rockwell collins (col) earnings report: q1 2016 conference ... · rockwell collins (col) earnings...
TRANSCRIPT
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
©2014TheStreet,Inc.Al l R ightsReserved Page1of23
RockwellCollins(COL)EarningsReport:Q12016ConferenceCallTranscriptThefollowingRockwellCollinsconferencecalltookplaceonFebruary17,2016,10:45AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
RyanMiller;RockwellCollinsInc;VPofIRKellyOrtberg;RockwellCollinsInc;Chairman,President&CEOPatrickAllen;RockwellCollinsInc;SVP&CFO
OtherPart icipants
DavidStrauss;UBS;AnalystPeterArment;Sterne,AgeeCRT;AnalystRichardSafran;BuckinghamResearchGroup;AnalystKenHerbert;CanaccordGenuity;AnalystCarterCopeland;BarclaysCapital;AnalystSamPearlstein;WellsFargoSecurities,LLC;AnalystSethSeifman;JPMorgan;AnalystRobertStallard;RBCCapitalMarkets;AnalystPeteSkibitski;DrexelHamilton;AnalystMylesWalton;DeutscheBank;AnalystRobertSpingarn;CreditSuisse;AnalystCaivonRumohr;CowenandCompany;AnalystGeorgeShapiro;ShapiroResearch;AnalystNoahPoponak;GoldmanSachs;AnalystMichaelCiarmoli;KeyBancCapitalMarkets;AnalystJasonGursky;Citigroup;AnalystHowardRubel;JefferiesLLC;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheRockwellCollinsfirst-quarterFY16earningsconferencecall.
Today'scallisbeingrecorded.
Foropeningremarksandmanagementintroductions,IwouldliketoturnthecallovertoRockwellCollinsVicePresidentofInvestorRelations,Mr.RyanMiller.Pleasegoahead,sir.
RyanMiller (VPofIR):
Thankyou,Operator.Goodmorningtoallofyouonthecall.
WithmeonthelinethismorningareRockwellCollinsChairman,PresidentandChiefExecutiveOfficer,KellyOrtberg;andSeniorVicePresidentandChiefFinancialOfficer,PatrickAllen.
Today'scallisbeingwebcastandyoucanviewtheslideswe'llbepresentingtodayonourwebsiteat
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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www.rockwellcollins.comundertheinvestorrelationstab.Theseslidesincludecertainnon-GAAPfinancialinformationandareconciliationtotherelatedGAAPmeasure.
Pleasenotetoday'spresentationandwebcastwillincludecertainprojectionsandstatementsthatareforward-looking.Actualresultsmaydiffermateriallyfromthoseprojectedasaresultofcertainrisksanduncertainties,includingthosedetailedonslide2ofthiswebcastpresentationandfromtimetotimeintheCompany'sSecuritiesandExchangeCommissionfilings.Theseforward-lookingstatementsaremadeasoftodayandtheCompanyassumesnoobligationtoupdateanyforward-lookingstatement.
Withthat,I'llnowturnthecallovertoKelly.
KellyOrtberg (Chairman,President&CEO):
Thanks,Ryan,andgoodmorning,everyone.
Ifyourecallonlastquarter'searningscall,wesaidthatweexpectedthefirsthalfofFY16tobeaslowstarttotheyear,followedbygrowthinthesecondhalf.Weexpectedthefirstquartertobetheweakestandinfact,itwasevenalittleweakerthanweanticipated,mostnotablyinGovernmentSystems.Soletmetakethathead-onandsummarizetheperformanceandoutlookofeachofthebusinessesandI'llstartwithourGovernmentSystemsbusiness.
Duetoprogramtiming,weexpectedourGovernmentSystemsbusinesstobedownmidsingle-digitsinthefirsthalffollowedbynicegrowthinthesecondhalf,resultinginoveralllowsingle-digitgrowthfortheyear.Inthefirstquarter,wedidexperiencetheanticipatedheadwindsthatweoutlinedonlastquarter'searningscall.
However,wewerealsoimpactedbytwoissuesthatwedidnotanticipate.Onewasasupplierissuethatimpactedlatequarterdeliveriesofsomeproducts.Andtheotherwasadelayinsomeexpectedfollow-onorders.All-in,thesupplierissueandtheordertimingdelaycausedabouta500-basispointimpacttoourGovernmentSystemsforthequarter.
Thegoodnewsisthatwe'vealreadyresolvedthesupplierissueandwehavebookedoneofthedelayedorders.Iexpecttorecoverboththeordertimingandproductdeliverycatch-upwithintheyear.
Now,Iknowthatitmakesinvestorsnervouswhengrowthisback-endloaded,soIwouldliketoprovidesomeadditionalcoloronwhatweexpecttodrivethatgrowthinourGovernmentSystems'secondhalf.Roughly60%oftheback-halfgrowthiseitherinbacklogorannualfollow-onbusinesswhereourcustomersmakeannualbuysthroughouttheyear.Allthislookstobewellfunded,soIdon'tseemuchriskhere.
About25%ofthesecond-halfgrowthisinprogramsthatwehavewon,butarenotyetawarded.Theonlyriskisthetimingofthecontractactionandwe'retrackingthatverycloselyandareconfidentthatwe'llcloseinatimelymannerforouryear.
Andthenthelast15%ofthesecond-halfgrowthareprogramsthatwehaveyettogooutandwin.Andthatnumberisinlinewithournormalhistoricalanticipatedsalesprofileforthispointintheyear.Sodespitethechallengingfirstquarter,Iremainconfidentinourlowsingle-digitgrowthforthefullyearinGovernmentSystems.
Now,beforeImovefromGovernmentSystems,Idowanttomakeafewcommentsaboutthebudgetoutlook.Firstofall,thenewbudgetisnetgoodnewsforourgovernmentbusiness.Ifyourecall,we'vebeenforecastingourgovernmentbusinesswithsequestrationasthebudgetbaseline.AndasI'msureyouknow,theagreementisanimprovementfromthatbaseline.
