Textron Inc. (NYSE:TXT ) Q2 2022 Earnings Conference Call July 28, 2022 8:00 AM ET

Eric Salander - Vice President, IR

Scott Donnelly - Chairman, President & CEO

Frank Connor - EVP & CFO

David Strauss - Barclays Capital

George Shapiro - Shapiro Research

Noah Poponak - Goldman Sachs

Cai von Rumohr - Cowen

Robert Stallard - Vertical Research

Pete Skibitski - Alembic Global

Robert Spingarn - Melius Research

Kristine Liwag - Morgan Stanley

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2022 Textron Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded.

I'd now like to turn the conference over to Eric Salander, Vice President of Investor Relations. Please go ahead.

Thanks, Brett 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, 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 $3.2 billion essentially flat with last year's second quarter. Segment profit in the quarter was $303 million up $14 million from the second quarter of 2021. During this year's second quarter, we reported net income of $1 per share compared to $0.81 per share in last year's second quarter. Manufacturing cash flow before pension contributions totalled $309 million in the quarter down $200 million from the second quarter of 2021.

With that, I'll turn the call over to Scott.

Thanks, Eric and good morning, everyone. Aviation had another solid quarter with higher revenues and strong execution, resulting in a 12.1% segment profit margin. We continue to see strong demand, solid pricing and increased deliveries for our citation jets, commercial turboprops and higher aftermarket volume from increased aircraft utilization. We delivered 48 jets up from 44 last year and 35 commercial turboprops up from 33 in last year's second quarter.

Order activity was strong in the quarter, reflecting continued order momentum that generated $700 million of backlog growth resulting in $5.8 billion of backlog at aviation at the end of the second quarter.

During the quarter, aviation's defense business was awarded a $91 million contract for 86 aircraft, spares and related support services to Tunisia. Also a tax aviation defense earlier this week, the AT-6 Wolverine received military type certification from the US air force paving the way for continued global sales of the light attack aircraft.

On the new product front, we delivered the first [indiscernible] our launch customer FedEx and also delivered the first XLS Gen2 aircraft.

At Bell, revenues and segment profit were down in the quarter, primarily reflecting lower H1 program volume. On the commercial side of Bell, we delivered 34 helicopters down from 47 in last year's second quarter. While commercial order activity was strong across all models, supply chain headwinds impacted Q2 results as several commercial helicopter deliveries slipped out of the quarter.

Overall, the strength in commercial demand, which included South Korea, selecting the Bell 505 aircraft for use as its next military trainer, contributes to an increase in Bell backlog of $500 million in the second quarter. During the quarter, Bell announced the contract award of $518 million to upgrade Canada's fleet of CH-146 Griffon aircraft. This upgrade program is expected to be completed by 2028.

Moving to Future Vertical Lift, we now expect the FLRAA contract announcement sometime in October, following the AUSA conference. As a result, we anticipate continuing our investment on this program, which will be incremental to our original segment guidance.

Moving to Textron systems, revenues were down in the quarter on lower volume, primarily reflecting the impact of last year's withdrawal of US army from Afghanistan on our fee for service and aircraft support contracts. At ATAC, we continue to see increased flight activity on our U.S. Navy and Air Force adversary air contracts. During the quarter, we delivered LCAC 104 to the US Navy and continue to progress through the build process of the remaining EMD craft on the ship to shore connection program.

Last week, the US army announced that systems was awarded a $354 million firm fixed price contract for the production and delivery of XM 204 Tupolev ammunition in anti-vehicle system. This is an IDIQ contract with an estimated completion date of 2027.

Moving to industrial, we saw higher revenues in the quarter driven by higher pricing volume in specialized vehicles, mainly in our personal transportation and golf product lines. At CalTex, the auto market remains challenging as we again experienced order disruptions related to the global auto OEM supply chain shortages and COVID mandated factory shutdowns in China that continue to directly impact our production schedules.

