Ladies and gentlemen, thank you for standing by, and welcome to the Textron Second Quarter Earnings Call. And at this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session [Operator Instructions]. And as a reminder, today's conference is being recorded. I will now turn the call over to Vice President, Investor Relations, Eric Salander. Please go ahead, sir.

Thanks, Kevin, and good morning, everyone. Before we begin, I'd like to mention, we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our Web site. Textron's revenues in the quarter were $3.2 billion, down $500 million from last year's second quarter. While net income was $0.93 per share, up from $0.87 per share last year. Manufacturing cash flow before pension contributions totaled $102 million compared to $399 million in last year's second quarter. With that, I will turn the call over to Scott.

Thanks, Eric, and good morning, everybody. Q2 was a solid quarter for Textron as we continue our focus on operational improvements across the company. Segment profit margin was up 120 basis points as we continue to see strong execution across our businesses, driven by higher margins at Aviation and Industrial. At Bell revenues were down in the quarter, largely due to lower military volume as we transition to lower production quantities on our military programs. On the commercial side, we delivered 53 helicopters, down from 57 last year. Despite the lower commercial deliveries in the quarter, we expect to see a ramp in deliveries in the second half of the year, supported by continued strong order activity and increased production rates. In the quarter, Japan's National Police Agency placed the first order for the Bell 412epx, the newest upgrade of the 412 series. This aircraft has been co-developed between Bell and Subaru Corporation for the new utility helicopter program under Japan's Ministry of Defense and we expect this program to support the 412 program well into the future. Within Future Vertical Lift, we continue with the flight testing and demonstration activities of our Valor V-280. We have now demonstrated Army level one handling qualities successfully proving the aircraft's maneuverability in pitch, roll and yaw. This represents the highest performance standards for agility, which is critical to the Army mission. We're also encouraged by the Army's recent actions regarding the potential acceleration of the future long-range assault aircraft program. These actions include an industry days schedule at the end of this month that should allow potential contractors to gain more insight into the Army's acquisition approach, propose alternate procurement path through other transaction authority mechanism to be awarded in February. And identification of an engineering manufacturing development program or a middle…

Thank you, Scott. Good morning, everyone. Segment profit in the quarter was $339 million, down $7 million from the second quarter of 2018. With segment profit margin of 10.5%, up 120 basis points from a year ago. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.1 billion were down $153 million from last year's second quarter, primarily due to lower commercial turboprop and defense volume and mix. Textron Aviation delivered 46 jets, down from 48 last year and 34 commercial turboprops down from 47 last year. Segment profit was $105 million in the second quarter, up $1 million from a year ago, as favorable performance was offset by the lower volume and mix. Textron Aviation backlog at the end of the second quarter was $1.9 billion. Revenues at Bell of $771 million were down 7% from last year, primarily on lower military volume. Bell delivered 53 commercial helicopters in the quarter, down from 57 last year. Segment profit of $103 million was down $14 million, primarily due to lower military volume. Bell backlog at the end of the second quarter was $6 billion. Revenues at Textron Systems were $308 million, down from $380 million last year, primarily reflecting lower volume at TRU Simulation and Training and Unmanned Systems. Segment profit was up $9 million from last year's second quarter, primarily due an $11 million impact from performance, reflecting an $18 million gain related to the formation of our new training business with Flightsafety International. Moving forward, we will continue to record our portion of the operating profit from the new training business. Textron Systems backlog at the end of the second quarter was $1.4 billion. Industrial revenues of $1 billion decreased $213 million, largely related to the impact from the disposition of our Tools and Test product line and lower volume. Segment profit was down $4 million from the second quarter of 2018, largely due to the impact from the product line disposition and lower volume, partially offset by favorable performance, primarily related to the Specialized Vehicles product line. Finance segment revenues were down $1 million and profit was up $1 million from last year's second quarter. Moving below segment profit, corporate expenses were $24 million and interest expense was $36 million. We also repurchased 3.1 million shares at an overall cost of $159 million. Through the first six months of the year we've repurchased 7 million shares, returning $361 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 $3.65 to $3.85 per share, up $0.10 from our prior outlook . We are reiterating our outlook for cash flow from continuing operations of the manufacturing group before pension contributions of $700 million to $800 million. That concludes our prepared remarks. So, Kevin, we can open the line for questions.

Thank you [Operator Instructions] First question is from the line of David Strauss. Please go ahead. Barclays.

Good morning. I guess, first clarification, can you just tell us how much the gain was on the systems side for the training JV?

It was $18 million, Dave.

And then, Scott, could you maybe talk about the potential for your 737 MAX Stimulator business. How many you've built there? What's your ability to ramp that up, given the potential training needs on the back of what's going on with MAX?

