Thank you for standing by. Welcome to the Textron Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] This conference is being recorded for digital replay and will be available after 10 a.m. Eastern Time today through January 24, 2025 at midnight. You may access the replay service by dialing (866) 207-1041 and enter the access code 4065507. I would now like to turn the conference over to David Rosenberg, Vice President of Investor Relations. Please go ahead.

Thanks, Leah, and good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website. Revenues in the quarter were $3.9 billion, up $3.6 billion in last year's fourth quarter. Segment profit in the quarter was $384 million, up $78 million from the fourth quarter of 2022. During this year's fourth quarter, adjusted income from continuing operations was $1.60 per share, compared to $1.23 per share in last year's fourth quarter. Manufacturing cash flow before pension contributions totaled $380 million in the quarter, up $12 million from last year's fourth quarter. For the full year, revenues were $13.7 billion, up $814 million from last year. In 2023, segment profit was $1.3 billion, up $191 million from '22. Adjusted income from continuing operations was $5.59 per share as compared to $4.45 per share in '22. Manufacturing cash flow before pension contributions was $931 million, down $247 million from '22. With that, I'll turn the call over to Scott.

Thanks, David, and good morning, everyone. Our businesses closed out the year with another solid quarter with strong margin performance and cash generation. Throughout the year, our team has worked to mitigate supply chain challenges to deliver products to our customers. At Aviation, while we ended the year with an expectation of a book-to-bill 1:1, solid order flow and customer demand across our product portfolio resulted in year-end backlog of $7.2 billion, an increase of $782 million. Textron Aviation Defense delivered 13 T-6 aircraft for the year, up 10 from a year ago. During 2023, solid aircraft utilization within the Textron Aviation product portfolio resulted in a 6.5% growth in aftermarket revenues. At Bell, revenues in the quarter were up driven by higher commercial and military revenues. On the commercial side of Bell, we delivered 91 helicopters in the fourth quarter, up from 71 in last year's fourth quarter. For the full year, we delivered 171 helicopters in 2023, down from 179 in 2022. The higher military revenues reflected the continued ramp on our FARA program. On the FARA program, Bell completed the installation of the ITEP engine on the 360 Invictus. The team continues to conduct integration activities and prepare the aircraft for initial ground runs in 2024. Moving to Textron Systems. Revenue and margin were flat with last year's fourth quarter. During the quarter, Systems delivered the last detailed design and construction craft on the Ship-to-Shore Connector program following its successful completion of acceptance trials. Moving to Industrial. We saw higher revenues in the quarter, driven by higher volume in Caltex and favorable pricing in specialized vehicles. Moving to Aviation. Pipistrel delivered 135 aircraft during the year, up from 61 in 2022. Also at eAviation, during the quarter, the Pipistrel Bells Electro was selected to participate for a…

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.5 billion were down $58 million from the fourth quarter of 2022, reflecting lower volume and mix of $158 million, partially offset by higher pricing of $100 million. Segment profit was $193 million in the fourth quarter, up $23 million from a year ago, reflecting a favorable impact from pricing net of inflation of $51 million, partially offset by lower volume and mix of $22 million. Backlog in the segment ended the quarter at $7.2 billion. Moving to Bell, revenues were $1.1 billion, up $255 million from last year's fourth quarter, reflecting higher commercial revenues of $171 million largely driven by increased deliveries and higher military revenues of $84 million related to the FARA program. Segment profit of $118 million was up $55 million from a year ago, primarily driven by higher volume and mix of $39 million. Backlog in the segment ended the quarter at $4.8 billion. At Textron Systems, revenues were $314 million and flat with last year's fourth quarter. Segment profit of $35 million was equal to last year's fourth quarter. Backlog in the segment ended the quarter at $2 billion. Industrial revenues were $961 million, up $54 million from last year's fourth quarter, largely reflecting higher volume and mix at Caltex and a favorable impact from pricing at Textron Specialized Vehicles. Segment profit of $57 million was up $14 million from the fourth quarter of 2022, primarily due to higher pricing net of inflation of $18 million. Textron eAviation segment revenues were $10 million and the segment loss was $23 million in the fourth quarter of '23, which reflected the research and development costs for the initiatives related to the development of sustainable…

Thank you. [Operator Instructions] And I would now like to start with Sheila Kahyaoglu with Jefferies. Please go ahead.