In April, we closed the acquisition of PIPISTREL, pioneer and global leader in electrically powered aircraft. Beginning in the second quarter of 2022, PIPISTREL became part of Textron eAviation, a new reporting segment that includes PIPISTREL's operating results and R&D expenses related to the development of sustainable aviation solutions.

In the quarter, we announced that PIPISTREL Velis Electro received the UK Civil Aviation Authority Certification. The Velis Electro remains the only type of certified electric aircraft in the world.

Overall, it was a solid quarter with strong cash generation and growth and earnings. Our teams executed well in a difficult environment where we continue to experience supply chain disruptions, labor supply shortages, and COVID related impacts across our businesses. While these challenges drove manufacturing inefficiencies and delayed product deliveries at many of our businesses, our financial performance demonstrates the resiliency of our operations. Looking forward, we anticipate these headwinds to continue through the remainder of the year.

With that, I'll turn the call over to Frank.

Thank you, Scott. Good morning, everyone. Let's review how each of the segments contributed starting with Textron Aviation. Revenues at Textron Aviation of $1.3 billion were up $123 million from the second quarter of 2021, largely due to higher aircraft and aftermarket volume. Segment profit was $155 million in the second quarter, up $59 million from a year ago to the impact from higher volume and mix of $25 million, a favorable impact from performance of $19 million and favorable pricing net of inflation of $15 million. Backlog in the segment ended the quarter at $5.8 billion.

Moving to Bell, revenues were $687 million down $204 million from last year due to lower military revenues of $170 million primarily related to the H1 program and lower commercial revenues of $34 million. Segment profit of $63 million was down $47 million from last year's second quarter, reflecting lower volume and mix, partially offset by a favorable impact from performance, which included lower operating expenses, partially offset by an unfavorable change in net program adjustments. Backlog in the segment ended the quarter at $5.3 billion.

At Textron Systems, revenues were $293 million down $40 million from last year's second quarter due to lower volume of $44 million, primarily reflecting the impact of the US Army's withdrawal from Afghanistan on our fee for service and aircraft support contracts. Segment profit of $42 million was down $6 million from a year ago, primarily due to lower volume and mix. Backlog in the segment ended the quarter at $2.1 billion.

Industrial revenues were $871 million up $77 million from last year's second quarter, primarily due to a favorable impact from pricing and higher volume and mix, principally at specialized vehicles. Segment profit of $41 million was up $9 million from the second quarter of 2021, primarily due to the higher volume and mix.

Textron eAviation segment revenues were $5 million and segment loss was $8 million in the quarter. Finance segment revenues were $14 million and profit was $10 million. Moving below segment profit, corporate expenses were $12 million and interest expense was $28 million.

Our manufacturing cash flow before pension contributions was $309 million in the quarter down $200 million from last year's second quarter. The second quarter of 2022 included significant cash tax payments as a result of the 2022 change in R&D tax treatment.

In the quarter, we repurchased 4.4 million shares returning $282 million in cash to shareholders. For the full year, we are reiterating our earnings per share guidance of $3.80 to $4 per share and we are increasing our cash flow from continuing operations before pension contributions guidance to be in the range of $800 million to $900 million, up a $100 million from our prior outlook.

That concludes our prepared remarks. So Brad, we can open the line for questions,

And our first question today comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Hey guys, I'm impressed nine minutes today. So in terms of your guidance for the year, you read and reiterated it, but several companies are missing on supply chain. So maybe can you talk about, are you seeing some of those supply chain headwinds for the second half of the year? And Scott, in your prepared remarks, you mentioned FLRAA, the push out to mid-October, how does that impact results and the additional investment there?

Sure, Sheila. Well, look, I think, if we look at sort of across the company, first and foremost, I think textile aviation performance will continue to be very strong in the second half. We are trying to ramp production. We expect to try to continue to ramp production through in the 2023, given the very strong demand environment. Supply chain and headwinds are causing some disruptions there, obviously.

