've made. Was there enough there in terms of funding?

I would say that we're pleased with what's in there. Obviously the bulk of the money that's laid out for FY20 was on FARA. The money for FLRAA was really to initiate and get the program going. You have to remember though that when they put all those budgets together, that was really before the V-280 was very far into his flight test program. So I'd say that that has influenced things pretty significantly. They would like to add additional funding and they have asked for more funding to keep that program moving both in terms of flight test activity as well as to initiate the former procurement. And the army just talked about this, that's why we've seen the RFI come out. Those responses actually were due and went in last Friday. They'll use that to inform their next step, which is to put an RFP out to begin the competitive phase of the program. So I think we'll – we see a fair bit of money through the five-year plan and we expect that based again on the fact that JMR has been as successful as it has been, has really demonstrated that this program is ready to move on. And the Army has talked about that and is working both the funding that they did get in there as well as additional request for funding to help accelerate this going forward. So I think in that respect, it's all positive.

Great. And then just one follow-up, maybe if you could talk a little bit about the level of profitability at Bell, 14% margin, obviously, very strong and strong relative to what you guys had guided to the year. And maybe a little bit more color on what drove that. And also, we've seen consistently high margins at Bell for a while now. And kind of how you think about that 10% to 12% range you've talked about over time. And if there's room to kind of be over time towards the higher end of that range.

Well, Seth, I mean, we have been performing really well. I think the team down there had done a great job driving productivity. Obviously, we're in the quarter wrapping up a lot of sort of the end of Multiyear II program on V-22 and we see great productivity and that's driving part of it. We had a good mix on the commercial side. So in terms of the overall deliveries in the commercial side, we saw better margins there as well. So that contributed to a very strong Q1. I think the business will perform very well throughout the year. But remember as we go further into the year, we'll see this transition to Multiyear III revenue on the V-22 front. And as we've always seen there is – when you negotiate new pricing on one of those contracts, it's at a lower level and then we've got to work hard to drive productivity over a period of time to get those margins back up. So I think that our guide is still accurate on Bell. We're just going to see a stronger start here, again given mostly the ramp-up of Multiyear III versus kind of close out on all the Multiyear II activities. But again, the business does a great job. They're delivering strong productivity on both the military and the commercial front.

Great, thanks very much.

Sure.

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

Hey, good morning, guys. And thank you for the time. On the Longitude, everybody likes the fashionably lead entrance. But I guess, what are the lessons learned here. How to improve the process, if any? And then if you could just update us on the Denali and the SkyCourier and EIS there?

Sure. So I think Sheila, there's a lot to learn on how to go through this new process. I think if we were able to start over and do it again, there's a lot of up-streamlining in terms of how you would create all these documents and how you would put all the tools in place. Particularly, one of the things that we never imagined the challenges of how interconnected all these different documents are, so not only is it staggering in terms of the sheer volume and quantity per document, but the linkages. So if a commentary is made and a small change is made somewhere, how that connects to all the other documents, whereas these things used to live sort of independently as you look system to system. So we have been trying to put together tools and ways to make that an easier process. I think frankly, the FAA reviewers as they look through this have recognized that there is, I mean, there is a lot that's being done here that's valuable, but there's a lot of things that could be optimized to make it more productive. I think we feel good about the fact that we've had some FAA folks in and now using some of these tools we develop to help do the reviews and look at the documents. So for sure, there are lessons to be learned here on future certifications. And frankly, when you start this process, there are ways that you can create these documents and treaties much, much earlier that we just weren't familiar with at the time we started this program. So we kind of injected this process halfway through. So at any rate, it has proven to be a massive challenge. Again, this is for us, this is a timing issue and I don't think this will affect our performance in the year. The production line is humming along the – it's a great product. It continues to fly really, really well, and we'll get there. The only disappointment frankly for us is we have customers that want the aircraft. And we've been trying to do everything we can to support training and readiness for deliveries and all those kinds of things. But it's – people would like to get their hands on the aircraft. It's a great plane. So anyway, well, there's a lot to learn here and I think it'll help us on future certifications. With respect to the Denali and SkyCourier, we are still planning on first flights of each of those aircraft this year. I think they're coming along well from a performance cost. They're tracking and we obviously are a little bit behind a couple where we'd like to be based on a lot of the resource still being tied up on the Longitude certification, but the critical things that need to happen on that program continue to happen. And I think both programs are on track to be great aircraft.

