Ladies and gentlemen, thank you for standing by. Welcome to the Textron Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Eric Salander. Please go ahead.

Thanks, Greg, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $2.7 billion, down from $3.3 billion in last year's third quarter. During this year's third quarter, we reported net income of $0.50 per share, compared to $0.95 per share in the third quarter of 2019. Adjusted net income and non-GAAP measure was $0.53 per share for the third quarter of 2020. Adjusted net income excludes $7 million of pre-tax special charges $0.03 per share after tax, related to the restructuring plan announced in the second quarter. Segment profit in the quarter was $189 million, down from $297 million in the third quarter of 2019. Manufacturing cash flow before pension contributions totaled $344 million, up $163 million from last year's third quarter. With that, I'll turn the call over to Scott.

Thanks, Eric, and good morning, everyone. Overall, the third quarter results reflected a strong operating performance across all our teams with strong cash generation and improved margins. At Bell, we had a very strong quarter with 15% operating margin on slightly higher revenues. On the commercial side of Bell, we delivered 41 helicopters down from 42 in last year's third quarter. Military remain strong in the quarter largely due to higher aftermarket volume on existing contracts in support of the V-22 and H-1 fleets. Also in the quarter, Bell continued to increase the scope of its support of the U.S. military aircraft, with the award of a new $213 million H-1 Spares contract. In the past year, H-1 aftermarket contracts now total over $1 billion. Also in the third quarter, Bell finalized [ph] a $272 million contract on the H-1 program, with the Czech Republic for eight Yankees and four Zulus. On future vertical left, the V-280 continues to fly and supported the Army's Risk Reduction Program, and has now flown over 190 hours as we continue to demonstrate the capabilities of this aircraft to our army customer. On FARA Bell has begun building a 360 Invictus prototype aircraft, starting with gearboxes, rotors and airframe structure. Our new Textron systems third quarter was strong with margins of 13.2%. In the quarter, systems was awarded an initial contract to support the Ground Based Strategic Deterrent missile system, as a subcontractor to Northrop Grumman with work beginning this year. Also in the quarter systems received an additional task order for the Air Force CAPCAS program to support Eglin Air Force Base. This reward is an addition to the two bases announced at the end of the second quarter. Just as we also announced, the successful flyway of the first two Ship to…

Thank you, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues of Textron Aviation of $795 million were down $406 million from a year ago, largely due to lower citation jet volume of $234 million, lower aftermarket volume of $95 million and lower commercial turboprop volume of $83 million. Segment loss was $29 million in the third quarter down from a $104 million a profit last year, primarily due to the lower volume. Backlog in the segment ended the quarter at $1.8 billion. Moving to Bell, revenues were $793 million up $10 million from last year on higher military volume, partially offset by lower commercial revenues primarily due to mix of aircraft sold in the period. Segment profit of a $119 million was up $9 million, largely due to favorable impact from performance. Operating margin of the segment was 15%, up a 100 basis points from last year. Backlog in the segment ended the quarter at $5.7 billion. Our Textron systems revenues were $302 million down $9 million from a year ago, primarily due to lower volume of $20 million, a TRU Simulation and Training. Segment profit of $40 million was up $9 million due to a favorable impact from performance, partially offset by lower volume. Operating margin of 13.2% was up 320 basis points from last year's third quarter. Backlog in the segment ended the quarter at $1.9 billion. Industrial revenues of $832 million were down a $180 million from last year, primarily from lower volume specialized vehicles. Segment profit was $58 million up $11 million from the third quarter of 2019, primarily related to the favorable impact from performance of $24 million, principally reflecting cost production activities, partially offset by lower volume and mix. Operating margin was 7% up…

Thanks, Frank. To wrap up, our teams executed very well and generated solid results in the third quarter. Looking at the fourth quarter, we expect our defence businesses to continue their strong performance. At aviation, we expect to return to profitability as they begin to capitalize on the new aircraft order flow generated in the third quarter. At an industrial, we expect a continuation of the rebound in our end markets. That concludes our prepared remarks. Operator, we can open the lines for questions.

Okay. [Operator Instructions] Your first question comes from the line of Robert Stallard from Vertical Research. Please go ahead.

Thanks so much. Good morning.

Good morning, Robert.

First of all, Scott, I was wondering if there's been any change to your thoughts on 2021 deliveries at aviation. Are you still thinking about the same as you were three months ago?

Yes. I think the order flow has been encouraging, Rob. I would say at this point, our plan is that we probably see about half of the recovery. If you look at the dip from '19 into '20, we would expect to see about half of that come back in demand in '21.