So, I think we'll probably be a little light on revenue. We'll probably miss some deliveries as things push into 2023. But I think that from a performance standpoint, from a margin standpoint, the business will continue to excel. Aftermarket remains very strong obviously, and that's an important part of the financials in the business. So I think that that business will be a strong performer in the second half and be really well positioned for us going into 2023 as well.

The Industrial segment like our vehicle business continues to perform well. It continues to improve. First half was pretty tough in the automotive world. Again, mostly supply chain and COVID shutdowns in China. I certainly expect that to improve in the second half. So we'll see better performance, from CalTex in the back half of the year.

So I think, continued improvement. It'll probably be towards the low end of margin just because of the first couple quarters on the automotive side, but otherwise strong performance.

Systems in the second half, look, we should get back. We've had these negative revenue comparisons driven largely by the Afghanistan pull-out and the impact it had on fee for service business. Those comps go away in the third and fourth quarter. So I think we get back to stable, even showing some growth probably towards the end of the year, resulting from some new wins and again, very strong performance I think in terms of segment profit and bell will be the one that's a bit of a challenge.

Look, we are starting really strong performance on the commercial side. The demand environment is good. We'll certainly have a lot more deliveries in the back half of the year. But they are fighting through supply chain issues and inefficiencies. We know, and fully expect we're going to see lower volume, particularly on H1 aftermarket. There's just been lower demand, lower flying in that side of the house. But the big issue, we also have to face into is obviously the Flower program, which we continue to feel good about. Our teams are working really hard on it, but that's probably a three or four month slip from where we thought it would be when we gave our guidance originally.

So, obviously we have a big team and we're going to retain that team and keep pressing on, but certainly that will result in some more investment in our program before we get to a contract award. So that will weigh on Bell for the total year. So I think we'll probably get there on revenue, but we'll be on the lighter side of margin given that transition.

Maybe just a follow up on balance, since you just mentioned it, 22% decline, how much of that or 23%, how much of that was due to supply chain and how much of a decline should we expect in the second half? Is it still $3 billion feasible in terms of revenue?

Yeah, I think $3 billion is still feasible and really look, the split is going to be in part again, lower aftermarket on the military side, which is down and that's kind of lumpy. It was actually pretty strong in the first quarter. It was pretty weak here in the second quarter, but I do think we'll see softness in that aftermarket side. But we'll see, I think strong deliveries on the commercial side of the helicopter business that will partially offset that here in the third and fourth quarter.

Great. Thank you very much.

And our next question comes from the line of Ron Epstein with Bank of America. Please go ahead. Oh, one moment. Sorry about that, please go ahead with your question.

Hi, it's Elizabeth. Can you hear me?

Yeah, we can hear you now.

Okay, great. Good. I'm on for Ron this morning. We noticed on your finance segment slide in your presentation that the 60 plus delinquency more than doubled quarter-over-quarter from $2 million to $5 million. Is there anything to worry about there?

No, the finance segment's been performing very well, as you can see from kind of the earnings for finance. So we continue to see good performance out of the portfolio. Kind of things come up from time to time where things move around, but the overall portfolio is performing well.

And our next question comes from the line of Peter Arment with Baird. Please. Go ahead.

Yeah, thanks. Good morning, Scott and Frank. Nice results, Peter. Hey Scott, your backlog continues to swell in aviation, can you maybe talk a little bit about just how you think of managing that, ramping that production and you're obviously probably well into 2023, when you think about kind of delivery slots, just maybe a little color there, that'd be helpful.

Sure. Peter look, Obviously demand's been really strong in that backlog is continuing to grow. It gives us really good visibility, which is terrific. Something we didn't have for a long time as you know. So yeah, we continue to work to be able to ramp and we're continue to do that through the course of the year, and obviously we'll be needing to do that as we into 2023.

We're working really hard on hiring on our end of things to bring staff on board and working with suppliers. That just, to be able to meet that ramp. So, we're making sure we're cautious about how we're committing to customers who want to deliver on the dates that we'll say we'll deliver, but it's a headwind.