Thank you for that color. And then just on Systems. How do we think about the business returning to growth and stabilizing here? You mentioned a couple of new programs…

So I think if you look at the performance for the quarter, look, I'm very happy with how these guys are doing. Most of the businesses are performing really, really well. That win on the next-generation of UAS, where we invested in that hybrid quadcopter version of Aerosonde. Obviously, to be selected as one of the two guys to go demonstrate that capability and get fielded with the Army is a big deal for us. The rest of the UAS business fee-for-service is continuing to do very well. As I said, most – all of those businesses are performing really well. Obviously, the reason we guided the margin rate that we guided is we still have a very large piece of the business on ship to shore in particular that as the fixed price development that we're booking at zero. And now we are starting to see revenue. We'll see that continue to grow over the course of the year on the production program. Again, revenue that we're going to book is zero. Clearly, we don't expect that to be a zero margin. We expect that to be a normal, healthy margin business. But here in the initial phases, we're booking that at zero. The first three craft are in the production phase, there's a lot of long-lead material that's out there. And so we're starting the negotiation with the government to try to finitize that contract for fiscal year 2017, 2018, 2019. So I think clearly that program is to going to drive a significant amount of growth going forward. As I said, we already have a long-lead out there. We're already initiating the production of the craft. So that will have I think a real positive impact for us in 2020. But it's all business that's being booked at zero margin that weighs down the whole segment, obviously, when you've got a big piece of business at zero. But clearly that will swing to a very positive program for us going forward.

Thank you very much.

Sure.

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

Thanks. Good morning. Following up on that, Scott, the changes that we saw on the budget in and around ship to shore look like, some volumes were taken out. Can you just comment on that? And how that potentially could affect the cadence of the program?

Well, the FY2020 zero was I think from the Navy's perspective a logical thing to do because the monies have been appropriated in 2017, 2018, 2019 not under a contract yet. So I think that was the rationale for doing this. Clearly, we have a pretty significant volume of craft that are sort of in the backlog, if you will. We would certainly like to see them put something back in for 2020 just so that we don't have a break in terms of how we negotiate and work with our suppliers on anticipated volume. So that's certainly something that we see as an opportunity to step that up as we go finalize the FY2020 budget and also for the fit up as we look out. But I don't think there is nothing sinister here, it's just the Navy's perspective was you guys have a whole bunch of craft that are already appropriated in 2017, 2018, 2019. We've got to get those under contract and get going here before we add on additional appropriated volumes.

Okay. Within industrial, the down 7%, can you help us a little bit in terms of how Kautex and vehicles did within that down 7%? And then how do you feel you’re set up for the dirt season because I think that's where we've seen problems in the past. Thanks.

Sure. Look, the majority of the volume down here is associated with the fact that we had the Tools & Test business a year ago, so we'll see that headwind here in the first two quarters. And then we should get to more normalized comparative on a year-over-year basis. I think the Kautex business, as you would expect, we were down on the revenue based upon the OEM volumes, what with being down. I think from everything we're hearing from our customers when we look at deliveries for the balance of the year, this is probably the lowest quarter for that just on a year-over-year comparative basis. We expect it to be somewhat better in the second quarter. And again improving because we get to again more normal comps in the third and fourth quarter in terms of where the OEM volume is around the world. But the business is executing fine. Obviously, there’s some challenge there on FX as well, which is almost half the decline that we saw in the automotive side of things. But it's performing and sort of to our expectations based on what people were thinking the global auto volumes would be. So I don't think there's any issue there that we’re particularly concerned about. On the vehicle side, we saw a pretty significant improvement on a year-over-year basis, in terms of the performance of the business. So the actions that we said that we would take around cost and realigning production and some of the main changes that we made in product portfolio have gone very well, I think that team is executing extremely well and we clearly expect to see the benefits that continue to accrete over the balance of the year. And then, of course, the unknown which will drive any potential upside to this is, how successful we are on the partnership with TRACKER.We feel great about it right now. But again, we’re early here, we’re doing a lot of work together on training and getting everybody ready to receive and retail this new product line in both the stores and the independent dealers. I'd say that process, it's a huge undertaking, it's just a – it’s a lot of stores, it's a lot of retailers, so it's a lot of training. And – that I think that's going very well so far. We're obviously building out vehicles and have started to stock a lot of the initial stores and dealers, and that program continues on track. But we need to give it a couple of quarters here to see what the retail sell through looks like to know what that's going to do to the business. But, all that aside, I think we are absolutely on track with the execution that we expected and forecast for the year, so we're in pretty good position.

