Sheila Kahyaoglu

Sheila Kahyaoglu asked for clarification on the 'muted' commercial aftermarket outlook for the upcoming year, specifically how LEAP and GTF growth compares to legacy engines, and the magnitude of any pull-forward or restocking observed. She also requested additional color on the 5% price realization forecast, particularly its weighting across aerospace and aftermarket segments.

Answer

Chairman and CEO Chip Blankenship explained that strong repair growth is expected for LEAP and GTF, with flat to slight growth for V2500 and CFM56. He attributed the 'muted' top-line growth to lumpy spare end item orders in the prior quarter, which are not forecasted to repeat. CFO Bill Lacey confirmed the 5% price realization at the total Woodward level, noting aerospace would slightly outpace industrial due to the JDAM price increase and catalog growth, with industrial also seeing good price results.

Sheila Kahyaoglu of Jefferies asked for more detail on the timing and payback of the multi-hundred-million-dollar investment in the new A350 facility. She also inquired about the sustainability of the outperformance in the defense business.

Answer

CFO Bill Lacey confirmed the investment would be a 'couple of hundred million' dollars, primarily spread across fiscal years 2026 and 2027, and that the company expects good returns. Regarding defense, he stated that demand for the entire Smart Defense portfolio is strong and that they feel good about this demand continuing through at least the first half of fiscal 2026.

Sheila Kahyaoglu asked about the quantified impact of tariffs on guidance and the reasons behind the strong defense OE growth and weak defense aftermarket performance.

Answer

CFO William Lacey quantified the potential tariff pressure at $10-$15 million for the fiscal year, which is incorporated into the guidance. CEO Charles Blankenship attributed the 52% defense OE growth primarily to Smart Defense programs and explained the aftermarket decline was due to lumpy customer order timing.

Sheila Kahyaoglu questioned the drivers behind the strong 20% Q1 aftermarket growth, the potential shop visit revenue from the LEAP engine fleet, and the factors contributing to the improved core Industrial segment profitability.

Answer

CEO Charles Blankenship attributed the strong aftermarket start to an easier year-over-year comparison, improved operational turn times from lean initiatives, and pricing. He noted Woodward's aftermarket is more correlated to engine flight hours than shop visits. CFO William Lacey added that core Industrial margins of 15% were aided by favorable foreign exchange rates, with the full-year guide remaining 14% to 15%.

Sheila Kahyaoglu inquired about the aerospace aftermarket outlook for 2025, the drivers of the Q4 defense OEM surge, and the strategic rationale behind divesting a gas turbine component business.

Answer

CEO Charles Blankenship expects commercial aftermarket to level off at a high plateau due to MRO capacity constraints. CFO William Lacey attributed the Q4 defense surge to overcoming supply chain issues and strong demand. Blankenship explained the divestiture was a strategic move to exit a build-to-print product line that lacked Woodward's own intellectual property.

Sheila Kahyaoglu asked about the international opportunities for the Valkyrie program, specifically regarding the German Air Force procurement, and sought insights into the expected revenue contribution from Valkyrie in the coming years. She also inquired about potential revenue synergies from the recently announced Orbit acquisition.

Answer

Eric DeMarco, Kratos' President and CEO, clarified that Airbus procured Valkyries for a CCA opportunity with the German Luftwaffe, and Kratos is pursuing additional tactical drone opportunities in Europe, leveraging existing flying aircraft. He emphasized that current financial forecasts only include RDT&E quantities for Valkyrie, not production-level revenue, pending contractual clarity. Regarding Orbit, Mr. DeMarco highlighted significant synergy opportunities, particularly in antenna technology, combining Kratos' microwave expertise with Orbit's installed base and customer reach.

Sheila Kahyaoglu of Jefferies inquired about the procurement process for the Poseidon win and asked how to track the progress and funding flow for Kratos's largest programs.

Answer

CEO Eric DeMarco revealed that the Poseidon win was highly competitive and that Kratos's vertical integration was a key differentiator. To track progress, he advised monitoring the obligation of funds from the recent reconciliation bill for hypersonics and drones, and following public updates from partner Northrop Grumman on the Sentinel ICBM program.

Sheila Kahyaoglu from Jefferies inquired about the next steps for the Thanatos program and how the Department of Defense's DOGE (Designing Out Great-power competition) initiative is factored into Kratos's guidance.

Answer

CEO Eric DeMarco stated that the Thanatos program has a number of flights scheduled through year-end, with hopes for a follow-on contract in 2026 if successful. He described DOGE as a 'huge win' for Kratos, as budget reallocations from services to hardware are directly benefiting the company, with some related contracts already received. This positive impact is reflected in their strong bookings and outlook.

On behalf of Sheila Kahyaoglu from Jefferies, an analyst asked for an update on the current state and trajectory of the hypersonics business and for more detail on the growth opportunity for the micro-electronics business in 2025 and beyond.

Answer

CEO Eric DeMarco detailed Kratos's deep legacy in hypersonics, noting their current sweet spot is in target and test vehicles, with a potential future expansion into tactical systems. For micro-electronics, he projected 15-20% annual growth for the foreseeable future, driven by inventory replenishment and new capacity in India to support regional allies, which he sees as the next major growth driver for that business.

Sheila Kahyaoglu inquired about the growth trajectory within Leidos' defense systems segment and how potential issues with DoD and civil customers might impact the company's overall portfolio.

Answer

CEO Tom Bell highlighted the defense systems business's pivot from R&D to LRIP and programs of record, citing 10 franchise programs with $15 billion in potential value over five years, including air/base defense, counter-UAS, hypersonics, and maritime autonomy. CFO Chris Cage added that the FedSiv portfolio has proven resilient, delivering mid-single-digit growth despite impacts, with strong performance in Veterans Benefits Administration and FAA missions.

Sheila Kahyaoglu inquired about the growth trajectory within the defense systems segment, particularly how Leidos views its expansion and the potential impact of DoD and civil customer issues on its portfolio.

Answer

CEO Tom Bell highlighted the strong performance of the defense systems business, citing 10 franchise programs expected to deliver $15 billion in value over five years, including air/base defense, counter-UAS, and hypersonic missiles. He noted a pivot from R&D to LRIP and programs of record. CFO Chris Cage added that the FedSig portfolio has proven resilient, with modest impacts mostly on the Digimod business, and mission-essential programs like Veterans Benefits Administration and FAA holding up well.

Sheila Kahyaoglu from Jefferies asked for an update on the Health segment's growth drivers, including the rural health program, DHMSM, and VBA, as well as the contribution from incentive fees.

Answer

CEO Thomas Bell highlighted record volumes in medical disability exams, reaching 5,000 cases per day, and noted investments in mobile clinics for rural health. CFO Chris Cage added that the DHMSM contract was successfully extended and that the company is positioned for a potential consolidation of DoD and VA EHR systems. He also mentioned a pipeline of new opportunities like the Global Nurse Advice Line.

Sheila Kahyaoglu of Jefferies asked about the opportunity in VA EHR modernization, where Leidos is a subcontractor to Oracle, and whether Q1's strong Health & Civil margins are sustainable.

Answer

CEO Tom Bell highlighted managed health services as a key growth pillar, citing rising veteran exam volumes. CFO Chris Cage added that while not directly in their control, they could expand their role over time. He affirmed that the company is capable of sustaining the Q1 performance run rate, as the VA wants to maintain high activity levels.

Sheila Kahyaoglu questioned the outlook for the Health segment's VBA medical disability exam program, asking about its top and bottom-line contribution following the recent recompete and the impact of a new competitor.

Answer

CEO Thomas Bell expressed confidence in meeting financial expectations for the program despite a new entrant, citing Leidos's scale and technology. He also noted that the North Star 2030 strategy diversifies growth beyond this single contract. CFO Chris Cage added that demand remains robust and Leidos is positioned to deliver quality and capacity.

Sheila Kahyaoglu inquired about the Health and Civil segment, seeking details on the VA funding, the status and timing of the upcoming recompete, and the outlook for segment EBIT into next year.

Answer

CEO Thomas Bell expressed high confidence, stating that the "fog of war has been lifted." He confirmed the customer exercised the current contract's option year and a new two-year contract award is expected in weeks. He believes the subsequent long-term competition will favor Leidos's innovation. CFO Chris Cage added that Q3's strong results were partly due to performance incentives and noted a potential three-year extension on the DHMSM program is another positive indicator for the business.

Sheila Kahyaolu asked about the improving IMS segment, specifically inquiring about recent wins like the South Korea award and classified ISR program ramps, and sought insight into the segment's future outlook and capacity runway.

Answer

Chairman and CEO Christopher Kubasik explained that significant leadership changes and a renewed focus on execution have led to the IMS segment's improved performance, with backlog doubling in 12 months. He highlighted continued classified growth, international interest in Armed Overwatch, the C-130 award in Morocco, F-35 depot support in Canada, and opportunities with Joby Aviation, emphasizing the team's strong execution.

Sheila Kahyaoglu from Jefferies Financial Group asked for quantification of how the TDL and Aerojet Rocketdyne acquisitions are accelerating 2026 growth, and specifically for Aerojet's five-year outlook and key growth drivers.

Answer

Chairman and CEO Christopher Kubasik reported that both acquisitions are exceeding their deal models, with TDL showing strong growth and margins. SVP and CFO Kenneth Bedingfield detailed Aerojet's long-term drivers, including tactical motors, interceptors, and large solid rocket motors. Kubasik added an aspirational goal for Aerojet to reach $5 billion in revenue by the end of the decade.

Sheila Kahyaoglu of Jefferies asked for quantification of how the TDL and Aerojet Rocketdyne acquisitions are contributing to 2026 growth and for the biggest growth drivers for Aerojet over the next five years.

Answer

Chairman & CEO Christopher Kubasik reported that the TDL acquisition is exceeding its deal model, with upper-single-digit revenue growth and margins approaching the high CS segment level. SVP & CFO Kenneth Bedingfield detailed Aerojet's significant opportunities in missile solutions and long-term programs like Sentinel and NGI. Kubasik added an aspirational goal for Aerojet to reach $5 billion in revenue by the end of the decade.

Sheila Kahyaoglu asked about the prospects for the airborne side of the SAS business, inquiring about the F-35 outlook beyond the current headwind and potential new pursuits.

Answer

CEO Christopher Kubasik confirmed the airborne market is solid and that 2025 represents a low point for F-35 revenue as TR3 development winds down. He stated that the F-35 portfolio will return to growth in 2026, driven by the production ramp. Kubasik also noted that L3Harris has content on nearly every aircraft, including new development programs like the T-7, positioning the company well for future growth in the airborne sector.

Sheila Kahyaoglu asked for details on where the incremental $200 million in LHX NeXt savings are being generated and what key performance indicators (KPIs) are used to track them.