Good morning, Scott, Frank, and welcome, David. Scott, maybe first one for you. How do we think about 2024 aviation deliveries and just book-to-bill in the context of your guidance?

Sure, Sheila, I think we'll continue to see a ramp on the production side. As I noted, I think we did in the fourth quarter, start to see some improved productivity in the line. There are still some supplier issues, but number of parts coming into PO are improving somewhat. So I think that will help us continue to increase volume here as we go through into 2024. So I certainly see unit deliveries being up on a year-over-year basis, the market is still strong. I mean, obviously, our book-to-bill covers '24 deliveries quite well. But I think our expectation, as we said coming into the year was kind of targeting a 1:1 book-to-bill. We did better than that obviously in 2023, but our assumption as we go into 2024 is that we'll see a 1:1 book-to-bill. So the market is still good. I think we're seeing nice stimulation in some of the new products coming out, like CJ3 Gen2 has been really well received. Ascend, I think will start to also drive strong demand. And overall, the product lineup is in good shape. So I think market-wise, we're good, and we will see, obviously, to get to the guide of around $6 billion on the Aviation side, we will see continued volume on both aircraft production as well as aftermarket growth.

Can we get to about 200 deliveries in '24? Do you think that's reasonable?

We are -- as you know, we don't put a number out there, but it will be increased from 2023.

Got it. And if I could ask one on FLRAA, just good progress on the program with ITEP. But I think revenues were about $175 million in 2023, fell short of our expectations. And how do we think about 2024, we have about $850 million of FLRAA according to the budget. So…

I think -- for sure, Sheila, I think our revenues were higher than that on FLRAA probably for the year. We won't break out all the details, but it was certainly just south of a few hundred million dollars. But we do expect as we go into '24, the program is reacting very nicely. As you know, like the number was lighter than we originally expected, just because of the delay with the protest in the early part of the year. But the ramp -- as we've ramped after the contract award is going really well. So I would expect a number closer to the $900 million range in 2024 on the FLRAA program.

Thank you.

Next, we go to a question from Peter Arment with Baird. Please go ahead.

Yeah. Good morning, Scott, Frank, David. Just maybe -- just circle back just on how you're thinking about kind of the margin leverage in Aviation, Scott, when you think about just because you called out some of the pricing that you continue to get. How are we thinking about just kind of that flowing through? I mean just given the margin outlook of 12% to 13% kind of at the low end of the range, it's flat, but at the upper end, obviously, 100 basis points. Just how are you thinking about that?

Sure. Look, Peter, I think we definitely expect to continue to see price net of inflation is a positive for us. It won't be as significant as it was in 2023, but we still have good pricing in the backlog, and I think it will be a tailwind for us. So if you look at the guide and the numbers, you're right. Look, I mean, we're -- as I said, I think we saw some improved performance in Q4 on the manufacturing conversion side. So we're bringing -- we're certainly baking some of that in as we go into 2024, but as you move towards the high side of the guidance, you get up into that 20-plus-percent conversion, which is where we historically like the business to be. So it's something we've got to work on, obviously. We still have some of those headwinds that we faced all this year on the operating side, but the combination of improved performance and continued price over inflation is positive, while it's not as big a positive, I think, will help us get towards that 20-plus range.

Got it. That's helpful. And then just Frank quickly, the interest expense increase, just maybe what's going on there specifically? Thanks.

Well, yeah, go ahead.

Yeah, a little. We've got slightly higher borrowing costs from the bond deal that we did last year. So that's a little bit of the rollover on the financing. It assumes slightly lower cash balances and a little bit of conservatism around the interest rate that we earn on that excess cash.

Thanks again. Thanks, Frank.

And next, we go to David Strauss with Barclays.

Thanks. Good morning, everyone.

Good morning, David.