All right. Great. Thanks very much.

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

Hi. Good morning, gentlemen.

Good morning.

Scott. Just a question on certification. I appreciate the longitude comments earlier. But just a bit more broadly, I mean, there's clearly right now a bit more public debate around the suitability of ODA in the cert process. And I just wondered, if you look forward when you think about the remaining certifications that you have and the ones in the future, do you think there is a risk that this becomes more elongated? And this is a process you got to plan for longer lead times? Or just any color you can give us on how you're thinking about that, given what's been going on lately?

Well, Carter that’s all very hard to predict. Look, I think that the FAA recognizes the value and the importance of ODA in the certification process. This is a process which has worked extraordinarily well. I mean our industry, whether it's civil aircraft or business jets or GA aircraft, has an unbelievable safety record. And I think the FAA knows that, the process which we all gripe about here and there. The bottom line is it works, it has delivered incredible safety records. So I hope that no one has a knee-jerk reaction to some of the issues or the – the only issue frankly, that's going on right now in the industry and doesn't – we go back and say what are the things that should be done differently? Although I think we're always open and should always be open to that, if it's something that will improve safety of the delivered product. I think the FAA will be balanced and these guys are very close to this, they understand the technical details and how the process really works with respect to the overall certification process, as well as ODA. I just hope we don't get something that is jammed from a legislative standpoint that mandate something that would be, as I say, a knee-jerk reaction. We have a process that does work and it has an unbelievably terrific track record in terms of safety of the aircraft. So one isolated incident shouldn't cause people to change a very complicated and very effective process that’s worked for a very long time.

Great. Thanks for that. And just as a follow-up, I wondered if you might just give us some very general color. I know you don’t go by model, but just characterize the aviation book-to-bill sort of longitude versus everything else. Did you see – what did you see across the product line? Or did you see any particular strength in longitude worth noting?

I think it's been strong across virtually every model. I mean certainly there were some longitudes in there on both retail as well as ongoing – the process we go through sort of year out on NetJets on the fractional side. But we saw good retail activity. And that's true both at longitude and really across the rest of the product line.

Great. Thank you very much.

Sure.

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

Good morning, guys. This is Caitlin Dullanty on for Ron Epstein. When we think about the future vertical lift programs with FARA and FLRAA, the initial operating capability is still a way’s away with 2028 for FARA and 2034 for FLRAA. Until these programs gain traction, how do you think about bridging your programs at Bell as the V-22 comes down?

Well, there is a couple of things going on there. So one is, first of all the Army has been pretty open about trying to – as their baseline bringing the future long range assault back from that 2034, 2035 to 2030, as part of the RFI process, they asked for ways that it could be further accelerated. As you can imagine, we've submitted our input to that. So I mean clearly there are ways for this to go faster. And I think the Army, well, the Army has been very open about the fact that they would like to see this go even faster. So I think the – these discussions out into the 2030s are really no longer relevant. The Army is absolutely intent on bringing that back and getting aircraft onto the ramp much sooner than that and clearly we can support doing that. So they're not as far out as you would think, but they're still pretty far out. So you will see a lot more engineering development and initial activity between here and say the early-to-mid 2020s. One other things that will help to bridge us on our current programs in both the 22 and H-1 is these install bases are growing obviously very rapidly. There's a lot more aftermarket work that’s coming in. The government is working very hard around readiness and sustainability, so you’ll see more PBL and more work that we're performing to help them make sure that these aircraft are supported. And they’re – again, the installed bases is much larger and they're flying these things a lot of hours. So aftermarket will certainly step in and fill part of that void. And the other is FMS, so as you know, on the H-1 front, we’ve got Boeing. There’s is a number of other opportunities out there. There is interest and activity, which again is public around, Israelis let’s say on V-22, so I think the real answer here is there’ll be a lot more aftermarket activity to help fill that gap. There will be some upgrades and refurbishments, like CCRAM for instance, on the V-22 program. And there will be some FMS opportunities to help, also to fill that gap. And I think you'll see more, as I said at the beginning, sort of a pull to the left here to try to accelerate things like long-range assault.

