Doug Wilburne - VP, IR Scott Donnelly - Chairman and CEO Frank Connor - CFO.

Carter Copeland - Barclays Capital Sheila Kahyauglu - Jefferies & Co.

George Shapiro - Shapiro Research Sam Pearlstein - Wells Fargo Securities, LLC Julian Mitchell - Credit Suisse Cai von Rumohr - Cowen and Company Peter Skibitski - Drexel Hamilton Noah Poponak - Goldman Sachs Myles Walton - Deutsche Bank Johnny Wright - Nomura Jeff Sprague - Vertical Research David Strauss - UBS Jon Raviv - Citigroup Ronald Epstein - BofA Merrill Lynch Robert Stallard - RBC Capital Markets Steve Levenson - Stifel Nicolaus & Company Justin Bergner - Gabelli & Company.

Ladies and gentlemen, thank you for standing by and welcome to the Textron First Quarter 2015 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time I would now like to turn the conference over to our host, the Vice President of Investor Relations, Mr. Doug Wilburne. Please go ahead..

Thanks Stan, 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. Textron's revenues in the quarter were $3.1 billion, up $226 million from last year's first quarter.

Income from continuing operations was $0.46 per share up $0.31 from the first quarter of 2014. Textron Aviation operating results included a $5 million reduction to segment profit from fair value step-up adjustments to acquire Beechcraft inventories sold during the quarter.

Manufacturing cash flow before pension contributions of $20 million was a $125 million use of cash compared to $111 million use of cash in last year's first quarter. With that I’ll turn the call over to Scott..

Thanks, Doug, and good morning, everybody. Revenues were up nearly 8% in the quarter reflecting the success of our strategy of investing in new products and acquisitions. We achieved this increase in topline of Textron despite an expected decrease in revenues at Bell.

Decline in revenues at Bell was primarily due to lower volumes in our V-22 program where we delivered 6 V-22s down from 8 aircraft a year ago. We also delivered 4 H-1 aircraft down from 5 units in last year's first quarter. So it was just timing on the H-1s as we still expect to deliver about 25 units for the full year.

On the commercial side we delivered 35 aircraft up from 34 a year ago, where our mix was unfavorable as strength in the wide end of the market was offset by softness in the medium segment with no 412 deliveries in the quarter.

Based on the continued softness in the medium segment of the market, we are adjusting production levels and taking additional cost actions to allow Bell to perform within its targeted 2015 segment margin range of 11% to 12%.

We still expect the commercial deliveries will be up this year but probably only modestly so given the current demand environment.

While the medium segment remains challenging, our win rate continues to be favorable and we had an especially good success at Heli-Expo where we signed 238 orders in production aircraft including a 200 deal order from Air Methods for our new 407 GXP model.

At the show we also signed 29 letters of intent for the 525 Relentless and 24 for the 505 Jet Ranger X.

In addition to HAI orders, we received an order for seven 412s from the Canadian Coast Guard which we expect begin delivering in 2016 and announced two orders totaling 31 407s from customers in the Middle East and Mexico reflecting success in international markets.

We also celebrated opening of two new regional sales and service offices in Tokyo and Abu Dhabi to better serve our customers in those regions. On the new product front, we continue to make progress on our safety of flight testing with the 525 Relentless test aircraft and are expecting first flight soon.

Development of our 505 Jet Ranger X program is also proceeding well with the second flight test aircraft now in the air. We are also in our promising developments on the military side of Bell in the quarter. First the V-22 was included in the U.S. presidential budget for the Navy carrier on-board delivery mission which calls for 44 aircraft.

This will provide a solid basis for a third multi-year contract beginning in the 2020 time frame. The Japanese V-22 program continues to move forward as we were in country last month meeting with the customer and expect contract signature this summer. Deliveries could begin in late 2018.

We are also seeing foreign opportunities take form for the H-1s as the U.S. State Department announced its approval of potential sale of 15 AH-1Z Vipers to Pakistan.

So while we continue to see lingering weakness in the medium helicopter segment, we believe the growth outlook at Bell over the next several years remains strong driven by our expanded global commercial sales efforts, recent commercial product upgrades, new commercial products on the way and foreign military opportunities for both the V-22 and the H-1.

Moving to systems, as expected revenues were also down in the quarter primarily driven by lower vehicle deliveries. However we are making good progress in our Canadian TAPV program and believe we are still on track for initial deliveries in the fourth quarter.

We are also working on a number of additional foreign opportunities as we contribute to fourth quarter vehicle delivers. At Textron's Marine and Land Systems we were awarded an $84 million contract for two additional Ship-to-Shore Connector units to be delivered in 2019 with the original two units scheduled to go offline in 2017 and 2018.

Moving down to Land Systems we were awarded a contract for 10 additional TCDL V2 Shadow retrofit system as well as a number of additional contract for our fee per service platform.

At TRU Simulation and Training last month, we unveiled our Bell V-280 simulator at the Army Aviation Mission Solutions Summit giving you army leadership and users tangible hands on experience of this revolutionary capabilities of the new platform.

Moving to industrial, we saw a 9.4% increase in revenues after a 7.7% negative impact from foreign exchange reflecting increase volume in our automotive markets, the success of new product programs, and the impact of the TUG, Douglas Equipment, and Dixie Chopper acquisitions.

At Jacobsen, we introduced our new trucks to HD heavy duty utility vehicle for the choice of gas or diesel engine and over 3500 pounds of payload for most powerful utility vehicle available in this class and provides compelling new product in the Jacob portfolio.

In the Tools & Test business, Sherman + Reilly introduced a number of new products including a revolution series P-1400, the first of its kind in 14,000 pound electric power for lines and a new line of termination tools for the power line industry.