Okay. And then secondly for me, in terms of the fourth quarter, you gave us some points on the business. But I was wondering if very strong cash flow that you saw in the third quarter, can be continued? Or did you pull some items forward into the third quarter?

I think we'll continue to see good cash flow. It's pretty balanced across working capital and across all segments of the business. As you know, we tend to have growth in inventory going into a fourth quarter and then burn that down. And this year the inventory was obviously something we've been managing much more closely, but I expect that we will continue to see good cash generation in Q4.

That's great. Thank you very much.

Yes.

Your next question comes from a line of Peter Arment from Baird. Please go ahead.

Good morning, Scott, Frank. Hey Scott, just maybe good to see the backlog kind of a spike up at aviation. Can you give us a little color there on kind of what the mix of what you're seeing there?

Yes. It's pretty much across the board. We've seen nice pickup in jet activity. And it really is from lights through our mid-sized super-midsized platforms, which is good. And also pretty strong order activity in the King Air family.

Okay. And just as a follow-up and staying in aviation. Just the lower aftermarket demand, I guess it still seems a little surprising to us just given what we've heard about this jet flight activity. What are you seeing there? And do you expect that actually start to turn the corner before we see deliveries pick up?

Well, I mean, it sequentially it certainly is improving, Peter. So it's still down in the sort of low-to-mid 20s on a year-over-year basis. But as we've seen the flight activity continue to grow, the service is coming back with that. So it's not surprising that it would trail a little bit, but we don't think it'll get back to comparable in fourth quarter, where we certainly expect to see it continue to sequentially improve.

I appreciate the color. Thanks, guys.

Sure.

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

Hi. Good morning, guys, and thank you. On aviation, I realized there was a tough slog from the losses in Q2, but how do we think about the past to breakeven and losing pieces that you saw in Q3 and going forward?

Well, I think given the backlog that we've seen and deliveries that are scheduled now for Q4, Sheila, I definitely think that we'll see profitability at aviation in Q4. What we're trying to get that to claw all the way back to kind of breakeven on the year, whether we get there or not, it will probably be close depending on how the demand and service activity and whatnot happens in the quarter. But certainly, we're expecting a profitable Q4 and getting the business back to breakeven.

Okay. And then switching over to Bell. I think there's been a lot of noise from third parties on FAAR and FLRAA on the future of the program, which I disagree with. But perhaps you could provide us your thoughts Scott, and how you're thinking about that? And if there's any change with the administration next week, how you think about the future of that program too?

Okay. We continue to have a lot of dialogue from the working level all the way to very senior members in the army. There is no question that they are very committed to the FBL programs. It's one of the highest priority programs they have in monetization in the army. They realized it's absolutely critical to their capability and the role that they play, whether that's in near pure competition, or just in general. I know they recognize that their operating aircraft that are 40 going on 50 years old technology. And for sure they've been upgraded over the years, but the capability that they're looking for in FBL, is something they need. As I said, it's a very high priority. They're rational people. They understand budgetary pressures, and they know there will be budgetary pressures, regardless of whether there's a change in administration or not, I'd say over time. But look, these are very long cycle programs, and they're committed to the programs, and they've worked hard to make sure that they have the ability to budget and fund these programs. And obviously, from our standpoint, we're very focused on continuing to execute on it. As I said, in the prepared remarks, the V-280 continues to fly, it's done great. As you know, we've been over 300 knots flight level. We've demonstrated level one maneuverability, so most critical things that they're looking for in speed and range, maneuverability, we've demonstrated now. Hard to believe it, but we've been - the flight test program almost three years in December. So on the FARA front, we're making great progress, starting to build initial critical components of the aircraft. So, I think our teams even through the whole COVID process continue to make great progress and work hard at demonstrating the capability of the products that we've designed and built for the army. So, we feel very good about the program.

Thank you.

Sure.

Your next question comes from the line of Carter Copeland from Melius Research. Please go ahead.

Hey, good morning, guys. Just wondering if you could speak about the margin performance of Bell and the productivity commentary there. And just if you encountered any COVID-related costs, and how you anticipate if there's reimbursement of those? Or just what it was that you saw that drove that? Thanks.