Answer

CEO Christopher Kubasik identified supply chain management, facility rationalization, and organizational structure as primary sources, noting some savings are reinvested into digital transformation. CFO Kenneth Bedingfield added that KPIs track both the generation of savings and their programmatic realization, which varies in timing, with labor savings being faster to realize than supply chain or systems efficiencies.

Sheila Kahyaoglu asked for details on the primary drivers that will accelerate organic growth to meet the company's long-term revenue target of $23 billion by 2026, given the strong recent book-to-bill performance.

Answer

CEO Christopher Kubasik cited a record backlog and alignment with key U.S. budget priorities as foundational for growth. He highlighted a $10 billion international pipeline in the Communication Systems (CS) segment, future growth in space as missions shift from air, and capacity expansion in Aerojet Rocketdyne hitting in 2026, supported by major wins like the Glide Phase Interceptor. He also noted lumpy but significant international ISR opportunities in the Integrated Mission Systems (IMS) segment as potential upside.

Sheila Kahyaoglu from Jefferies asked about Howmet Aerospace's long-term vision and "end state" over the next few years, considering its strong balance sheet, low leverage, excellent segment margins, and various expansion opportunities.

Answer

Executive Chairman and CEO John Plant outlined a future focused on continued growth and margin improvement, emphasizing that growth will likely be a more significant factor than margin expansion over the next five years. He highlighted ongoing investments in automation, artificial intelligence, and machine learning to improve yields and enable next-generation technology for both aerospace and gas turbine segments. Plant mentioned plans for an investor technology day in March 2026 to showcase these advancements, including the "digital thread" for manufacturing traceability.

Sheila Kahyaoglu asked Ken Giacobbe about Howmet Aerospace's strategic vision and end state over the next few years, considering its strong balance sheet, low leverage, and robust segment margins, as well as its areas of expansion.

Answer

Executive Chairman and CEO John Plant, responding on behalf of Ken Giacobbe, emphasized that growth will be a more significant factor than margin improvement over the next five years, though margin expansion remains a daily focus. He highlighted ongoing investments in automation, artificial intelligence, machine learning, and the 'digital thread' to enhance manufacturing yields and content for next-generation aerospace and gas turbine technologies, with an investor technology day planned for March.

Sheila Kahyaoglu of Jefferies asked for an update on the timing of revenue contributions from new engine expansions in aerospace and IGT, their expected profitability profile, and the key pacing items for bringing them online.

Answer

Executive Chairman and CEO John Plant detailed the timeline for new capacity. A Michigan plant is expected to have saleable output in Q4 2025, benefiting turbine airfoils. Two other projects for the IGT market (a new plant in Japan and an expansion in Europe) will see output in 2026, ramping to full capacity in 2027. Plant expects the initial cost drag from hiring and training to be offset by volume leverage, with profitability improving in late 2026 and 2027 as launch costs fade and scrap rates decrease.

Sheila Kahyaoglu from Jefferies questioned the rationale behind the implied margin step-down in the second half guidance, given the strong Q1 results and the minimal net impact from tariffs.

Answer

Executive Chairman and CEO John Plant explained the cautious guidance is due to several factors: the margin-dampening effect of dollar-for-dollar tariff pass-throughs, an expected production slowdown in the Commercial Truck business, and the costs associated with hiring and training approximately 1,000 new employees for growth projects.

Sheila Kahyaoglu asked about the cause of the sequential step-down in Engine Products' margins in Q4, the margin outlook for 2025-2026, and which segment is expected to see the most deceleration from Q1 levels.

Answer

Executive Chairman and CEO John Plant characterized the Q4 engine margin dip as 'de minimis' noise, attributing it to temporary costs associated with the LEAP-1A engine changeover, which are now resolved. Looking at year-over-year margin improvement for 2025, he expressed the most optimism for the Engineered Structures segment, which he believes will show the largest percentage improvement.

Sheila Kahyaoglu asked for details on the Q3 free cash flow, the factors underpinning the positive core free cash flow expected in Q4 (pre-DOJ payment), and the outlook for 2026 free cash flow, specifically if it's expected to be break-even or a low to mid-single-digit inflow.

Answer

EVP and CFO Jay Malave updated the 2025 full-year free cash flow usage outlook to $2.5 billion, an improvement of $500 million. He outlined Q4 expectations, including a significant inflow from BDS (over $1 billion), partially offset by lower BCA receipts due to mix, higher interest payments (around $900 million), and a potential $700 million DOJ payment. Operationally, Q4 is expected to be positive before the DOJ payment. He deferred a specific 2026 free cash flow outlook until January, noting favorable trends.

Sheila Kahyaoglu asked about the drivers of the Q3 free cash flow, the expected Q4 free cash flow exit rate, and the outlook for 2026 free cash flow, including the underlying BCA rates.

Answer

EVP and CFO Jay Malave updated the 2025 full-year free cash flow usage outlook to $2.5 billion, an improvement of $500 million. He projected a positive Q4 free cash flow of approximately $500 million before a potential $700 million DOJ payment, driven by over $1 billion in seasonal inflow from BDS, partially offset by lower BCA receipts due to a mixed headwind (fewer 777 deliveries) and higher interest payments. He stated it's too early to provide a strong call on 2026 but noted favorable trends.

Sheila Kahyaoglu from Jefferies inquired about the impact of recent trade agreements, particularly the 'zero-for-zero' tariff deal with the EU, on Boeing's order momentum, pricing power, and supply chain costs.

Answer

President & CEO Kelly Ortberg stated that recent trade deals, like the one with Japan, are helpful for reducing input tariff costs, and the company aims to beat its previously stated sub-$500 million impact. He noted the order environment is very strong, and the constrained supply environment supports pricing. Ortberg also highlighted remaining trade risks related to China and the USMCA agreement.

Sheila Kahyaoglu inquired about production ramp plans for the 737 and 787 beyond 2025, the most significant risks in the supply chain and master schedule, and the correlation to future cash flow expectations.

Answer

CEO Robert Ortberg affirmed that strong demand supports the existing rate increase plans, with the 737 moving to 42, 47, and 52 per month in increments of about six months, contingent on KPI stability. He noted 787 KPIs are green for the next rate increase. CFO Brian West added that inventory levels and supplier alignment are sufficient to support these ramps.

Sheila Kahyaoglu questioned the timeline for stabilizing the fixed-price development programs in the Defense, Space & Security (BDS) segment, how they are being 'actively managed,' and the cash flow impact of recent charges, including when the segment might reach breakeven.

Answer

CEO Kelly Ortberg explained that 'active management' involves working with customers like the U.S. Air Force on MOAs to derisk programs, though these are in early stages. CFO Brian West specified that about one-third of the new $1.7B charge will impact cash flow over the next three years. He projected 2025 BDS cash flow to resemble 2023's and suggested cash flow breakeven for the segment could be possible in 2026 or 2027.

Sheila Kahyaoglu of Jefferies asked for details on the drivers of Q3 free cash flow, the outlook for the Q4 outflow, and the underlying assumptions for BCA deliveries and BDS losses in the 2025 free cash flow forecast.

Answer

EVP and CFO Brian West attributed the better-than-expected Q3 free cash flow to the timing of BCA customer advances. He projected a Q4 cash outflow similar to Q2's, driven by inventory builds from production delays. For 2025, he anticipates a significant cash use, though an improvement over 2024, with a negative first half turning positive in the second half as production stabilizes.

Sheila Kahyaoglu asked about the financial implications of upsizing the Strategic Capital Initiative (SCI) to $6 billion, specifically regarding segment EBITDA and free cash flow, and sought details on the ATOPS acquisition, its capacity addition, and expected EBITDA contribution or savings.

Answer

Joe Adams, Chairman and CEO of FTAI Aviation, explained that the SCI upsizing accelerates growth, potentially increasing FTAI Aviation's aerospace products volume from SCI from 20% to 25%, providing locked-in volume for 5-6 years, and enhancing cross-selling opportunities. David Moreno, COO of FTAI Aviation, detailed the ATOPS acquisition, noting it adds 150 modules of capacity, 60 employees, and facilities in Florida and Portugal, increasing total company production to 1,950 modules. He also mentioned the Bauer joint venture (Prime Engine Accessories) is expected to generate $75,000 in savings per shop visit for 350 engines annually by 2026.

Sheila Kahyaoglu asked about the financial implications of the upsized Strategic Capital Initiative (SCI) on segment EBITDA and free cash flow, and requested details on the ATOPS acquisition, including its origin, capacity addition, and expected EBITDA contribution or savings.

Answer

Joe Adams, Chairman and CEO, explained that the SCI upsizing accelerates growth, potentially increasing SCI's share of aerospace products volume to 25%, providing locked-in volume, efficient production planning, cross-selling opportunities, and faster market share gains. David Moreno, COO, detailed the ATOPS acquisition as a capacity expansion, adding 150 modules and 60 employees, increasing total production from 1,800 to 1,950 modules, and establishing a field service hub in Lisbon. He also highlighted the Bauer joint venture (Prime Engine Accessories) for margin increase and vertical integration, projecting $75,000 in savings per shop visit for 350 engines annually by 2026.

Sheila Kahyaoglu of Jefferies inquired about the key drivers for Aerospace Products' margin improvement into 2026 and the strategic rationale behind the acquisition of Pacific Aerodynamic, including its potential financial returns.

Answer

Joseph Adams, Chairman, CEO & Director, explained that margin expansion is multifaceted, driven by new in-house repairs, cost savings from acquisitions like Pacific Aerodynamic, new serviceable material, and most significantly, the upcoming PMA parts. He noted that the Pacific Aerodynamic acquisition could have a one-year payback period due to FTAI's ability to direct significant volume to the facility, making vertical integration highly accretive.

Sheila Kahyaoglu inquired about the potential impact of tariffs on Aerospace Products margins and the company's strategy for growth CapEx, particularly a $127 million parts investment in Q1, in the context of its full-year free cash flow guidance.

Answer

CEO Joseph Adams stated that tariffs are not expected to have a material negative effect due to the rebuild-nature of the business, geographic diversification of facilities, and the ability to pass on price increases. He clarified that FTAI plans to invest approximately $200 million in parts inventory in the first half of the year, viewing it as a crucial step to avoid missing sales while production ramps. This investment is already factored into the company's free cash flow guidance.

Sheila Kahyaoglu asked for a breakdown of the drivers behind the Aerospace Products segment's 35% EBITDA margin and its sustainability. She also inquired about the specific profit drivers, such as PMA and green time optimization, that could lift margins toward the newly guided 35% to 50% range in 2025 and beyond.

Answer

CEO Joe Adams detailed four margin components: standard repair work, unique green time optimization, a multi-faceted parts strategy (USM, LLPs, PMA), and high-value 'white glove' services. He affirmed these are sustainable and expects green time and parts contributions to grow, with PMA potentially adding 5-10 percentage points to margins. COO David Moreno then elaborated on the green time optimization process, using an example from the investor deck to show how FTAI creates significant value by disassembling engines and building rightsized modules, turning a $10 million investment into $16 million of value.