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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Ialsobelievethatwe'rewellpositionedtoatleastgetourfairshareofthebudgetincreases,giventheirprioritiesandthebreadthofourportfolio.Iwouldexpectthatwe'llstartseeingsomeofthisimprovementasearlyasnextyear.Infact,Iwouldn'tbesurprisedifwegetalittletailwindonshortcycleordersbytheendofthisyear.SothisisastrongboosttoourplantoreturnGovernmentSystemstosustainedgrowth.
MovingnowtoCommercialSystems,first-quarterresultswereinlinewithourexpectations.OEMsalesweredown,primarilydrivenbytheimpactofthepreviouslyannouncedglobalexpressratereductionsatBombardier.ButwedidseenicegrowthinourCommercialSystemsafter-market.
Wedeliveredanotherquarterofstrongoperatingperformance,headlinedby22.2%operatingmargins.OurCommercialSystemsteamdidareallygreatjobofcontrollingtheirspendingtomanagethemarginimpactfromtheglobal5,000-6,000productioncutsatBombardier.
FY16isanimportantyearofprogramexecutionforourCommercialSystems.Wecompletedalargenumberofmilestonesinthefirstquarter,includingthecertificationoftheCSeriesandtheARJ-21aircraft,firstflightoftheMitsubishiRegionalJet,entryintoserviceoftheChallenger650atBombardier,entryintoserviceofthefusion-equippedKingAirsatCessna,andentryintoserviceoftheLegacy450atEmbraer.Alloftheseprogramsareimportantinourlong-termgrowthplanforourCommercialSystemsbusiness.
Now,finally,letmeturntoInformationManagementServices,wherewedeliveredmidsingle-digittop-linesalesgrowthforthequarterandsomereallystrongoperatingmarginperformance,130-basispointimprovementovertheprioryear.Ourcoreaviationbusinessgrewat7%andcontinuestodrivetheincrementalmarginimprovementthatweexpectfromthatbusiness.
Lastyear,mostofourrevenuesynergiesfromthebusinessaviationsideofthebusinesswereleveragingsynergiesbetweentheARINCDirectservicesandRockwellCollinsinternationalflightserviceportfolios.Andwhileweanticipatesomeadditionalopportunitiesinthispartofthebusiness,we'renowstartingtoseesynergiesinotherareasofthebusiness.
Forexample,we'vesecuredanumberofnewagreementstoprovideglobalexpressconnectivityserviceinthecabin,allowingustoaddressthebroadbandconnectivitymarketthatwehavenotpreviouslyserved.WealsosignedlaunchcustomersforourARINCMultiLinkflighttrackingservice,whichiscompliantwiththenewEuropeanmandatethatwillhelpairlineskeeptrackoftheirfleet.
IknowIprobablysoundlikeabrokenrecord,butIcontinuetobeextremelypleasedwiththeacquisitionofARINCfrombothafinancialperspectiveandhowwellthecultureoftheARINCteamandtheRockwellCollinsfamily.Ithinkwecontinuetoexpectmoregoodthingstocomefromthisbusiness.
Soinsummaryforthequarter,Ifeelreallygoodaboutachievingourfull-yearplan.Wehavegoodlineofsighttosecond-halfgrowth,andwesuccessfullyexecutedourrestructuringplaninthefirstquarter,whichwilldeliverbenefitgoingforward.
ThepermanentreinstatementofthefederalR&Dtaxcreditandthe2015governmentbudgetdealarebothverypositivecatalystsforRockwellCollins'future.Icontinuetobelievewithstrongexecutiononnewprograms,wehaveaveryoptimisticoutlookforthelong-termgrowthdriversofourCompany.
Sowiththatasanoverview,letmeturnitovertoPatrickandhavehimwalkthroughthefinancialdetails.
PatrickAllen (SVP&CFO):
Thanks,Kelly.Goodmorningtoeveryoneaswell.
Iwouldnowliketowalkyouthroughtoday'spresentationslidesthatsummarizeourresultsforthefirstquarterofFY16.I'llbeginonslide3,wherewehighlightourtotalCompanyfirst-quartersales,earnings
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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pershare,incomefromcontinuingoperationsandsharesoutstanding.
TotalCompanysalesforthequarterdecreased$57million,or5%,comparedtothefirstquarteroflastyear,primarilyduetolowerGovernmentSystemsales.Incomefromcontinuingoperationsdecreased$36millionor21%.Andearningspersharefromcontinuingoperationsdecreased$0.26or21%,comparedtothesameperiodlastyear.
Incomefromcontinuingoperationsincludesa$28millionafter-tax,or$0.21persharerestructuringcharge,primarilyrelatedtoheadcountactionsacrosstheCompanywhichwearetakingasaresultofchallengingmarketconditions,particularlyinbusinessaviation.Inaddition,thefirstquarterofbothFY15andFY16includesourretroactivebenefitfromthefederalR&Dtaxcreditof$0.16and$0.18,respectively.
Asweturntoslide4,CommercialSystemsachievedrevenueof$562millionforthequarter,down1%comparedtothesameperiodlastyear.SalesrelatedtoaircraftOEMsdecreased$18million,or5%,to$313million,primarilyduetolowerbusinessjetaircraftOEMproductionrates,unfavorableairlineselectableequipmentmix,andlowerAirbus330productionrates.AllofthatwaspartiallyoffsetbyhigherdeliveriesinsupportoftheAirbusA350andEmbraerlegacybusinessjetproductionramps.
After-marketsalesincreased$17millionor8%,primarilyduetohigherhead-updisplayretrofitsalesinChina,higherinorganicsalesfromtheacquisitionsofPacificAvionicsandInternationalCommunicationsGroupandhigherregulatorymandatesales.CommercialSystemsoperatingearningswerebasicallyflatcomparedtolastyear,withoperatingmarginsimproving20basispointsfrom22%to22.2%.OperatingearningsandmarginbenefitedfromlowerCompany-fundedresearchanddevelopmentexpense,partiallyoffsetbynegativemix,asanincreaseincustomer-fundeddevelopmentsalesoffsetlowerbusinessaviationproductsales,aswellashighercostsfromthePacificAvionicsandICGacquisitionsandhighercostsfromfurtherexpansionininternationalemergingmarkets.