Scott, I wanted to ask about the V-22 grounding. Does that impact Bell at all? I know you have a pretty big aftermarket business on the V-22?

No, David, I don't think it's a material impact. The services, frankly, are using the opportunity -- the grounding to continue to do their maintenance activities and get aircraft ready to fly. So we probably can't say much more about that situation than that. But no, I don't expect it to be a material impact.

Okay. And Frank, free cash flow, the guidance were flat, I know you had a pretty big inventory build in '23, but you also had positive advances. What are you assuming for working capital? And in terms of the adjusted EPS guide, what are you baking in as far as share count and share repo in '24? Thanks.

Yeah. From a cash standpoint, we obviously are anticipating volume growth in the year. So that's going to put a little continued pressure on inventory levels as we look kind of to '24 and '25 volume growth, not a lot. There is a little bit of working capital pressure with the timing of some customer payment activity, particularly on the military side. Bell, in particular, had a very good year in '23 in terms of the timing of payment activity that puts a little bit of a headwind on cash flow. And then as you heard a little higher CapEx guidance kind of -- in terms of the spend there. So it's not any one item. It's kind of a little bit of headwinds on working capital associated with the things I mentioned and a little bit higher levels of investment. But we still think we're -- there's still very solid cash flow performance for the year. In terms of the share count, we talked about 191 million average shares. So kind of roughly 5% or so reduction in average share count for the year.

Thank you.

Next, we go to Jason Gursky with Citi. Please go ahead.

Yeah. Good morning, everybody. Scott, I was wondering if you could just spend a few more minutes on systems and talk about the pipeline of opportunities there and the timing of potential awards kind of with the backdrop of what's going on with the budget in mind and whether things like continuing resolutions to go out half a year have any impact on kind of your expectations around those?

So the CR situation right now doesn't really worry me very much on the system side of things. As we indicated, Jason, we're going to be relatively flattish on the revenue in 2024, I'd say the pipeline is very strong. You look at some of these down selects on FTUAS, the ARV program, what used to be the [indiscernible] program. A lot of these things are significant opportunities for us are really important down selects that we achieved last year. We'll execute on those, and they're not big growth programs so they don't really have a CR impact that I'm too concerned about. And there are virtually all programs that will have their next significant contractual award down select in 2025. So that's why you see us kind of flattish. We had -- I think 2023 was a hugely important year for the down selects on those really important programs, execute this year and you start to see the revenue growth driven by ultimately being final selection awards, EMD programs that award in 2025.

Okay. Great. Thank you. And then just quickly on eAviation. We've got widening profitability losses, they're projected for '24 on higher revenue. I was wondering if you could just kind of give us a broad brush update on the plans for that business? And at what point does the revenue potentially pick up here and you begin to see those profitability losses begin to contract? And kind of your overall vision for that business over the next, I don't know, three to five years?

Sure. Absolutely. Look, keep in mind, there's two things going on in that eAviation segment, right? There's Pipistrel, which is our current -- it's a real business, real sales, roughly doubling the volume of aircraft sales from '22 to '23, roughly doubling '23 to '24. So I think the product lineup at Pipistrel is doing quite well. We're expanding distribution channels. It's a relatively small business, but it's doing well. What's driving the losses is these investments in R&D, particularly around the Nexus program, that's something that won't generate revenue probably for several years and investment on, say, the Nuuva 300 which is our hybrid unmanned cargo, which again, this is a few years from revenue. And so that's part of why is we broke this thing out, right? So you guys see these investments, which are, frankly, not dependent or tied to the revenue within that segment. So the two big moving pieces in there in terms of the investment side are the Nuuva on the unmanned cargo and the Nexus on the sort of the EV tall side, which, again, I don't think that has to be necessarily dependent to urban air mobility, but just GA in general. Both of those teams are making great shape. I think we'll see first flight of the Nuuva in 2024. We've also begun the assembly and wings and fuselage build on the Nexus program in Wichita. So both programs are making very good progress, but they're both technology investment programs.

Okay, great. Thanks.

Sure.

Next, we go to the line of Noah Poponak with Goldman Sachs. Please go ahead.