Sheila Kahyaoglu of Jefferies asked about the long-term sustainability of FTAI's business model beyond current aftermarket bottlenecks and inquired about the pace of new customer onboarding and their initial and subsequent module order sizes.

Answer

CEO Joe Adams stated that FTAI's value proposition of cost and time savings creates a sticky customer base, with no evidence of reversion to old maintenance methods. He highlighted the FTAI Canada acquisition as key to scaling module production to 100 per quarter in 2025 to meet demand. COO David Moreno added that Q3 was a record for new customers (19), who typically start with 1-2 modules, while repeat customers order 5-10 modules and provide long-term shop visit schedules.

Sheila Kahyaoglu asked about the learning curves for the G800 and G700, how margins remain stable despite the G650ER phase-out, and the expected tailwind from R&D as major programs are certified.

Answer

Phebe Novakovic, Chairman and CEO of General Dynamics, explained that while the G650ER was a mature, high-margin aircraft, the G800 will take time to reach similar gross margins, but both new models are coming down their learning curves, supported by a stabilizing supply chain. She stated R&D would remain about the same for a while due to ongoing developmental programs and certifications, with the G800 replacing the G650 and the G700 expanding the market.

Sheila Kahyaoglu inquired about Gulfstream's total production capacity beyond the current 150-unit base, the reason for the G400's margin impact in 2028, and whether aerospace services revenue was down in the quarter.

Answer

Chairman and CEO Phebe Novakovic confirmed that Gulfstream has the capacity to produce up to 200 aircraft annually and will scale production with market demand. She explained the G400 will dilute margins upon entry as it is a lower-margin aircraft compared to the large-cabin jets. She also confirmed that aerospace services revenue was down in the quarter.

Sheila Kahyaoglu asked for an update on the Aerospace margin outlook as the last G650 is delivered and the G700/G800 ramp. She also asked what has changed in the Marine segment to warrant increased government engagement on productivity and investment.

Answer

Phebe Novakovic, Chairman and CEO, explained that G700 margins are improving but not yet at a normal cadence, and the G800 will enter with higher margins than the G700. For Marine, she noted a 'step-up in engagement' from the civilian side of the government focused on increasing throughput, hiring, and making investments in resiliency and automation to meet national needs.

Sheila Kahyaoglu of Jefferies posed a high-level question about the potential impacts of a new U.S. administration on the trajectory and profitability of each of General Dynamics' business segments. She also followed up with a specific question on quantifying the profitability floor for the Marine segment amid its persistent supply chain issues.

Answer

Phebe Novakovic, Chairman and CEO, emphasized the company's agility in adapting to new administrations and reiterated that defense spending is primarily threat-driven, with GD's programs being well-positioned. Regarding Marine profitability, she stated that while the company is focused on cost management and productivity, supply chain stabilization will take time and that recent CR funding helps but does not fully address underlying cost pressures.

Sheila Kahyaoglu asked about the profitability profile of the civil versus defense and intelligence portfolios, and a broader question to Horacio Rozanski on the long-term business model for Booz Allen Hamilton, considering market shifts and how the company aligns its sales force, workforce, and management during restructuring.

Answer

Horacio Rozanski (Chairman, CEO and President) confirmed the profitability range for civil and national security was 'in range' and discussed the company's single P&L operating model for market responsiveness. He emphasized the continuing trend of integrating commercial technology and outcome-based models, leveraging tech ecosystem partnerships for a long-term edge. Matt Calderone (EVP and CFO) did not directly answer the margin question but acknowledged the civil business's higher proportion of fixed-price contracts.

Sheila Kahyaoglu asked about the current profitability margins for the civil versus defense and intelligence portfolios and sought Horacio Rozanski's perspective on the long-term business model for Booz Allen Hamilton, particularly how the company plans to align its sales force, workforce, and management team during the restructuring given shifting market priorities.

Answer

Horacio Rozanski (Chairman, CEO and President) confirmed the civil portfolio's higher margin due to a greater proportion of fixed-price contracts. He emphasized the single P&L operating model allows rapid market response and highlighted the continuing trend of integrating commercial technology and moving to outcome-based models, which he believes will provide a long-term edge through tech ecosystem partnerships.

Sheila Kahyaoglu from Jefferies asked about the long-term implications for headcount growth given the administration's focus on large, transformational contracts. She also inquired about the 8% rise in revenue per employee and the headcount expectations for the end of the fiscal year.

Answer

CEO Horacio Rozanski explained that while new transformational contracts are expected, the government will also use existing vehicles to accelerate funding. He and COO Kristine Anderson noted that AI and a shift to outcome-based work will increase productivity, potentially decoupling revenue growth from headcount over the long term. CFO Matt Calderone added that in the short term, the core algorithm of hiring following funding normalization will likely hold, and they anticipate adding headcount as funding comes in.

Sheila Kahyaoglu of Jefferies asked for catalysts that could stabilize the Civil business after its forecasted decline and questioned how a 7% Q1 headcount drop aligns with the full-year revenue guidance.

Answer

Kristine Martin Anderson, EVP and COO, stated that most civil programs have passed reviews and that winning now depends on superior tech and converting contracts to outcome-based models. Horacio Rozanski, Chairman, CEO and President, called it a 'onetime reset' with growth expected in the second half. Matthew Calderone, EVP and CFO, explained the traditional revenue-to-headcount algorithm is changing due to a higher mix of fixed-price work in the Civil segment, where the headcount reduction is concentrated.

Sheila Kahyaoglu from Jefferies questioned the growth trajectory for the Intelligence business, specifically the progress of the Thunderdome program, and asked how the Civil business growth rate might change under the new administration.

Answer

CEO Horacio Rozanski stated the Intel business has pivoted towards technology, cyber, and space, which he sees as a key long-term growth driver. CFO Matt Calderone noted that while Civil growth may moderate short-term, many of their "big ideas" and commercial partnerships are in the Civil sector, with opportunities to bring Defense/Intel tech to Civil clients. He confirmed Thunderdome is growing as anticipated.

Sheila Kahyaoglu inquired about the details of corporate growth, how it's translating into sales numbers, and any changes to the growth formula, especially given the forward selling into January and the observed yield premium.

Answer

COO Andrew Watterson reported that Q3 corporate sales for future travel, excluding government, inflected up 5% year-over-year. He anticipates that assigned seating in Q1 2026 will unlock additional corporate growth, aiming to increase Southwest's domestic managed business share, which is currently in the mid-teens and below its overall capacity share. He noted that this potential growth is not yet quantified in current numbers.

Sheila Kahyaoglu from Jefferies asked about the performance of new distribution channels like Expedia and Google Flights, specifically regarding yields versus volumes. She also questioned the ability to improve both yields and loads simultaneously with different initiatives.

Answer

Chief Operating Officer Andrew Watterson reported that Expedia has ramped up faster than expected, representing 4-5% of recent bookings and attracting new customers, particularly in markets where Southwest is less established. He and CEO Bob Jordan explained that initiatives are targeted: yield-driving tools like the new revenue management system are for peak periods, while load-driving tactics like Basic Economy and network connectivity are for off-peak periods, thus avoiding a direct trade-off.

Sheila Karin Kahyaoglu asked about the expected inventory unwind and its implications for Hexcel's projected $1 billion in free cash flow over the next four years, considering the additional $500 million in revenue and 35% incremental margins. She also sought clarification on the factors contributing to the implied 100 basis point margin decline in the 2025 guidance, beyond the impact of tariffs.

Answer

Tom Gentile, CEO, Chairman, and President, stated that the goal is to reduce inventory from the current 90-95 days to a steady-state of 70 days, with unwinding expected in coming quarters. He attributed the remaining margin pressure (beyond tariffs) to absorption impacts from inventory drawdown, investments in the new Microsoft D365 ERP system, lower volumes due to destocking, and changes in product mix.

Sheila Kahyaoglu asked about Hexcel's projected $1 billion in free cash flow over the next four years, on an additional $500 million in revenue, and how much inventory unwind is anticipated. She also sought clarification on the implied 100 basis point margin reduction for 2025 versus prior guidance, with tariffs accounting for 60 basis points, asking for the attribution of the remainder.

Answer

CEO Tom Gentile reiterated the goal to drive inventory down from the current 90-95 days to a steady-state target of 70 days, with inventory winding down in coming quarters. Regarding the margin reduction, he attributed the remaining impact to inventory drawdown (absorption impact), investments in the new ERP system (Microsoft D365), lower overall volume due to destocking, and changes in product mix.

Sheila Kahyaoglu of Jefferies Financial Group noted that headcount per aircraft appears flat versus 2019 levels, implying price declines, and asked when this would be rectified. She also asked which program offers the most operating leverage and about the payback on the Belgian factory closure.

Answer

CEO Tom Gentile attributed margin pressure primarily to a lack of operating leverage from underutilized capacity compared to 2019, rather than price declines. He identified the A350 program as having the most significant operating leverage potential due to prior investments and current low production rates.

Sheila Kahyaoglu of Jefferies inquired about the specifics of the estimated $3 million to $4 million quarterly tariff impact, asking what base assumptions were used and why it was excluded from guidance. She also asked what factors would drive margin expansion in the latter half of the year despite projections for flat sales.

Answer

Chairman, CEO and President Tom Gentile explained that the tariff figure represents the direct impact, which Hexcel believes it can offset with productivity improvements. It was excluded from guidance due to the high uncertainty surrounding indirect effects on the supply chain and potential OEM production rate changes. Gentile attributed the weak Q1 margin to lower-than-expected revenue, which prevented the company from achieving expected operating leverage given its existing capacity is built for higher production volumes.

Sheila Kahyaoglu questioned the path to restoring profitability to high-teens margins in the medium term and inquired about the company's current hiring and capacity status.

Answer

Chairman, CEO & President Tom Gentile explained that returning to pre-pandemic high-teens margins is contingent on regaining operating leverage as aircraft production rates recover to 2018-2019 levels, which he projects for 2026 or 2027. He noted that offsetting recent significant inflation through productivity initiatives, like the 'future factory' program, is also critical to this goal.

Sheila Kahyaoglu from Jefferies requested more detail on Hexcel's 737 MAX production rate assumptions for Q4 2024 and into 2025, and asked about the fungibility of the workforce across different aircraft programs.

Answer

CEO Tom Gentile reiterated a conservative Q4 assumption for the MAX pending the strike outcome and stated 2025 rates depend on Boeing's updated schedule. He confirmed that Hexcel's labor is highly fungible across programs because they produce base materials like carbon fiber prepreg, not program-specific finished parts.