Operating results were also by as far industrial in the quarter as the higher volumes contributed to a year-over-year margin increase of 110 basis points. Moving to Textron Aviation, in the quarter we delivered 30 free jets compared to 35 last year, as well as 25 King Air.

Margins in the aviation segment continue to improve reflecting our expanded scale and efficiency improvements. On the service front aviation during the quarter we extended our ProAdvantage Jet aftermarket support programs to Hawker customers, plus added to our King Air service footprint with certifications in Sacramento and Paris.

Development on our new Latitude remains on pace for FA certification in the second quarter, as the flight test program is now complete and we should be on track for Latitude deliveries in the third quarter. The availability of used Citations continues to come down, with used aircraft under 10 years old declining to 1.6% of the active fleet.

Used aircraft are continuing to move fairly quickly and we've also seen evidence of improving residual values especially for aircraft at low hours. New jet demand is usually seasonally lighter in the first quarter, the customer interest and inquiry activity was relatively healthy and consistent with our outlook for the year.

To sum up at this point in the year we’re confirming our full year Textron guidance for both earnings and cash flow as we expected stronger results at Textron aviation and industrial will offset the lower volume at Bell. With that, I will turn the call over to Frank..

Thank you, Scott, and good morning everyone. Segment profit in the quarter was $259 million, up $40 million from the first quarter 2014 on a $226 million increase in revenues. Let's look at how each of the segments contributed starting with Textron Aviation.

At Textron Aviations, revenues were up $266 million from this period last year, primarily reflecting the impact from the Beechcraft acquisition. The segment had a profit of $67 million compared to $14 million a year ago. This was driven by improved performance reflecting the impact of the Beechcraft acquisition and higher overall volumes.

Backlog in the segment ended the quarter at $1.3 billion, $99 million lower than at the end of the fourth quarter. Moving to Bell, revenues were down $60 million primarily reflecting lower V-22 deliveries.

Segment profit decreased $20 million from the first quarter in 2014, primarily reflecting lower military volume and an unfavorable mix of commercial aircraft deliveries in the quarter. At Textron Systems, revenues were down $48 million primarily due to lower Marine and Land Systems volumes.

Segment profit was down $11 million, reflecting the lower volumes. Industrial revenues increased $75 million due to higher overall volumes and the impact of acquisitions, partially offset by a $62 million unfavorable impact from foreign exchange. Segment profit increased $16 million, reflecting the higher volumes.

Finance segment revenues decreased $7 million and profit increased $2 million. Moving below the segment profit line, corporate expenses were $42 million and our tax rate was 30.4%. Interest expense was $33 million, down $2 million from the first quarter of 2014.

To wrap up with guidance, we estimate that our announced cost reduction activities at Bell will result in pre-tax charges in the range of $40 million to $50 million which will be recorded as part of segment expenses.

Inclusive of the charges related cost savings and lower expected revenues, we still expect full year margins at Bell will be in the 11% to 12% range. From a total Textron perspective, stronger results at Textron Aviation and industrial are expected to offset lower volume at Bell.

Therefore we are confirming expected full year EPS from continuing operations of $2.30 to $2.50 of share and cash flow from continuing operations of the manufacturing group before pension contributions of 550 million to 650 million. That concludes our prepared remarks. So, Dan we can open the line for questions..

[Operator Instructions] And our first question comes from the line of Carter Copeland from Barclays. Please go ahead..

Hi, good morning gentlemen..

Good morning..

Frank, just a clarification or, maybe, if you could give us a little more detail, on the charges for the cost actions at Bell, obviously $40 million, $50 million, if you still think you're going to come in within the prior range, I was just wondering if there was something other than run rate savings there would apply a lot of savings? Is there something else as an upper that's helping you overcome that $40 million, $50 million or am I missing something?.

No, its really run rate savings in the way that then gets rolled through the EAC's from a cost reduction standpoint. So obviously, we will have headcount savings, we will have rate savings, we are doing other things on the discretionary side as well.

And, when you look at those savings from a program accounting standpoint, as well as the cost, it will roll through such that we don’t expect any big, kind of impact in any particular quarter and what we should see is the generally kind of the same type of seasonality from a quarterly standpoint as we've seen Bell over the past couple of years with improving margins as we go through the year in a higher volumes but it will get spread out over that period of time..

Can you quantify how much of that is the EAC keum catches that is you'll get out of that for this year?.

Well, its not really kind of keum catch its just, as we - there will be a little bit of keum catch but it's mostly as we deliver, product will have lower cost, embedded in those products. We’re on a unit to delivery basis and so it rolls through as we deliver units..

Okay, great. Then just one other one.

With respect to the market softness, you talked about, Scott, the -- I wondered if there is any after-market service support impact in Bell related to the weakness -- it's probably related to lower usage, that you might be seeing in Bell as well?.

We’re trying to keep an eye on that and have some concern about but in the quarter our aftermarket activity was fine and we continue to see order activity.

So, utilization still seems to be okay, I think we really seen is, more people just being a little nervous about investing the new CapEx and putting a new aircraft and to replace a older aircraft but at least today utilization and aftermarket seems to be fine..

All right. Thank you, gentlemen..

Thank you. Our next question comes from the line of Sheila Kahyauglu from Jefferies. Please go ahead..

Hey, good morning, everyone.

Scott, how should we think about the progression of the backlog within Aviation? When can we start to see that move up a bit?.

Well, I think Sheila the thing is most likely to start impact our backlog here in the balance of the year is, getting through certification on Latitude, which as I said I think we’re getting pretty close, we done the flight test, we're done with all the ground test activities or at this point we’re really just into the paperwork exercises getting through that.