So, look on the cost front, I mean, for sure, there are some costs that are directly incurred. We've had some disruptions here and there. But I have to say, that business and this has been true in several of our businesses continue to operate through the whole COVID process. And obviously, we had to put all the proper safety protocols in place. And I think those have been very successful. But our guys have continued to execute. We're getting the output; we're delivering what the customer needs. Obviously, one of the things we're benefited from is we've seen a significant uptick in the amount of activity on the installed base contracts on V-22 and H-1, and that's driven some additional volume through some critical parts of the factory, which has yielded good productivity. So I think that for sure, there have been some minor relatively speaking, I would say minor costs incurred in the process of working through a difficult time, but really what you're seeing in terms of margin performance is just good solid performance by our teams, and executing well on some increased volume going through the shops.

Okay, great. And then just a quick follow-up on aviation. Just with respect to Q4 deliveries, what you're looking for there? I mean, I know there have been some challenges getting some aircraft delivered and whatnot due to restrictions. How are you thinking about the remainder of the year, just as it's important to think about the '21 commentary you gave us earlier?

Well, I would say there's risk here and there on a couple aircraft, if a customer is unable to show up for get the - take the delivery. Again, we're still living in a bit of a dynamic world, obviously, in terms of restrictions around travel and things like that. But at least as we see it right now, it's sort of one offs here and there. It's not - we don't expect it to be a material number, obviously, that could change if there is a real big change in terms of travel restriction. And again, there much like a Bell, the teams are working. We have occasional disruptions on supply base issues and things like that, but in general, are working our way through it. So I think we feel pretty confident that we'll be able to deliver on the volume that we're expecting to see in Q4, and obviously, we expect to see the same in that assumption in terms of how we recover and increase volume in 2021.

Okay, great. Thanks for the color Scott.

Sure.

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

Yes, good morning. Scott, you avoided answering Carter's question about specific deliveries in the fourth quarter. I mean, you're expecting somewhere around 50 deliveries in the fourth quarter?

I didn't think Carter asked for a specific number. Of course, if he had, I would have evaded the question.

Okay. So you're going to evade my question as well.

George, you know we don't give a forecast of the exact numbers, and like, it's not an environment, probably where we would do that. But certainly, we feel like the order book coming through Q3, we're pleased with the amount of activity. We're pleased with the amount of activity that we're still seeing out there in the marketplace. And look, I think our expectations are that we'll see a decent recovery coming out of this. This is as you know a very different environment than maybe what we've seen before, where you had challenges in the sand [ph] market. The used market continues to be robust. If you look at activity, and that light to mid-size jet market in the EU side is quite strong. I mean, your brokers talking about that all the time, we certainly see that, in selling our own used aircraft business. So, again, as you know, these things are all sort of subject to something crazy happening from an overall market environment. But right now, we think the demand is looking pretty good. The fundamentals are good, and then we ought to be able to deliver a good fourth quarter.

In terms of orders in the fourth quarter, Scott, you expect orders to be significantly better than Q3? I mean, usually your fourth quarter is the biggest order quarter.

Well, Q4 can be a decent quarter, George. As you know, usually the book of bill is not there, because usually our strongest delivery quarter is in Q4. But as I said, I think right now, we are continuing to see good activity. Look, some of those aircraft we will deliver in Q4, but for sure, we're starting to see bookings and things that are aircraft deliveries are out in 2021, as well.

But I mean like last year, the implied orders in Q4 were $1.5 billion versus $1.2 billion in Q3, so you did almost a $1.2 billion this Q3, would you expect to see a $1.5 in orders in Q4?

George, I don't honestly don't know. I mean, I think that, trying to dial in on that number is something we probably won't do anything, because we just don't know, right? Look, our sales teams are out there, they're selling. I'm encouraged by the amount of activity; we're seeing deals close. Aircrafts are moving at a good pace. So, I mean, we never guide that number. But we certainly feel good about what's going on in the end market.

And the percentage of orders in the quarter from NetJets, can you disclose that?

We do not. But suffice to say there are orders in the quarter, and I expect to the orders in the quarter for Q4. So, again, look, the encouraging part about what's going on in the market is that we're seeing increased activity in flight hours, and we're seeing increased demand. And when we talk to guys that are, frankly charter operators of our aircrafts from companies that are, guys like wheels up that are memberships-oriented kind of companies. And from NetJets, who as you know is a very important partner for us in that fractional market. The demand, in all of those areas appears to be quite strong, which is encouraging not only for deliveries this year, but also for ability some order book and giving us some visibility into 2021.

Okay. Thanks very much. I'll get back in the queue for some more.

Okay.

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

Hey, thanks. Good morning. I guess asking George's question another way. Are NetJets fully what they de-booked in Q1?