Sheila Kahyaoglu asked for a deeper dive into American's capacity and premium investment strategy, specifically regarding the mix of premium versus main cabin and short-haul versus long-haul capacity, given the 777-200 fleet plans and 5% schedule increase in H1 next year.

Answer

Robert Isom, CEO, stated that American will maintain a balance between international and domestic growth, with premium seating expected to grow at roughly twice the rate of non-premium offerings, and lie-flat international capable seating by 50% by the end of the decade. He also highlighted the 20% year-over-year growth in AAdvantage enrollments in Chicago, anticipating it will return to being one of their largest and most profitable hubs, with capacity restoration focused on Philadelphia, Miami, and Phoenix.

Sheila Kahyaoglu inquired about the capacity and premium investment mix, specifically how the 777-200 fleet and 5% schedule growth in H1 next year will impact the balance between premium versus main cabin and short-haul versus long-haul offerings.

Answer

Robert Isom, CEO, stated that American will maintain a balance between international and domestic growth. He highlighted that premium seating is expected to grow at roughly twice the rate of non-premium offerings, with lie-flat international capable seating projected to increase by 50% by the end of the decade, reflecting customer willingness to pay for experience. Regarding domestic hubs, he noted strong AAdvantage enrollment growth in Chicago (20% YoY), anticipating its return as one of the largest and most profitable hubs. Capacity restoration will also focus on Philadelphia, Miami, and Phoenix.

Sheila Kahyaoglu asked about the biggest opportunities and margin implications for the Aerospace division, considering 2025 as a transitory year with headwinds and the evolution of OE mix. She also followed up on the commercial aftermarket's acceleration in Q3 and expected moderation in Q4.

Answer

Vimal Kapur, Chairman and Chief Executive Officer, stated that the OE mix becoming less intense, reduced tariff pressures, and the case acquisition no longer being a headwind will benefit Aerospace margins in 2026, confirming Q2 2025 as the bottom. Mike Stepniak, Senior Vice President and Chief Financial Officer, noted that aftermarket growth was broad-based and stable, driven by demand and improved supply chain, expecting high single-digit growth in Q4.

Sheila Kahyaoglu from Jefferies asked about the biggest opportunities and implications for Aerospace margins, considering 2025's transitory headwinds and the evolution of OE mix next year. She also followed up on the aftermarket, noting its acceleration and Q4 moderation, asking what surprised to the upside in Q3's commercial aftermarket.

Answer

Chairman and CEO Vimal Kapur stated that the less intense OE mix, reduced tariff pressures, and the CAES acquisition becoming a tailwind will all contribute to Aerospace margin expansion in 2026, confirming Q2 2025 as the margin bottom. CFO Mike Stepniak attributed aftermarket growth to broad-based, stable demand and improved supply chain performance, expecting high single-digit growth in Q4 with no particular drivers beyond supply chain efficiency.

Sheila Kahyaoglu from Jefferies Financial Group posed two questions on Aerospace: one on the deceleration in aftermarket growth and the full-year outlook, and another seeking more detail on the commercial OE destocking and its specific platform drivers.

Answer

SVP & CFO Mike Stepniak described the aftermarket growth as normalizing to a more sustainable rate, which he considers the new go-forward expectation. He attributed the OE destocking primarily to North American platforms where customers are depleting previously built-up safety stock, expecting normalization in Q3 and a return to normal in Q4. VP of Investor Relations Sean Meakim added a nuance about differing supply chain statuses between electromechanical and electronic components.

Sheila Kahyaoglu of Jefferies Financial Group asked two questions about the Aerospace segment. She inquired about the deceleration in aftermarket growth from Q1 and the full-year outlook, and also sought reasons for the OE destocking, given that aircraft deliveries are increasing.

Answer

SVP & CFO Mike Stepniak described the aftermarket growth as normalizing to a more sustainable rate for the second half. He explained the OE destocking was predominantly related to North American platforms where OEMs, now with better visibility, are depleting safety stock inventories built up previously. He expects this to normalize in Q3 and be back to normal in Q4. VP of Investor Relations Sean Meakim added that electronic solutions were caught up while electromechanicals still faced challenges.

Sheila Kahyaoglu asked for details on the 15% commercial aftermarket growth in Aerospace, specifically the role of pricing and regional trends. She also questioned if commercial OE is still expected to outperform aftermarket for the full year.

Answer

CFO Mike Stepniak explained that strong aftermarket growth is supported by a large backlog and capacity to ship, with pricing in line with prior guidance. He noted that while flight hours have moderated, business aviation and defense aftermarket remain strong. He added that commercial OE performance will normalize in the second half of the year.

Sheila Kahyaoglu requested color on the Aerospace segment's 2025 outlook, particularly the assumptions for OE versus aftermarket growth, given peer commentary on a deceleration. She also asked about the expected return on the significant Bombardier investment and other long-term investments affecting the aerospace margin profile.

Answer

Incoming CFO Mike Stepniak stated that the aftermarket growth profile would be similar to the prior year, with some deceleration as flight hours stabilize. He noted that due to a higher OE backlog, original equipment sales are expected to outpace aftermarket growth. CEO Vimal Kapur added that the Bombardier agreement is a long-term win with revenue expected in 4-5 years, and that R&D and M&A investments in Aerospace will continue.

Sheila Kahyaoglu of Jefferies Financial Group Inc. asked about the MAX production rate assumptions for Q3 and Q4 and the reason for the significant Aerospace margin deceleration from Q3 to Q4. She also followed up on commercial aftermarket growth, asking if the Q4 strength would be driven by ATR or a pickup in BGA.

Answer

CEO Vimal Kapur explained the Q3-to-Q4 margin change is due to business mix; discrete manufacturing disruptions in Q3 reduced lower-margin OE shipments, which artificially boosted the Q3 margin. As these shipments recover in Q4, the margin will normalize. CFO Gregory Lewis added that Boeing's demand has not changed meaningfully, and confirmed Q4 aftermarket strength will continue to be led by ATR growth. VP of Corporate Finance Sean Meakim emphasized the full-year margin outlook is unchanged, with the difference being timing between quarters.

Sheila Kahyaoglu followed up on the MV-75 program, seeking additional color on its current status, including completed flight hours, scheduled test article deliveries, and the timeline for a contract signing with the U.S. Army.

Answer

Scott Donnelly, Chairman, President, and CEO, clarified that the MV-75 program is largely cost-plus development with fixed-price elements for LUT and LRIP. He emphasized the low risk of accelerating LRIP due to extensive flight hours on the Bell V-280 Valor and ongoing fabrication. Mr. Donnelly also explained the expected fluctuations in booking rates due to contract exercises and the program's overall healthy execution and strategic importance.

Sheila Kahyaoglu asked for an update on the MV-75 program, including details on flight hours, test articles, and the timeline for a contract with the U.S. Army, seeking clarification on its structure and potential risks.

Answer

Scott Donnelly, Chairman, President, and CEO of Textron, explained that the MV-75 program is largely cost-plus development with some fixed-price elements (LUT, LRIP). He highlighted low risk in accelerating LRIP due to extensive V-280 Valor flight hours and ongoing component fabrication, noting that booking rates might fluctuate but the program is not expected to enter lost territory.

Sheila Kahyaoglu from Jefferies questioned the market impact of tariffs on competitors and asked for details on higher warranty costs at Aviation. She also inquired about the outlook for Bell's segment margins.

Answer

Scott C. Donnelly, Chairman, CEO & President, responded that Textron has not seen a dramatic impact from tariffs, citing its large North American base. He clarified the warranty cost was a reserve true-up. Regarding Bell, he attributed the lower margin to higher R&D and a revenue mix skewed towards the lower-margin MV75 EMD program, expecting full-year margins to be at the lower end of the guided range.

Sheila Kahyaoglu asked for details on Bell's outstanding performance, specifically the future FLRAA revenue contribution, and how the sale of the Arctic Cat product line would impact the Industrial segment's financials.

Answer

Chairman and CEO Scott Donnelly explained that Bell's growth was driven by strong commercial deliveries and a significant increase in the FLRAA program activity. He expects FLRAA revenue to grow around 20% year-over-year. Regarding the Industrial segment, Donnelly noted the sale of the powersports business would cause a 'de minimis' reduction in revenue but could move the segment's profit margin toward the upper end of the guided range.

Sheila Kahyaoglu asked about Textron Aviation's 2025 delivery guidance, the expected quarterly cadence for jet and turboprop deliveries, and the projected margin ramp throughout the year.

Answer

Scott Donnelly, Textron's Chairman and CEO, explained that deliveries will ramp up through 2025 as the factory recovers from the strike and expands capacity. He noted that Q1 deliveries will include aircraft priced at 2024 levels. Donnelly characterized the Q4 Aviation margin of 7.8% as an anomaly caused by low volume and unburdened overhead from the strike, projecting that margins will progress from below the annual guide early in the year to above it by year-end.

Sheila Kahyaoglu asked for details on the $0.80 EPS guidance cut, the outlook for the Aviation and Industrial segments exiting the year, and the anticipated cost impact of the new labor contract in 2025.

Answer

CEO Scott Donnelly confirmed ongoing softness and production cuts in the Industrial segment. For Aviation, he clarified that delayed sales are pushed into 2025, expecting revenue to surpass the original 2024 guide. He noted the new labor contract cost was largely anticipated and will be managed through productivity improvements, viewing it as a positive for workforce stability.

Sheila Kahyaoglu asked about the Aeronautics Systems (AS) outlook for 2025, the shift in B-21 award timing, how delayed awards might be recaptured in 2026, and the free cash flow impact related to B-21 CapEx in 2026.

Answer

Ken Crews, CFO, clarified that the AS sales adjustment for 2025 was due to timing of production activity, not lost sales, and B-21 percentage of completion method created some top-line headwinds. He noted that B-21 is expected to contribute to AS growth in 2026. For B-21 free cash flow, he stated that the 2026 overall guidance is being held, and more clarity on the program's cash flow will be provided as discussions on ramping rates conclude.

Sheila Kahyaoglu from Jefferies Financial Group inquired about the Defense Systems revenue growth profile given the planned increase in solid rocket motor production, and how the maturation of Sentinel's Command and Launch segment impacts the segment's long-term margin profile.

Answer

Chair, CEO & President Kathy Warden stated that Defense Systems is likely to have the company's highest sustained growth rate, fueled by tactical weapons, second-sourcing opportunities, and hypersonics. Regarding Sentinel, she explained that agreements reached with the customer on the program's restructure and path forward increased confidence in realizing incentives, leading to the positive margin adjustment. While not giving future guidance, she noted the drivers for the improved DS margin outlook are fundamental, not one-time items.

Sheila Kahyaoglu questioned the potential impact of tariffs on Northrop's overall portfolio and asked for drivers behind the Q1 Mission Systems (MS) margin performance and the expected improvement path.