So as a result, we now have a couple of aircraft that we've recently been able to put out, we really dedicated to customer demo activities those aircraft are pretty booked up.

So we think there is a lot demand up there for the aircraft, a lot of customer interest and now that we can really dedicate those assets to getting out there and doing customer demos and we would expect to see those orders start to finalize..

Okay.

Are you sold out for any particular models throughout this year?.

It's pretty tight on a couple but if you really want to one we could probably work with you somewhere..

I'll ask Doug for a favor. Then, I guess on underlying margins within Aviation, if we compare the first half of last year versus the quarter, about 200 basis points of underlying improvement excluding the PP&A.

Should we expect that kind of improvement as we progress throughout the year, or could you attribute that to pricing? Was it Beech? Was it productivity? Maybe if you could just elaborate a bit there?.

I think that’s probably going to be typical for the year. I think the volumes, we expect to be online with what we’re expecting from the beginning of the year, we got a slide uptick, we think on a year-over-year basis on the King Air which we are doing well. So I think the trajectory on is, going to track a couple hundred basis points better..

Okay, thanks..

Thank you. Our next question comes from the line of George Shapiro from Shapiro Research. Please go ahead..

Yes. Good morning.

Scott, I was wondering on the orders, if you could just go out and talk a little bit about where the strength is? US versus international, are you seeing any impact negatively internationally because of the dollar, so a little more color on that, if you could?.

I think the dollar is a problem George and in some parts of world obviously because of the - I mean the dollars has strengthened so much and obviously in some markets, particularly Eastern Europe and Russia where you had a lot of devaluation and similarly in South America there is just great a lot of problem.

But I would say in general right now on the jet side of things, the market is very driven by the North American marketplace, probably something around two-thirds to 80, 20 and interestingly enough its almost exactly inverted if you looked at King Air's. So the strength of the turboprop market has been more international, the U.S.

market still good, there has been more demand internationally. So, total portfolio it's going to balancing out a bit but definitely on the jet business its much more North American centric and King Air more international..

Then, in Bell on the commercial, is the weakness, would you say, totally due to the oil and gas market or is there something else going on?.

Well, I think its mostly related to that George and certainly part of its is direct, right. So I mean if you’re talking about customers whose mission is flying specifically oil and gas missions out the rigs, clearly that market is very soft right now given the price of oil.

But I think for us a bigger knock on effect of that is that historically we see a lot of sales, a lot of our aircraft particularly 412s in emergency medical services, and CSAR and a lot of sort of quasi-military, government operations and a lot of those countries that have very strong oil economies are seeing a lot of CapEx in their budget.

So I think, there is a piece of it that is absolutely directly oil and gas but I think part its – been a bigger issue for us is just a lot of our customer, our oil and gas natural resource driven economies and they're soft right now..

Okay.

One quick last one for Frank, what was the aftermarket growth at Aviation?.

It was mid single digits and kind of consistent with what we’ve been seeing and expect to continue to see..

Great. Thanks very much..

Thank you. Our next question comes from the line of Sam Pearlstein from Wells Fargo. Please go ahead..

Good morning. Can you talk a little bit more about industrial. Just, it looks like sales and margins are certainly running ahead.

I know you mentioned auto strength, but where is the higher volume? Is it the specialty vehicles business, like what is it that's driving things this year?.

Probably on a absolute dollar basis, the biggest increase is in the automotive side.

We certainly seeing good auto demand, but we've also seen very strong earns from the vehicle business, that's such organically the business is growing nicely, but then of course we also have technologies and the acquisition side for ground support equipment that acquisition is performing extremely well for us.

We're seeing great topline and great margin delivery out of that as well. So it’s kind of - I’d say the good news is, it's pretty broad. The organic growth of the businesses in product lines that we were in has been very solid and the acquisitions we've done on that base are also performing very well..

Okay.

Then just a question on the finance slide, the 60-plus-day delinquencies, why did those increase sequentially? I know it's not large dollars, but it's certainly a large percentage change?.

Yes, that's true. And look we had a couple of customer accounts that moved into that 60 day window and we have a little bit of loss small numbers now right. So if 412 aircrafts become a problem, we can swing that percentage by a pretty good chunk even though it might be two airplanes and $20 million makes a big difference from a percent basis.

So, I don’t think there is any fundamental underlying change there. I mean clearly some customers internationally, because of some of the issues around U.S. dollar and currency and what not, those payments have got little expensive. And so obviously we’ll work through that and in general I think we’ll be fine..

Okay. Last question, just on the $600 million in free cash this year, I know you've talked about at a minimum buying back enough stock to offset the employee programs.

One is, how much buyback is required to do that? Then, what would it take for you to do more? You don't really have any other debt maturing, so I'm just trying to think about where else does it go?.

Yes. We will buyback to offset the programs it's about 3 million shares or so. And as we talked about, we will - obviously we continue to look at acquisition opportunities and we have kind of - have had a steady stream with those.

And we have expected we will pay down a little bit more of the bank debt that we took on as it related to the Beechcraft acquisition, and then we’ve said kind of any excess capital after that we would look to continue again to return to shareholders through share repurchase activity.

But the target from the share repurchase standpoint is to offset the employee dilution number..

Thank you..

Thank you. And our next question comes from the line of Julian Mitchell from Credit Suisse. Please go ahead..

Hi, thank you. Just a question around any change in the competitive landscape.

In Aviation and in Sikorsky, you obviously have some competitors based in countries where the dollar has strengthened considerably against their local base, so how does -- has that changed anything yet you're seeing commercially? Also, there are obviously some idiosyncratic issues at a couple of rivals of yours right now.

I just wondered if you'd seen any change from that as well?.