Now,movingontoslide5,you'llseethatwereclassifiedGovernmentSystemssalescategoriesintoavionicsandcommunicationandnavigation.Thesesalescategorieshavebeenconsolidatedfromthepreviouscategoriestobeconsistentwithaninternalreorganizationandaredelineatedbasedontheunderlyingproducttechnologies.
GovernmentSystemsoverallrevenuedecreasedby11%to$451million,drivenbylowerrotarywinghardwaresales,thetimingofdeliveriesfortheE6program,thewind-downofinternationalelectronicwarfareprogram,lowerstimulationintrainingsales,andlowerinternationaltargetingsystemsales.GovernmentSystemsfirst-quarteroperatingearningsdecreased$20millionto$86million,resultinginanoperatingmarginof19.1%comparedto20.8%inthefirstquarteroflastyear.Thedecreasedoperatingearningsandmarginresultedfromlowersalesvolume.
Turningtoslide6,InformationManagementServicessalesincreased5%overtheprioryear,ascommercialandbusinessaviationservicessalesincreased7%,whilethenon-aviation-relatedbusinesseswereflatcomparedtolastyear.InformationManagementServicesfirst-quarteroperatingearningsincreased$3millionto$24million,resultinginanoperatingmarginof15.4%comparedto14.1%inthefirstquarteroflastyear.Theincreaseinoperatingearningsandmarginwasduetoincrementalearningsandthehighersalesvolume.
Slide7providesanupdateofourR&Dinvestment.Totalspenddecreasedfrom$231millioninthefirstquarterofFY15to$228millioninthefirstquarterof2016.Company-fundedR&Ddecreased$17millionduetolowerdevelopmentexpendituresfortheEmbraerLegacy450andAirbusA350,aswellaslowerbusinessjetproductlinedevelopmentcosts.
Customer-fundedresearchanddevelopmentexpenseincreased$5millionduetohigherdevelopment
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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costsforinternationalprogramsinCommercialSystems.AndpreproductionengineeringinvestmentnetincreasedduetohighercostsincurredforcertainmilitarytransportprogramsinGovernmentSystems.
Movingtoslide8,weshowthestatusofourcapitalstructureasoftheendofthefirstquartercomparedtotheendoflastyear.Duringthequarter,ourdebttoEBITDAratioincreasedto2.0from1.7atyearend.Theincreaseisprimarilyduetoanincreaseincommercialpaper,asthefirstquarterhadtypicallylightcashflows.Iexpectthelevelofdebttocomedownoverthebalanceoftheyearasalargerportionofourcashflowistraditionallygeneratedlaterintheyearandwepaydownaportionofthatshort-termdebt.
Theupdatedstatusofthesharerepurchaseprogramasoftheendofthefirstquarterisdetailedonslide9.Duringthefirstquarter,werepurchased1millionsharesatanaveragecostof$87.40.Ourrepurchaseauthorityremainingattheendofthequarterwasabout$290million.
Nowontoslide10,whereweprovideasummaryofourFY16financialguidance,whichhasbeenupdatedasaresultofthepermanentreinstatementofthefederalR&Dtaxcredit,aswellasupdatedrestructuringcharge.Totalsalesandsegmentoperatingmarginsremainunchangedfromthepreviousguidance.Theearningspersharerangehasbeenincreasedby$0.25.
ThefederalR&Dtaxcreditprovidedabouta$0.35benefittoourFY16earningspershareguidanceandispartiallyoffsetbyhigherrestructuringexpenseandhigherincentivecompensationexpense.Thecashflowfromoperationsrangehasbeenincreasedby$50million,primarilyduetothebenefitofthatfederalR&Dtaxcredit.FY16guidanceforresearchanddevelopmentinvestmentandcapitalexpendituresremainsunchanged.
OureffectivetaxratefortheFY16isnowexpectedtobeintherangeof22%to23%,downfromthepreviousguidanceofabout28%,dueagaintotheretroactiveandprospectivebenefitfromthefederalR&Dtaxcredit.Thesecondquarteroftheyearwillhaveaneffectivetaxrateofabout30%,whichincludesthebenefitofthattaxcredit.
Andthethirdandfourthquarterswillbesimilartothesecondquarter.However,weexpectsomelumpinesstohappeninthequarters,asabenefitfromcertaintaxplanningstrategiesisexpectedtoberealized.Thatcompletesmyreviewofthefinancialresultsandprojections.
Ryan,backtoyoutokickofftheQ&Asession.
RyanMiller (VPofIR):
Thankyou,Patrick.
Inordertogiveeveryonetheopportunitytoaskquestions,weaskthatyoulimityourquestionstoonepercaller.Ifyouhavefurtherquestions,simplyreinsertyourselfintothequeueandwewillanswerthoseadditionalquestionsastimepermits.
Operator,wearenowreadytoopentheline.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
DavidStraussfromUBSSecurities.
DavidStrauss (Analyst-UBS):
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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Goodmorning.
RyanMiller (VPofIR):
Goodmorning,David.
PatrickAllen (SVP&CFO):
Morning.
DavidStrauss (Analyst-UBS):
Kelly,maybetouchonbusinessjet,businessjetOE,howyou'refeelingaboutthings.IthinksinceyougaveusguidancelasttimeDassaultcameoutwithsomeprettyweaknumbers.Seemslikealltheindicatorsonthebusinessjetsidecontinuetoweaken.Maybetalkaboutnotonlytheguidanceforthisyear,butyouthinktheabilityoftheOEMstoholdattheselowerproductionratesandnothavetogodownevenlowerfromhere.Thanks.
KellyOrtberg (Chairman,President&CEO):
David,ifyourecall,wehadputalittlebitofdiscountinourforecastsassociatedwithanticipatedfurtherchallengestoOEMproductionrates.Whatwenormallyhavehappenisatthistimeoftheyear,alltheOEMsreallygiveusatrued-upforecastastowhattheyaregoingtodofortheyear.Andinfactwedidseethatproductionratedecline.Really,wesawdeclinesfrommostoftheOEMsandyou'veheard,asyou'vepointedout,you'veheardsomeweaknessdescribedinthemarketfromthosefolks.Infact,we'veusedupthereservethatIhadallocatedforthat.