So Dave, I can't give you a whole lot of detail on it. I mean, obviously, we've been delivering MAX since Boeing and several 737 MAX customers. I think a lot of that will depend on how all those plays out in terms of the recommendations or requirements that FAA and they also put on airlines around the need for SIM training. It looks at this point to us like it's probably going to be a requirement that allows them to get back and flying in the transition course and then would mandate actual MaxSim training later on. So we've certainly had quite a number of inquiries from customers who are interested in going ahead and getting MaxSims on order. We started to do some long lead ordering already for to support those deliveries next year, but I couldn't give you a firmed up number yet. I think we're still working on that and working with Boeing to understand their strategy on a go forward basis as well. But we really have to kind of wait and, I think, see where the FAA also end up in terms of what their training mandates are.

And our next question is from the line of Carter Copeland, Melius Research. Please go ahead.

Scott, I wondered if you could just kind of expand a little bit on the rationale that's been made here with the company you set up with FlightSafety and just what that should tell us about the -- what applications are for your -- what you've been trying to create organically there? How much does this change the growth expectation that you have for those efforts? And are you trying to expand that much more rapidly and trading some of the profit as a result to try to get more scale there? Just kind of give us some detail on the rationale and then what you're trying to accomplish with that?

Sure, Carter. So, as you know, we decided to get into that training business several years ago, we felt that was a very important part of sort of the service aftermarket element of our business and we weren't really participating in that. We had a lot of feedback from customers that they would be interested in us participate in that space. And so, as you know, we made a couple of fairly small acquisitions. Obviously, over the last few years, we've invested a fair bit in both IRAD and R&D, as well as CapEx to start to build out that training capability. The business is going very well, great customer feedback. I think the training materials and the techniques that we were deploying were working. The challenge was that, the time frame of how long that would take to build out the number of training centers and number of locations, it was a fairly daunting task and was going to take quite some period of time to do that. We happen to engage in discussions with Flightsafety, whom we had relationship for many years, obviously, in the training side. And so, look, we ought to link together, let's take the technology and a lot of the Tools and the capability that we developed organically and put these businesses together in a joint venture, and basically what that's allowing us to do is, take what we think were the advantages of that business and the positive feedback we are getting from customers and expand it much more rapidly. So this now has the ability to much more quickly accelerate the returns for us, and I think for the customers it sort of taking the best of whole worlds. The combination of what we would invest in organically and the significant footprint that Flightsafety has around the world, so that we could touch more customers in a time frame. It was much shorter than doing this just going training center by training center in terms of us putting more and more capital out there and Flightsafety already have the capital out there. So, as we said, the gain is a function of having invested in that business and having put those assets in the joint venture. You got to look at sort of reevaluating those assets and, obviously, we created a very valuable business. And so that's a good thing. I think more importantly, what we will see going forward is the earnings as a result of our share of that joint venture, which is going to grow much faster than we had, we stayed just on a pure organic path. And you'll see those earnings come through systems as we go forward.

Just in general terms, do you expect the growth to be 50% more or 2X or what -- just any color around how you can help what your expectation is or how much you've accelerated that as a result?

Well, I don't -- we don't break out the numbers and that level of detail, Carter. But I'd say, it's significantly faster in terms of the rate of return. What we would have had if we had played this out on a purely organic basis. Let's say, the difference to having build up that capital infrastructure versus leveraging what Flightsafety already had on the ground, that becomes more of a technology play than a CapEx play.

Our next question is from the line of Sheila Kahyaoglu, Jefferies. Please go ahead.

Scott, just a big picture question, organically your sales were down 10% in the quarter. You've been focused on new products to gain share by fleet so in relatively tough end markets. How do you kind of think about the levers from here, just given your decision on the Hemisphere as well?

Sure, Sheila. I think the for us in the quarter really in the first half of the year, the big impacts that will change how the second half plays out here is one around Bell commercial. And we talked last year when you were seeing strong demand on the commercial side, we indicated that we need to turn up our production rates to meet that demand. That takes a little bit longer for the -- from the time you make that decision till the time you have aircraft that are coming off the line. So when we increase the production rates on aircraft like the 407 and the 429s. We didn't have those aircraft available coming off the line until right about now. So I think we'll see a significant impact in increases on the third and the fourth quarter. The demand is there, the orders are there, it's been a matter of getting the production up and delivering at a higher rate and that's where we are now. So you'll see the benefits of that here in the third and fourth quarter. They are already supported by orders that we have, we just needed to meet the demand in terms of the production side. On the Aviation side, obviously, Longitude getting into service. That was a huge part of our growth story on Aviation for the year, and we expect that clearly will be the second half impact here. We continue, frankly, to see good demand on the historical aircraft. Latitudes continue to sell very strongly, we -- again demand a Longitude side is very good, I think across the whole portfolio. Clearly, we had a very strong first quarter. For second quarter, we felt pretty good, things did get a little bit shaken up there right toward the end. And -- but they're mostly customers who would say, look, I want to wait for the markets to settle out, and I'm going to defer this in the second half. So I think our view at the business jet market is still very healthy. And so I think between that and the Longitude coming into service, we will see strong growth in the second half.

Thank you. And then, Frank, one for you on working capital. It's been a steep usage in the first half, I think primarily due to inventory. How do you think about that reversing and any potential risks in it?