I mean the dollar is not helpful for sure from a competitiveness standpoint and I think that some of our European competitors do get an advantage out of that. Of course they also have a fair bit of those supply chain that is dollar denominated so it’s not of a disadvantage as it could be.

But when we look at deals in Europe for instance right now, it does make it more challenging, but again that's just the nature of a competitive market these things swing around.

I think if you look at Latin America and Eastern Europe, Russia, the currency devaluation makes it a challenge for both dollar and euro denominated business, just because of the currency devaluation.

But either anyway I think, I would not say that it has markedly changed what’s going on it makes it certainly tougher in Europe, but I mean I think we’re still winning and feel really good about where we are from a share perspective. When you look at deals in Asia, we’re competitive and we are winning.

So I think even though the helicopter market in particular, we see as being pretty soft I’d say that we feel very good about our order rate this year in terms of share I think we’re doing quite well..

That's very helpful. Then, my second question is just on the Systems, the revenues were weak, but it sounded like very much in line with your planning assumption.

It doesn't sound like your full-year view has changed on that segment, so I just wondered if you could confirm that? Also any color at all on the linearity of the sales progression? Is it going to be a very, very Q4-loaded year at Systems because of the TAP 3 delivery schedule, or do we start to see things improve a bit by mid year?.

Well I think you will see things improve a bit by mid-year Julian but absolutely our expectations and where we think it’s going will be very back end loaded and that really primarily is driven by the vehicle program. So we clearly expect and we think we're on track to have a pretty big fourth quarter on the vehicle side of the business..

Great. Thank you..

And our next question comes from the line of Cai von Rumohr from Cowen & Company. Please go ahead..

Yes. Thank you very much. Give us a little more color on demand at Aviation? You say customer demand is quote/unquote healthy, and yet 0.85 book-to-bill hardly looks like healthy.

How was it at Cessna versus legacy Beech? How did it roll out sequentially, since we've heard that January and February were very weak and March improved?.

Well I think the normal seasonality is sort of demand is inline with our expectations I guess what I would say Cai. The early first quarter is always very soft from an order intake perspective. And I think that's what we saw for the most part this year.

On a seasonal basis, it's performing exactly as we would have expected I think we probably said in terms of customer activity and what not as strong as we've seen in a while in Q1. And we're pretty happy with how things were progressing.

Obviously as I said earlier, I think the real demand driver for us in terms of any kind of backlog filled would be around Latitude as that thing goes through it’s certification process.

So even though the customer environment is considerably better than it has been, it is still sort of a full business people are in conversations, and as they get close to when they want to take deliveries that's when they put their deposit down and sign up.

So as we said we’d love to be out in three to six months and we certainly have a couple of models where it's out in more in that range, but generally speaking it’s still more of a full business.

But with a lot more customers are sort of in the queue and a lot more conversations going around to yield, what we need to see in terms of deliveries and so frankly we feel pretty comfortable with that..

Given that Cessna depends on the US, where the economy is improving somewhat, and Beech depends on the foreign market, where there's less evidence of that, could you contrast demand between those two sectors?.

Cai, they really been pretty similar.

I think if you look at how deals progress the number of customers that we are in conversations, when they actually placed their orders and take deliveries as you point out it is more international on the King Air side and domestic on the Jet side but still a very similar prospecting, selling order taking selling process for both platforms..

Okay. Then, two quick ones on Bell. You said commercial up a bit.

Would that include the 412? Secondly, if you're going to have $40 million to $50 million of pretax charges, how much would the run rate savings be against that?.

So in terms of the unit deliveries, we still think that will be up slightly over a year ago primarily driven by higher volumes on 407s and 429s, offset by probably slightly lower volumes on 412 versus last year, which is why we come back to the mix issues what prefers the margins out of the spring.

So, we're still feeling reasonably good about volumes on the lights but clearly not so on the mediums.

In terms of the cost and that roll through, I mean I would say most of the cost is related to severances and reductions of people and so generally speaking if you forget program accounting and inventory and all that sort of stuff, you generally expect that those costs will be covered in sort of a 9-month window obviously how you recognize that see through the P&L is going to be more function of the program accounting and EACs and how that comes.

So Frank said, you will see not a whole lot of impact on a quarter-to-quarter basis through the balance of the year because while we will take the cost source of restructuring, that will manifest itself in program accounting where you won’t see much difference in terms of the net impact through the balance of this year and obviously as you go out in time, you would start to see positive benefit there..

Okay. Thank you..

Our next question comes from the line of Pete Skibitski from Drexel Hamilton. Please go ahead..

Scott, I think you mentioned secondhand pricing in used jets, in your opening remarks, being maybe modestly improved.

Can you tell us, is the improvement rolling through to meet pricing on some of the legacy models, or is that some kind of a flash environment and you just get a pricing power on the brand-new models?.

Both we’ve seen pricing fairly stable on the new models, we’ve seen beginning of some uptick of residual values in the used aircraft, as you see in Vrefs and the blue books which is encouraging. I don’t know that there is a direct correlation frankly to saying okay the prices up on the used and therefore it translates directly to price on the new.

It does help us in terms of customer's that wants to trade in their old aircraft or sell their old aircraft and step up into new aircraft. In terms of that gap and value between what they know that they can get for their used aircrafts and how much additional capital they would want to put into buy new airplanes.

So as we see those residual values starting to rebound, I think it definitely bodes well for demand on the new aircraft side..

Okay. Understood. Then, just wanted to follow up. I don't know how widespread this was, but I saw at least one article during the quarter that talks about a lot of nervousness on the TAPV program in Canada, just on the redesign.

Can you tell us when is the redesign going to be done and fully tested? How thorough is this, such that it could eliminate the risk in the program?.