Hey, good morning, everyone.

Good morning, Noah.

Scott, we've heard some discussion in the business jet end market that even though 2023 was a decent order year that there's actually maybe some pent-up demand because it was so consensus that there was going to be a recession or something like it. And that in 2024 if we're having an inflation decel and rate cuts and some version of a soft landing that you could have your normal underlying demand plus anybody that deferred from '23. And so I'm curious if you hear that from your customers or your sales force and there's an upside case for bookings? Or is that too aggressive and just stick with book to bill of 1?

Well, look, no, I think as I said at the beginning, we feel good about the end market. Customer dialogues are robust. Frankly, the only headwind that I see would run to is just on availability, right? People would like to get aircraft sooner. So we're -- I think our sales folks are out there working hard. There's no doubt there's demand. I think that's, as I said earlier, helped by the fact that we've got some new models that are coming out that are going to be really well received in the market. So, look, all in all, as we talked about, the book-to-bill number can change a little bit quarter to quarter, but I think we feel very good about the end market. I think we'll stick at this point with our kind of one-to-one in our base assumption as we did in 2023. And if the market remains that robust, we can exceed that number, which would be great. So look, I think the market remains strong. It's -- we feel good about it.

Okay. And I wondered if you could just maybe discuss a little more just how much better is supply chain, labor, your ability to get airplanes out the door. The delivery number was down in '23 despite all the demand, kind of to your point there on availability. Whatever the '24 delivery plan is, it's got to be up a lot to get to that revenue guidance. Do you feel like you really have that hitting the ground running in January here? And then as that pertains to the margin, why would price net of inflation not be better if that -- if pricing is still good, I know the rate of change matters, but if that -- if the cost inflation and disruption piece settles down significantly for you?

Well, look, I'd say I don't know how to quantify the exact number for you, Noah, but there's a couple of dynamics here that make us feel good about it. Again, we saw better labor productivity, all the metrics we track in terms of training hours, direct charging to [interact] (ph), all those sorts of things, applied hours, were positive in the quarter. We do track a number of parts that are late to PO. These numbers are getting better. Also, I think as you look at the '23 to '24, we have net less hiring we need to do to hit the ramp. Last year was a big year in terms of onboarding new people. As you can imagine, that's very disruptive. It's a lot of training that takes not just the new people, but it takes a lot of our capable people to help train and develop them. We made a lot of investments in 2023 around new training facilities. So -- but the absolute number, we still need to onboard new people, for sure. But on -- the number of them is less than what it was in 2023, and that should be helpful. The supply chain thing, as I said, look, it is getting better, but it's still susceptible to the wrong part not being available, right? I mean I think it's going to help us do less out of station work but we still have suppliers we're keeping a close eye on because a lack of delivery on their part could hold up an aircraft. So we're still being cautious about how we work through that, but it has improved. And like I said, there is less hiring. I think most of our lines are flowing better as a result of all the things I just talked about. So we do factor that into our ability to hit that larger number of aircraft deliveries in '24. And I think we'll get there.

Okay. That's good. I'm just going to ask one more. The Bell margin, pretty strong in the quarter, close to '23, well ahead of the initial plan. This '24 guide, 9.5% to 10.5%. Kind of flat year-over-year. There was a view that this was going to 7%, 8% as you ramped FLRAA, you're ramping FLRAA, that's not happening. Can you talk about how you're outperforming there and absorbing the FLRAA ramp? Is '24 the trough or does that still need to go down some number of hundreds of basis points before then going back up?

No, look, Noah, I think, look, the team is doing everything they can to manage costs, control -- do the right cost actions here as we see the ramp down on some of these military production programs, and we continue to do that. Those were certainly better mix than a big cost-plus EMD program. So we still will have some pressure around the margin rate. But as we talked about that, the growth benefit of seeing this program ramp up, we believe will still generate accretive not dollars. So even if we see some pressure on the margin rate, the business will still be contributing positively to the overall dollars and therefore EPS for the business.

Okay. All right. Thanks.

And next, we go to the line of Myles Walton with Wolfe Research. Please go ahead.