Now,theytypicallyholdprettywellthroughthefiscalyear.Ifthere'sanotheradjustment,itusuallycomesaroundthesummerfurloughworktime,time-offperiod.Sowe'rehopefulthatwe'retruedupfortheyearandthat'swhyweputthatdiscountthere.Unfortunately,itisn'tgoingtobeopportunity;weneededthatdiscounttoreflectthis.
Asfarasthelong-termoutlook,itstillremainssoft,David.Andwecontinuetobefairlyconservativeinouroutlookforbusinessaviation.Theseratelevelsareprettylow.Ithinktheycanbesustained,butwedoneedtocontinuetowatchthatmarketgoingforward.Idon'thaveabettercrystalballforwhatproductionratesaregoingtolooklikenextyear.We'lltruethatupwhenweprovideourguidancefornextyear.
Operator :
PeterArmentfromSterneAgeeCRT.
PeterArment (Analyst-Sterne,AgeeCRT):
Yes,thankyou.Goodmorning,KellyandPatrick.Patrick,maybeyoucouldremindusintermsofthecadenceofhowthesavingskicksinfortherestoftheyear,fromaperspectiveontheEPSfront.Andtherestructuring.
PatrickAllen (SVP&CFO):
Peter,Iwouldsaywerealizedverylittlesavingsfromtherestructuringinthefirstquarter.AndIwouldsaythesavingsisgoingtoprettymuchspreadoutevenlyoverthenextthreequarters.Soweshouldseeaprettybalancedsavingsprofileoverthenextthreequarters.
PeterArment (Analyst-Sterne,AgeeCRT):
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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Okay,thankyou.
Operator :
RichardSafranfromBuckinghamResearch.
RichardSaf ran (Analyst-BuckinghamResearchGroup):
Hi,goodmorning.
KellyOrtberg (Chairman,President&CEO):
Hi,Richard.
RichardSaf ran (Analyst-BuckinghamResearchGroup):
IwantedtoaskyouaquestionontheaftermarketandaboutIntertradeanddemandyou'reseeingfromrefurbishedparts.Therearesomeindicationsofincreasingdemandforrefurbishedparts.Wanttoknowifyoucancommentonthat,whatyou'reseeingthere.Also,giventhattheinventoryofaircrafttocannibalizeforrefurbishedpartsisfinite,justwonderingifyou'reseeingimprovingdemand,howlongyoumightexpectthattolast?
KellyOrtberg (Chairman,President&CEO):
OurIntertradebusinessisseeingimproveddemandorincreasingdemandforusedcomponents.Richard,that'sreallynotnew;wesawthatallthroughlastyear.We'reexpectingtobeupdouble-digitinourIntertradebusinessthisyear.AndIthinkthat'satrendthat'sheretostay.SoIthinkyoujustgottolookatwherethatusedcomponents--it'sgoingtobeafunctionofwhataircraftarebeingretiredandthepaceofretirement,andthat'swhat'sgoingtodrivethatmarket.Ithinkit'sbecomingabestpracticeintheindustry.AsImentionedinthelastcall,we'reseeingitnowbeingusedcomponentsrecyclingisbeingutilizedinAsia-Pacwherewetypicallytheyhavealwaysboughtnewsparesinthepast.
SoIthinkit'sheretostay.That'swhywe'vefactoredouraftermarkettogrowalittleslowerthanwhatyou'regoingtoseethetrafficgrow.BecauseIthinkthataftermarketisgoingtobeimpactedbytherecyclingoftheusedcomponents.Now,luckilywehaveausedcomponentbusiness.Unfortunately,it'snotquitebigenoughtooffsettheimpactthatwe'llseeinouroverallMRO.ButIthinkthat'sheretostay,Richard.
RichardSaf ran (Analyst-BuckinghamResearchGroup):
Thanksalot.
Operator :
YournextquestioncomesfromKenHerbertfromCanaccordGenuity.
KenHerbert (Analyst-CanaccordGenuity):
Hi,goodmorning.Thankyou.
KellyOrtberg (Chairman,President&CEO):
Goodmorning.
KenHerbert (Analyst-CanaccordGenuity):
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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Kelly,IwonderedifIcouldstartoff--there'sbeenobviouslyalotofspeculationwiththeannouncementyesterdayonthe747cutfromBoeing,abouthealthoftheoriginalequipment,commercialcycle.IwonderedifIcouldgetyourthoughtsonifyouseeanyincrementalriskinthelastmonthorsorelativetosomeofyourinitialplansoneitherbuildratesonthe737,787.Anyparticularincrementalareasofriskyouwouldhighlightbeyondwhat'sbeenpubliclyannounced?OranyupdatedthoughtsontheOEoutlookonthetransportsideherethisyearandinto2017.Thankyou.
KellyOrtberg (Chairman,President&CEO):
Ken,reallynothingnewthatIwouldhighlight.Idon'tthinkthe747-8ratechangeprobablysurprisesanyofus.Obviously,alleyesareonthebasic777backlogandtheabilityofBoeingtosustainthat.Andwe'restillwatchingthatjustlikeyouare.I'vegotnothingtoupdateyouonthat.
OnethingI'vesaidisthatBoeingwouldneedtogiveusanupdatedrateforecastontheexisting777hereprettysoontohaveanyimpactonourFY16.Andthefactthattheycameoutwithratechangeson747-8anddidn'tdothaton777tellsmethattheyarestillmarchingtotheirplantosustainthebasic777rates,atleastthroughthedemandforourFY16.
Sonothingnew,really,toreportonthat;stillveryhealthybacklogforus.Andasyouknow,we'vegotnewsharegainopportunitiescomingintothemarket.
Operator :
CarterCopelandfromBarclaysCapital.
CarterCopeland (Analyst-BarclaysCapital):
Hey,goodmorning,guys.
KellyOrtberg (Chairman,President&CEO):
Hi,Carter.