The redesign is complete and we have had initial vehicles with the redesign fully incorporated into them and all going through the test environment, so we’re as we were doing the redesign, these things were all fairly well isolated to during suspension system which basically just we said to beef it up the severity of the conditions of the test were frankly beyond anything that we’ve experienced before.

We have a lot of these vehicles out there obviously of various different types and we’ve never had issues or problems with any of those components. But the severity of the testing frankly pushed some of these things literally break some of these steering numbers.

So the redesign was in essence just beefing up those individual components, most of which are available and used in some larger vehicles interestingly enough, and in some cases there were actually cheaper than the lighter version because they are manufactured in high volumes.

And so we have been sort of testing each of these new components as we could get our hands on them and those have gone well as I said we now have couple of vehicles out there that are completely the new design configuration with all of the new configuration components.

And the testing so far is going great, so it is an endurance test, right so you have to get through that phase which will take us another couple of months before we’re comfortable enough to say we are ready to go into the formal customer testing, but so far the design is complete and initial testing results are very promising..

Okay. That feedback I would add that article fits that one that I am thinking of I think if you read it closely lot of the information and quotes in that article are really from last year, it’s really not current data..

It was quite dated and this customer has been terrific to work with I think everybody has had their head around same thing and want to make sure we went back to the process so it’s test was successful and the sort of the tone in the article is pretty dated..

Okay. I appreciate you guys..

Thank you..

Thank you. Our next question comes from the line of Noah Poponak from Goldman Sachs. Please go ahead..

Hi, good morning everyone. Scott, are you surprised that the legacy, not new products Cessna demand environment is not getting better faster.

Because, I guess it's been a few quarters since you first cited stabilization, you keep giving us the inventory as a percentage of fleet number for you, and it's improved a lot, and I don't even know if that could go any lower.

Is there just too much total market used inventory, so you're still competing with everyone else's used inventory? Or is it just a long-cycle business and it takes time to get escape velocity, or is this market just at a structurally new lower demand level for a while?.

No I think that I mean the numbers I should say are down in terms of the used available, it’s kind of hard to imagine they could go much lower frankly they are certain well below historical norms.

The only thing I would say is that they still have probably a relatively higher spread between what the values are for those used aircraft as opposed to new aircraft and I think that’s still is a drag on some of our customers because trade in premium right to say if I go from the used to the new, how much cash flow I have to kick in to do that is higher than it’s historically been.

And so I still think the every placement cycle people will drag that out just given that that value gap if you were but the aircraft still keep getting older and they’re using more and I think have this longer timeline in terms of how many years older aircraft before they trade in.

And I think that is the primary dynamics still driving the marketplace, that’s what I think we have been talking out for couple of years really about the percentage coming down and coming down and coming down, the past quarter so is really the first time we are starting to see that residual value come up.

So I think that actually is more important and just that percentage and frankly we’ve been surprised that with such a low inventory used aircraft you think from a supply demand standpoint you would start to see pricing come up.

And at least for final you will see that okay we have been surprised frankly probably the last year as that number really started to drop that you didn’t see a corresponding residual value increase and like you said finally we’re starting to see that which is encouraging. And I think that’s what is driving that kind of demand environment..

On the upgrading topic, is there also an issue with length of time the jet is with the first owner, where in prior cycles because of the maintenance warranty being five years you were getting a ton of upgrading in years four and five? Now folks are extending that because, obviously, a plane can be used substantially longer, and once you go past the roll off of the maintenance warranty and you do that first major check, you then have signed up for keeping the airplane for a lot longer until you get to the next major check.

Is that overall time an issue?.

Well I think the time is clearly being extended and what you’re seeing is more customers get to the end of that warranty period were historically would have said okay, I am going to go ahead and trade in but again you back to that what the step up cost, what is that premium to go from that five rolled aircraft to brand new aircraft and instead you’re seeing people that are sticking with it, putting part programs and we do provide obviously for customers and always have for second customers the ability to in essence extend warranties and pay to sort of protect themselves from those cost which is a good business for us.

So this is I think this all comes back in order to basic dynamic of all right five years whether it would be coming of warranty, whether it is how many hours, whether it is just going to larger lift it’s extending that period because that residual value is just substantially lower than it historically has been..

Got it.

Then, just lastly, on the margin for the overall aviation segment, I mean, you have an outstanding margin forecast for the year, could you possibly update us on that? Just because it looks like with the very good first-quarter performance, one can get substantially higher than that range you have there, just even simply using a 20% sequential incremental margin through the rest of the year.

Any more color on where you expect the full year to land?.

No formal update, all as I said and as I think Frank referenced I think will at least feel like given the demand environment and the performance in the business in total and I mean we’re still early in the year obviously right but I mean our perspective on the market and certainly our perspective on how the team is executing and delivering on cost and product programs will probably be towards the high side of that number..

Okay. Thanks a lot..

Thank you. And our next question comes from the line of Myles Walton from Deutsche Bank. Please go ahead..

Thanks. Good morning. Frank or Scott, I think you alluded to the service extension to offer customers.

I was curious if you'd talk about the level of uptick you're seeing on that extension of your service program? Also, one year post the Hawker acquisition, can you comment on the level of cross totalization you've had in bringing customers over to the Cessna lineup? Any metrics you have against that to support it?.

Well, we have a dedicated team frankly that this is what they do for living is reaching out to our Hawker customers, part of what we just talked about around our ProAdvantage system being able to go out to those customers and be able to put them on the same kind of maintenance and service programs that we currently have today for our citation customers.

And that program and the needs of those customers, is what kind of droves that, creation of that program based on interactions that our dedicated Hawker team has had with those customers. In terms of conversion that’s also something we look at and are working on and we certainly have had.