Thanks, good morning. I was hoping to circle on Aviation. In the last few quarters, there's been more discussion of this performance as a negative variance to the profit walk. That wasn't part of the conversation. It was clearly price offset by a little bit of volume. So is it fair to think that, that bucket of performance that you all cite has materially become nonmaterial?

Well, I wouldn't say non-material. I would say, Myles -- and look in 2023, we had pretty significant price overinflation benefits. And I think we did talk through the course of the year that, that did help to offset some of the performance issues that were driven by these labor inefficiencies and supplier impacts and stuff like that. So I think as you look at 2024, we're expecting improved margins. We're absolutely expecting significantly improved revenue and therefore, operating profit in the business. But the trade you're going to see is there's probably still positive price over inflation, but not as big a number. But you're going to have less performance issue to have to cover with that number because we do expect to see better efficiencies in the factories and lesser impact from the supply. So net of all this stuff, I mean, there's a different dynamic, I believe, in 2024. That's how we're going to get there than 2023. But the bottom line, you're going to see significant revenue growth and significant operating profit, including expanding margin in 2024.

Okay. And then on the restructuring program, you executed, I think, about 60% maybe was directed at Bell. Of the $75 million gross savings you talked about, how much net savings is Bell getting in '24? And also is Bell getting most of the lower R&D benefit?

Well, look, I mean we don't -- we're probably not going to break that all the way down, but certainly part of why the discussion I just had with Noah around why are we seeing some better margins and holding in there on the margin rates at Bell is this is part of why we took that restructuring action to control cost and manage our way as we reduce the volume in some of these historic military production programs. And so that's part of what's helping to sustain a better margin rate even as we see those programs ramped out. We just have to take the cost out of the business in the areas that were largely supporting these big military production programs. So I won't put the exact number in there, but that's a dynamic that's helping to improve that margin.

And is R&D drop there mostly in Bell?

It is. I mean, as you know, we don't break that all the way out. But look, we still had, as you recall, the delay of the FLRAA program in 2023, we had more of our own costs, still sustaining and supporting that program in the earlier part of the year, obviously, as that has ramped and become a full-blown contract, that's helping to reduce that number. The overall gross R&D, the business is still growing significantly as FLRAA ramps, but the net number in terms of the IRAD side is certainly shifted from that IRAD into the contract over.

Makes sense. Thank you.

And the next question we have is from Kristine Liwag with Morgan Stanley. Please go ahead. She has disconnected. We will move on to the next line of Robert Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning.

Hi, Robert.

Scott, I’d just like to follow up on Noah's question about the supply chain and the parts behind at the moment. Are any specific areas where you're seeing any problems like interiors that are holding things up?

Nothing that I would comment on a call. There's -- we all have our problem children, Rob.

Yeah. Understood. And then secondly, there's been some press reports that Textron has been looking at some M&A competitions in recent months. I don't expect you to comment on that. But I was wondering if you could maybe reiterate your priorities for capital deployment as we start 2024?

Sure. No, we definitely would not comment on that. And look, I think what we've talked about and Frank's indication on the share count of 191 million, obviously indicates that our priority continues to be share buyback, and that makes, we think, at this point, a pretty significant benefit for our shareholders, and that's what we expect to continue to do in 2024.

Okay. That’s great. Thanks, Scott.

And our next question is from Seth Seifman with JPMorgan. Please go ahead.

Hey, thanks very much and good morning, everyone. I guess just asking about the performance at Aviation and kind of the improvement in productivity and parts availability that you started to see in the fourth quarter. Does that mean that in the first quarter, we can expect to see kind of a nice increase in deliveries and something that would kind of affirm the notion of being on track for the revenue guide for the year?

Well, we're not going to get into quarterly guidance for sure, Seth. I mean, you certainly should expect to see a nice progression in terms of the revenue on a quarter-to-quarter basis over 2023, consistent with the guide of $6 billion of revenue for the total year.