CarterCopeland (Analyst-BarclaysCapital):
Justaquickquestionontheaftermarket.WhendoyouexpecttoseeanymaterialimpactfromA350provisioningsales?Isthatalater-this-yearimpactordoesittakeFY17toreallyseeanymaterialuptickthere?
KellyOrtberg (Chairman,President&CEO):
You'reprobablynotgoingtospikeoutseematerialimpactfromA350provisioning.We'vealreadyseeninitialprovisioningandyoureallydidn'tseethatasamajorspikelikewesawon787.It'salittlebitofafunctionofthecommoditiesthatweprovideonthetwodifferentairplanes;theyaredifferent.AswellasthefewernumberofnewairlinestakingtheA350asopposedto87whenitcameout,hadalotofdifferentairlines.
Ithink,Carter,thenextbigprovisioningspikeforusisreally737MAX.Andwe'llstarttoseethatmaybealittlebitattheendofthisyearandcertainlyintonextyear,we'llseesomegoodprovisioninginputforthat.
CarterCopeland (Analyst-BarclaysCapital):
Awesome.Thanksforthecolor,Kelly.
Operator :
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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SamPearlsteinfromWellsFargo.
SamPearlstein (Analyst-WellsFargoSecurities,LLC):
Goodmorning.
KellyOrtberg (Chairman,President&CEO):
Hi,Sam.
SamPearlstein (Analyst-WellsFargoSecurities,LLC):
Hi.Wanttoknowifyoucantalkmoreabouttheaftermarketingeneral.Howmuchofthe8%overall,the16%businessjetaftermarket,wasorganicversusacquired?Thencanyoutalkalittlebitabouttheparts,theretro-fits,theupgrades,theprovisioning,inthedifferentbuckets,howtheyallperformed?
KellyOrtberg (Chairman,President&CEO):
Yes,ifyoulookoverall,wewereup8%,aswedisclosed.Airtransportwasuplowsingle-digit.AndthatwasreallyHUDretro-fits,somecabinwirelessactivity.Mandatesaredowninairtransport.We'regoingtoseethatthroughouttheyear,thatthemandaterevenueisdownthere.
Interestingenough,mandatesoverallwereupbecausemandateswereverygoodforthequarterinbusinessaviation.Andfinally,wesawareallynicequarterofavionicsupgradeswheretheyareputtingfans,updates,tothebizjetavionics.I'mveryhopefulthatwillcontinueandactuallyprovideusalittlebitofopportunityforthefullyear.Intermsofinorganicrevenue--
PatrickAllen (SVP&CFO):
It'sabout$8millionintheaftermarketandalmostallofitisinairtransport,actually.
KellyOrtberg (Chairman,President&CEO):
So,Sam,ifIgaveyoualittlebitofanoutlook,Ithinkwe'regoingtoincreaseourgrowthratethroughouttheyearinairtransport.You'regoingtoseethebusinessaviationnumbersmutealittlebit.We'renotgoingtoseequiteashighagrowthrate.Butoverall,westillfeelgoodaboutthathighsingle-digitgrowthinouraftermarket.
SamPearlstein (Analyst-WellsFargoSecurities,LLC):
Thanks.
Operator :
SethSeifmanfromJPMorgan.
SethSeifman (Analyst-JPMorgan):
Thanksverymuch.Goodmorning.Patrick,historically,withtheR&Dtaxcredityouguyswouldhavearateofabout30%.Butasyousaid,you'veimplementedsometax-savingstrategies.Whenwethinkaboutgoingforward,abaselinetaxrateforyouguyswiththepermanentR&Dtaxcreditandperhapssometax-savingstrategiesthatcanbepermanentaswell,whatkindoftaxratedoyouthinkaboutoveralongerterm?
PatrickAllen (SVP&CFO):
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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Ithinkoverthelongerterm,Seth,we'relookingatrightaround30%.Maybeaitwouldbelittlehigher,butrightaround30%.
SethSeifman (Analyst-JPMorgan):
Okay,verygood.Thanksverymuch.
Operator :
RobertStallardfromRoyalBankofCanada.
RobertStallard (Analyst-RBCCapitalMarkets):
Thanksverymuch.Goodmorning.
PatrickAllen (SVP&CFO):
Goodmorning.
RobertStallard (Analyst-RBCCapitalMarkets):
Kelly,you'vementionedonthegovernmentsideaboutthepotentialpositiveimpactoftheFY16DoDbudget.Iwaswonderingifyoucouldcommentonwhatyouareseeinginthedefenseexportmarket,whetherthere'sanyimpactasyetfromthedeclineintheoilprice.
KellyOrtberg (Chairman,President&CEO):
No,nonewhatsoever.It'ssomethingwekeepaneyeon,butinfactallthepriorityfunding,ourSaudiF-15programcontinuestobefundedasexpected.We'vegotsomefollow-onbusiness,highprioritybusinessintheMiddleEastintargeting.Allthoseprogramsseemtobewellfunded.So,no,I'mnotseeingany--theoilissuesseemtobeplayingthroughthecommercialbusinessmuchmorethanthedefensebusiness.
RobertStallard (Analyst-RBCCapitalMarkets):
That'sgreat.Thankyouverymuch.
Operator :
PeteSkibitskifromDrexelHamilton.Mr.Skibitski,
PeteSkibitski(Analyst-DrexelHamilton):
Oh,sorry.Goodmorning,guys.
KellyOrtberg (Chairman,President&CEO):
Hi,Pete.
PeteSkibitski(Analyst-DrexelHamilton):
Guys,there'sbeenacouplequestionsonairtransportaftermarket.Iwanttogetalittlemorecolorthere.Itlookslikeorganicallyitwasdownabout4.5%inthefirstquarter.Kelly,youtalkedaboutthenewtrendsthataregoingonthere.Onafull-yearbasis,Ithinkpreviouslyyouwereexpectingmidsingle-digitgrowth.
Isthislong-termnow,moreofverylowsingle-digits,2%,3%typeofmarketforyouguys?BecauseofthenewtrendsthereandmaybeAsiaweakness,Asiachanges?Canyouaddalittlebitmorecolor?