Some of those and I would expect frankly, when you talk to a lot of Hawker customers many of whom are in Hawker 900s and 850 things like that, these are cabin sizes and mission that did quite well to where we are talking about going with Latitude and ultimately longitude.

So I think most of that conversion will start becoming more material as we have a Latitude and then eventually launched at the marketplace..

Okay. Then a clarification.

From a sales perspective, it sounds like Bell may be looking for $4 billion roughly at the start of the year and maybe it's a few hundred million lighter than that, is that about the right thinking?.

That's probably right..

Okay. All right, great. Thanks guys..

Thank you. Our next question comes from the line of Johnny Wright from Nomura. Please go ahead..

Hi, guys. About the restructuring points again, you guys saw a lot of money there in the last 12 to 18 months taking costs out.

How confident are you that there's another $40 million to $50 million to keep you in that guidance range? Where are the new areas you're focusing on that you haven't looked before?.

You're right, we’ve gone through a number restructuring as frankly over the last couple of years in anticipation of the V-22 volumes coming down. I think all this really changed here is that while we were undertaking to try to make sure we had a cost structure that supported that, we have seen the soft on the commercial side.

So I don’t know if there is any particularly different strategy here obviously, we’re looking very much at structure and looking at organization structure to try in more efficient ways to operate given that it’s a small business in terms of its revenue in topline,. So it's primarily around, structure and layers overhead.

We are not impacting our critical programs, so the investments in 525 and 505 and V-280 which are significant, those are continuing full speed ahead.

So it’s never an easy go process to go through obviously but we’re working very hard to make sure that the cost come out in places that are discretionary or other overhead and indirect burden as oppose to effecting how we manufacture and deliver what we need to and make sure that we continue to make kind of progress on our new product programs..

Okay. Thanks.

Can you just provide an update on the Scorpion? Where we are at terms of timing for first orders, maybe just a number of customers you're in conversation with at this point?.

Well, there is a number of customers in conversation right now. I would say that the number of customers who we are talking to is probably increasing at this point.

I wouldn’t hassle to guess a first order date at this stage of the game but I think we have a lot of good customer conversations going on, like program is continuing, we’re in the process of completing the design modifications that we wanted to make coming out of the original flight test demo program and are in the process of the build cycle for what will lead to the first confirming aircraft.

So that’s kind of where we are in the program..

Great. Thank you..

Our next question comes from the line of Jeff Sprague from Vertical Research. Please go ahead..

Thank you. Good morning, gentlemen..

Good morning, Jeff..

I think you've covered a lot of ground here. I guess a couple things.

On Latitude, can you give us the sense of to what degree you do have some orders in hand? Obviously, you're indicating that once you think you've got final cert it picks up, but any color you can provide there?.

So we do have a number of orders for the Latitude Jeff. I think we’re in pretty good place, in terms of initial delivery commitments, customers that are waiting for us to get through certainly begin the delivery process.

But there are still some slots obviously to go for the year but as I said, I think we have a very robust level of customer interest and a bunch of folks that are waiting the demo and fly the aircraft at that point make there decision on order.

So having now finish the flight test program or have a couple aircraft flying around the country, fully configured for customer interiors, its pretty booked up.

So I think there is a lot of interest, a lot of customers, but they all want to, they want to fly the aircraft, we obviously done a number of customer demos, we had in aircraft, that we have there for while doing demos and that generated more activity and I think we are at that point now in the program where that pace will increase..

Then, just taking that a step further, you had this mix down in Q1 and it's obviously a low-volume quarter.

I understand the Latitude mission is obviously different Sovereign and XLS the capabilities are different, but is there some peripheral cannibalization of those product lines, you think, on anticipation of Latitude?.

The only thing I can figure out Jeff is that from a mix standpoint, last year in Q1, we've just gotten the Sovereign plus certification in the very, very end of 2013. So we had a lot of Sovereign deliveries in first quarter of 2014.

So I think we had good Sovereign deliveries in the first quarter of this year but not something that would reflected - sort so that pent-up demand given the late certification of Sovereign a year ago..

Sure, that makes sense. One last one. Just back on Bell, you hit it a couple times here in the Q& A. It sounds like on the restructuring you're telling us that effectively all or most of that $40 million to $50 million gets recovered, so you're close to net-net neutral on cost versus benefit on restructuring.

A, is that correct? Then B, if I just think about that being a wash, I'm still struggling a little bit with getting from 9% and change in Q1 to 11% to 12% for the year.

Obviously there's some seasonal volume lift, but is there anything else in the mix or anything that really supports your confidence in that range?.

There is. So first of all your assumption is correct with respect to the discussion around, the incurring of the restructuring charges and what that does on sort of a net basis through the balance of the year. Okay, so that’s more or less a wash.

In terms of, sort of how we think about quarterly progression of margins, generally speaking as we work through the year at Bell, we do see increased volumes and we do see more favorable mix. So in the first quarter is that we had zero 412s.

So we would expect the quarterly progression of margin rate, given that the restructuring and the balance sort of that net out, you will sort of the normal incremental improvements in margin rate through the course of the year..

Okay, great. Thank you very much..

Thank you. And our next question does come from the line of David Strauss from UBS. Please go ahead..

Good morning..

Good morning, David..

Scott, could you talk about what you're seeing in terms of utilization on your own fleet that's out there in service? Obviously, we can see the FAA data, but I just wanted to get a sense of what you're seeing in terms of the utilization on your own fleet as it comes in for service? Does that -- are you seeing a pickup there? It looks like the FAA did.

It picked up earlier in the year, but now has fallen back. Thanks..