Answer

CEO Kathy Warden stated the company does not see a significant risk from tariffs, as only about 5% of its supply chain is sourced directly from overseas. CFO Ken Crews explained the MS margin was impacted by known long-term investments, and improvement will be driven by a ramp on mature programs and efficiency gains.

Sheila Kahyaoglu of Jefferies questioned the growth outlook for the Space segment, excluding the headwinds from NGI and a classified program, and asked when the segment is expected to return to margin expansion.

Answer

CFO Ken Crews clarified that the Space segment's remaining portfolio grew at mid-single digits in 2024 and is expected to return to growth towards the end of 2025, driven by strategic communications, restricted space, and propulsion systems. He also stated that Space segment margins are expected to expand in 2025 to the high 10% range, driven by performance improvements and efficiency initiatives.

Sheila Kahyaoglu of Jefferies inquired about Northrop Grumman's multi-year growth outlook, considering the strong backlog and the potential for supply chain improvements to accelerate execution.

Answer

Chair, CEO and President Kathy Warden highlighted the company's 5% compound annual growth rate since 2019 and positioned the 2025 guidance of 3-4% as a balanced starting point. She noted that easing supply chain challenges, new contract wins, and continued strength in international orders could provide upward pressure on that rate. Warden affirmed her belief that mid-single-digit growth remains an achievable long-term target.

Sheila Kahyaoglu asked about the drivers for Pratt's commercial top and bottom line, specifically the $150 million increase in commercial OE revenue guidance, whether it's due to GTF advantage or spares mix, and how it impacts the negative engine margin headwind for 2025, as well as the outlook for higher MRO output into Q4 and 2026.

Answer

CFO Neil Mitchill clarified that Pratt's OE revenue uptick was due to the finalization of the year and the mix of spare versus installed engines, not GTF advantage. He also noted growth in military sales and aftermarket, driven by GTF MRO output and heavier V2500 shop visits. He confirmed no change to the $150-$200 million negative engine margin headwind outlook for 2025.

Sheila Kahyaoglu inquired about the drivers for Pratt's commercial top and bottom line, specifically the $150 million commercial OE revenue guidance raise, its impact on the negative engine margin headwind, and the implications of higher MRO output for Q4 and 2026.

Answer

CFO Neil Mitchill clarified that Pratt's revenue uptick (total $1.1 billion) included $150 million from OE, driven by year-end finalization, mix of spare vs. installed engines, and volumes, not GTF engine advantage. He also noted $100 million upside on defense. The remaining increase was in aftermarket, with MRO output (GTF heavy) driving revenue and V2500 shop visits contributing. The negative engine margin outlook remains unchanged ($150 million to $200 million year-over-year headwind).

Sheila Kahyaoglu of Jefferies noted that Pratt & Whitney's guidance implies a significant aftermarket growth deceleration in the second half and asked for details on volumes, work scopes, and profit drop-through for the GTF and V2500 engine programs.

Answer

Christopher Calio, Chairman & CEO, highlighted strong performance, including a 22% year-over-year increase in GTF MRO output in Q2, which is key to reducing aircraft on ground (AOG) numbers. He also confirmed continued strength in the V2500 program. CFO Neil Mitchill acknowledged that while aftermarket sales are now expected to be up mid-teens for the year, the year-over-year comparisons become more difficult in the second half.

Sheila Kahyaoglu sought further detail on the $850 million net tariff impact, asking for its expected distribution across the remaining quarters of the year and its allocation between the Collins and Pratt & Whitney segments.

Answer

CFO Neil Mitchill clarified that the $850 million is an approximation, net of mitigations. He detailed that the impact on Raytheon would be minimal, with the remainder split fairly evenly between Collins and Pratt & Whitney, at slightly over $400 million each. He expects the earnings impact to be back-half loaded, with a slightly larger cash flow impact due to timing lags on duty drawbacks.

Sheila Kahyaoglu of Jefferies asked for details on Pratt & Whitney's performance, questioning the drivers behind its 2024 OE growth relative to GTF deliveries and how the 2025 EBIT growth would be impacted by factors like negative engine margins.

Answer

CFO Neil Mitchill attributed the strong 2024 OE growth to a favorable engine mix and robust demand for priced spare engines. For 2025, he anticipates the majority of Pratt's profit growth will come from the aftermarket, which will be partially offset by a $150 million to $200 million headwind from negative engine margins on higher OE volumes.

Sheila Kahyaoglu of Jefferies asked for details on Collins Aerospace, focusing on the outlook for original equipment (OE) sales, which implies a Q4 decline, and the aftermarket, questioning if it's benefiting from delayed OE deliveries.

Answer

Executive Neil Mitchill confirmed the Collins OE outlook was recalibrated due to lower narrow-body volumes and strike impacts, though some shipments are expected to resume in Q4. He also cited mix headwinds from higher, less profitable 787 volume. On the aftermarket side, he stated that strong demand for parts and repair continues, supported by low aircraft retirement rates, and he expects this strength to persist into the next year.

Sheila Kahyaoglu inquired about the drivers behind GE Aerospace's exceptional 25% year-to-date services performance, specifically asking how much was due to volume unlock via FlightDeck and supply chain improvements versus tariff price surcharges, and the reasons for an anticipated sequential step down in Q4 services revenue.

Answer

CFO Rahul Ghai explained that the strong services growth was driven by improved material availability leading to higher volume, increasing work scopes, robust demand, and significant LEAP output growth. He noted that year-to-date inductions outpaced output and highlighted strong spare parts performance. Ghai attributed the Q4 sequential step down to typical seasonality in spare parts and demand, while emphasizing a strong full-year outlook.

Sheila Kahyaoglu asked for a detailed breakdown of the exceptional services performance, specifically inquiring about the contribution of volume unlocked by FLIGHT DECK and supply chain improvements versus tariff price surcharges or other factors, and the rationale behind the expected sequential step down in Q4.

Answer

Rahul Ghai, CFO of GE Aerospace, explained that the strong services performance was driven by improved material availability leading to higher volume, increasing work scopes, robust demand, and significant LEAP output growth. He noted that spare parts sales were equally strong, supported by a high backlog. The expected Q4 sequential step down is attributed to typical seasonality in spare parts and demand, despite a strong full-year outlook.

Sheila Kahyaoglu from Jefferies Financial Group Inc. asked about the LEAP aftermarket profitability trajectory, specifically how its margins progress as profits approach CFM56 levels by 2030.

Answer

SVP & CFO Rahul Ghai detailed that LEAP profitability will be driven by leveraging MRO fixed costs, better pricing on new contracts, a growing external parts channel (30% of shop visits by 2030), and expanded repair capabilities. He clarified that LEAP profit *dollars* will reach parity with CFM56 by 2030, while its service *margins* will approach the company's overall service margins.

Sheila Kahyaoglu of Jefferies inquired about the expected margin cadence for the remainder of the year, given the strong Q1 profit beat despite tariff impacts.

Answer

CFO Rahul Ghai explained that while Q1 was strong, the company maintains its full-year guidance due to second-half uncertainty. He projects Q2 revenue growth to be better than Q1, with profit dollars flat to sequentially up. The second half outlook incorporates conservatism around flight departures and tariff impacts in China, but the company still expects year-over-year profit growth and feels more confident in its annual targets than it did in January.

Sheila Kahyaoglu asked for a deeper analysis of the strong Q4 CES margins and the key drivers for the 2025 services growth outlook, including mix and cadence.

Answer

CFO Rahul Ghai attributed the strong Q4 CES margin of 28.2% to a favorable mix skewed towards high-margin spare parts, as material constraints impacted internal shop visit volumes. For 2025, he projects mid-teens shop visit revenue growth and low-double-digit spare parts growth, driven by volume, increased work scopes, and pricing. He anticipates a strong start to the year for CES, partly due to a large spare parts backlog.

Sheila Kahyaoglu of Jefferies asked about the profitability pressure in the Defense & Propulsion Technologies (DPT) segment, questioning the drivers for the expected Q4 margin decline and the outlook for 2025.

Answer

Executive Rahul Ghai explained the primary driver for Q4 margin pressure is increased R&D investment in next-generation programs, compounded by some unfavorable product mix at Avio Aero. For 2025, he anticipates the strong backlog will fuel mid-to-high single-digit revenue growth, with profit expected to grow faster than revenue, leading to margin expansion for the DPT segment.

Sheila Kahyaoglu from Jefferies asked about the sequential unit revenue trajectory for Q4 2025, specifically the interplay between domestic and international performance, booking curve insights, and holiday outlook. She also sought clarification on the drivers for United's long-term target of 100 basis points of margin improvement annually, considering rising CASM.

Answer

EVP and Chief Commercial Officer Andrew Nocella highlighted significant sequential RASM gains for Q4, noting a substantial negative impact from Newark in Q3 that is now dissipating. He expects strong sequential improvement across all international entities, with Atlantic and Pacific likely showing positive year-over-year RASM. CEO Scott Kirby explained that RASM must outperform CASM, driven by brand-loyal customer traction, market share gains in hubs, and significant future upside from the loyalty program. CFO Mike Leskinen added that conscious investments in premium products, while adding CASM pressure, are profit-accretive due to consumer preference and upgrades. Andrew Nocella further noted pre-programmed premium capacity growth for next year to capitalize on these trends.

Sheila Kahyaoglu of Jefferies asked about the dynamic of declining non-U.S. origin international traffic, the opportunity for share gains, and the expected operating margins and free cash flow in the recessionary scenario.

Answer

EVP and CCO Andrew Nocella confirmed a modest decline in foreign-origin business but noted it's easily offset by strong U.S. demand, with the Pacific, particularly Japan, showing phenomenal strength. EVP and CFO Mike Leskinen stated that in the $7-$9 EPS recession scenario, free cash flow would be near breakeven but still positive, with operating margins being a function of that math.

Sheila Kahyaoglu questioned the relatively small $81 million share buyback in Q4 given strong free cash flow and management's view of an undervalued stock. She asked about the capital deployment priorities for 2025 between debt reduction and share repurchases.

Answer

EVP and CFO Mike Leskinen explained the conservative start to buybacks was due to the stock's steep price increase following the authorization announcement. He emphasized a balanced approach between improving the balance sheet and opportunistically repurchasing shares, noting they expect to reach their sub-2x net leverage target in 2025.

Sheila Kahyaoglu asked for more detail on the drivers behind the domestic RASM improvement from July to September and the source of the strong booking trends observed for Q1 2025.

Answer

EVP & CCO Andrew Nocella attributed the Q3 improvement to an acceleration in business traffic, which was up 13% in September. For Q1, he pointed to a 'much better pricing environment for leisure yields' early in the booking curve, driven by industry capacity changes and the elimination of unprofitable flying by competitors.