Yeah. Sheila, as Scott said with that growth in the second half, we expect to kind of, obviously, sell off and liquidate that inventory that the bulk of that build is at Aviation. It's kind of certainly impacted by the Longitude moving into the second half of the year, but it's also kind of Bell Commercial and other volume that Scott indicated. We are looking to have come through in the second half of the year and feel good about where we're positioned to do that.

Next question is from the line of Peter Arment, Baird. Please go ahead.

Scott, could you just give us a little more color on how things are going in terms of within the Industrial segment, particularly, I guess, specialized vehicles. Format seem to be a little better than I think a lot of us were expecting. What's -- how is the Bass Pro kind of rollout going? Just maybe some color there.

No, there's a couple of things there, Peter. First of all, obviously, from an operational performance standpoint, the business is doing much better. Historical businesses where we've had a very strong position and good performance for a long time in golf and ground support equipment and areas like that. Our sales performance is back where it should be, guys are doing very well, the markets are healthy, and again, the teams operational execution is quite strong in the off-road world, we're down in revenue, that's quite conscious, right? We're working very, very hard to make sure that we do a much better job in terms of how we manage those retail channels. Snow is a good example, the position that we took this year as we said, guys, we're only going to pre-sell. When you look at the North American market, which is obviously the vast majority of the market in the snow world, we went out with our program. And so guys were only going to build what we've already sold. So we went around and have deposits from customers, this product line is basically sold out. And so we'll be here through the whole third quarter manufacturing all those units and shipping them out, but unlike in previous years where we'll be putting a lot of inventory out into the field and dependent on how that sold through, and then getting into rebating if it's not selling through. We said, we're just not going to do that. So we're going to do only a presale and that was frankly a very successful program. We saw very strong demand across the product line, but were pre-sold. So on the dirt side, obviously, that's a longer and sort of a little bit of a different selling season as you go…

Appreciate that. And just a quick one on. Scott, did you see any change in business jet pricing, just given the softness in end market a little bit that you saw in May or price is still holding?

No, Peter, we're still seeing pricing holding. You know, there's always a crazy deal or two and we choose not to participate in those, right? So I think we make a great product, it's fairly priced, got a great service network behind it and there is no reason for us to chase a crazy price deal here and there. So we're maintaining that discipline. And as we've said all along, we will trade volume rather than damaging the price in the industry. So I think that's -- I think the pricing is in a place where it should be, right? And we're going to hold the line and like you'll see here in the quarter, we had price net of inflation up a little bit, which is healthy for the business and that's what we need to continue to do.

Thank you. Next question is from the line of George Shapiro of Shapiro Research. Please go ahead.

Scott, the implied orders in the quarter were pretty weak. And obviously, the book-to-bill was less than one. Given that you see things picking back up in third quarter here, is it natural to expect the book-to-bill over one in the third quarter recovering from the second quarter?

Well, George, I would hope that that's the case. I mean, clearly, we had a very strong first quarter on the book-to-bill front. We're still have our backlog numbers net through the first half, above where it was coming into the year. So I think we're not overly concerned by this. As I said, things did slow down in June, given some of the gyrations in the market and talks around tariffs and things like that. But I think most of the discussions that we've had with customers, particularly in the U.S. were, some things would pushed into the second half and those dialogs continue with customers. So I think we're still in a pretty good -- in a pretty good place with that respect. We were light on the turboprops, particularly in the international market. And as you know, George, that's a little bit lumpy. We've seen this before where it kind of goes in fits and starts. So that's a little bit harder market to predict. It generally affects more the turboprops than it does the jet side of the business, but we'll see how it plays out. But certainly my expectations would be that, we would continue to see good order flow through the balance of the year.

And Frank, one for you, just Aviation aftermarket, how does that compare to last year?

It was fine, it was down just a touch, but continues to kind of be solid for us.

And the reason it's down a touch as opposed to up a little bit, any color on that?

No, nothing significant kind of we've seen some variation in volume in the shops from time to time where we are looking at solid or a strong second half performance there. And kind of continue to be feel good about how we're executing it.

And next we have Robert Stallard, Vertical Research. Please go ahead.

Scott, on the BizJet side of things, a couple of your competitors have launched some new products so far this year. And I was wondering if you could comment on whether this could impact your market share, going forward?

Really nobody, Robert, right in our warehouse. I mean if you look at the -- I mean, earlier in the year, obviously announced Praetor. I think that's largely those product lines from that particular competitor have been up against the Latitude and, obviously, on Longitude. I think our products are outstanding performers and we continue to see strong demand on the Latitude front. And look, I think Longitude is in a very good position. I wouldn't expect to see a lot more activity to get through the certification. I mean, there is plenty of customers that are in the process and many of whom I think are just waiting for cert to be done. So, I think from a performance standpoint, we continue to get fabulous feedback from everybody that demo, flies that aircraft. So I think it's a competitive marketplace, I think it's always been one and it will continue to be a competitive marketplace, but I think we're -- we stack up quite well with that. So every transaction has got competitive nature to it, but I think we're winning our fair share and feel pretty good about where we stand.