And like I said, I think it will impact us this year on some deliveries that we would've originally had that'll push off into the beginning of 2023, but our teams are obviously working every day on this stuff and we are making progress with growing our workforce in-house and we're continue to work with our suppliers to help them meet that ramp as well. So I don't think it's going to be easy, but clearly I think we have line of sight that continue to increase our production rates as we go through the balance of this year and through 2023 as well.

That's great. And Frank, do you have what the aftermarket growth number was in the quarter?

Yeah, it was it was 18% on aviation, 18% and 33% of the revenues.

And our next question comes from the line of David Strauss with Barclays. Please go ahead.

Scott, on FLRAA, what gives you confidence that we're actually going to see a decision here on October? We've seen several slips now, I guess. What color can you give us around your confidence that we're actually going to get a decision here come the fall?

Well, obviously we've had ongoing interaction with the acquisition side of the army. Everything is all obviously very quiet from a post evaluation stage. The indications we get from the acquisition side are that they're going through their process and there haven't been data requests or proposal related activity here for some time. So we know they're in their detailed evaluation phase.

Secretary Bush, who we saw last week, indicated that, and he has said this publicly in several forums that he expects that they're on track to make an announcement after the USA conference. That's what the 10th, 11th or so of October. So, when he says that we're kind of surmising, that means sometime in that mid to late October timeframe.

So, that's what we're currently trying to factor into our plans and what we need to do to make sure that our team, that's assembled, which are currently working, obviously on the risk reduction program, will continue to have activity and keep progressing this thing while they finish their evaluation. But, the dates I'm quoting are again, kind of publicly, Secretary Bush has made those statements. And again, there's no indication from him when we met that there's anything other than just working through their process.

Okay. Frank, couple of questions. How do you see -- you've raised your free cash flow guidance, but how do you see working kind of pieces of working capital, mainly inventory and advances going from here the rest of the year, and then, any initial thoughts on pension for '23, given asset returns and discount rates, it's a pretty big income item for you guys. Thanks.

Yeah. So on the cash flow side, we're consistent with where we had Ben. We continue to see good working capital performance. The supply chain issues and kind of potential delays and deliveries obviously could create a little bit of pressure on the inventory side. But I don't expect that to be at all significant as we go into year end.

But we obviously raise cash flow guidance anticipating continued overall good working capital performance and that's bolstered by strong order activity and customer deposits, frankly both at aviation and a Bell on the commercial side as well. So overall good cash flow performance so far year to date and expect that to continue through the remainder of the year.

Look on the pension side, it's kind of too early, I guess, right now, if you snapped a line, the interest rate impact would more than offset the impact from on the asset valuation side in terms of, kind of creating any headwind associated with pension. So, we have the potential for some additional tailwind given where things are right now as we move into '23 from pension.

And our next question comes from the line of George Shapiro with Shapiro Research. Please go ahead.

Good morning. Quick one, why was corporate expense so low on the quarter?

That has to do with the share price impact that kind of flows through corporate for our equity related comp programs. So, unfortunately we saw a tough overall market and tough share price performance for us in the quarter. So that impacts that number. I'd say in terms of overall for the year, kind of given where the overall market environment is we're probably $10 million-ish better. We expect on corporate expense from an overall cost for the year. But, hopefully that number is not a sustainable quarterly number because the share price performance.

Okay. And then you'd also mentioned that in Bell, there was an adjustment unfavorable adjustment. Can you quantify that?

Yeah, we don't talk about that, kind of by segments. But the comment related to we did see some unfavorable program adjustments this quarter and when you compare that to a year ago, we had some favorable program adjustments. So the overall we, between the two years, kind of created more negative program adjustment therefore. So that's the nature of the comment. Overall expenses are down at Bell anticipating the kind of the reduction in volume. But frankly volume has come out a little faster than we anticipated and so it did have some negative impact on performance.

Okay. Then for Scott, in terms of the general aviation demand, did you see any changes? They went through the quarter and is April -- is July continuing to be strong?