Sheila Kahyaoglu asked about Delta's Atlantic capacity planning for next year, specifically how it will be more evenly dispersed. She also inquired about Delta's competitive capacity strategy, network planning, and the performance of its A330 and A350 products, especially given new additions by competitors.

Answer

President Glen Hauenstein stated that Delta's transatlantic product is best-in-class, with new aircraft enhancing Delta One suites and Delta Premium Select. He confirmed Delta will not fly narrow bodies in the transatlantic. For next year, capacity is expected to be in the low single digits, with very low single-digit growth in peak summer months and a slightly higher shoulder season, which is becoming more peaky.

Sheila Kahyaoglu asked about Delta's Atlantic capacity planning for next year, specifically if it will be more evenly dispersed. She also inquired about Delta's strategy regarding competitive capacity, network planning, and the A330/350 product in the context of competitors' new additions.

Answer

President Glen Hauenstein stated that Delta's Atlantic product is best-in-class, with new airplanes featuring Delta One suites and enhanced premium cabins. He confirmed Delta's choice not to fly narrow-bodies in the transatlantic due to product and brand issues. For next year, he expects very low single-digit capacity growth in peak summer months, with a slightly higher shoulder season, aiming for better distribution of capacity.

Sheila Kahyaoglu asked about the drivers behind the 5% decline in Main Cabin revenue and the expected timeline for it to turn positive. She also inquired about Transatlantic performance, specifically the US vs. non-US point-of-sale mix and trends in Europe.

Answer

President Glen Hauenstein attributed the Main Cabin weakness to off-peak periods and noted that Delta and the industry are addressing this by cutting capacity on off-peak days and times. He expressed optimism it could turn positive or neutral by Q3 or Q4. For the Transatlantic, he noted lower travel volume from Europe is partially offset by favorable currency changes, and that demand is shifting from peak summer to the more pleasant shoulder seasons.

Sheila Kahyaoglu of Jefferies Financial Group asked about the path for Main Cabin revenue to return to positive growth and the timeline for this recovery. She also inquired about Transatlantic performance, including point-of-sale mix and regional trends.

Answer

President Glen Hauenstein identified off-peak flying as the primary source of Main Cabin weakness and explained that capacity cuts in these areas should drive improvement. He expressed confidence that Main Cabin revenue could turn positive by Q3 or Q4. For the Transatlantic, he noted that a demand shift from peak summer to shoulder seasons is the key trend, with currency changes offsetting lower European point-of-sale volume.

Sheila Kahyaoglu asked about the slowdown in corporate travel, questioning if it was due to general volatility or active cost-cutting, and requested industry-specific color. She also asked what would trigger an increase in aircraft retirements.

Answer

President Glen Hauenstein and CEO Ed Bastian explained the flat corporate demand resulted from mixed performance, with sectors like auto down while banking and tech were up. Bastian noted that in uncertain times, companies minimize travel, but it encouragingly hasn't turned negative. CFO Dan Janki added that with flat capacity, net aircraft additions are already being reduced and retirements will be at or above the high end of their target range.

Sheila Kahyaoglu asked about the plan for aircraft retirements in 2025, the number of A350 deliveries, and whether this affects the retirement timeline for 767s and 757s. She also requested an outlook on maintenance spending.

Answer

CFO Dan Janki stated that aircraft retirements are expected to increase to approximately 30 in 2025, up from over 20 in 2024. He noted that about 12-13 of the year's ~40 deliveries will be widebodies. He indicated that maintenance spend should see year-over-year improvement as it normalizes, though the full process will span multiple years.

Sheila Kahyaoglu of Jefferies Financial Group Inc. asked about the sustainability of premium cabin revenue outperforming the main cabin by 9 points and the margin implications of a potential catch-up in main cabin performance.

Answer

President Glen Hauenstein suggested that the trend is driven by both main cabin underperformance, which should improve with industry capacity cuts, and continued growth opportunities in premium products. He noted the overall backdrop is constructive for both cabins, driven by business travel recovery and better supply-demand balance.

Sheila Kahyaoglu inquired about the timing of Alpha Flight 7 and 8, their impact on 2026 launch targets, and the balance between production capacity and current backlog. She also asked for insights into the "Golden Dome" opportunity, its framework, and expected timing.

Answer

CEO Jason Kim stated that Alpha Flight 7 is expected in the coming weeks following FAA return-to-flight approval, with Flight 8 also in a mature state, and production capacity is increasing for 2026. Regarding Golden Dome, Mr. Kim highlighted Alpha's role in launching surrogate targets and test missions, Elektra's suitability as a space-based interceptor host, and Eclipse's capability for launching constellations, positioning all three products to support the architecture.

Sheila Kahyaoglu inquired about the timing of Alpha Flight 7 and 8, their impact on 2026 launch targets, and the balance between production capacity and current backlog. She also asked about the "Golden Dome" opportunity, its expected timing, and key news to anticipate.

Answer

CEO Jason Kim stated that FAA approval for Alpha's return to flight was received in late August, with Flight 7 expected in the coming weeks and Flight 8 in a mature state. He emphasized increasing production capacity for 2026. Regarding Golden Dome, Mr. Kim highlighted Alpha's role in launching surrogate targets and test missions, Elektra's suitability for space-based interceptor host missions, and Eclipse's capability for launching constellations, positioning Firefly across three product lines for this architecture.

Sheila Kahyaoglu asked about the timing of Alpha Flight 7 and 8, how it integrates with 2026 launch targets, and the interplay between production capacity and current backlog. She also inquired about the Golden Dome opportunity, its implications, and the expected timing and framework for related news.

Answer

CEO Jason Kim stated that FAA return-to-flight approval was received in late August, with Flight 7 expected in the coming weeks and Flight 8 in a mature state. He emphasized increasing production capacity for 2026 and close collaboration with the range and Lockheed Martin. Regarding Golden Dome, Mr. Kim highlighted Alpha's role in launching surrogate targets and test missions, Elektra's suitability as a space-based interceptor host, and Eclipse's capability for launching constellations, all positioning Firefly to support the architecture.

Sheila Kahyaoglu asked for more details on the CFM56 exchange program's capacity and margins, and questioned the potential impact of MTU's new Dallas facility on StandardAero's $1 billion LEAP revenue target.

Answer

CEO Russell Ford stated the exchange program fits within existing capacity and yields normal CFM56 margins, enhanced by USM and in-house repairs. Chief Strategy Officer Alex Trapp added this model is used on other mature platforms. Regarding MTU, Ford viewed the added industry capacity as a positive ('goodness') that validates market demand and does not threaten their LEAP target.

Sheila Kahyaoglu asked about the resilience of MRO trends if airlines were to cut capacity and inquired about the percentage of StandardAero's business that is secured under long-term contracts.

Answer

CEO Russell Ford stated that the MRO business has a delayed or dampened response to changes in flight operations, as maintenance is driven by previously accrued flight hours, providing confidence in the 2025 plan. CFO Dan Satterfield confirmed that the portion of business under long-term agreements remains stable at approximately 77%, ensuring strong future visibility.

Sheila Kahyaoglu asked for clarification on the 19% commercial aerospace organic growth, specifically questioning the contribution from early LEAP engine work. She also inquired about the company's total MRO capacity for LEAP and CFM56 engines as they ramp up, including the impact of the new Dallas facility.

Answer

CEO Russell Ford clarified that the LEAP program's revenue contribution is currently minimal as it is in the early industrialization phase, though he noted the demand pipeline is filling up faster than expected. He affirmed that the company has planned appropriate capacity for both test cells and assembly to meet demand through the end of the decade.

Sheila Kahyaoglu of Jefferies Financial Group inquired about the financial contribution from the new Beadlight acquisition, the status of the pending L&B transaction, and the performance drivers within the commercial aftermarket segment, including engine exposure.

Answer

Executive Co-Chairman Brett Milgrim confirmed the L&B acquisition is awaiting French regulatory approval, likely post-August, and noted Beadlight's significant 2026 earnings potential. Founder, CEO & Executive Co-Chairman Dirksen Charles clarified that the 2025 guidance uplift is organic, with Beadlight adding only ~$2M in sales this year but poised for major accretion. Director of Investor Relations Ian Mckillop stated that engines constitute about 7% of revenue and grew in line with the broader aftermarket.

Sheila Kahyaoglu from Jefferies asked about the defense business, questioning what drove the robust 33% organic growth in Q1 and why guidance implies a deceleration to high teens. She also asked about the commercial OE business and what Loar is seeing on Boeing and Airbus production rates.

Answer

Director of Investor Relations Ian McKillop attributed the strong Q1 defense growth to the 'lumpy' nature of the business and described the full-year guidance as conservative. CEO Dirkson Charles addressed the OE business, stating their guide conservatively assumes Boeing MAX production around 24/month, though current rates are higher. He noted Airbus rates have been consistent with their guide in the mid-30s per month.

Sheila Kahyaoglu of Jefferies inquired about the drivers of Loar's strong aftermarket guidance, asking for a breakdown of price versus volume and backlog visibility. She also questioned the sources of the projected 120 basis point margin expansion in 2025, specifically the contribution from the Applied Avionics acquisition versus the dilutive effect of the defense mix.

Answer

CEO Dirkson Charles confirmed strong aftermarket bookings and backlog, noting the primary challenge is keeping up with demand. Regarding profitability, he explained that while the Applied Avionics acquisition is accretive, the 120 basis point margin improvement is also driven by achieving price increases over cost inflation, operating leverage, and other internal productivity initiatives, with the full effect expected to be visible in the second half of 2025.

Sheila Kahyaoglu of Jefferies asked about the drivers behind the strong Q3 commercial aftermarket outperformance, questioned the math behind the 2025 organic growth guidance, and inquired about the implied margin deceleration in Q4 2024.

Answer

CEO Dirkson Charles attributed the strong commercial aftermarket growth to broad-based market share gains and new product introductions, not a single business unit. Regarding 2025 growth, he confirmed the segment growth rates were correct but noted the total is impacted by an expected decline in the non-aviation business. For Q4 margins, he explained the expected deceleration is due to a sales mix shift toward lower-margin defense products, minor revenue delays from OEM production issues, and potential customer requests to push deliveries into the next year.

Sheila Kahyaoglu of Jefferies Financial Group asked about the sustainability of the strong top-line growth, particularly in the Land segment, and the outlook for 2026. She also questioned the remaining steps in the turnaround of the Elbit Systems of America (ESA) subsidiary.

Answer

Executive VP & CFO Yaacov Kagan reiterated internal targets of mid-teens growth for 2025 and double-digit growth for 2026, supported by a strong backlog. He noted the Land segment's growth is driven by high demand for ammunition, Iron Fist, and Rampage missiles. For ESA, Kagan confirmed the turnaround is on track, with the final losing maritime contract set to conclude in Q3, which will enable further margin expansion.