And then maybe one for Frank. You only changed your guidance as being up EPS by $0.10. I was wondering if you could comment on whether you see at the halfway point of the year any changes to the divisional split for the full year?

No, it's largely intact. I'd say that, obviously, we've seen good performance out of Bell so far this year. So kind of reflected in that $0.10 is kind of continuing solid performance on the Bell, that probably kind of give some a little bit of upside to our original margin guidance there. And then, systems has done a nice job as well in kind of executing through the first half. So, kind of -- those are the two places where we're seeing some better performance that are contributing to the $0.10.

Next question is from the line of Cai von Rumohr, Cowen and Company. Please go ahead.

Yes. Thanks so much. So, yes, you mentioned Bell doing particularly well, how much of the strong profit in the second quarter reflected favorable EACs on Z22 multiyear two and kind of as we go into next year, are we still looking at 10 to 12 or can it be better?

Well, Cai, I'd say that we always -- I mean, every quarter we have our EAC process and there is always some performance in there. It's certainly less than it was last year. So from a comparable place and then we kind of talked about this. Right? I mean, we've kind of been winding down the multiyear two revenues and ramping up the multiyear three revenues and that is certainly at a lower margin. And again, a lot of the performance and sort of reserves that you keep around multiyear two have largely played through. So on a year-over-year basis, the EACs or the gain associated that are down, but there is still there and I would expect that'll always be there. I mean, we always try to continue to drive productivity and performance improvement and we recognize that we each time we go through an EAC. There is always some puts and takes. But I think the team executes quite well. But anyway, I would say, along the lines of how they're performing, there continue to be strong performance. So even though the EAC numbers might be lower gains in the quarter, we're reflecting it solid operating profit across whole business and I think we'll continue to see that. Next year I would say, look, we've had sort of that 10 to 12 guide out there for some time on Bell. They certainly have been overdriving that here as we worked our way through multiyear two. I wouldn't change my perspective, that's a business that's well run, and we will continue to sit in that 10% to 12% range. There's a fair bit of R&D, as you know, going on, 525 has been a big part of that, V-280 has been a very large part of that. What we will be transitioning into these cape set one and cape set three OTA programs and those cost share associated with those. Our R&D spending needs to stay at a pretty high level to support what we think are some really significant opportunities for the future of Bell. So I think that 10 to 12 range is still how you all think about it.

Thank you very much. And then, Frank, so you're -- maybe give us some numbers on where the net price increase at Aviation was. It narrowed a bit in the first quarter. So where was it in the second? And also, given that you have yet to certify the Longitude, is your full year delivery target fully intact or does it -- should we be looking at a slightly smaller number this year?

Yeah. So on the price side, Cai, our gross price was $13 million for the quarter and net price was $3 million. So a continued good performance on that front. And, no, I mean, we continue to be positioned to deliver on Longitude once we achieved certification and kind of we feel that we're in the right place to meet the commitments that we have for that. And we, obviously, haven't adjusted the Aviation number kind of in anyway.

Our next question is from the line of Seth Seifman, JPMorgan. Please go ahead.

Thanks very much, and good morning. Just a follow-up there on Aviation, I guess the projection you've given for the segment is for about $550 million of earnings for the year. It implies a pretty big second half and I think given the Longitude deliveries, that kind of -- we can understand why the second half would be bigger and second half is seasonally usually bigger anyway, but even bigger this time. And so, can you walk us through, I mean, do you expect a significant increase in the earnings for Aviation in the third quarter, or does it kind of all come in the fourth quarter with the Longitude. And to the extent that there was any temporary softness in demand around some of those macro issues that you mentioned during the quarter. I mean, have you already seen that start to come back in terms of orders or indications of interest in the first couple of weeks of the third quarter here?

Well. Seth, I would say that our progression as you know, I mean, this is usually a business that has a back-end load, a lot of that is driven by tax, folks wanted to get their aircraft deliveries done by the end of the year. I don't see any change in that. I think the progression that we normally see, we would expect to see. Arguably, it's going to be a little more accentuated than that, just because we have the Longitude coming in to service. So, yes, there will be more of a pickup in the back half associated with that. In terms of just the normal order flow, again, I think, things appear to be normal. We actually did see customers that had said all are going to wait and see what happens after everything kind of got a little shaken up in the late-May, into June timeframe and to take delivery in the second quarter. But more of them were -- look, I just want to sort of put this aside and think about this as a second half activity. So again, from -- it's hard to our sales teams, those dialogs are ongoing. And so I would expect that we will see most of that come back and turn into third, fourth quarter deals. And in fact, this summer around aircraft that are deliveries that would be out in the next year.

Right. And then on the Longitude, given -- I think, it's probably just a handful of the initial units that are either marginally profitable or not profitable. And so, on that basis is it possible for Longitude to contribute to earnings in Q3 or is the Q3 earnings that we're going to see basically all from non-Longitude platform?