Okay. That's very helpful. And the another question on the V-280. Right now, the Army does not currently operate any tiltrotors. What hurdles do the Army need to overcome to commit to a tiltrotor like the V-280?

Well, I think that the Army is, as they've seen the JMR program play out and they've seen the V-280 performance in terms of not just the things which sort of everybody knew about tiltrotor in terms of their benefits in speed and range, which is inherent in having a – in effect what's a high performance turboprop when you're in route. But there was always a question around the low level agility and the need to be able to be very agile down at – in a landing zone. Again this is a big change from where we were even a year ago with the 280 flying, the Army has been able to observe and frankly fly this aircraft in those modes and it's superior to the helicopters that are out there today, in terms of its low level agility. So I'd say, if there was a concern around tiltrotor with the Army, it was, how do you do with this low level agility and the V-280 has been able to demonstrate that this is actually a superior technology for that application. So I think that's – having seen that, is what's giving them the confidence to try to move out on this program.

Okay. Thank you. And lastly, can you walk us through what drove the working capital headwind in the quarter?

Well, inventories obviously, we didn't sell longitudes, so those guys are there and we always have a cyclicality anyway. I mean, if you look at the longitude is obviously a significant chunk of that. In general we tend to have more build on both the commercial aviation side, as well as and Bell on their commercial side. Again, even though deliveries were not the same as they were a year ago, we still feel very good about the overall commercial volumes for the year and those aircraft are in production and are in finishing and that’s what drives the bulk of it. And we have a little bit of additional inventory, again, we're doing all the build for the stocking on the vehicle side. So it's mostly driven by some of those sort of normal annual inventory builds.

Great. Thank you very much. That's it for me.

Sure.

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

Yes, good morning.

Good morning.

In the aviation, what was R&D year-over-year because my recollection was you had like $15 million of Scorpion expense in the quarter last year, so I just wondering how much it might have been down year-over-year?

The numbers George, our overall R&D number is about on track to where we guide for the year. It's not a major impact one way or the other. Obviously, we spent a little more longitudinal but net it's pretty flat.

Okay. And then what was the aftermarket increase in the quarter since this year? It was more apples to apples. You didn't have the 606 messing it up.

In the aftermarket it was actually down slightly, George. January, February, and again, whether its weather or why we don't really know, but the shop visits were below what we usually see. The good news is we saw most of that come back in March and our position for bookings in April here as we go into the quarter are back to more normal level, but it was a little lighter than we usually see in January, February, but again that activity has picked back up. So I think for the year we would be fine.

Okay. And then if I switched to industrial, was the special vehicles business sequentially better profitability than the fourth quarter?

Sure, yeah.

Okay. So that would imply that the bulk of the organic revenue decline was at Kautex and also maybe the margin was a little bit weaker at Kautex. Is that a correct statement?

Well, we're not going to go through the exactly segment by segment, but Kautex was fine, the vehicle business was up and obviously the Tools and Test top wasn't in there.

Okay. And then one for Frank, corporate expense was $47 million in the quarter that's somewhat higher than implied run rate of the $140 million that you kind of gave at guidance on January. Is there any change to that? Or what caused it?

No, we're on track for that $140 million, George. It’s just the timing issue related to the recognition of certain expenses, particularly, kind of how compensation does and things like that. So it's we're on track for the $140 million.

Okay and one last quick one. Tax rate was low in the quarter. Is this a new tax rate? Or are you still sticking with the 20% for the year?

Now, 20% is still good. We had a discrete item in the quarter that helped that, but 20% is still good for the year.

Okay. Thanks very much.

Sure.

And we do have a question from the line of Robert Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning.

Good morning.

First question, in terms of capital deployment, are you still sticking to your guns in terms of prioritizing a share buyback going forward versus M&A?

Yes.

Yeah.

Yes, we did that in the quarter, Robert. So I think that the level of buyback activity has been strong and we wouldn't expect to see it stay there.

Okay, that's great. And then secondly, we'll commercial helicopter, you mentioned it was a bit soft in the quarter, I don't know, three months is a short period of time. But have you seen anything changed there in the end market?

Sure, Robert. I don't want to interpret it to be soft. I mean it's just the normal – I mean our sole position is quite strong. Order activity is very strong, so there is no change to our outlook on the commercial side. It just happens to be and we always have some lumpiness here in delivery of certain customers and certain model types. So the commercial side is continuing to be strong. Order activity is very good. Sole position is very good. Mix was actually positive from a standpoint of few more fort walls here in the quarter, but there's no change to our outlook of the end market or the forecast for the year.