Sheila Kahyaoglu of Jefferies Financial Group asked about the sustainability of the strong 22% year-to-date revenue growth, the outlook for 2026, and the performance of the Land segment. She also inquired about the remaining steps in the turnaround of the Elbit Systems of America (ESA) subsidiary.

Answer

Executive VP & CFO Yaacov Kagan reiterated internal targets of mid-teens growth for 2025 and double-digit growth for 2026, supported by a strong backlog. He noted the Land segment's exceptional 45% growth is driven by high demand for ammunition, Iron Fist, and the Sigma howitzer. Regarding ESA, Kagan confirmed the turnaround is progressing, with the final losing maritime contract set to conclude in Q3, which will enable further margin expansion.

Sheila Kahyaoglu from Jefferies questioned the current pricing environment across the portfolio, its expected impact in the second half, and the key opportunities and conversion timelines for the European defense market.

Answer

CFO Blaine Browers stated that pricing achieved a net 1% increase over material inflation in Q2 and this trend is expected to continue, with a Q2 price increase starting to impact results in Q3 and Q4 as backlog is worked through. President Brad Williams addressed the European defense market, specifically EOD, noting that significant cleanup opportunities in conflict zones like Ukraine are contingent on the conflicts winding down, though Cadre maintains existing relationships and is preparing demining products.

Sheila Kahyaoglu asked for quantification of 2024 pricing performance and the outlook for 2025, as well as Cadre's total addressable market in Europe for law enforcement. In a follow-up, she inquired about the company's exposure to the DOE, FBI, and Department of Homeland Security and any observed changes in their purchasing behavior.

Answer

CFO Blaine Browers stated that blended pricing was 1.5% to 2% in 2024 and is expected to be in a similar range for 2025, excluding any tariff impacts. President Brad Williams clarified that for European defense, the primary opportunity lies in their EOD product line rather than body armor. Regarding federal agencies, Blaine Browers noted they have not seen a meaningful impact from DOE personnel changes and do not see significant long-term risk, though temporary procurement disruptions are possible. Brad Williams added that government headcount often shifts between agencies, and they have not seen anything concerning on the demand side. Blaine Browers concluded that the company does not disclose exposure levels by specific agency.

Sheila Kahyaoglu of Jefferies questioned the confidence in achieving the strong Q4 guidance given recent disruptions and asked about the expected business cadence into 2025. She also requested a bigger-picture view of the underlying business potential for 2025, excluding one-time items and factoring in M&A and margin goals.

Answer

CFO Blaine Browers expressed confidence in the Q4 forecast, citing a strong inventory position and specific capacity-increasing measures like adding workdays. For 2025, he stated the outlook is consistent with historical growth trends (3% for core, 4-6% for nuclear) and that the main one-time impacts from 2024, like the $5 million Q3 margin pressure, are not expected to recur.

Sheila Kahyaoglu of Jefferies questioned the organic growth outlook for the second half of the year and sought an update on the Critical Infrastructure segment's strong margin performance.

Answer

CEO Cary Smith and CFO Matt Ophelis projected 18% organic growth (ex-confidential contract) for the second half, driven by the ramp-up of already-won contracts across both segments. Ms. Smith attributed the strong Critical Infrastructure margins, which are at a record 10.5%, to excellent program execution and high demand, stating that double-digit margins are the long-term expectation for the segment.

Sheila Kahyaoglu questioned the drivers of the second-half revenue inflection needed to meet the 15% organic growth target (ex-confidential contract) and asked about the path for Federal Solutions (FS) margins to recover from the 9% level in Q1.

Answer

CEO Carey Smith attributed the expected H2 ramp to the strong backlog in both Critical Infrastructure and Federal Solutions, particularly in cyber, plus the conversion of $12 billion in awarded-not-booked contracts. CFO Matt Ofilos explained the FS margin dip was due to lower volume on the high-margin confidential contract and a mix shift to more cost-type work. He reaffirmed the full-year FS margin target of approximately 9.5%, expecting a ramp as the mix stabilizes.

Sheila Kahyaoglu from Jefferies sought clarification on the wide 2025 revenue guidance range, the assumptions for a key confidential contract within that forecast, and the reason for a decrease in the 'awarded but not yet booked' backlog figure.

Answer

CEO Carey Smith confirmed the guidance includes the negotiated value for the confidential contract's option year and that the variance in the growth outlook is primarily due to this program peaking, which was anticipated. She explained that the decrease in 'awarded not booked' backlog is a positive indicator, reflecting the successful conversion of these opportunities into funded, booked backlog, which is the strategic goal.

Sheila Kahyaoglu asked about Parsons' potential top-line growth rate for 2025, given its strong recent performance and large unbooked pipeline, and inquired about the normalized run-rate margin for the Critical Infrastructure (CI) segment once legacy programs are completed.

Answer

CEO Carey Smith noted that the $13 billion awarded-not-booked pipeline is stable due to the timing of large contract bookings and pointed to the $8.8 billion backlog and 66% funded backlog as strong indicators for future growth, anticipating mid-single digits or better. CFO Matt Ofilos explained the CI segment's underlying margin is in the 9-10% range, with a long-term goal of double digits, expecting a gradual improvement of 40-60 basis points per year for the segment as legacy programs conclude.

Sheila Kahyaoglu of Jefferies sought clarification on the commercial OE destocking, asking if it affected both narrow-body and wide-body aircraft and how quickly it might resolve. She also requested color on the outperformance in the freight and interiors aftermarket segments.

Answer

Co-COO Mike Lisman confirmed the OE destocking was across both narrow and wide-body platforms due to lower-than-expected OEM production rates and should be transitory, with growth returning in Q4. He added that freight aftermarket grew in the double digits, while interiors growth was even stronger due to increased airline refurbishment activity.

Sheila Kahyaoglu followed up on the implied 200 basis point margin decline in the second half, asking for the specific factors driving the conservatism. She also asked for an outlook on the various submarkets within the commercial aftermarket.

Answer

Co-COO Mike Lisman attributed the conservative margin outlook mainly to conservatism and a second-half mix shift towards lower-margin commercial OEM sales, adding he hopes the forecast proves conservative. He also noted that all four commercial aftermarket submarkets were up nicely, with the engine segment being a "strong outperformer," and expects continued growth across all four.

Sheila Kahyaoglu asked for clarification on why profitability is expected to flatten out and if the new OEM contract alters the profitability profile. She also asked about drivers for the interiors aftermarket recovery.

Answer

CEO Kevin Stein stated the new OEM contract's impact is already factored into the forecast. Co-COO Joel Reiss explained the interiors recovery depends on when airlines begin major refurbishment programs. Kevin Stein added that a lack of new plane deliveries from OEMs makes it difficult for airlines to take existing planes out of service for interior work.

Sheila Kahyaoglu asked for a detailed breakdown of the fiscal 2025 commercial aftermarket forecast, questioning the expected growth drivers for each of the four submarkets and seeking specifics on passenger and interiors performance.

Answer

Co-COO Mike Lisman explained that the guidance is based on a bottoms-up process. He anticipates a return to growth for the freight and biz jet submarkets in fiscal 2025. He noted that passenger aftermarket grew nearly 20% in fiscal 2024 and will decelerate but remain positive in 2025. He also expects good growth in the interiors market as airline refurbishment activities resume.

Sheila Kahyaoglu of Jefferies asked for details on the 85% growth in Defense and National Security, specifically the contribution from the Next Generation Interceptor (NGI) program, and for an update on Starlab's progress toward CLD Phase 2.

Answer

CFO Phil De Sousa disclosed that NGI revenue is expected to reach approximately $50 million for the full year, with $11 million contributed in Q2. CEO Dylan Taylor added that as a merchant supplier, Voyager is well-positioned for new programs like space-to-space interceptors. Regarding Starlab, Taylor noted that CLD funding appears robust in recent government bills and that Voyager anticipates achieving its own Critical Design Review (CDR) for the station around December 2025.

Sheila Kahyaoglu of Jefferies asked about the sustainability of free cash flow generation, given the strong first-half performance, and requested an update on the Kaelstrom acquisition's performance and the strategic shift in the USM business.

Answer

CFO Adam Cohn confirmed expectations for strong free cash flow improvement in the second half, citing working capital seasonality and the less capital-intensive nature of recent acquisitions. President & CEO John Cuomo added that Kaelstrom's distribution and MRO businesses are performing strongly. He explained the USM strategy is shifting from opportunistic trading to an integrated "new, used, and repair" model to better support distribution and repair services, which will improve margins despite some top-line pruning.

Sheila Kahyaoglu inquired about the expected cadence of VSE's 35% to 40% aviation growth forecast for 2025, specifically the split between distribution and MRO. She also asked about the drivers behind TCI's significant outperformance and the potential revenue synergies from the Kellstrom acquisition.

Answer

President and CEO John Cuomo explained that the growth outlook is evenly split between its commercial and business aviation markets and is expected to be consistent throughout the year, not back-end loaded. He noted the guidance includes a cushion for potentially pruning some of Kellstrom's USM business. Cuomo attributed TCI's outperformance to successful capacity expansion and collaboration with OEM partners. For Kellstrom, he stated the primary focus is on synergy capture and margin improvement rather than aggressive revenue growth, though double-digit growth is still anticipated.

Sheila Kahyaoglu inquired about the drivers of the Aviation segment's strong organic growth, seeking to understand the balance between organic outperformance and contributions from the TCI acquisition. She also asked about the expected exit rates for MRO versus distribution growth heading into 2025.

Answer

CEO John Cuomo and CFO Adam Cohn clarified that the 13% organic growth in the Aviation segment excluded the TCI acquisition. John Cuomo attributed the strong performance to balanced growth across both MRO and distribution, driven by share of wallet gains and new program wins. Looking ahead to 2025, Cuomo expressed confidence in achieving double-digit organic growth, fueled by continued share gains that will offset a moderating, but stable, business and general aviation market.

Sheila Kahyaoglu of Jefferies Financial Group requested clarification on the $4.6 billion tax liability and its potential free cash flow impact, and also asked for a detailed breakdown of the drivers for the 2026 free cash flow forecast of $6 billion.

Answer

CFO Evan Scott stated that the company fundamentally disagrees with the IRS's position on a tax accounting method change and has appealed, with a $100 million charge taken for potential interest. Regarding 2026 free cash flow, Scott outlined several factors: cash usage from classified programs, benefits from new tax legislation, working capital initiatives, and an assumed $1 billion pension contribution, which is absent in 2025.

Sheila Kahyaoglu of Jefferies asked for clarification on the $4.6 billion tax liability and its potential free cash flow impact, and for details on the drivers behind the 2026 free cash flow target being lowered to approximately $6 billion.