David, I guess, I don't have that around the supplementary forms here. We usually keep track of the average flight hours and then I don’t know if I have that in front of me. Usually what the FA is reporting is take-off and landings and we usually look at the average daily utilization.

So there hasn't been a huge change in that frankly, I mean it's sort of in the realms..

Do you think that's the missing piece in all of this? I know we've talked about used inventories and used pricing, but do you think it's really possible that we can have much of a recovery before we see a pick up in average daily utilization?.

I don't know that there's a huge correlation from the ADU to the new aircraft sale. I really think that is more a basis of residual values versus new aircraft sale. We look at the ADUs more as a function of service activity and how much activity we’re going to through see to the service centers.

And again that’s been relatively stable with sort of its get older and it’s all base get bigger that's what's been driving our guidance around sort of that mid single-digit growth and that's where we continue to see even though we had relatively stable ADU now for quite sometime..

Is that ADU number still well below what you guys were seeing prior to the financial crisis?.

Sure, yes, if you went back and you looked at, it dropped off, at the end of the 2008 beginning of 2009 in the sort of the 0.67, 0.65, 0.64 I mean it's been pretty flat for several years now..

Right. Okay, thank you..

And our next question comes from the line of Jason Gursky from Citi. Please go ahead..

Hi, good morning. It's Jon Raviv on for Jason. Question back on Bell. I was just wondering, is there more to cut, perhaps, if this oil market weakness continues? Related to that is, do you have any visibility on 412 deliveries this year? My understanding is that this is usually a spot market for helicopters, that is.

Then if the market does come back, do you have to hire back up or does this restructuring suggest higher structural margins going forward when things improve maybe next year or the year after?.

So look our intent you never like to go through this with the organization our intent here is that we would do this and that positions us to go through what we think is a fairly lean this year around that segment of the market and then well in the next year.

And then of course we have things like 505 by 525, new things that are kicking in and look we've also taken some orders some of the 412s can be a bit of a spot market aircraft here there, but often there are also fleet buys right. So when you look at the Canadian deal for instance that's seven 412s.

But those deliveries won’t start until sometime next year into 2017. I think there is some other opportunities out there around 412s that are going to be similar. So there is customer activity going on and some of them are fleet buys but they’re going to be from a timing perspective they will be out there.

Now in terms of the ability to hire back, if we something on the production line obviously we know how to modulate their production line and those folks tend to be on recall and we can bring people back even if we need to do that to increase the production volumes.

Clearly on the salary side we are trying to try to make it a restructuring of just how we organize and run the business. So that wouldn't necessarily be a volume related action later on. But certainly on the production side we have the ability to stay our production capacity up and down based on future volumes..

Great. Thanks. Then, just following up on cash deployment.

How would you characterize your M&A appetite at this point given where things are and especially as a relatively sizeable potential helicopter asset could come to market?.

I would say that on - generally speaking on the M&A side, the way we think about it is more along the lines of a lot of the deals we’ve done with TUG and ground support equipment, with our simulation businesses, with the Sherman and Reilly's, that sort of the general scope of what we look at transactions that are kind of in that size that are very complementary or bolt-on to our existing businesses.

With respect to sort of the reference you're making in helicopter industry, I mean I think there is probably too much to say about that, I mean it’s a process that’s largely driven by that company who is been pretty public about type that they’re doing something and I’m sure we’ll all see what they’re going to do on their timeline, which I think they'll describe as being sometime mid-year..

Thank you..

Our next question comes from the line of Ron Epstein from Bank of America/Merrill Lynch. Please go ahead..

Good morning guys. Scott, just maybe backing up on the end of that last question, it seems like there's potential to do all kinds of M&A going forward. I mean, there might be some other properties in the market, even one in Wichita.

Can you just remind us broadly what your thinking is about doing M&A at this point given the asset base that you already have?.

Well Ron, we're quite open to M&A. I mean we’ve done a fair bit of activity here over the last few years. We’ve been generally speaking very happy with the results I mean they’ve been very accretive to the company. We’ve been happy with what they’ve done in terms of strengthening us in the marketplace.

And clearly that range is from the Beechcraft's or the world which for us is a very large deal. But we’re really happy with how that’s going both tactically and around cost and strategically where it positions the company going forward.

And as I said we had a bunch of significantly smaller deals that we think have done really good things for our portfolio, they have helped to strengthen the businesses that we have, they have put us into some exciting new spaces that are very complementary like the simulation side of things, we strengthened our utility side of our Tool & Test business.

The TUG stuff and ground support as I said earlier has gone really, really well. We think that’s a great space for us to be in. And it’s performed very well.

So we’re sort of open for business for that respect but there are things obviously that have to make a lot of sense for us, we’re not just going out to try to do M&A for the sake of doing M&A, there have to be things that in our view fit with portfolio and the strategy of the company and as a result I mean things I think our investors would agree are the right places for us to deploy capital..

Sure.

Maybe just following up on one of those, the Mechtronix acquisition in the sims space, I mean, how is that going? Are you picking up share? How could you -- if you can give us color around that?.

Yes, it’s going really well, we’re very happy with it. The strength of that business so the foundation of it was more near transport side and as we said at the time we did the deals, we wanted to increase sort of our exposure in Aviation from just GA into the commercial civil aerospace side of things. We're really happy with it.

We had some big strategic wins particularly with Boeing on the 737MAX and so we continue to execute well, I think on that contract and pick up more simulators as they progress down in their program, we have some other new platforms that we’re investing in where we had some wins that haven’t been announced particularly yet but I think we’ll continue to help position us as a very serious player in the air transport market.