Right. And then just finally for me, I was wondering if you could comment on business jet pricing. You obviously saw some strength through last year and I was earning if that had continued.

It did I mean at a lower level. I think we made a lot of moves in the last year plus in terms of trying to get price back to a more normalized place. And I think we've done that. We'll continue to keep pushing to keep up with just – I mean market inflation is what it is. So I think we did see some pricing in the quarter, but I wouldn't expect it to be at the same level of increase that we've seen over the last year or so.

It sounds great. Thank you very much.

Thank you.

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

Hi, good morning, gentlemen. This is Jonathan on for Rajeev. So moving back to industrial, you mentioned the Bass Pro Shop relationship is progressing and you're loading vehicles in stores. Have you completed the footprint rationalization and what's left to do here and what’s the expected timeline?

So the footprint rationalization and the product lines, that work has been done. That's, I would say, pretty well completed at this point in time. So our focus right now is obviously around the core of our business in golf, in GSE, which are doing well and continuing on the turf product particularly in the golf. I think we feel we’re in a very good place there. The rationalization of product line and addressing a lot of the issues around inventory and whatnot on the dirt and snow side is in a good position. We had a fabulous year in terms of snow and getting that to a position that we're happy with in terms of inventory levels and so most of our work now on that is really around the Tracker partnership and driving that to be a successful program.

Got it. And then just another follow-up on share repurchase. Are you still comfortable with the original guide? And any excess going – any excess free cash flow in the share repo?

Yeah. As we said, when we guided, we expect that the bulk of our free cash flow will go to share repurchase this year and that continues to be the intent and the first quarter rate was reflective of that.

$200 million in the first quarter is consistent with the guide that we gave you.

Yes, very solid. Okay, thank you guys.

And we do have a question from the line of Noah Poponak with Goldman Sachs. Please go ahead.

Hey, good morning everyone.

Good morning.

Good morning.

Scott, the assessment jet unit is up 22% year-over-year in the quarter without longitude and with a normal latitude compare at this point. How should we expect the remainder of the year's growth rate in the ex-longitude, the legacy – the legacy business? How should we expect that growth rate rest of the year to compare to the 22% in the first quarter?

Well, look – I mean if you look at the total year, it's going to be consistent with the guide. And also certainly we would have expected a few longitudes here in the first quarter, so you'll see certainly a shifting here, particularly as we go into Q3 and Q4 where more growth will be driven by the longitude program.

I think my question is more. The guide is for volume up ex-longitude. And we've sort of – in the past you've talked about the ability to tweak the number of units on some of the legacy programs versus I guess the different process of a full on production increase. And so with that up 22%, which I think is a surprising number to most folks trying to figure out are you tweaking units in the legacy business ex-longitude? Or have you actually raised the production system 20% such that you would have 20% growth the rest of the year in the legacy business ex-longitude?

No, we think it will be consistent with where we guided, Noah. So the production planning process, which again we – it's a real time process, right. And looking at that's high up and demand in the marketplace would not cause us to think that it's up 20%.

Okay.

Our revenue guide was up 11% for the year. We were up 12% in the first quarter without longitude. So you can kind of do the math around that, but consistent with what Scott said, we had planned legacy up somewhat and we're maintaining that perspective.

But the good news is the demand is there, right, and it's consistent with what we guided and we're seeing demand that supports our guide. So I think it's we continue to feel great about the end market, but we’re clearly going to need – see the delivers of the longitude kick in to drive the overall guidance number and we feel good about that.

Got it. So for several years in a row prior to this one, you had the first quarter unit number right around 35 and then a pretty steep ramp through the year. So is this year just more level loaded, ex-longitude?

Look I think its more level loaded. If you go back in and look at last year, we've had more normal demand in the marketplace and we have the ability to move aircraft not just for instance in selling in Q3 and Q4 in particular, which is always very high demand, but enough demand in the marketplace that we needed people to move into the next year, which is a good thing, right. So you saw a little more level loaded because you had customers that are taking few more deliveries. And the good news is our level of order activity is also up around that same 12% kind of range or just order activity in Q1 versus Q1 a year ago. Which again I think supports our perspective that that's about the right increased level that we'll see for the year.

Got it. Any quantification you can provide on how much your average lead time in the legacy jets has extended versus six to nine months ago?