Oh, so George so far the market feels about the same. Demand is strong, continues to be strong business jet market in North America. In the quarter we saw a significant pickup in international activity, particularly in our turboprop business. So strong international demand on years, which certainly helps.

We see some more of the corporates, coming back in as corporate flight activity picks up, but still seeing a lot of new entrance into the market as well. So I think that, as we look at sort of how Q2 played out and continues now in the beginning of Q3 is indicative of really strong demand across the entire portfolio of products.

And our next question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.

Scott, how are you going about deciding exactly where to lay the Cessna production and deliveries for the remainder of this year and next year?

Well, for the most part, no, these are pretty well booked. So, we know what commitments we've made to customers in terms of delivery dates. As you know, unlike it was for a long time, and this is pretty well booked business. So we know the models, we know the mix, we know the interiors and colors. We know what we got to go do. That's not a problem. The challenge is just getting enough people and suppliers to deliver the parts and get the stuff in there and get it produced.

So it's a good problem to have, but it's still a problem, right? So we're working our way through that and like I said, I think the performance of the business, despite a lot of those interruptions and disruptions, they're largely getting it done. I do think we'll have some aircraft slip out because of some particular supplier issues that we're not we just know their delivery dates aren't going to get there, but it's a relatively small number of aircraft and again, that's offset by a very strong aftermarket, the utilization of the aircraft is very high, that drives a lot of service business, which is great and just overall, I think the business is performing really well,

You've had bookings in excess of revenue by about 50%, several quarters in a row. The backlog isn't all new billed, but just the implied bookings it's running about $2 billion a quarter. Do you try to take the production system and the revenue to a place that would match some assumption of that order rate slowing down and try to get the revenue and the orders to land in the same run rate or do you want the orders to keep exceeding revenue and keep growing the backlog from here? Or can you just not even do that because it's customer dependent?

Well, look, there's a lot of moving parts here, right. But, to be honest, you had your dream, you'd have a one to one, right? You'd keep building and keep selling and everything would be great. So, obviously right now demand is stronger than that and we know which leads to that, backlog going out further in time, that's certainly not all bad, but it gives us visibility and we'll plan a production rate.

And again, we are increasing our production rates and we'll continue to increase those rates in the next year. But look, we keep a close eye on that right because in the end, this is about matching supply and demand and I think as we've talked about before, this is a business that should run off backlog, right?

It's better for our customers. It's better for us. I think the whole market is in a better place when there's adequate time for people who have their aircraft to sell their aircraft and doing their upgrades and have a better flow in manufacturing and customizations. So look a one to one's a healthy place to be. You can't build backlog forever obviously, right?

You get to a point where somebody's not going to order an aircraft if it's not available for three or four years and there's more customization and longer lead time probably in order cycle around some of the larger aircraft and smaller aircraft so that, you have that dynamic in there. But look, I think we're in a really good place. Obviously we want to maintain a backlog and we need to balance it where it's a good spot for both ourselves and our customers and I think that's where we are right now. So the out demand continues to grow and so we will grow our production rate, but there's no objective to try to get this back to where you're not working off of a backlog. I don't think that's good for the business or the overall market.

Yeah, no, I meant it more anticipating a slowdown in the order rate and therefore keeping the supply tight.

Well look, the good news. No, we're out far enough, but if you do see us slow down at some point, you can adjust that right, and manage a view, start seeing some absolutely.

And then just on the margin, it's another incremental that's well above that sort of longer term framework you have in the segment. Can you give us some color on how much of that is price versus absorption versus mix and then where do you see that for the remainder of the year?

Well, look, I think we're still coming out of some, highly disruptive times when you look at the year over year, right? So we saw this in the first quarter as well. Price over inflation is good. We've needed that in this industry obviously for a long time. So I think that obviously is a positive contributor, but, I still think if you think about the long term, the gross margins, the mix between the original equipment and aftermarket that this is a business that generally you should expect to see sort of that 20%, 25% conversion.

We're a little stronger than that coming off some pretty extraordinary times, but as we go forward, I think that's a reasonable expectation is that you generally will see somewhere in that 20%, 25% range.