And of course we’re leveraging those assets to help things like the V-280 we talked about. One of the issues around the V-280 with our army customer is, do you have the maneuverability and the capability that they’re used to today with the more conventional helicopter.

And by taking the technology and the capability we have in the company now and very quickly going out and building a very realistic well modeled simulator, a lot of customers get in there and go out this thing, does perform like a conventional rotorcraft and also it’s - I think it's helping us performing well tactically and strategically I think it’s doing all the things that we hope that would do..

Okay, great. Thanks..

Our next question comes from the line of Robert Stallard from Royal Bank of Canada. Please go ahead..

Thanks so much good morning..

Good morning..

To follow onto Ron's question, but from the other direction. It looks how we've seen a bit of M&A picking up in defense sector with people looking to put assets onto the market.

I was wondering if you had any expressions of interest in some of your systems assets and what your criteria might be if you were looking to sell some things there?.

I guess I would say not we have not and whatever it might be or would be, we have to be something that we thought was in the best interest of our long-term shareholders and generate a lot of value..

Okay.

Have you got any specific financial metrics, maybe, you might have in mind then?.

No..

Okay. Maybe on the aviation side, Scott, you mentioned the US market for Cessnas being pretty good.

I was wondering if you could maybe give us some an idea of what end markets have been better or maybe worse? Have you seen any impact in the slowdown in energy, for example?.

I’m sorry, slowdown in what Robert?.

Energy..

No, I don’t know how much color I give you on that. It’s been pretty broad based obviously our citation customer base is for the most part small to mid-size businesses, lot's of privately held companies and it's pretty well across that whole normal spectrum of our kind of customers.

And we always see rotations in the industry, whether energy is doing something real estate right now is pretty strong, construction these are – it’s a pretty broad base of industries. And I don’t know that I can really give you any color specifically this quarter as to which ones are more active than others..

What about maybe on the charts or the fractional side, has there been any improvement there?.

We haven't had a fractional aircraft sale in the seven years I’ve been here. So, yes it’s been since 2008, so there’s - in terms of new aircraft into a fractional obviously some of our current fractional customers are selling aircraft as they roll-off the deals for previous customers.

So there’s an aftermarket out there, but there’s nothing new that we’re selling into fractional right now.

We have had a fair bit of closed charter operation obviously goes up has been a big customer, King Air has put some used XLSs into it but that's probably the some total what I see going on - in terms of our sales directly into the fractional charter market. Now we hope to see that change obviously.

The NetJet guys has selected a Latitude is their mid-sized platform and with that product now getting the certification there’s an awful lot of activity between ourselves and NetJets on how we help market and take that product into the fractional market.

So I think we have some significant upside in terms of fractional NetJet is obviously is a very powerful player in that in market and the fact that they chose Latitude is their mid-sized platform, I think it will be big boost to us..

Thanks Scott..

Thank you. Our next question comes from the line of Steve Levenson from Stifel. Please go ahead..

Thanks good morning everybody.

Could you give us an update, please, on Scorpion and maybe a little bit more on international interest for that plane as well as V-22?.

First the Scorpion program is progressing very, very well. We got a ton of flight hours, it's been a very busy test and demonstration program. The aircraft is performing extremely well. As I think we mentioned before, there’s a couple of things as we went through the test program that we felt would modify when we went into full-grade production.

So we had an engineering team that's been incorporating all those changes. And we’re getting to ready to undertake build of what would be the conforming aircraft ready to go into certification testing in production. So in terms of the technical side of the program, I’d say it’s going very well.

In terms of the business developments side we have a number of customers that are ongoing conversations around the aircraft and have seen the aircraft and there's sort of what I would call a normal business development activity.

Those processes tend to take a while, because as you can imagine they are government sales and so budgeting and evaluation and what not is a - they take their normal course but there's number of conversations going on. In terms of things like V-22, we’ve seen the Japanese deal has been announced, it’s been budgeted.

There is detailed negotiations and we're hopeful that sometime this summer that will actually be under contract. They’ve already budgeted I think the first five aircraft though the total I believe 19 is they are talking about. So I think that program is progressing well.

There is a number of other customers to which there are active discussions underway. So I think combined with the COD announcement, and as well as those activities I think we got a very, very strong future on V-22.

At the time the only issue for us is just the timing of getting these things through the - getting them on the contract and getting them into the production process.

So the – the unfortunate side is it's probably not a material impact to us until the late teens as opposed to some would help us out next year just given how long it takes to get them under contract and get it going..

Got it. Thank you very much for the color..

Dan I think that we're little bit over time here, so we’ll take one last call here that’s still in queue and then call it a day..

Thank you, sir. Our last question for today comes from the line of Justin Bergner from Gabelli & Company. Please go ahead..

My one question which remains after all the other questions have been answered is with respect to Bell and commercial mix, will that weigh on margins even after the cost reductions that are being taken are completed? Or do you expect you'll be able to offset the mix headwinds as well?.

I would say that on the – as you look through the course of the year, again what's typical for us is that we’ll see not only overall higher volume through the balance of the year but we’ll see a higher mix of 412s as we move through the year. And that’s what really drives that quarterly progression of margins late through the balance of the year.

And that would be true across all of our platforms frankly, as you look at the cost savings associated with the restructuring that we’re doing, that really manifest itself in overall manufacturing rates and overhead rates and so the cost and/or benefits associated with that are spread across all of our commercial and military product lines.

So the underlying mix and volume which will increase the course of the year is really what drives that incremental margin rate..

Okay.

But you don't expect an ongoing mix headwinds as we look out to next year and the following years?.

No, not at this time, I would expect it will just see our normal progression where we have higher volumes for 412 through the balance of the year..

Thank you..

Great. Thank you ladies and gentlemen..

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