Well, as you know, typically the initial deliveries are going to be at a lower margin. There will be some contribution, but certainly from a margin rate, there is no question in the third quarter they would be dilutive. So, now that being said, I think the performance, you've seen very strong performance of the business here in the first half. So our relative profitability on light revenue is stronger than has been. So it's offsetting against what is very strong performance. So it's still going to be respectable margins, but it will be -- if you just looked at Longitude on a stand-alone basis, it would certainly be dilutive.

Our next question is from the line of Pete Skibitski of Alembic Global. Please go ahead.

Scott, can you update us on ship to shore in terms of that initial LRP contract that I think you're expecting when that -- is the one that comes through here in the second half. Is systems going to kind of return to growth on that basis or maybe the UAV headwinds still too tough right now. Can you just update us there?

So, Pete, I definitely think that -- Well, first of all, ship to shore is moving along well, the first craft is in builders trials, that was a huge milestone. So we're about halfway through that process, we're expecting delivery of the first aircraft here this quarter. The rest of the initial developmental units are moving along well behind that. We do continue to get long lead funding for that next production, lot of aircraft is actually three fiscal years that are in there. We are in negotiation of that process. I would expect here in the third quarter or four quarter, the latest, obviously, we would get that under contract. So -- but the amount of revenue that we'll see this year is largely associated with those long lead materials. We do have some of the initial assembly or initial welding activity going on the first craft, but really you will see the impact of that as it starts to ramp up and generate revenue, where it will be a 2020 story. So, clearly from our perspective, Systems here is sort of bottoming in 2019 and you'll see the growth in 2020, in large part driven by that transition of ship to shore from development program to the production program.

Can I just ask one follow-up, Scott? I haven't asked you in a while about this Marine Corps MUX program. They're doing a lot of interesting things, I think, with the acquisition strategy. Are you guys kind of comfortable on that program right now, it's an opportunity for you or some of the things that they're doing are they kind of making it tougher to bid on. Just your thoughts?

Well, I think -- look, I think the Marine Corps is doing a lot of work right now. And then you've see these small levels of activity in prices, where they are just for best soliciting ideas, which I think is a very healthy thing to do. Obviously, we have done a lot of work on the concept of the MUX and how we would approach that program. The Marine Corps, obviously, is well aware of everything that we've -- that we've done there. We have participated in some of these other smaller projects where they're sort of going to industry and say, hey, give us your ideas around different Mission Systems and different concepts of operations. So I think they are sort of in a fact finding mode. Obviously, we have put a lot of information in front of them over the last couple of years. And at this point, I think most of the work that we feel like we need to do in advance of those thing, we've largely done that. And I think here in the next couple of years you will see that thing transition from sort of the solicitation of ideas to help them formulate their final specifications, if you will, around that program and then it will turn into -- hopefully into a funded development program. Obviously, we would participate in that. I think we have a great solution to what they're looking for. But it will ramp over the next couple of years, I think.

And next we have the line of Rajeev Lalwani of Morgan Stanley. Please go ahead.

First, just a question on Hemisphere. Can you talk more about the decision to put that on hold? How much of it was engine versus simply what you're seeing in the overall market and the signals you're getting there?

It was purely the engine, as we've talked about for the last year or so, we think that the niche -- the area that we intended to fit with that aircraft and obviously had that shared feeling with NetJets as our launch customer was an area that would be a great product and a great price point, performance point to go into the marketplace. But the challenge was, there was really only one engine in development that was suitable to meet that performance point. And as I said in the prepared comments, that engine hasn't yet demonstrated the performance required for the aircraft. So if at some point in the future that engine or whatever is demonstrated that can meet it, we would certainly revisit it. It's just -- I think, just too much time has gone by here and we can't sort of hold this thing in a -- I mean, we can't expect our customers to kind of wait an uncertainty any longer. So there is still potential for it out there, we have to evaluate and understand what's competitive dynamic, what's going on in the marketplace, what's going on with customers to determine at that later time whether that product would make sense or not We'd be certainly happy to evaluate and look at that, but in the meantime, clearly we need to take our engineering resource and focus on those things that are going to drive our growth in the mid to near term here, which is not just getting Longitude done, but getting SkyCourier and Denali into the Q. And as you know, we're always kind of looking at other concepts and opportunities within our portfolio that need refreshes, updates and things like that, which is what we normally do. So we're simply just going to take all that engineering resource that would have gone into the Hemisphere program and deploy that into our current portfolio of programs.

On the Bell side, obviously, are pretty well positioned on the long-range and have the reconnaissance program. How important are those for the future of Bell. I mean, assuming that you're not successful there, should we start thinking about an overall restructuring of the military side of the business there, do you feel like there is enough other things going on to sort of sustain what you're seeing today or add to it?