Okay. Okay. Great. And then maybe just following up a little bit different twist on Rob's question. I know you probably won't comment on specific M&A reports. But the reports that we have read tend to deal mainly with the space end market. I wonder if you could comment on -- do you view that as an important and/or attractive end market into which to expand?

I wouldn't comment.

Fair enough. All right. Thank you very much.

Thanks, Seth.

And next, we go to the line of Kristine Liwag with Morgan Stanley. Please go ahead.

Hey guys. Can you hear me okay?

Yep, we can hear you fine.

Okay, great. Hey, Scott, Frank, Dave. Thanks. On your restructuring actions, can you provide more details on what you're doing and what your expectations are for the timing and the size of the payback from your investments?

Well, Kristine, as we kind of put out there, there's a sizable piece that's going into Bell, and that's really aligning our cost structure with the lower production rates on some of the historic military programs like H1 and V-22. That's a very -- in terms of cost and the mix of people within the business, the ramp obviously is net positive, but it's largely in the engineering program side of the FLRAA program. So it's a necessary action to align costs with the old historic production programs. As we also indicated, we're just -- we're aligning some of our plans on the auto side to understand where is demand around the world and rationalizing where we think it's appropriate to keep that business healthy with a high return and cash flow. So just -- there's bits in a number of other places. But we believe on a run rate basis, it's going to be about $75 million a year positive impact to the business. And so that's, I think, a good return and why we decided to proceed with the program.

Great. Thanks for the color. And maybe on Aviation, if I could do a follow-up. $100 million in pricing power for new aircraft is very healthy. And so if we're seeing -- if you're continuing to see bottlenecks in new aircraft production, can you talk about the demand environment for aircraft services then? And what's the pricing power in services, especially with the lack of new airplanes coming into the market?

Look, I think what we saw this year, which was strong growth, 6.5% on the services side. Obviously, that's a mixture between volume and pricing. I expect we'll continue to see good demand on that side. We certainly have that baked into our forecast. Aircraft are flying. Our customers are running the aircraft. They're doing the necessary maintenance. So I think it will continue to be a healthy part. Certainly, what we've incorporated in the guide for next year is good growth in the service business, both our service centers as well as the parts. And as always, that's going to be a function of both volume increases as well as annual expected pricing in the aftermarket side.

Great. Thanks, Scott.

Next, we go to the line of George Shapiro with Shapiro Research. Please go ahead.

Yes, good morning.

George.

Scott, I was just curious, you were saying that the supply chain seems better, yet the deliveries in the fourth quarter were a lot lighter than what most of us were looking for. So if you could kind of just connect the two dots there?

Look, George, as you know, it takes many months to build an aircraft. So the improvements in both the labor side and the parts side takes a while to push through the system. So the higher cost and a lot of the impacts that we kind of saw through the course of the year were full year impact. So -- but I do feel like as we look at the numbers, and what we experience on a day-to-day basis, we did see improvements. And I think that's -- as a result, you'll start to see that improvement as you get into 2024.

And then one other one. The book-to-bill in the quarter was 0.9 and the orders were like only $1.4 billion. So that was really down a lot from last year as well as from the third quarter now. I guess you're just looking at as timing or have anything to do with Noah's comment that people are concerned about a recession in the fourth quarter, we get a pickup this year. But if you could just comment on that as well.

George, I think it's largely timing. We always have a little bit of lumpiness in terms of when deposits are coming in on some of our larger customers, but there's -- I don't think there's anything concerning there. We've said all along, we expect there's going to be some quarters where it's going to be below 1:1, probably some quarters where it's above 1:1. But again, our assumption full year going all the way back through '23 was 1:1. We did better than that. Our assumption in 2024 is it's going to be 1:1, and obviously, we'll see how the market plays out. But I still think we feel good about the end market. We feel good about demand, and I think it's healthy.

And one last one. The strong Bell margin in the quarter, I mean, does that just really reflect the commercial delivery strength, which has much higher margins, more than offsetting the drag from the lower-margin FLRAA program. And if that would continue next year, the margins would probably be somewhat higher than what you've guided to?