No I don’t think there has been any change.

No major change on that? Okay. And then similarly on the margins in the segment, if you maybe could just dig into those a little more, I mean, especially without the Longitude, it's a pretty strong margin at the 9.3, and you've got the guide for 10 for the year. And similarly, it usually ramps through the year. Will that just also be more level loaded? Or perhaps you could just peel back the onion a little bit on the margin strength in the quarter?

Well, I don't think we're going to get into Aviation margins on a quarter by quarter basis. It means you're certainly right. Generally, the Aviation business, again in large part driven by volumes, which kind of changes as we go through the year, typically sees stronger margins. I think we will see more level loaded – again, the volume is a little more consistent, the revenues are little more consistent so I expect the margins to be a little more consistent. But Q4 will still be a bigger quarter than most quarters, as it always is. And therefore, I would expect to see a little bit better margins in Q4. But I think we'll see strong margin through the course of the year. And again, it should all be consistent with our guide. The first Longitude, when we make those deliveries, will have some dilutive effect. But as you play through that volume, our cost and pricing is in line with what we're expecting it to be, and it will be a great part of the portfolio from a profitability perspective once you get through those first units. So we will have to bear the burden of some dilution of that first four, five aircraft.

Got it. Thanks so much.

Okay.

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

Hey good morning everyone. Scott, you kind of went through a couple of these – you went through all of the segments. But just any sort of tweaks versus the guidance you offered three months ago? It seems like Aviation and margin was tracking ahead, whereas maybe there are some moving pieces elsewhere. So any kind of tweaks you want to offer in terms of who's running ahead, who’s running behind thus far?

No, I think, it's early in the game here. We delivered a great quarter. The businesses position where we expected them to be. And at this point, nothing that would cause us to change anything in the guide.

Thanks. And then in auto, in the outlook that you've given for the industrial segment, sales outlook and the margin outlook, what is the auto assumption built in there? And to what extent is it derisked, just because it seems like that you mentioned customers has their plans but maybe those plans can change sometimes.

I think so far, it's tracking as we would expect. And the outlook that we're getting both at sort of the industry role of IHS kind of data, as well as we're what hearing from individual customers in terms of their model mix and expected quantities, it's consistent with our plan. So I think we're in a fine shape in terms of how that business is positioned with respect to our guide.

Great, thanks. That’s helpful too.

Sure.

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

Yes thanks so much. So not to beat dead horse, but could you give us what the net price impact was at Aviation? It was $14 million in the last two quarters. And secondly, the impact of pre-owned transactions in the quarter?

The impact of pre-owned was trivial, Cai, so not a big mover one way or the other. You're going to see pricing impact of around $6 million. That's price.

That's price.

And then inflation is going to be a little more than that. So one of the things we look the business is terrific performance. But we're a little behind the power curve on price inflation. So you'll see that as a slight drag and, obviously, something we're working on. But the overall performance of the business in terms of driving productivity in total is what drove strong margins, and I would expect that to continue through the year.

Got it. As we look out to next year, what are your thoughts in terms of when you hope to certify the Denali and the SkyCourier and start to deliver them?

No, Cai, I'm pretty focused on Longitude right now. So we have said that we want to get both aircraft into the flight test program with first flight here by the end of the year. We don't want to go out there yet with expected certification dates. Obviously, that process has been a lot more painful than we expected. So we'll probably take a little time to make sure we understand how that process is going to play out on those aircraft before we commit dates out there.

Got it. That’s it from me. Thank you.

Okay.

And we do have a question from the line of Pete Skibitski with Alembic Global. Please go ahead.

Good morning guys. A couple of Bell questions. Scott, I don't know if you mentioned the 525, is that – I guess another certification question. Is that still on track for late this year, sir?

It's still flying. The program is going really, really well in terms of flight test. In terms of an exact date, look, with the FAA our process right now, we're just not going to – we really can't commit a date. We don't really control that process as much as we like to think we do. So we're focused on the flight test, the aircraft is flying spectacularly. So we feel great about where it is. But in terms of getting through this process, we'll have to see.

Okay. And then anything you can share on the air taxi market? Is Bell spending a lot of IR&D on that effort? That might be impacting margins although the performance has been great. I'm just kind of wondering, are they focused more so on the air taxi type of stuff versus kind of more traditional, next-generation commercial helicopters?