Guys, we've never given backlog by aircraft, and certainly not by customer. So, I don't think we would provide that guidance. I would say from a color standpoint, we feel good about where NetJets is. I think they feel good about where their market is, and they're seeing strong demand. A lot of it is new customers coming to the market, which is good for business aviation overall.

Okay. And just roughly taking Scott the deliveries now forecast that you're talking about for 2021. It looks like the last time you were at similar kind of volume Cessna was a mid-single digit margin business. Is that the right place to think about for next year, just I guess given the cost cutting that you've done and maybe a bit of a different mix in terms of bigger airplanes coming through?

No. Look, I mean obviously we're not doing 2021 guidance at this point, but when we get to the call in January, we would expect at this point that we'll get back to providing you that kind of revenue and margin expectations for the year.

Okay. I guess last one. Looking at industrial Caltex versus vehicles, was Caltex actually up year-over-year in the quarter? And I think you commented special, the vehicle side would be up in Q4. Is that sequentially or year-over-year you're talking about? Thanks.

Well, from a revenue standpoint, we weren't back to where it was on a year-over-year basis, and obviously the same is true in the specialized vehicles business. But we did see a recovery, frankly that was stronger than we expected, particularly in North America and Asia, looks strong. Europe is still a little bit soft. So revenue is not up on a year-over-year basis, but it was up significantly, obviously from where we were in Q3 and delivered good margins.

Okay. Thanks very much.

Sure.

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

Yes, thanks a lot, and good results. So I was kind of surprised by how good numbers were at industrial and Bell as well as the extent of the drop at aviation. Could you maybe walk us through any favorable adjustments or unfavorable adjustments, particularly EACs? And were there any sort of catch ups or anything in the profit? Because those numbers at industrial are kind of better than anything, I can think of that you've done in a long time? Thanks.

Sure, Cai. Well, look industrial, that's not the kind of counter so we don't do EACs or catch up sort of things like that. I think that, obviously, as we went through the last six months, there was a lot of focus on efficiencies and cost reductions and trying to optimize the operation. So as volume came back into those businesses, they performed well and delivered good margin. We expected for instance in the Caltex side, we're anticipating how long getting some fairly good mix, a lot of the newer technology, particularly around hybrid vehicles and things like that, where we have a good position and a strong product line are contributing there as well. So, on the industrial front, it was just delivering and converting well on volume starting to come back into those businesses. I don't think there's anything particularly notable. I think the best color to give you on Bell is that we really have seen nice growth in the aftermarket side, particularly on the military programs, and H-1s and V-22s and that's driven additional volume and critical technologies for us, right. It's a lot of our gearboxes rotating things and blades and things of that nature, which help to drive good productivity and efficiency in terms of utilization of the factories, and that I think was good margin business.

Thanks. So Bell, you consistently talk of the drop in margins to 10% to 12%. And the margins pretty consistently go up. How should we think about where your margins might be next year? I mean, does 10% to 12% assume kind of the level of military aftermarket you were seeing, and therefore, that's now too low? Or are we going to see a steep drop off? And if so, why is it because it looks like, you would be headed for a cliff, maybe talk a little bit about the trend we should expect in '21?

Well, Cai, I think that we'll obviously get the guidance in '21 or later time. But overall we work again on these and in some cases, multiyear contracts. We've had additional volume come in, but as you know, as you do future contracts, these are negotiated deals, and you expect to see some pressure on some of those margins, once that higher volume is in there and goes into your base numbers. But a lot of it will depend, frankly, for us on what level of R&D do we continue to spend around these FAAR and these FLRAA programs, which will certainly pressure as you know, those are cost share programs. So the government's funding a lot of that, but there is still a contribution for us to have to make in support of those programs. And there's still a lot of work to do there. So, that will put some margin pressure on a go forward basis, as well. And over the long-term, it'll depend a lot on how we do on volume of bringing in additional [Indiscernible] cases and things of that nature. So, I still think this is a low-double-digit margin business. We've always said that 10% to 12% number. Originally, people didn't believe us and said no, it's going to be 8% to 9%. Now, people don't believe us and say it's going be 13% to 14%. So on the average it sounds like 10% to 12% is probably about right.

Last one, could you give us any sizing of the EACs you've been seeing there at Bell, as you come down the end on the V-22?

Not at Bell. I mean, the program adjustment for the quarter was $22.5 million compared to $21 million last year. So on a year-over-year basis, total Textron, there was no big deal.