Well, I think if you look at the military side of Bell. We have good visibility on H1 production out in the '20, '22 timeframe. There's a number of FMS opportunities that are out there that we're pursuing. As you know, those always take time to get those to closure. V-22 were already running at that lower rate associated with multiyear three. Again there is some FMS opportunity or other things that they could increase that over time. And I think there are certainly some possibilities there. And of course, this has become a very large installed base. So there is a ton of service business associated with this. There's upgrades and enhancement programs which are typical of any large defense platform, which we expect we will continue to see in the future. So I think Bell on the military side, just around V-22 and H1 can sustain and be a nice healthy business. But clearly from a growth standpoint, the opportunities are out there around far around far those V-280, of course, the MUX program which we just talked about, and some other opportunities around tiltrotor is what's going to drive the growth in the future. I think we're very well positioned on several of those programs. Will we win them all? Probably not. But these are, these are very large programs. And so winning one or two of those is what would drive significant growth for Bell on top of the ongoing sustaining of the V-22 and H1 programs.

And next question is from the line of Jon Raviv of Citi. Please go ahead.

Good morning. Can you just level set us a bit more on systems margin going forward post the Flightsafety deal, but then also with the ship to shore connect ramping up. I understand that sales bottoms in for '19, but how about the margin rates. And I guess overall, how you think about earnings dollars growth going forward here with those two big moving pieces?

Yes, we've showed you. I think the Systems business should be targeting around 10% margin, we have returned that last year. We're on track to be in that neighborhood this year, obviously, there has been a bit of a drag on -- associated with the fixed-price development on ship to shore, but again, that transitions into a production program. This is a business that we should expect to see a 10% margin business.

Okay, thanks. And then just going back to Aviation and it got it seems like something really kind of scared customers in May, June, even though the market has been through some other gyrations, especially for 2018, but it's kind of through that period. You typically sounded quite positive. So what do you think was different about the nature of this May-June move. And then look, I mean, that's a beat a dead horse, but really what gives you confidence that this is going to come back. I mean the Fed's cutting rates because the economy is slowing, that's probably not a good thing for customers.

Well, look, I think people -- when you look at the combination of you -- Again, we had some market gyrations, but to your point, this happens periodically. Right? I mean, but you have this concern over Mexico tariffs. I mean that -- I think, we had a couple of customers that just flat out. They do a lot of business in Mexico and this is -- was a big problem for them. So that created some of that uncertainty. Look, a lot of people were talking down to. The economy is really going to slow down dramatically. And I think the numbers that actually came out would indicate that's not the case. I mean, unemployment numbers are still quite good. The GDP numbers were actually better than most economists were forecasting. So, is the market on fire? No. But is it healthy and steady? I think that's more of a case of where we are. So customers that are interested in upgrading and buy new aircraft, they didn't go -- say, hey, I'm done. They were -- let me see what happens when things settle down a little bit. So -- and at the timing of it. When we get one of these perturbations in the first month of the quarter that gives you time for customers to kind of understand where they are and get comfortable and move forward. When they happened in the last month of the quarter, it's a little more challenging because they come back to the table, but it's now past the end of the quarter. So I think -- but if that had not happened, we probably would have over driven a few jets, just given the number of things that were in the pipeline, but I think at least our view right now is, those were larger activities that deferred into the third quarter.

Next question is from the line of Robert Spingarn, Credit Suisse. Please go ahead.

Just a couple of things. On the industrial business, you're guiding, I think pro forma for the divestiture about flat this year and that seem to track in the first half. But I'm wondering about some of the moving pieces in there. For example, how does the channel fill work with the Tracker product against streamlining your other distributors? And how do you think about automotive in the second half given some of the macro weakness that we're expecting, so that on Kautex. Can you -- essentially can H2 be flat with H1 is what I'm asking.

So, I think if you look at -- Let me talk to the automotive side first. Clearly volumes around most of the world are down, but frankly the comparisons on Q3, Q4 are going to be easier than Q1 and Q2, because you really saw that slowdown hit in the latter part of last year. So I think our business is performing well. I mean, we're happy with performance and operations and margins and how the guys are doing. But there is no doubt, it is on a lower volume basis but more or less consistent with where we thought it would be. And as I said, the Q3, Q4 comps are certainly easier than what we saw in Q1 and Q2, just given the global automotive slowdown. So, I think we're comfortable with where we are. Again, the team is executing quite well and delivering based on where that end market is. So we continue to be feel good about new programs and new nominations which obviously are growth and opportunities in the future as well. On the off-road side, I'll tell you the Tracker, the way that the -- the inventory and stocking model works in Bass Pro and Cabela and their dealers is a very disciplined process. It's a very healthy process and we feel very good about how that's going, and the way the team there manages that. It's a great partnership. We're pleased with how it's going and very comfortable with just how they do business and how they manage that business. I talk a little bit about the other piece of the channel around snow. We're just -- guys, we have some very, very good deals out there, particularly a lot of our dealers who have a long history with that brand in the snow side. As I said we're being extraordinarily disciplined with how we do that and how we manage that and we'll do that on the dirt side as well, because it is largely those same dealers of guys that are historical snowmobile dealers that are carrying that Arctic Cat brand of dirt. And by the way, they are very complementary channels. The strength of that channel under that Arctic Cat brand tends to be in the northern parts of the US and Canada where the snowmobile country exists. And in most of the rest of the country happens to be where the Bass Pro, Cabela's and their independent Marine dealers are very strong. So it gives us in total, I think a very strong distribution network.