Well, so I would say that the vast majority of the R&D that we're spending on any new program starts at this point is more oriented around, obviously, the future vertical lift programs. There is a relatively small amount of R&D that we're spending around some of these new, be they electric or hybrid-type technologies, which probably is the future of a lot of commercial helicopter. There's a lot of work that's gone into these things we call EPTs, which are the really more of a lite cargo. There is clearly a lot of interest in the military for that kind of technology. There's already some RFIs. And we expect RFPs that are coming out. So that work will support the early adopters which, frankly, I think will be more military than commercial. These are not necessarily expensive technologies, but they have a very high value in the combat environment in terms of delivering cargo around the battlefield. And so that technology, I think, will be adopted there first. On the air taxi, again part of this technology investment is along those lines. But it's a relatively small number because we need to see how does that market really play out, I think, there's a lot of uncertainty. I think if it's going to happen, clearly our team at Bell is some who can design and build aircraft that would fit into that marketplace. But right now, it's something that's a relatively low level of funding compared to where we allocate the things that are more important here in the nearer term, which is primarily around FEL.

Got it. I appreciate the color.

Sure.

And we do have a question from the line of Robert Spingarn with Credit Suisse. Please go ahead.

Hey good morning. Just a couple of clarifications on some things, Scott. First of all, on the regional, if we look at biz jet demand regionally, is North America still driving the market? Is that where the strength is coming from?

North America still drives the market, but we saw some pretty good order activity in the international markets in the quarter as well.

Any particular [indiscernible]?

Well we've had some pretty good order activity going into the Chinese market. We've seen a little bit better in some of the European market. But it's still more of a North American story than an international story around jets.

Based upon reports from different manufacturers, I don't think everybody else is seeing the strength that you're seeing. So would there…

I’m sorry your line is really breaking out, we can’t really get the question.

I was asking if [indiscernible]?

Well, I’m sorry your line is not readable.

Okay.

Well why don’t we go to the next question?

My apologies. We do have a follow-up question from the line of George Shapiro with Shapiro Research. Please go ahead.

Yes. Scott, I mean, you've seen strong used pricing in your market availability down. I mean, you’ve had strong orders for quite a while now. What does it take to start to increase the legacy production rates? And could that have a positive impact on your guide for this year?

Well, George, we did plan, as we talked about, having an increase in legacy deliveries in the year. And we saw that here in Q1. So I think we will continue to see that. The end market is good. Our order activity again in the quarter on a year-over-year basis was very positive. So I think we have set our expectations around having an increase across all those product lines. And I think we’ll see that for the year for sure.

Okay. And then just, Scott, on the commercial helicopter business, you said things will be stronger the rest of the year. Can you highlight any of the models that you expect to be stronger?

Well, I think it’s going to be – deliveries are going to be up in virtually every model type, George. And again, the deliveries are never linear, right? So I mean, this is not something that we weren’t expecting. This is a question of when people are taking deliveries of the aircraft and getting into finishings. So the order activity has been there to support what we have guided for 2019. It’s just not a linear delivery schedule.

I actually had switched and maybe to in Bell – Bell’s commercial delivery is still what we’re…

No, I’m sorry, that’s what I’m talking about, George. So Bell, the order rate through all of last year on the commercial side has been good. It continues to be good. So the orders are there to support our forecast in terms of deliveries in 2019, and it’s just a matter of when customer delivery dates are. And that’s – there’s nothing that’s an issue, there’s no softness, there’s no concern. It’s just this is what the delivery plan was in terms of customer dates.

Okay. Very good. Thanks very much.

Sure.

And we will try Robert Spingarn with Credit Suisse again. Here we go.

Hopefully, this is a better connection. Can you hear me?

Yes, sir. We can hear you now.

Okay. All right. What I was getting at with the regional strength is, are you perhaps taking share? We’ve seen some of your competitors have much weaker demand situations, missing deliveries, et cetera. And I wanted to understand if this is somewhat, driven by share. And then secondarily, how are the tailwinds that we got in the United States from tax reform, et cetera, how are those holding up now?