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

Yes. Thanks so much for taking the question. So Scott, could you talk a little bit about supply chain specifically at aviation and also labor availability in the Wichita area. You seem to have obviously done pretty well? What kind of a challenge is it and is it getting better or getting worse?

You know, Cai, it's kind of flat, right? On the labor front look, we are making progress. But, if I look at the ramp, as we think about this year, going into next year, we're looking to add, kind of net, a 100 people or so a month. So that's we're running, hiring fairs. We are seeing people coming back into the workforce. We're working that hard. It's the entry level, bringing new people in and obviously, you've got training and development.

So, there's only so fast we can do it, but we're working and like, Wichita's always been a great place for us in terms of availability, labor, and people that have good work ethic and stuff. So we're continuing to work that, but it's sizeable number of people that we need to bring on board to support that ramp every month.

So when you go to the supply chain, Cai, look, I think, a lot of our smaller suppliers continue to struggle with a little COVID thing here and there and when we have an issue and some people can't show up to work, we're big enough that we can kind of try to move people around and sort of keep things going, not easy, but our guys do a pretty good job of that. When you've got smaller suppliers and they lose a chunk of their workforce for a week, they can -- they slip a week on part availability.

So again, our guys do everything they can to manage those inefficiencies and do out station work and they're constantly working this. So I don't think it's getting worse. But, unfortunately we haven't seen it get dramatically better. And then, you always have a couple suppliers where, what the lead times are, if they've had an issue or problem, we talked last time about some resourcing out of Russia into US manufacturers.

That's a discontinuity that we will get caught up on some of that, but I do think it'll impact us in pushing some things into 2023, but again, net of all that I think the businesses performing really well, despite those challenges.

Terrific. And you've owned PIPISTREL now for a little over a quarter. Could you give us some thoughts on where you plan on taking the products here specifically before PIPISTREL, you had some designs, do you hope to take their technology and pursue that area? You have the Nuva [ph], you got a number of potential opportunities. Maybe give us some color in terms of where you're thinking of taking that?

Sure, absolutely. Look, the Nuva [ph] you just mentioned, we're very excited about that thing. They've done some good work in the past that that is one of the areas that we're adding R&D to try to accelerate that and get the aircraft, the first aircraft flying. I think when you think about unmanned, I actually think unmanned cargo, is probably something that's a reasonable expectation for acceptance in the marketplace and growth and that Nuva is kind of a 1,000 pound cargo, kind of a crap.

The guys are working hard on that right now and again, that's an area we've accelerated some of our investment to bring that to market. You talk about Nexus and sort of the EV space, as we talked about Cai, I think that when we look at our company, we feel great about our arrow and fatigue and structures and flight controls guys. Obviously, these things look like at least in our view is sort of a mini rotor kind of a technology. We actually do that. We have the right technical talent to pull that off.

Our weak spot in terms of organic capability was around the power train and electric propulsion and the PIPISTREL guys are fantastic at that. This is what they do and so in that particular area on Vitol [ph], absolutely, we have that team now engaged in adding some resources to help our team in Wichita to deal with the battery storage, battery energy and electric propulsion trains that would support [indiscernible]. So I'd say so far, we've only owned them for a couple of months here.

They've got some great current product line. You've got things like Pantera that have been sold previously under sort of experimental tickets. I think we have a great pathway for that to be a great airplane, part of our portfolio as a certified IFR aircraft. So again areas where the teams that do that kind of work in Wichita are now helping the team in Slovenia and how do you lay out, product certification for an IFR aircraft.

So, so far I'd say the integration is really going really, really well, the PIPISTREL folks have a fabulous engineering and technical base and we're just growing that, so…

And our next question comes from the line of Robert Stallard with Vertical Research. Please go ahead.

Scott, probably question for you, obviously concerns out there about a slowing global economy. I was wondering if you'd seen any sign of this in your industrial division, and if this were to occur switching over to aviation, how would you say the setup here differs from what you saw back in say 2007, 2008 peak of last cycle?