Answer

CFO Evan Scott stated that the company fundamentally disagrees with the IRS's position on the tax matter, has appealed, and the $100 million P&L charge is for potential interest. Regarding the 2026 cash flow outlook of ~$6 billion, he cited cash usage from classified programs, benefits from new tax legislation, and an assumed $1 billion pension contribution as key factors. CEO James Taiclet added he is 'incredibly confident' the tax issue will be adjudicated fairly.

Sheila Kahyaoglu asked for a rank-ordering of segment growth within the long-term outlook and which specific programs or campaigns could elevate overall company growth from low-single-digits to mid-single-digits.

Answer

CFO Jesus Malave identified Missiles and Fire Control (MFC) as the primary growth driver, projecting a high-single-digit growth rate for the segment. He stated that achieving mid-single-digit growth for the consolidated company depends on accelerating the conversion of the existing backlog, similar to the improvement seen in 2024, and on the performance of key new awards and classified programs.

Sheila Kahyaoglu of Jefferies Financial Group questioned how to reconcile the 0.8 trailing twelve-month book-to-bill with the company's growth guidance and asked for details on the margin ramp needed to meet the full-year target.

Answer

CEO Toni Townes-Whitley explained the low TTM book-to-bill was due to a tough prior-year comparison and expressed confidence in reaching the 1.2 target, citing over $2 billion in awards post-quarter close. CFO Prabu Natarajan quantified the Q2 bookings needed and noted a space program headwind affected the quarter's margin by 50-60 basis points. He expects the Civil business margin to continue improving.

Sheila Kahyaoglu asked for color on the Flight Support Group's (FSG) 14% organic growth, the strength in its various subsegments like parts and defense, and the drivers behind its strong margin performance.

Answer

Co-CEO Eric Mendelson detailed the strong organic growth across FSG subsegments, including 16% in parts and distribution. EVP & CFO Carlos Macau clarified that the significant margin lift was largely attributable to a favorable product mix driven by the high-performing defense business within specialty products.

Sheila Kahyaoglu of Jefferies noted that both segments achieved 23% operating margins and asked about the potential for further expansion. She also inquired about PMA adoption trends and new product opportunities for 2025.

Answer

Victor Mendelson, Co-President, stated he is comfortable with the Electronic Technologies Group's EBITA margin in the 26-28% range. Eric Mendelson, Co-President, explained the Flight Support Group's 27% EBITDA margin was achieved through efficiency and cost control, not aggressive pricing. He also highlighted new avionics acquisitions, like Millennium International and Honeywell product lines, as key growth areas.

Sheila Kahyaoglu of Jefferies requested a breakdown of the Flight Support Group's organic growth, trends in the parts business, quantification of Wencor revenue synergies, and whether the PMA approval process for commercial parts might become easier under the new administration.

Answer

Co-President Eric Mendelson projected strong double-digit organic growth to continue across all three FSG segments (parts, repair, specialty products) in fiscal 2025. He pointed to the significant organic growth in Q4 as evidence of Wencor synergies. Regarding the commercial PMA process, he stated that the FAA has always been "outstanding to work with" and he expects no change.

Sheila Kahyaoglu asked for confirmation on the offsetting impairment and contingent liability items, clarification on ETG's cash margin performance, the drivers of ETG's defense growth, and the go-to-market strategy for the combined HEICO-Wencor PMA portfolio.

Answer

CFO Carlos Macau confirmed the impairment and contingent liability changes were two separate items in ETG that largely netted out. He and Eric Mendelson clarified that ETG's cash margin actually improved year-over-year. Victor Mendelson stated ETG's defense business saw double-digit growth. Eric Mendelson explained that while they can present a combined portfolio, the core strategy remains having individual business units engage directly with airlines to leverage their deep product expertise.

Sheila Kahyaoglu from Jefferies inquired about the dynamics of the order book and customer engagement, and asked for details on the expected free cash flow cadence for the year and the company's overall liquidity position.

Answer

CFO Eduardo Couto explained that the order book is stable, with the focus shifting from new LOIs to deepening engagement with existing customers to develop ecosystems and firm up orders. He also clarified that the Q1 cash burn was artificially low due to a payment timing shift, and the full-year burn is expected to be near the low end of the $200M-$250M guidance, with liquidity sufficient through 2026.

Sheila Kahyaoglu sought to clarify if the new timeline represents a 1.5-year delay and asked about the strategy behind the growing services backlog despite flat aircraft LOIs.

Answer

CEO Johann Bordais corrected that the timeline shift to 2027 is up to a 12-month adjustment, not 1.5 years. He explained that the growth in the services backlog reflects Eve's core strategy of selling a complete ecosystem solution, not just an aircraft. The recently launched 'TechCare' platform formalizes this offering, which customers value for ensuring operational readiness and reliability.

Sheila Kahyaoglu asked for CACI's perspective on potential impacts from government efficiency initiatives (DOGE) and followed up with a request for an update on the Spectral program and the integration of the Azure Summit acquisition.

Answer

CFO Jeff MacLauchlan noted a slight, manageable slowdown in administrative tasks but minimal business disruption. CEO John Mengucci added that CACI's resilient strategy mitigates these risks. On Azure, Mengucci stated the integration is going 'very, very well,' with the combined teams accelerating the deployment of next-gen capabilities for the Navy. MacLauchlan also noted the integration yielded CapEx efficiencies, contributing to the raised free cash flow guidance.

Sheila Kahyaoglu of Jefferies Financial Group Inc. asked about the drivers for the strong Q4 margin exit rate and its implications for the next fiscal year, and also requested an update on the Spectral program's progress.

Answer

CFO Jeffrey MacLauchlan attributed the strong second-half margin profile to historical customer buying patterns. CEO John Mengucci added that the long-term focus is on free cash flow per share, not just margin. He reported that the Spectral program is progressing well, with the recent Azure acquisition accelerating delivery timelines and securing a significant $319 million follow-on award.

Sheila Kahyaoglu of Jefferies inquired about the outlook for full-flight simulator (FFS) deliveries for the fiscal year, given the strong Q3 performance, and its implications for Q4 and future margins. She also asked for CAE's perspective on the GTF engine grounding issues.

Answer

COO Nick Leontidis confirmed the full-year FFS delivery guidance of 'more than 50' remains intact. Interim CFO Constantino Malatesta added that the higher mix of product sales will result in the annual Civil margin being modestly below the 22-23% range. Regarding the GTF engine issues, Mr. Leontidis noted that while the situation is improving, as seen with customers like Indigo, the timeline for a full resolution is still uncertain.

Sheila Kahyaoglu of Jefferies asked for quantification of the drivers behind the second-half Civil margin improvement and whether the implied exit rate above 25% represents a new run rate. She also requested color on the impact of A320 aircraft-on-ground (AOG) issues.

Answer

CEO Marc Parent explained the margin improvement is driven by a combination of factors, including cost savings from business simplification, rather than a single element. He expects margins to trend higher but did not confirm a new run rate. Both Parent and COO Nick Leontidis stated the industry is at the 'peak' of the A320 engine-related issues, which had slowed pilot hiring, but they now see the situation stabilizing and expect improvement.

Sheila Kahyaoglu asked for a bridge from the record $82 million in quarterly free cash flow to a more normalized level, given the breakeven second-half outlook, and also inquired about the profitability of recent competitive wins.

Answer

CFO Dave Farnsworth explained the record cash flow was boosted by a ~$40 million increase in deferred revenue from milestone payments, which represents a pull-forward of cash that will be worked off in the second half. He also reiterated that production margins are targeted to be roughly 1,000 basis points higher than development margins. CEO Bill Ballhaus highlighted two key competitive wins: a satellite program secured by the new Advanced Concepts group and a CPA-related takeaway from an entrenched competitor, both won on technical differentiation.

Asked about the drivers for the significant margin expansion in the Systems and Support segment, the OE assumptions for the second-half free cash flow recovery, and the reasons for the strong outperformance in aftermarket growth.

Answer

Margin expansion is driven by a combination of higher volume, pricing, and cost-out initiatives in the second half. The free cash flow profile follows typical seasonality. The strong aftermarket is a broad-based trend driven by older fleets flying longer and military readiness, a trend expected to continue for years.

Asked for clarification on several guidance items: the specific MAX rate assumption, the amount and driver of working capital usage, the net price realization within the margin guidance, and whether the long-term targets changed organically beyond the divestiture.

Answer

The MAX rate reduction assumption varies by factory (20-30%) but is not a flat cut. Working capital usage of $20-25M is assumed for FY25, driven by holding inventory for future ramps. A net price realization of ~1% is a reasonable assumption. The long-term goal of 20%+ EBITDA margin remains, though the timeline is slightly set back by the divestiture.

Inquired about the long-term margin profile for the remaining systems business after the product support sale and sought clarification on the free cash flow contribution of the divested business.

Answer

The product support business had higher-than-average margins, causing a short-term dip, but the company is focused on improving margins in Interiors and Geared Solutions to restore overall profitability. The free cash flow guidance for FY24 still includes the divested business due to uncertain closing timing, but it was noted that the divested business was not 100% cash generative due to high inventory levels.

Sheila Kahyaoglu of Jefferies inquired about the pricing assumptions for the A220 and A350 programs that led to the significant forward loss, and asked for the expected cash usage for the Airbus business in 2024 and 2025.

Answer

CFO Mark Suchinski clarified that previous assumptions included a pricing benefit from Airbus negotiations that did not materialize, requiring a reversal. This, combined with new orders and cost growth, drove the loss. He noted that the reversal and future obligations accounted for $373 million of the total. For cash usage, he stated that Airbus programs represent 80-85% of the current forward loss liabilities on the balance sheet.

Sheila Kahyaoglu of Jefferies inquired about the pricing assumptions behind the significant forward losses on the Airbus A220 and A350 programs and asked for an estimate of the cash usage for the Airbus business.

Answer

CFO Mark Suchinski confirmed that previous assumptions for a price increase were reversed, which, along with new orders, drove the forward loss. He noted that about $373 million of the loss was tied to these factors. For cash usage, he stated that Airbus programs represent 80-85% of the company's total forward loss liabilities on the balance sheet.

Asked about the 737's cash profile per shipset given current costs, how it would change with future rate breaks under an FAA cap, and whether free cash flow would be positive in 2024.

Answer

Management explained that cost reduction efforts continue regardless of rate, but they are not in a position to provide 2024 cash flow guidance due to uncertainties around production rates, Airbus negotiations, and potential quality-related costs.

Asked for details on the revised free cash flow guidance, specifically how much is tied to the 737 program and what immediate improvements can be expected in Q4.

Answer

Mark Suchinski attributed the revision primarily to fewer 737 deliveries, as the company was staffed and had inventory for a higher rate. Other headwinds included forward losses, negative cume adjustments, and lower A220 deliveries. Positive impacts came from the Boeing MOA. The cash impact of lower 737 deliveries is significant because they are not collecting cash on delivery while costs are already incurred.