Well, look, the gamma numbers will show whatever the share is. I mean, I think that as again, guys, we’ve been talking for a long time about the investments we made in new products and our belief that, a, they partly stimulate the market, and if you’ve got a better product, it helps in terms of being out there and selling in the marketplace. So I like where our product lineup is. I think the guys have done a very nice job on that, and I think we’re being rewarded for that in the marketplace. But we look, the gamma numbers show what they show. In terms of tax, because as we talked about before, this – I don’t think we’ve been in a particularly a tax situation, that’s very different than it’s been for quite some time. You already had those appreciation. Now you have 100% versus a 50-50 kind of deductibility in the U.S. I think this has been much more driven by our customers having more confidence in what’s going on in the economy and their willingness to commit, in most cases, to upgrade their aircraft. And certainly with the used market, that has had a lot lower levels of inventory, a lot more liquidity in terms of time to sell aircraft. All those dynamics are what is creating a more robust end market than what we had seen for many years. So I – but I personally think it’s a lot more about confidence in what’s going on in their businesses than it is a pure tax [point].

Okay. And then just lastly, on the Longitude. Is there a point in time that you need to have certification in order to deliver to your internal plan the quantities for this year?

No, our internal plan would’ve had deliveries starting, frankly, here in Q1. We adjusted those internal plans, again just based on just our expectations for the timeline to get through all the document reviews to plan on Q3.

Yes, that’s what I’m asking.

No, from a financial standpoint to us, the guide will be a little lighter in Q1 and Q2 than we had expected, but we would expect that will be fully made up in Q3, Q4, the aircraft are being produced, they’re ready to go. So it’s not an inability for us to respond once that certification’s issued.

Okay. Thanks very much.

Sure.

And we do have a follow-up question from the line of Noah Poponak with Goldman Sachs. Please go ahead.

Hey. Just wanted to try to better understand the Bell margin and specifically the V-22 transition impact to it. I thought you had said in the past that the transition to the next multiyear from a volume impact perspective was – had a larger impact in 2020 than 2019. And so if that’s true, with a positive cumulative catch ups associated with the late stages of the current multiyear, should we be expecting that to kind of last through much of the rest of 2019 and then see the margin drift lower next year? Or does that change occur sooner?

Well, it has some impact this year, right? I mean, a lot of the accum cash on Multiyear IIs are recognized this year. And remember, Noah, now under the revenue recognition system here, we are starting to recognize a lot more revenue on Multiyear III as we go through this year. So it’s not just – it doesn’t just impact actual delivery quarter but as you start to drive revenue associated with those craft, which we are, those are recognized under the margin rates of Multiyear III as opposed to Multiyear II.

So we’re going from in the first part of the year, more Multiyear II revenue at Bell than Multiyear III. And that transitions in the second part of the year to more Multiyear III than Multiyear II. And then, obviously, next year, 2020, it’s Multiyear III. So this is the transition year. And as Scott said, you get the program impacts as you – Multiyear II as you go through winding up that program.

That’s really helpful on that first half versus second half mix, Frank. So thank you, thanks a lot.

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

Thanks a lot. One follow-up question on future vertical lift. You mentioned, Scott that that you guys will have an offering for FARA. And it’s not something you really talked about a lot. That’s obviously that one that Sikorsky has been pushing as what they would like to see happen first. And they’ve kind of taken a view of the radar that’s somewhat like you guys have talked about on V-280 and we’ve got it flying and we’re racking up hours and stuff. And so how do you see that competition playing out? What can you tell us about the offering that you guys have? And whether you view that as kind of realistic avenue for Bell to go down?

Of course, I think we have a very competitive offering for FARA. We haven’t talked a lot about it publicly, but I mean look it’s not going to be a secret for long. We had basically taken the technology that we’ve invested in pretty significantly over the past number of years on 525. Remember, 525, we’ve seen this craft flying over 200 knots. And that’s a function of the technology that we invested in terms of the rotor technology, the fly-by-wire systems, control systems that has enabled us to field a more conventional helicopter that has very high speed, very efficient, very smooth operating capability. And so what we did basically is taking that technology that we validated in the 525 program and scaling that down to a size and weight that’s consistent with the FARA requirement. So if you look at what’s required from a speed and performance standpoint to execute the FARA mission, we think we have some technology that’s been validated, that can meet that requirement with a much more cost-effective, much more reliable conventional technology. I say conventional, I mean this is obviously a big step in terms of a more conventional rotorcraft, but we’ve – I think we have a proposal on the table that meets the requirements that can do it in a very cost-effective, very highly reliable and sustainable way.

Great. Thank you very much.

Sure.

Okay, everyone. That completes our call for today. Thank you and we will talk to you again in the second quarter.

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