Well, Robert that's a great question. Look, we haven't seen it yet. I think, look, we all kind of keep an eye on things and everyone sees some softness in some of the let's call it lower end retail source side of things. I think that makes a lot of sense. People are obviously putting a lot more cash into their gas tank that takes some of that discretionary spending away, but we keep a very close eye on this in terms of the demand, particularly in some of that in the industrial world.

But, we're still seeing a very strong demand environment. We continue to be gated more by supply chain issues and just getting product out there. Dealer inventories are still at very, very low levels. So we we'll continue to keep a very close eye on it obviously. But, we're not seeing that change just yet on the.

On the GA side, Robert, we have the situation today having lived through that 2008, 2009 is just a totally different dynamic, right? You had a liquidity based financial crisis. Today I would argue we have absolutely the opposite of that, right? The world is a wash in money. And I think, again, if you go on the aviation side, you had political overhang back in 2008, 2009, right?

Where, it was bad to have a business jet and today you see a situation where good, bad and different, the commercial airlines, and the whole network of commercial travel is struggling and you see people moving and being incentivized to moving into the business, aviation world. So the dynamic is just wildly different. I think the underlying economics are just totally different, right? You went from a liquidity problem to a world that's it's just a wash in money. So totally different dynamic.

And our next question comes from the line of Pete Skibitski with Alembic Global. Please go ahead.

Hey, good morning guys. Question on system, sorry if I missed this, but are you still expecting $1.3 billion for the full year and if so, which programs are going to ramp in the back half?

Well, I think that we'll, I'm not sure it's probably going to be a one, two or something in that Peter. I think the we continue to see growth in our services business, on the adversary air. we're continuing to see growth in our webs and munitions business, as GBSD continues to ramp.

We just mentioned an award on the XM204. It's a program we've been working on for a very long time. It's across obviously very important milestones here that will start to contribute growth to the business. So, it's across all the other segments. The comparative that we've struggled with really has been this Afghanistan, withdrawal and I think again, you'll start to see this business pick up and go back into a growth mode here in the latter part of the year, driven by those programs.

Okay. And just last one for me much smaller program, but I'm just curious if you guys are tracking this Armed Overwatch program just because it seems like the type of thing that could be maybe leveraged internationally and you just got the 86 certified. So just wondering if you think that might be awarded this year and if it's going to be meaningful to you or not.

Well, look, it would be Peter. I think that the Armed Overwatch, our expectation is that that could be announced any day, any week here. Again, the air force is in their proposal evaluation. So all is quiet there, but they're going through their process. So, yeah, absolutely, I think that's something will be announced in the pretty near future.

But, regardless, the fact that we did get the military type certification on the T6 six is a big deal for us on the international markets. As you know, we've already taken our first orders for that because customers expected, we would get the type certain and we have a large installed base and a very successful product in the T6 on the trainer side of things.

So an awful lot of customers have been in dialogue with us around their desire to go be able to transition from that T6 into AT6 for their light attack aircraft. So I think that we see a bright future for that product. Now that we have the MTC if we were to win the Armed Overwatch program, that would obviously be a huge opportunity for us. But either way, I think, we feel really good about where the AT6 position going forward.

And our next question comes from the line of Seth Seifman with JPMorgan. Please go ahead.

Okay. Thanks very much and good morning, everyone. I was wondering if you could talk a little bit more about Bell and just kind of A, sort of the pace of recovery through the year, but also, with H1 ramping down just the extent to which the EBIT level that we saw in Q2, even though there was some one time aspect to it. To what extent does that become kind of a preview of '23, '24 as H1 goes away and we think about the transition, potentially into FLRAA?

Well, I think what we saw this quarter is probably kind of where Bell's going to be here for a little while, as we see those lower aftermarket military volumes. Again, we'll see commercial kicking in here with some increases on the revenue side and obviously a lot of this will depend on where FLRAA goes, right?