Yes, there is no change on a year-over-year basis certainly. So Cai, I think we had good margins in the system side as well. And I think part of that is - look we're sort of turning the corner, I would say on the Ship to Shore development program. We've started getting more aircraft deliveries. Collection lines are starting to run better. We're starting to get supply parts coming in at the right time. Obviously, we've got the initial units now from the definitized production. Contract are starting to enter into production. So that's a program that obviously is going to start to be a contributor to the profit and the rest of the business, frankly, continues to perform well. And we expect that as we see some of these new things like the CAPCAS program start to roll in, again, that'll generate revenue and good margin. So I think that systems is also going to run in that little double-digit margin area.

Great. Thank you very much.

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

Hi, good morning, guys.

Good morning.

I just wanted to circle back on Textron Aviation, so the bookings that you've had so far, can you provide more color on the pricing environment and competitive dynamics?

No. We had slight positive pricing in the quarter, and you'll see that. But the market, I think, again, it benefits from not having this huge number of used aircraft out there, particularly not new young used aircraft that puts pricing on customers considering do they buy a used aircraft or new aircraft. So that's a positive for us. Look, I think we all know in general, people were planning higher production rates this year than what the demand has turned out to be in the market. So you do occasionally see deals or someone's trying to move aircraft. And we're trying to be much more disciplined about that. And instead of reining our production volumes and maintaining reasonable pricing. And I think that's what you'll see in the quarters that we had slightly positive pricing.

Thanks. And also as that department plan out their fleets, to what extent has fewer commercial airline routes affected their buying decision so far? And when you think about customers who are in the cusp of ordering an aircraft that has been quite find the dotted line. What's the variable that they're looking at that would make them more confident in ordering? Is it more visibility with the economy? Is it a vaccine? Easing border restrictions? Can you just provide more color in terms of their decision tree?

It's hard to say. I mean, be anecdotal I guess, I mean, every customer is a bit different. But there's no doubt that, as an industry, I mean, we're seeing new aircraft, I believe that again, charters and cubs and fractional owners are also seeing this, that you have people that are coming into business aviation that have not historically been in business aviation, or owned an equity piece of an aircraft. And clearly, again the macro environment out there right now is there is some help dynamic to it, there probably is. It is also the fact that for a lots of companies and individuals that aren't around hub airports. We all know that when you see the dramatic reduction in the number of commercial flights, particularly if you have to connect through someplace, the reduction in the number of flights is making it very difficult for people to get from point A to point B in the country, without taking a whole day doing it. So, I think the convenience factor which a lot of customers obviously have enjoyed for many, many years, is becoming more appealing to a lot of other folks, as it becomes hard to travel commercially. And look, our view over the long-term is maybe some of that is people that might charter or maybe they go back to commercial airline someday, but we think a lot of people once they've experienced the convenience and the productivity and efficiency of traveling private, they'll stick with it.

Thanks for the color.

Your next question comes from the line of Jon Raviv from Citi. Please go ahead.

Hey, good morning, everyone. Scott, just kind of big picture. What's the visibility and confidence to getting back to sort of what I'll call like '18-'19 segment profit levels? What's in your control versus what's not in your control? Pre-COVID you used to talk about aviation meeting pricing to deliver better margin, are you seeing that pricing now? Industrial had room for self-help pre-COVID, that's still the case? So, just holistically, what's the path back here?

Well, look, I mean, obviously, it's different in each one of the businesses. First of all, obviously, in Bell and systems that have not seen nearly as much disruption going through this, have continued on delivering good margins. I think Bell is in a very good place. Systems, we all know, needed some self-help, particularly around the Ship to Shore Connector program, which, as I said, is steadily improving, and we're starting to feel good about that, not only in executing what we have, but having got the first production contract under our belt. So, I think those guys are going well. Things like the CAPCAS program, which that was a non-trivial investment for us to get all those aircraft ready. And now putting them to work will be a nice turn in the performance of that business. So, I think those guys are fairly straightforward. If you looked in the industrial businesses where Caltex generally converts well, and performs well. And they I think are showing that as we come back, through the auto cycle. And I expect them to continue to perform well. As you know the volume is usually lighter in the automotive industry in Q4, but I think that, again, they're getting back into their normal stride and will do well. We know we had things to do in the industrial side around channel development in particular, and I think that we're seeing the benefits of our relationship with Bass Pro on the tracker side. Our Arctic Cat channel is also performing well, and we're seeing good retail volume through those channels. So, I think cost structure as we've talked about before, we're consolidating some facilities and reducing footprints. And as a result of those restructuring activities, I think we come out of this cycle in TSV in a much better place. So that should drive improved performance versus what we've seen in the past. Look aviation is very much a volume game. We've obviously had to go through some very difficult restructuring here, just in terms of adjusting for a lower volume than where we were in 2018, '19 timeframe. As I've said, I think we'll probably get half of that back is kind of how we think about 2021. And then get back to the road that we were on when we get into the future years. I think our product line-up has never been better, right? When you look at where we are with latitudes and longitudes. SkyCourier is coming along very nicely. So, it's been a rough year for sure for that team, but they continue to make the kind of progress in terms of the positioning of the products and the business and the cost that we should be able to get back on our contract here as we go into 2021 and beyond.