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KellyOrtberg (Chairman,President&CEO):
Yes,IthinkthebasicMROcomponentoftheaftermarketyou'reprobablyaboutrightbecauseofthatrecyclingthatItalkedabout.Butthenwehavethediscretionarysidethattendstobealittlemorelumpy.We'vegotmandate-drivenrevenue.We'vegottheseretro-fitsofheads-updisplaysandhead-downdisplaysystemson[some57/67].Thenwehavetheprovisioningthingsthatwetalkedaboutearlierthattendtospikethat.ButIthinkifyoustripthediscretionaryawayandlookatthefundamentalMRO,Ithinkyou'reprobablyaboutright.
PeteSkibitski(Analyst-DrexelHamilton):
Okay,okay.AndthenanyincrementalheadwindsatallfromAsia,givensomeofthevolatilityoverthere?
KellyOrtberg (Chairman,President&CEO):
Well,wehaveseenalittlebitofincrementalheadwindsinourflightservicesbusinessinIMS,wherewe'redoinginternationaltripsupport.Ifyoulookatourgrowthrate,itwasalittlelowerthanwhatwe'vebeenexpectingandalmostallofthatsoftnessisjustinternationaltrips.Infact,ourinternationaltripsforthequarterweredownabout6%.We'regainingcustomers,buttheyareflyingfewerinternationallegsrightnow.AndIthinktheChina,RussiaandBrazilaretheareasIwouldspikeoutthatarecausingthat.Hopefully,thatstabilizesheregoingforward.
PeteSkibitski(Analyst-DrexelHamilton):
Okay,that'shelpful.Thanks,guys.
Operator :
MylesWaltonfromDeutscheBank.
MylesWalton (Analyst-DeutscheBank):
Thanks,goodmorning.
KellyOrtberg (Chairman,President&CEO):
Goodmorning.
MylesWalton (Analyst-DeutscheBank):
Iwashopingyoucouldtouchonthegovernmentside.Iknowyoudon'twanttogivequarterlyguidance,buthowquicklycanyourecoverin2Qbacktothatdownmidsingle-digittrendyouhadoriginallythoughtabout?Areyouatapointwhereyou'rebackontherecoveryprofile?Oris2Qtrendsgoingtolooksimilarto1Q?
KellyOrtberg (Chairman,President&CEO):
Yes,soletmetalkaboutthat.Firstofall,it'sunfortunateanddisappointingthatwehadtheseissuesthatkindofpiledonasoftquarter.Theproductissue,ifithadbeenanyotherquarterthantheholidayquarter,Ithinkwewouldhavehaditresolvedandwouldn'thaveevenhadtotalktoyouaboutit.We'vealreadygottheissuesresolvedwiththecustomers;we'remakingthedeliveries.Sothatwillgoprettyquickly.
We'vebookedoneofthemajorordersthatwasaPakistanC-130thatweanticipated,sothatwillmoveforward.I'mprettyconfidentthatwe'llbeabletorecoverthatinthefiscalyear.Maybenotallinthesecondquarter,butcertainlybytheendoftheyear.Sowe'restillforecastingdownmidsingle-digitsfor
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thefirsthalfandthengrowthinthesecondhalf.
MylesWalton (Analyst-DeutscheBank):
Okay,andthenjustoneother.Ofthe[dime],Patrick,thatyoumentionedwasbeingabsorbedbyhigherincentivecompandextrarestructuring,howmuchisextrarestructuringofthatandwhereisitgoing?
PatrickAllen (SVP&CFO):
Thinkofitasabouthalfandhalf.And,youknow,theincreaseislargelyinthevoluntaryretirementprogram,whichisspreadacrossthebusinesses.
MylesWalton (Analyst-DeutscheBank):
Okay,allright.Thanks,guys.
Operator :
RobertSpingarnfromCreditSuisse.
RobertSpingarn (Analyst-CreditSuisse):
Hi,goodmorning,everybody.Hopefullyyoucanhearme.
KellyOrtberg (Chairman,President&CEO):
Goodmorning.Wecan.
PatrickAllen (SVP&CFO):
Goodmorning.
RobertSpingarn (Analyst-CreditSuisse):
Kelly,wantedtogobacktoARINCandaskifyoucouldgiveusalittlemoreofawindowintowhat'sgoingoninthatbusiness.Maybeseparatetheaviationfromthenon-aviation,andtalkabouthowyou'regoingtogettothathighersingle-digitgrowthratelaterintheyear.Andalsoifyoucouldcommentontherelativeprofitabilityofthedifferentbusinessesinthere,becauseitseemslikethenon-aviationisthelower-marginbusiness.
KellyOrtberg (Chairman,President&CEO):
Yes,itis.Ifyoulook--reallytheeconomicengineasImentioned,andtheincrementalmargin,comesfromthegrowthinthecoreaviationbusiness.
Thenon-aviationbusiness,wecalledthatlumpyinthepast,wherewe'vetendedtohaveproject-orientedprograms.I'lladmitit'sbeenconsistentlylumpydown.Soifyoulookattheperformanceofthatbusiness,it'sbeenprettyflat.Anditwasflatthisquarter.
Iamexpectinggrowthinthenon-aviationcomponentofthebusiness.Sowe'llseeanimprovedoverallgrowthrate.Andweputsomestrategiesinplacetoaddressthegrowthinthatbusiness.Ithinkthisisgoingtobeanimportantyeartoseewhetherthosestrategiesaregoingtoplayout.
ButweareachievingouroverallEBITDAgrowthexpectationsbecauseofthefactthatweareachievingthecoreaviationgrowththatweexpectandthatweareachieving,oralittlebitexceeding,theincrementalmarginperformancethat'scomingwiththatgrowth.Again,Ifeelprettygoodaboutit.
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TheonlyheadwindthatIseethatmaybewedidn'tanticipatewasthisinternationaltripsupport.Ithinkthat'stemporaryforusandwe'llbebackwiththegrowthininternationaltrips.Butwe'rejustgoingtohavetoworkthroughtheeconomicissuesherethatwe'vegotinthoseregions.
RobertSpingarn (Analyst-CreditSuisse):
SowouldyousaythatQ1wasbelowplan?Revenues?