So, obviously we're optimistic about the program, but the army, it's their decision and hopefully we'll see that happen here in that October, sort of timeframe because clearly that's really important for us for the future in terms of that program moving from the investment phase, which it has been now for almost a decade and move into a real program.

Right. Okay. Thanks. And then I apologize if you mentioned it, but I think, you said a few deliveries might slip out due to supply chain issues in aviation. If we thought that the target was kind of to get back to 2019 level of 206, it, should we still be thinking about, let's say 200 deliveries and do these supply chain issues have much impact on the quarterly cadence in the second half?

Look, I think it's going to be, south of the numbers you're talking about here. We've never given the exact number, but like I said, I think you can expect that our original guide on the revenue is probably going to be short, a couple $100 million.

But on the margin side, it's going to be north of our guide because again, I think our business is despite all these disruptions is performing really well, very strong aftermarket. As Frank mentioned, really strong growth again in the quarter. So, as you'll look through the bounce of the year, I think aviation will continue to perform really, really well. But for sure these supply chain issues are going to have force a few aircraft out of the year.

And our next question comes from the line of Robert Spingarn with Melius. Please go ahead.

Scott, on the slippage, in the deliveries that we're just talking about here is you mentioned it's a lot of small suppliers, but are engines involved at all? Is there an engine shortfall?

And so, is that the dominant factor or again, it's across the airplane?

Well, it's across airplanes. The engine impact on one particular model is probably our single biggest impact. And again, that's one where like, I think they're working really hard at trying to get the stuff back in. And I think the good news is in that particular case, the resourcing is well defined. It's well understood. It's someone who's built the part before. I think there's a good path to getting back on track, but I just don't see that getting itself resolved and not impacting deliveries this year, but those are couple move into the 2023.

And again, financially we're going to be fine. Again, the business is performing really, really well. The bigger issue for me is frankly, I have some customers obviously that want their aircraft that are going to get pushed into next year as a, as a result of that. But I think the path to get that resolved is quite clear and it's being, it's being worked really hard. So, the other craft it's a couple here, a couple, it's small there's just a lot of suppliers with a lot of issues and it's like I say, it's a bit of a fight every day, so…

Right. And it looks like your pricing is outpacing inflation but if inflation continues to stay where it is or gets worse, are there any protections being built into the newer contracts?

No, look, we, most of our, aircraft, these deals are negotiated. We know what the delivery dates are and our guys have put in appropriate pricing associated with what our expectations are on the inflation side. So, when we have the few deals we have that are kind of out there in time and pre-negotiated take into consideration market pricing at the time. So, I think we feel like we have adequate protection and adequate, incorporation of inflation going forward.

And our next question comes from the line of Kristine Liwag with Morgan Stanley. Please go ahead.

Hey, Scott, back on Textron Aviation, you reported margins at 12%, the highest we've seen since 2008 and we look back, it's really been 14, 15 years since we've seen a real light and mid-size biz jet upcycle. At this point, use inventories in your favor, you're getting pricing, you're getting orders. If we continue to see sustained demand and the supply chain issues, ease, are there any structural differences in the business today that could prevent margins from going back to that mid to high teens that we saw in '07 '08? At some point, not this year clearly, but at some point,

Look, I think the way we look at the market right now and the performance of the business and the mix of aftermarket and aircraft and all the programs, the new models, obviously we have a very different portfolio product today than we than we did back then as well. I think the cost structure of the business is really, really well managed. It's well aligned to what the volumes are.

And so, certainly our expectation is that we'll continue to see positive margin progression as we go into the future. That's absolutely our plan and look, we've as you said, it's been a long, hard fight from back in the 2008 days to get to where we are today. But, this is kind of back to where you've got a business running the way it's supposed to be running and with a strong backlog like it's supposed to have.

And the dynamics, as you mentioned, used aircraft available for sale, or are at record lows versus being a real problem for quite an number years. So, look, I think the business 12% margins, this is a spectacular business and I do think we can continue to improve those margin rates as we go into future years.

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