Thanks. Scott, and then just following up on aviation comment you talked about getting back to the previous road that we were on. I mean is the double digit margin in that segment a pipe dream at this point, or is that a realistic goal? And also, I'd just say, thinking about production rate as a function of that you're talking about getting half deliveries back in '21. What will be the stable production 0rate in '21? Thank you.

Well, look, I mean, obviously, we've always been trying to target getting back to double digit. We were making good progress, I think, towards getting there. But as I said, you do need to have volume, right? I mean, we have to have a market that is got enough demand that we can get volumes back there to do that. I think, yes, we were getting there. A big part of it was obviously this year, having a full year of longitude. And obviously that, I mean, we have a full year of launch too, but overall, the business has seen a dramatic reduction in demand. So, as I said, I think we'll get about half of that back. So, when we think about the production run rates for 2021, it's targeting delivery, that's going to be sort of somewhere in between where we are this year and where we were in 2019. So we're setting production run rates to achieve that. Obviously, run rates increased through the course of the year, because we expect again, when you think about 2022, that your backup maybe to where you were in '19. But this is a plan guys, right? I mean, I think that we have that kind of visibility in this market, just we haven't had that kind of visibility this market in a very, very long time. So, I feel very good about the macro environment. The fact that there's not used aircraft out there. The fact that we have a very nice product line-up which makes us feel comfortable that we should be thinking that way and planning that way. But obviously, we'll make production line and volume decisions as things play out.

I appreciate that, Scott. Thank you so much.

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

Hey, good morning, guys. Maybe on the NetJets side, just following up on the whole string of questions that we've had. When the time comes to ramp back up, right, which hopefully isn't too far out, how difficult would that be? I mean, given the restrictions that's going on, how is your workforce enrich the time? And give a sense on how your supply chain is doing?

Well, look, I don't think it's that difficult to ramp back. Ron, we're certainly not straining our supply chain, obviously. So we have to work very closely with guys like Pratt and Williams and Honeywell around volumes on engines, which obviously are pretty long lead item. Avionics, that kind of, I mean, look, there's nothing magic about it, right? I mean, we work with our supply chain all the time to do these forecasts, and kind of line things up. Frankly, if I looked at some of the things that have been the longest lead times, and the most constraining things and supply base are typically, as you know around bearings and castings and forgings. And to be honest, right now, there's a lot of capacity that's been freed up. I mean, these are common suppliers to commercial aviation. And so as those volumes have dropped, the supply chain, frankly, our biggest struggles over the last four or five years, I mean, the team works through it. And obviously, it hasn't been a problem in the end, but there's a lot of work that goes into ensuring that we get the right supply and source of supply for a lot of those critical items. And that was strained because of the very, very strong demand in the commercial side. Obviously, that's not the case today. So, we still have to do a good job of forecasting and working with suppliers. But I'd say solving those issues is easier than it has been for the last 10-years.

And then maybe another aviation question, if I may. If you look at the fleet utilization today, do you guys have a sense on how many citations are being used just for personal leisure travel as opposed to business travel? And I guess my question is that when we get to a post-COVID world, and you have people flying for business and for all the other reasons they fly. One of the things that kind of seems to me that could happen is business aviation post-COVID could be actually far more robust than it was pre-COVID because of what happened during COVID. So, my question is do you see any evidence of that that something you guys talk about? Or am I completely off beat?