PatrickAllen (SVP&CFO):
Alittlebit,yes.
KellyOrtberg (Chairman,President&CEO):
Yes,Q1wasmaybeapointbelowwhatIwasexpecting.
RobertSpingarn (Analyst-CreditSuisse):
Okay,butyoustillfeelprettygoodaboutyouroriginalguide?
KellyOrtberg (Chairman,President&CEO):
Yes,Ido,yes.
RobertSpingarn (Analyst-CreditSuisse):
Okay,thankyou.
PatrickAllen (SVP&CFO):
Andjusttobeclear,whereitwasbelowplanwasinthenon-aviationbusiness.
RobertSpingarn (Analyst-CreditSuisse):
Right.
PatrickAllen (SVP&CFO):
Andreallythetimingofsomedeliveriesthere.
RobertSpingarn (Analyst-CreditSuisse):
Yes,butthequestioniscantheaviationmakeupforthat?Orcanthenon-aviationmakeupforthat?
KellyOrtberg (Chairman,President&CEO):
Well,look,we'vebeenabletomakeupforitfromaprofitperspectivebydrivingthegrowthintheaviation.Wehavegottogetthisnon-aviationbusinessoffthisflatforecast,andthat'sthestrategies.Myteamknowsthatverywell.Ithinkwe'vegotsomeplanstodothat.Ifwecanjustgetsomeaveragegrowthoutofthenon-aviationandcontinuewiththatreallystronggrowthoutoftheaviationbusiness,Ifeelreallygoodaboutachievingourlong-termoutlooks.
RobertSpingarn (Analyst-CreditSuisse):
Right,thankyou.
PatrickAllen (SVP&CFO):
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Thanks.
Operator :
CaivonRumohrofCowenandCompany.
CaivonRumohr (Analyst-CowenandCompany):
Yes,thankyouverymuch,guys.Soyou'veraisedyourEPSguidanceby$0.25.IthinktheR&Dtaxcreditisplus$0.30.Andyouhadmentionedonthenegativesidetherestructuringandincentivecomp.
Myunderstandingwastherestructuringsavingsinthelastninemonthswouldatleastequalthefirstquarter'scharge.AndthenIdon'tunderstandwhytheincentivecompisupwhenyoumissedyourplaninthefirstquarter.Soifyoucouldexplainthoseissues.Thanks.
PatrickAllen (SVP&CFO):
Sure,Cai.Iwouldsayboththerestructuringchargeandthesavingsareupfromouroriginalestimate.Iwouldsaythechargeisupalittlebitmorebecausewe'vewehavesomeneedtobackfillsomeofthepeoplewhotookthevoluntaryearlyretirementprogram.Soit'sreallyadisparitybetweenthesizeofthechargeandthesizeofthesavingsthat'sgeneratingwhat'sroughlyanickelofheadwindtotheR&Dtaxcredit.
Andtheimpactonincentivecompensation,ifyourememberlasttimewehadabigcatch-upinR&D,wehadEPSasagoalinincentivecompensation.Wetookthatout,butwestillhaveagoalassociatedwithcashflow.TheR&Dtaxcreditgeneratedincrementalcashflow,whichisgeneratinghigherincentivecompensationbecausewe'veraisedourcashflowgoalby$50million.Sothat'stheothercomponentofthe,I'llsay,roughlydimethat'soffsettingthe$0.35benefitinR&Dtaxcredit.
CaivonRumohr (Analyst-CowenandCompany):
Thankyouverymuch.
Operator :
GeorgeShapiroofShapiroResearch.
GeorgeShapiro (Analyst-ShapiroResearch):
Yes.IfIlookatthecommercialmarginex-R&D,sinceitclearlybenefited,itwasdropped170basispointsfrom30.1%to28.4%.Now,youmentionedyouhadalittleimpactwithhigherlow-margincustomer-funded,highercostsfromPacificAvionics.
Myquestionis,willR&Dstayatthislowerlevelthroughouttheyear?Orarethereother--someofthoseotherissuesIjustmentioned,one-timeitems?Orwhat'sgoingontoeffectivelycausea170-basispointdropintheunderlyingmargin?Thanks.
PatrickAllen (SVP&CFO):
George,Ithinkyourmathisspot-on.AndIthinkyou'veidentifiedthecausalsofwhythemarginhasbeenimpactedinthefirstquarter.
What'sgoingtohappengoingforwardiswe'regoingtosee,I'llsay,asteadyshiftbetweenCompany-fundedR&Dgoingupandourdeferredengineeringinvestmentcomingdownoverthecourseofthequarters.That'sgoingtobeoffsetbyrestructuringsavings,whichasImentionedearlierinthecall,wedidn'tgetmuchofanyinthefirstquarter.Sowe'llbebenefitingfromtherestructuringsavings.
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Plus,weshouldbegettinghighervolumeandwithhighervolumegettingtheincrementalflowonthat.SoI'mconfidentwe'llcontinuetogenerategoodmarginsonthecommercialsideofthebusiness.ButthedynamicswillbeasIdescribed.
GeorgeShapiro (Analyst-ShapiroResearch):
Okay,thankyou.
Operator :
NoahPoponakfromGoldmanSachs.
NoahPoponak(Analyst-GoldmanSachs):
Hi.Goodmorning,everyone.
KellyOrtberg (Chairman,President&CEO):
Hi,Noah.
NoahPoponak(Analyst-GoldmanSachs):
WantedtogobacktotheGovernmentSystemsgrowthrateinthequarter.Withthesupplierqualityissue,anyincrementaldetailyoucanprovideonexactlywhatthatwasorwhereitwas?
Andthenontheordertiming,whichsoundslikeaseparateissue,somebodyelseindefensehasbroughtuptheholidays.I'mwonderingiftherewasasystem-wideabnormalend-of-yearissue.Andcanyouquantifywhatthegrowthratewouldhavebeeninthebusinesswithoutthesetransitoryitems?
KellyOrtberg (Chairman,President&CEO):
Yes,itwasabout5pointsofimpacttoourGovernmentSystemsgrowthrate.Soweweredown11;wewouldhavebeendown6withoutthem.