George, I think we're continuing to see good margins on our military business, obviously outside of the FLRAA side. It certainly helps to have higher commercial deliveries. We -- I think we'll get some benefit of higher commercial deliveries as we talked about in 2024. But look, there's going to continue to be some pressure on the margin just because we are seeing significant growth in the FLRAA program. The reason we did the cost action and did the restructuring was to try to shore up the profitability of the business on the legacy production programs. And so part of the guide is, obviously, we continue to see some benefit of that. But again, there will be overall margin rate pressure going into the future. But I think as we talked about, even with that and the growth of the FLRAA program, we're going to see significant revenue growth, and we're going to see absolute up profit increases and accretion to EPS for the business. So I think as we work through a transition from legacy production to a new EMD program, I think we can manage our way through that well. And obviously, long term, it's going to be a great story for Bell.

Okay. Thanks very much.

Sure.

Next, we move to Pete Skibitski with Alembic Global. Please go ahead.

Hi, good morning, guys. Scott, can you expand on your opening comments regarding Caltex and your expectations there in 2024? It sounds like you think you might be a little bit weak there. Just was wondering what the drivers were?

Sure, Pete. Look, that's one business where we really depend on sort of industry customer forecasts. So our guide reflects that. We don't really apply a whole lot of our own judgment to that. We really go with where the industry tells us they're going and we got to see how the year plays out. I think we feel good about the business. Some of the restructuring we did was reflective of where the volume growth is and where the volume growth isn't. But the business is in a healthy place, and the margins have been doing better as we've come out of all the sort of the post-COVID world and the volumes will be obviously consistent with global auto OEM numbers.

Okay. Got it. And then I had a couple of questions on Aviation. Are you expecting Caravan sales deliveries to be up in '24? I know you delivered a lot of them to Asia, and we're seeing some softness in China. So just wondering what you're seeing there?

Look, Peter, I mean we're not going to get into model-by-model. But I would say net of everything, the turboprop market is doing really, really well. As you know, that does tend to be a little bit more international. I think we usually give the numbers, roughly 60% international versus the jet side is 80%. But I think our Turboprop business is in a really good place. I think Caravans will do well. I think King Airs are going to be strong. We continue the ramp on the SkyCourier. So we tend to get most of the questions around Jet. But look, I think the turboprop business is in a very good place, and we certainly net expect to see that business continue to grow in 2024.

Okay, great. Thank you.

Next, we go to the question from Cai von Rumohr with TD Cowen. Please go ahead.

Yes. Thanks so much. So, Scott, at Bell, are you looking for -- is part of the profit strength this year '24 coming from closeouts on the V-22 and the H1? And secondly, is there any risk to FLRAA volume from an extended CRR?

So, Cai, look, I think the 2024 -- obviously, we'll see some contracts come to an end, and there will be some MR release when you do that. But look, I think we can execute well on that pro forma. I mean, I think Q4 is a good example, Cai. We had about $8 million total in the company of EACs that's not a particularly material number and it's flat on a year-over-year basis. So do I think we'll have some reserve release next year? Sure, we will. I mean, we normally do as we perform through these programs. But I think the cost-out activity that we've been driving, the absorption and growth on both the commercial revenue side as well as the FLRAA revenue side will all help to contribute to preserving and getting a good margin rate for 2024. And in terms of the -- I'm sorry, in terms of the CRR, okay, I think we're okay. I mean, as we've talked about before, if the CRR goes all the way through a full year, that could put some pressure for sure. I think the Army probably has backup plans, they're trying to work in terms of how they would move money around. Obviously, FLRAA is a very high priority, very important program to them as well. So the whole thing would be a heck of a lot easier if Congress would just pass the budget for sure. But right now, I think we're okay unless it really goes to a full year, I think we'll collectively [return] (ph) ourselves and the Army to be able to manage through it.

Got it. And last one. At Aviation, can you give us some color in terms of where the order strength is in terms of fractionals versus high net worth versus corporate?