Do you find that whether is a bigger factor for dirt as it is for snow. And then one last thing I wanted to ask you is similar and how -- in commercial helicopter, similar to my first question about H2. How do you get optimistic or as optimistic for a bounce back when the rig counts have been fairly soft, especially in the second quarter?

Well, so on the helicopter front, keep in mind that our share in those deepwater rigs, we really don't address that market today. That's part of what the 525 is about for the future, but where our market is and where we've frankly seen strength and very strong workflow here in the last, almost going on a couple of years now is really around the near in stop in oil and gas and frankly a lot of emergency medical services, executive VIP, customs and border patrol. I mean it's a much broader market. Police -- really -- what really drives the 407 and 429 markets is not the oil and gas market. So there is a real contrast right now between the big machines that are large oriented serving that offshore oil and gas market, it's just not a market we've had a very big position or the market that's quite strong is, again, around more of that the light twins, the single, so it's volume around 505, 407, 429 and 412, which is not that deep water offshore oil and gas market.

And then just a whether question on dirt versus snow?

Well, I'd say it's a lot less dependent, snow is very dependent on the snow season. Again, this is part of why we want to sort of insulate ourselves from that by saying, guys, we're in a pre-sell. So those snowmobiles are going to be built and that will be shipped and they're paid for and that will all happen before there's -- we even get into the snow season. So by design, we were trying to insulate ourselves from that one way or the other. Of course, we look very hard at what's out there in the inventory, the inventory levels of our products frankly ended up at a very low level last year. Well below where we originally targeted and that was because it did seem a relatively in most parts a good snow -- strong snow season. And so our dealers did retail through a lot of product. So I think it puts us in a very healthy position. We have a fairly low level of inventory out there and we've already pre-sold all of our 2020 models that are going out. Dirt is more difficult. I mean, essentially more difficult. I mean it's not as weather-dependent, right? You've got a spring season, a fall season, it's not -- it really doesn't -- isn't driven by particular weather cycle on the dirt side.

Next we have Noah Poponak, Goldman Sachs. Please go ahead.

Scott, did you actually specifically have live -- in the process kind of ready to rock business jet customers then specifically cited the Mexico tariff situation as a reason to hold off. So as opposed to just -- you were talking broad macro and giving an example.

No, absolutely no. I mean there were couple of specific transactions with customers that do a lot of business in Mexico and their business is dependent on that. And they got pretty rattled. Now, will they come back? I would expect so. I think that whole issue -- I mean, if you look part of it, Noah, that came out of nowhere, right? I mean, this was a -- more of a diplomatic issue then a tariff -- they thought that the new free trade agreements, had all the dust settled on all that sort of stuff. And so this kind of came as quite a surprise, but of course, now it's also going away. So I think hopeful of those things will come back, but yeah, I think there were very specific transaction that literally stopped because of that. And in a bigger way it contributed just to a level of uncertainty economically and people don't spend big capex items when there is uncertainty.

It's interesting. Not to diminish the -- how meaningful that specific thing is, but it's just a pretty specific thing. And so I guess, just in trying to -- we all keep I think trying to ascertain where we are on the spectrum of weak market to OK market, but still kind of touching go and skittish to strong market and I had interpreted some of your commentary year-to-date to suggest we had -- we are really moving toward stronger market. And I guess how concerned are you that you just we'll never be able to get a fully firmed up tight market until we just have -- until we are just out of the cycle and we're in a new cycle as long as everyone's, because there's always going to be some headline not dissimilar to that, right?

No, there is always. And I can't predict them all or either, right? I mean, but look we've been playing this sort of over 10 years now. And so, yes, things get curveball get thrown in there of one flavor or the other, whether it's markets or international tensions or currency. I mean, look, this is the nature of the world that we live in. But some things are very specific localized problem some are more broad based. But as I said, I think, you look at where the market was through 2018 and the beginning of '19 still feel very good. I think we still feel like we have a very good list of customers. I do think that the cycle that -- if you want to talk about that way, there was a overhang of a lot of the used aircraft and all these sorts of things is largely behind us and so that gives us a little more stability I think. And then just a general better feeling on the new side where you don't have that big overhang on the used side, which clearly is the case right now. Most used aircraft that are out there are quite older used aircraft. I mean those transact typically at a slower rate. Every indication on the used aircraft market which obviously we're a big participant in that market is that, if you've got newer aircraft that kind of people to do trade in and do buy aircraft, it's still very liquid and there is good demand. You come out there with a good used aircraft, they transact. So it's healthy -- it is healthy. The underlying market is as healthy as has been in a very long time. Does that make it immune to something sort of percolating it like we saw here? No, absolutely not. But I still think in general, we feel good about where it is, the dynamics of, again, used of pricing of new products coming into the market that I think will help drive a lot of our growth. Again, we -- as you know we've taken an approach that says, if the markets are just sort of flattish we need to drive growth by bringing things like a Latitude into the market, by bringing the Longitude into the market, by bringing the Denali and SkyCourier into the market. Those are the things -- that are the investments that we make to try to drive growth in the business even if we have a flattish overall market.

