• Textron's book-to-bill ratio in Q4 2023 was 0.9, indicating a decline in orders and potential weakening demand; orders were significantly down from last year and the third quarter.
• Deliveries in the fourth quarter were lighter than expected, despite improvements in supply chain and labor productivity, suggesting ongoing production challenges that may impact 2024 performance.
• The benefit from price net of inflation will be less significant in 2024 than in 2023, potentially limiting margin expansion amid ongoing operational headwinds and efforts needed to achieve higher margins.

1. Aviation Margin Outlook
   Q: How are Aviation margins considering pricing and inflation?
   A: Scott Donnelly expects improved margins in the Aviation segment for 2024, driven by positive pricing net of inflation, though not as significant as in 2023. Improved manufacturing performance and reduced supply chain headwinds are also contributing factors. Moving towards the high side of the guidance, they aim for a 20-plus percent conversion, which is historically where they like the business to be.

2. FLRAA Revenue and Bell Margins
   Q: What are expectations for FLRAA revenue and impact on Bell margins?
   A: FLRAA program revenues are expected to be around $900 million in 2024, up from just under a few hundred million dollars in 2023. Despite the ramp-up of the FLRAA program, Bell margins are expected to hold, aided by cost management and restructuring actions. While there will be overall margin rate pressure due to FLRAA's growth, the company anticipates absolute profit increases contributing positively to EPS.

3. Supply Chain Improvements
   Q: Is the supply chain improving and impacting deliveries?
   A: Supply chain conditions are improving but still present challenges. Scott Donnelly noted that enhancements in labor productivity and parts availability in Q4 are expected to positively impact aircraft deliveries in 2024. He acknowledged that the supply chain remains susceptible to disruptions from key parts, but overall conditions have improved compared to 2023.

4. eAviation Losses and Outlook
   Q: What's the outlook for eAviation losses and revenues?
   A: The eAviation segment includes Pipistrel, which is doubling aircraft sales year-over-year. However, widening losses are driven by R&D investments in programs like NEXUS and Nova300, which won't generate revenue for several years. First flight of the Nova is expected in 2024, and the NEXUS program is progressing with assembly underway.

5. Capital Deployment Priorities
   Q: What are the priorities for capital deployment in 2024?
   A: The company's priority continues to be share buybacks, with an expected reduction in average share count to 191 million shares, roughly a 5% reduction in 2024. Scott Donnelly did not comment on M&A reports but reaffirmed the focus on returning value to shareholders through repurchases.

6. Working Capital and Cash Flow
   Q: How is working capital affecting free cash flow guidance?
   A: Despite volume growth putting pressure on inventory levels, the company expects flat free cash flow in 2024. Headwinds from timing of customer payments and higher capital expenditures are anticipated, but overall, they foresee solid cash flow performance.

7. Business Jet Demand
   Q: What's the outlook for business jet demand and bookings?
   A: Scott Donnelly feels positive about the end market, with robust customer dialogues. While acknowledging that availability is a constraint, the company maintains a book-to-bill assumption of 1:1 for 2024, consistent with 2023.

8. Restructuring and R&D Reduction
   Q: How is the restructuring affecting costs and R&D expenses?
   A: The restructuring program, with expected $75 million in annual savings, is helping align costs with lower production rates at Bell. Reduction in R&D expenses is mostly at Bell, shifting from internal R&D to contract work as programs like FLRAA ramp up.

9. Interest Expense Increase
   Q: Why is interest expense increasing?
   A: Higher borrowing costs from a bond deal, slightly lower cash balances, and conservative assumptions on interest income are leading to increased interest expense.

10. Impact of V-22 Grounding
    Q: Does the V-22 grounding impact Bell's business?
    A: The V-22 grounding is not expected to have a material impact on Bell. Services are using the downtime for maintenance, and significant effects on the company's aftermarket business are not anticipated.

11. Systems Segment Outlook
    Q: What's the outlook for the Systems segment?
    A: The Systems segment has a strong pipeline with significant opportunities and important down-selects achieved in 2023. Revenue is expected to be relatively flat in 2024, with growth driven by final selection awards and EMD programs in 2025.

12. Supply Chain at Bell
    Q: How is the supply chain situation at Bell?
    A: Previous supply chain challenges at Bell have been addressed, resolving critical issues and leading to higher deliveries in Q4. While the supply chain remains a focus, conditions have improved.

13. Pre-Owned Aircraft Impact
    Q: Are pre-owned aircraft affecting new aircraft sales?
    A: While pre-owned inventory levels have increased from unusually low levels, they remain historically low and consist mostly of older, out-of-production aircraft. Scott Donnelly does not see a significant impact on new aircraft sales.

14. Industrial Margins
    Q: What's driving improvements in Industrial margins?
    A: Despite flat revenues, improved margins in the Industrial segment are expected due to performance in both Kautex and Textron Specialized Vehicles.

15. Kautex Outlook
    Q: What's the expectation for Kautex in 2024?
    A: Kautex volumes are expected to be down somewhat, but margins should continue to improve.

16. Bell Margin Strength
    Q: What's contributing to Bell's strong margins?
    A: Higher commercial deliveries and cost management actions are helping to maintain Bell's margins despite the lower-margin FLRAA program ramp-up.

17. Share Count and Repurchases
    Q: What's the expected share count and repurchase plan for 2024?
    A: The expected average share count is 191 million shares, reflecting a 5% reduction through share repurchases.

Citations:

Sheila Kahyaoglu (analyst) and Scott Donnelly (executive) discussing FLRAA revenue expectations.
Peter Arment (analyst), Scott Donnelly (executive), and Frank Connor (executive) on Aviation margins and interest expense.
Frank Connor (executive) on working capital, cash flow, and share count expectations.
Jason Gursky (analyst) and Scott Donnelly (executive) on Systems segment pipeline.
Jason Gursky (analyst) and Scott Donnelly (executive) on eAviation outlook.
Noah Poponak (analyst) and Scott Donnelly (executive) on business jet demand.
Noah Poponak (analyst) and Scott Donnelly (executive) on supply chain improvements.
Noah Poponak (analyst) and Scott Donnelly (executive) on Bell margins and FLRAA impact.
Myles Walton (analyst) and Scott Donnelly (executive) on restructuring and R&D reduction.
Robert Stallard (analyst) and Scott Donnelly (executive) on capital deployment priorities.
Seth Seifman (analyst) and Scott Donnelly (executive) on M&A considerations.
George Shapiro (analyst) and Scott Donnelly (executive) on Bell margins and Kautex outlook.
Douglas Harned (analyst) and Scott Donnelly (executive) on supply chain at Bell.
Douglas Harned (analyst) and Scott Donnelly (executive) on pre-owned aircraft impact.
Gavin Parsons (analyst) and Scott Donnelly (executive) on Industrial margins.