It's pretty stable, Cai. We aren't really seeing a change from where we were. We don't break all that out, obviously, but it's -- the demand has been pretty strong. In terms of mix, as you know, the jet stuff tends to be more domestic, roughly 80-20, the turboprop is more like 60-40 international. We haven't seen big changes in that. We haven't seen big changes in the mix between what goes through the fractional world and what goes through the whole aircraft side, end demand continues to be, we think, pretty strong across the board.

Thank you very much.

Next, we go to a question from Doug Harned with Bernstein. Please go ahead.

Good morning, thank you. Scott, in the past, you commented on the supply chain that you'd actually seen more challenges at Bell than you had in Aviation. And given the strong margins at Bell, I mean, can you comment on where that stands today?

Well, look, this is the [challenge of the world we're look at, right?] (ph) I mean, we had some pretty significant impacts at Bell in the earlier part of the year around a very small number of suppliers, a couple of those suppliers either got healthier in some cases, we brought stuff inside and exited those suppliers. So when you do that, we had a situation at Bell with a couple of the aircraft models where we had very specific supply issues that we were able to resolve. And as a result, Q4 had a pretty strong delivery number on a year-over-year basis. So again, this is the challenge. So while the absolute number of parts might be getting less, you can still have a part problem that has a significant impact. So that's just the nature of the beast and what our guys work through every day. So I think we did resolve a couple of critical issues in the latter part of the year at Bell that enabled those higher deliveries. And obviously, we've got to keep working.

And then if I go back to the Aviation side and the end market, one of the things we've seen is more preowned airplanes out there for sale, higher percentage. We're still not back at kind of historical norms. But you were commenting that you're seeing a little bit less pricing benefit relative to inflation. I mean are you seeing any potential pressure here from pre-owned and as you look at your market?

No, we're not. Look, I think it's -- look, first of all, as you noted, it's up versus where it was, which was at ridiculously low levels. It's still at historically lower levels than normal. And we keep a very close eye on this. They're mostly much older aircraft, right? So the phenomenon that people kind of refer back to is, geez, do you have aircraft competing with new aircraft sales, obviously, there was a time, going back a number of years ago now, where you have relatively new aircraft that were coming on to the market. And we're just -- we're not seeing that dynamic. When we look at what's out there, what's available for sale in the used market, the number is increasing, but they are considerably older and in large part, out of production aircraft. So no, we're not really seeing an impact of used aircraft out there that are competing with new aircraft sales.

Okay, very good. Thank you.

And next we go to Gavin Parsons with UBS. Please go ahead.

Thank you, good morning.

Good morning.

I just wanted to circle back to industrial margins and just get a better sense for what's driving that, given I think context had been the section segment underperforming. And then just thoughts on, it seems like in TSV, some of your recreational vehicle competitors are having headwinds. So what's driving the margins and growth there?

Well, look, I mean, every -- sorry, look, we've -- we look at those end markets, be it in the auto side or in the vehicle side. And our view is, as I said, I think, overall, the industrial will be pretty flat, but with improved margins. And that's largely, again, based on just industry forecast, we think Caltex volumes will be down somewhat, although we think margins will continue to improve in that business. On the vehicle side, I think we'll see modest growth, and that is because we do factor in some of these higher dollar discretionary items. We don't expect to see growth in that area. But net of all of that, the business probably still sees some modest growth, and again, continued performance on the margin line. So those things that you guys might aggregate and look at in terms of other guys in that market are completely consistent with what we're seeing. But again, that is absolutely factored into our guide.

That's helpful. And maybe just circling back to the NetJets 1,500 over 15 years, I think typically, they firm up about a year out. But on average, that would be 100 deliveries a year. Is that something you need more visibility from them on over a decade of orders or…

Well, we don't. And you're right. So we -- the way we treat the backlog is when those firm up and that is roughly 12 months where they actually put deposits down, that's the point at which we move those aircraft into actual backlog. In terms of looking out beyond that, we do absolutely work closely with them on forecasting what that demand is going to look like even outside of that one-year firm up period. So we certainly have very, very good dialogue and working with them to collectively anticipate what that demand is going to be on the fractional side. But then we don't firm up and put into that actual backlog number until roughly, as you said, that one-year window.

That makes sense. Thank you.

Sure.

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