Yeah, OK. That's really helpful. I appreciate that. On the Aviation margin, do we need to be aware of a substantial variance between the third quarter and the fourth quarter margin, just as you bring the longitude in the third quarter?

Look, I think you're going to -- you would expect to see a somewhat lower margin in Q3 because of that dilution of the initial Longitude orders going out there. And then you would expect to see stronger Q4 margin. I mean -- but as you all know, we always -- that's sort of -- just the volume and the dynamic of our business is always kind of plays out a little bit like that anyway between Q3 and Q4. Q3 tends to be a lower margin and Q4 largely driven by volume, but there will be probably a little bit of differentiation here based upon that -- the dilution of Longitude. But again, I think the underlying performance of the business, how they're executing, the productivity, the efficiencies that has been driving a pretty significant improvement on a year-over-year basis. I mean, you run like couple of hundred basis points or so better and that will be tough to do in Q3, given the Longitude dilution. But I think we'll -- you'll see continued strong performance from that business.

And then last one on the cash flow. The year needs to be meaningfully more back-end loaded than the normal historical seasonality to get to the guidance. I'm assuming that's primarily or entirely Longitude, anything else?

Well, the biggest for Longitude is probably the -- is certainly the single biggest driver. We build these aircraft. The demand is there. Customers are there. We just got to get the certification done. So we've got plenty of aircraft set up and ready to go. I talked a little bit about Bell. Obviously, we've been ramping that production right up here. So, that's all sitting in working capital right now and you'll see considerably higher volumes here in Q3, Q4 on the commercial side of Bell. And then, I mean, that are smaller numbers but as you look at, for instance, the snow stuff. I mean we've got all that stuff going in working capital right now. We will produce all that stuff and sell that through mostly here in the third quarter. The dirt side, we're always going to have a little bit of some higher inventory carrying there, because we need to be able to run the factory and do nothing but snowmobile third quarter. So we build up enough inventory to make sure that we can satisfy the demand in that channel as well. But again, most of that -- the significant dollars are associated with Longitude's and the Bell ramp, things like the snowmobile going out. I mean, I think, that's why we still feel quite comfortable with our initial guidance range, albeit sure that it is more back-end loaded than we would like.

And next we have the line of Ronald Epstein, Bank of America. Please go ahead.

Scott, Safeaero just put out a press release that there is no financial impact for both of you from the contract termination on the Hemisphere. Since the issue seems to be largely from engine performance, I was wondering why there isn't more recourse for you from Safeaero. How is your contract different from your competitor that got a few hundred million dollars in penalties from them?

Well, because we don't have a few hundred million dollars of penalty associated with it. There was -- we do on a much smaller scale do R&D sharing with some of our key suppliers and largely we have had, again, a very small relatively speaking, number that's in there that's been supporting some of the R&D, it is a shared program. So we've had R&D in it, they have R&D in it. My understanding is, they're going to look to continue to work the engine. If they can get that engine to its specifications, it would be a great engine. So I can appreciate that they would continue to make some investment as well. But we don't deal in these massive programs to offset these things. And frankly because -- there is not -- I mean it's size of the market, there is not a volume that anybody would ever investor or put up that kind of a upfront-end loaded payment or obligation.

And when you think about that size aircraft in the market. I mean, the hemisphere was opposed to entering service sometime next year when you first initially rolled it out. Can you describe what's going on in that market environment today. And is there demand for replacement of Hemisphere type aircraft?

Well, the decision point was to be to launch it this year. So they are entry the service would have been out probably five years, anyway, before that we go into the market, but it was intended to be an aircraft that go into fleets like NetJets and obviously other retail customers, that had a requirement to do that longer range. Again, I mean, the theory of where we were in that business was, most of the large-cabin manufacturers are going to ultra long-haul and even longer range aircraft and there is still was a demand in a right place at the right price for the right performance capability for an aircraft that was more in that 4,500 nautical mile range. And there really hadn't been a clean sheet new airplane in that space in a long time. And that was what we thought the opportunity was, because the challenge there, you need to have the right engine airplane combination. And so that was always predicated on having that engine there. And as I said, there has been a lot of hard work. There has been a lot of progress frankly that Safeaero team has made it just was not yet able to demonstrate. And we just had a timeline that says guys we need to step back here and commit resources in other places for now and the engine, I guess there then we can revisit that.

Thank you for the color.

Okay. Operator, that does it for this call. Thank you everyone and you can reach me if you have any follow-up questions. And we'll see you next quarter.

Thank you, ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.