No, look, I think that's the macro environment that I think is a positive right. First of all, to answer your first question, I mean, we don't have the data, right? I mean, we know all of our citations flying, we have very good information on all that stuff. But nobody checks a block that says, hey, this is a personal trip or a business trip. So, I mean, we don't have that data, obviously, to break it out. But I think we know, when you see the market coming back, and you got 85% of the flight hours, we all know that this is conventions aren't happening, you guys aren't having conferences, or I mean there just isn't we all know, there's nowhere near as much business travel happening today as there was a year ago. And so we know that, therefore, that that gap and that increase has a lot of personal use going on of aircraft. And certainly we know this from discussions with our charter operators the cub guys our fractional. Everybody knows that there is a lot more personal travel going on than you would normally see. I mean, if we look at Europe in August, it was over 100% of a year ago. That's not business travel in Europe in August, right. So, you see a much higher utilization of these aircraft for personal reasons right now. And so the case we would make and certainly it's how we think about it is when you think about business travel coming back, and it is starting to come back, right and there's no question more people are traveling and moving around, but not anywhere near the scale of what you would have seen a year ago, that just as we're seeing more people opt to use business aviation for personal reasons, you're going to see more people choose to use business aviation for business reasons. And so you're going to have both higher utilization in personal and higher utilization in business. And therefore, that's what I say drives a better macro environment than we've seen in a long time. And again, as we look at orders as we look at customers, it is that kind of a mix in anticipation of people already using it personally and anticipating using it more on the business front. So that's the reason, frankly, for us to feel bullish about why this will recover in a positive way. And again, also, of course, you have this dynamic of not having this large huge market out there. So I think we'll see aggregate demand increase, and it will look to the new aircraft demand because you don't have a lot of new used aircraft out there to compete with it.

Yes, that makes sense. And then, one last one, if I'm kind of changing subjects completely. Before the pandemic and kind of the whole world got turned upside down, you guys have made a bunch of progress on reshaping the industrial portfolio. Are you comfortable with where it is? Or is there still work to do there?

There's always work to do, but we're comfortable with where we are. And we're very focused, obviously, at this point on executing and operating the businesses. And that's what we're doing. And I think it's working.

Okay, great. Thanks.

Sure.

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

Hi, good morning, everyone. Scott, last quarter you had provided the forecast that 2020 Cessna jet deliveries would decline 30% to 40% for the year. And the first three quarters are down 40% to 50%. Is the fourth quarter decline less than that 30% to 40% to still pull you into that range for the year? Or does the fourth quarter year-over-year decline look more like what it's been year-to-date?

No, I expect that we'll see some recovery on those percentage basis as we go into Q4, based on the order book and the level of activity we're seeing in the market.

Got it. Okay. So that 30% to 40% for the year, stands.

That's still how we're thinking about the year, correct.

Got it. And then maybe, looking at Bell commercial, somewhat similarly, the unit change year-over-year there improved nicely in the third quarter versus the first-half of the year. Maybe you could just elaborate on what you're seeing from your customers in that market? And how you're thinking about 2021 at this point?

Well, look, I think that we've certainly seen some softness on the commercial side. And it's largely driven by the fact that it's like aviation and a lot things, it's hard to get a lot of face time with customers, it's hard to kind of just get deals done. As you know our Bell commercial business is heavy on foreign customers. A lot of fleet operators, a lot of our bigger aircraft are international, and it's still a challenge to sell and do demos. And frankly, a lot of these are government or power of public kind of things, and a lot of the world it's hard to get deals done. So I think we'll continue to see that. And again, how does that change into 2021, I wish I could tell you the answer to that. I mean it depends on how the virus is progressing, and what different countries do around governments really getting back to work and getting deals done. So it's been a challenge through the course of the year and I think it'll continue to be one as we go forward.

Do you feel like you have less visibility on that on sort of where to set production there for next year than you do with how you're speaking to the Cessna jet business?

No, I think we're pretty well set on what we think the production levels need to be. Again, these are relatively long cycle production, especially when you get into customization and things like that. So, we've made the adjustments that we think we need to make in terms of production. But like I said, I think the only difference it's a little more challenging, maybe Noah is the fact that a lot of more international customers, so.

Okay. And Frank, on cash flow. Working capital has been not insignificant use of cash for pretty long time. And in the nice cash flow number you have in the quarter, it looks to be a source. Are you at a pivot point where with all the new jets in Cessna and some churn in some of the other businesses, you've had to use working capital where you can now have that as a source of cash sustainably for a while moving forward? Or is that a bad read?

No. I mean, look, it moves around, obviously depending on seasonality of the business and other factors. I think the teams have done a really nice job in decelerating as we went into the pandemic and being very focused on working capital utilization and cash generation. And that's reflected in the numbers, as we mentioned earlier in the call, we'll continue to see, I think some liquidation of inventory in the fourth quarter just on the higher volumes that we typically see in that fourth quarter. But then we would expect working capital to kind of seasonally move around as we move into '21. So, we've been very focused on and I think we're doing a better job of managing it. But there's always going to be some quarter-to-quarter volatility to it, but the teams have been very focused on it and done a nice job with it.

Okay. Thanks very much.

Your next question comes from the line of Seth Seifman from JPMorgan. Please go ahead.

Thanks very much, and good morning. I was wondering, the payroll tax holiday has been a benefit on the cash flow this year. And if so if you could quantify it.

It's been a benefit. We won't quantify it. But it has been a bit of a benefit, but it hasn't been a kind of significantly material number on cash.

Okay. And then, if we were to end the year today, what kind of change in pension expense would you be looking at for '21? And have you given any more thought to mark to market accounting?

Yes, look there's lots of things that go into the pension calculation. So I can't really kind of snap a line today, because we haven't done all of that analysis. From a discount rate standpoint, their interest rates are down a bit. So that probably creates some headwind. There's a little bit of tailwind associated with just the averaging of various gains and amortizations, and things like that over time? So it's ultimately kind of hard to tell where that will fall out. We wouldn't expect it to be a big headwind as we look at '21. But it may be some headwind. And, I'm not going to kind of comment around looking at different kind of accounting policies vis-à-vis pension. We'll save that for if and when we were to do anything in that regard.

Okay. Thanks. And then maybe one bigger picture, Scott. In the past, I feel like discussions of the business jet demand environment have often revolves around politics and elections and tax rates and all that stuff. And we're potentially looking at a change in administration and higher corporate tax rates. Is all that stuff kind of irrelevant this time given the other demand drivers that you talked about? Or maybe we've just made too much of it in the past?

Yes. I don't know, Seth. It's a good question. I mean, I should say, normally when you see uncertainty or question, and for sure we've seen that before, where people are kind of waiting to understand a tax policy or the outcome of an election, but no markets uncertainty, obviously. It's kind of interesting obviously this year because of the pandemic there's just so much other swirled going out there that maybe it's hard to see what role politics is playing. I mean, generally speaking, I'd say we've seen that in the past, right, where people kind of hold off until they have visibility and then they - look it's kind of interesting, because in the end, everybody goes kind of back to where they were right. It's just, regardless of what the answer is, in terms of a political outcome. It just seems like this year, because of all the other noise around the pandemic it doesn't seem to be playing as prominent role in discussions. But I'm sure there's some of it out there. I think in the end, Seth, as we know we've seen this before in election years, even when we see it on election years, once you get past the election, people kind of get back to life. And I suspect that would be a dynamic here as well.

Thanks very much.

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

Yes. I just wanted to follow-up on the margin at Bell and Systems. I mean, the Bell margin was the highest from my record since the fourth quarter of 2012. And the systems was the highest since the third quarter of 2009. So I guess my question is, I mean, obviously, Scott, you've said the Bell margin is not sustainable but the systems margin still seems to be sustainable? Or it's a little bit abnormally high this quarter?

Well, it's probably a little on the high side, George. I think, as I said there we've been seeing steady improvement and a lot of that is self-help around getting the Ship to Shore Connector program squared away, I do think the team has made really good progress on that. And that'll continue to be a contributor. We have had things like the CAPCAS program, which again, as I said, has required investment, which is now converting in the revenue and margin which will help us on a go forward basis. There's also a lot of new programs, a lot of R&D programs that are in there around monetization, which all that will balance out, I think to be, as I said, I think kind of a low double-digit margin business.

And what gets the margin at Bell down to the range you've talked about? I mean, there's been some expectation that this year would be weaker because you had the new V-22, I mean, obviously getting some benefit by growing after support for that program. But so what happens to get the margin drop as much as it seems to have to drop to get tied to your guide?

Well, again, I think we are ramping up R&D activity and we'll see that continue in the next year, as we got more and more resource coming in, particularly on the FARA program. I expect, as we continue to make progress on FLRAA, we've seen a lot of requirements work here in this early phase of the next phase of that program. And you'll just start to see more engineering in R&D as we sort of head towards a kind of a PDR capability on that platform. And I think we are getting benefits of having more volume going through a lot of these shops. And obviously, as you renegotiate and do future contracts, that volume goes in there and we'll get negotiate it down to a more nominal margin on some of those things. I'm sorry, go ahead, George.

Sorry about that. This is kind of a trivial question. But you delivered one citation 10 in the quarter, I think the last time, you delivered one was the first quarter of '19. So is there anything unique with that one? Was that one just sitting in inventory if you had any color on that?

Yes, I mean, we've obviously phased that program out. So just the last couple aircraft, which we've been using for other reasons are just finally selling out of inventory.

Okay. Thanks again very much.

Sure.

Okay, great. That concludes the call on our end.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.