ThesupplierissuewasanonconformingmaterialissueonaconnectorthatweusedinourARC-210radios.Infact,wedidn'thavetorework,wejustneededtogothroughthequalitypaperworkandgetawaiverinplace.Unfortunately,thatwasattheendoftheyearandwiththeholidays,wecouldn'tgetthatwaiverapproved.Sowe'vegotthatwaivernowapproved;theproductsareshipping.Soitreallywasjustablip;youshouldn'tthinkofthatasanykindofsystemicissue.
Intermsoftheordertiming,theonethatIhighlighted,thePakistanC-130,wehadexpectedquiteearlyinthefiscalquarter.Weactuallygotthathereearlythiscalendaryear,butitdelayed.Andthat'sanFMSorder.Idon'tthinkthatwasholiday-related,Noah.Ithinkthatwasjustthenormalchallengewehaveoftryingtopredicthowfastthingsgothroughthatcycle.Idon'thaveanythingelsetohighlightinGovernmentSystemsthatwasabnormalaroundtheholiday.
NoahPoponak(Analyst-GoldmanSachs):
Okay.Andyourshort-cycledefensecomment,wasthatachange?Hadthatstartedtofirmandthenhasmaybeturnedalittlebit?Oristherenochangeinhowyou'reseeingthatprogressing?
KellyOrtberg (Chairman,President&CEO):
No,no.Nochange.Short-cyclethingslikeradios,munitions,arethetypesofthingswewouldexpecttosee.NREprogramswouldbeanotherexample,thethingsthatwe'llseeoutofthebenefitofthisbudget
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update.Andsothere'snochangeinoutlookthere.
NoahPoponak(Analyst-GoldmanSachs):
Okay,thanksverymuch.
Operator :
MichaelCiarmolifromKeyBancCapitalMarkets.
MichaelCiarmoli(Analyst-KeyBancCapitalMarkets):
Hey,goodmorning,guys.Thanksfortakingmyquestions.Kelly,justtostayonthegovernmentsystem,specificallyIthinkyoucalledout15%ofthebackhalfthatyouneedtogoout,getandwin.Canyougiveussomecolor?IstherealotofFMSsalesinthere?AndalsoontheFMStopic,canyoutouchonanyrisksrelatedtotheKC-390program,giventhecurrentstateoftheeconomyinBrazil?
KellyOrtberg (Chairman,President&CEO):
Yes,letmewalkthrougheachofthosecategoriesthatIwentthrough.Forthoseofyouwhoareprogram-specificingovernment,you'llunderstandwhatprogramsaredrivingthat.Italkedabout60%beingfirminfollow-on.Ifyoulookatthefirmcontracts,KC-390,KC-46,somerotarywingatAgustaWestlandandSikorsky,SaudiF-15,areallfirmprogramsthathavefirsthalf-secondhalfgrowth.
I'mconfidentthattheKC-390firsthalf-secondhalfgrowthwillbeachievedinspiteoftheeconomicsituation.We'refundedbyEmbraer.Thatdoesn'tmeantheyarenecessarilyfundedbytheircustomer,buttheyaregoingforwardwiththat.Idothinkwe'llprobablyseesomefuturedelaysontheKC-390program,butatthispoint,nothinginthisfiscalyear.
Theninthat,Ialsotalkedaboutfollow-oninthat60%.Theseareourannualbuys.ThingsliketheARC-210,MIDSdatalinks,ourKC-135Block45program,wherethecustomerbuystheannualworkonayearlybasis.Theyareallfunded;theyareintheplanandIdon'tseereallyanyriskthere.The15%thatItalkedaboutisreally--there'snoreallargeprogramdrivers.Someofthemareinternational.Thesearethingswe'veeitherbidonorwe'rewaitingadecision.Wealsohavequiteabitofshort-cyclestuffwherewegetanorderandsellitoutoffinishedgoods.Andsowetrackthat--it'salotoflittleorders.
Wetrackthatrelativetohowdowelookfirmthisyearversushistoricalandwelookprettygood.Andwiththeimprovingbudgetenvironment,thatmaybeactuallyopportunityforus.ButIdon'tseeanythingthat'soutofthenormal,nordoIseeanymajoroneprogramdriverinthat15%.
MichaelCiarmoli(Analyst-KeyBancCapitalMarkets):
Gotit,veryhelpful.Thanks,guys.
KellyOrtberg (Chairman,President&CEO):
Okay.
Operator :
JasonGurskyfromCitiInvestmentResearch.
JasonGursky(Analyst-Citigroup):
Goodmorning.Thanks.IjustwantedtostickwithGovernmentSystems,onelastquestionhere.Youmentionedinyourpreparedremarksthatyouareexpectingsomelevelofannualrenewalsthatcome
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through.Butoneofthethingswe'veheardfromothersisthattheseannualrenewalsarebeginningtogetdescopedinsize.Sothegovernmentbuys100oneyearandbuysonly96or95thefollowingyear.Canyougiveusasenseofwhatyou'reseeingonyourannualrenewalsandwhetherthere'sbeenanydescopeoccurringforyouguys?
KellyOrtberg (Chairman,President&CEO):
Iwouldn'tsayanacross-the-boarddescope.Ithinkitdependsonwhat.Wedoseesomedescope,butwealsoseesomeincreaseinscope.OurJDAMordersarehigherthanwhatweexpected.WealwayslookatthequantitiesontheKC-135Block45,butthat'smoredrivenbythepaceatwhichthegovernmentcantakethekitsandgettheaircraftmodified.
We'realwaysdealingwiththat,butnothingsystemicornothingthatIwouldexpectwouldbeacross-the-boardandcauseusanychallenges.Radioquantities,MIDSquantitiesfortacticaldatalinks,alllookgoodgoingforward.SonothingthatIwouldbeabletosayweseethattrend.
JasonGursky(Analyst-Citigroup):
Okay.Thenaclarificationquestion,ifIcan.OntheIMScommentaroundinternationalflightoperationsbeingunderalittlebitofpressure,canyouletusknowwhetherthatwasforcommercialflightsorbizjetflights?Orwhatthemixofthatweaknessis?
KellyOrtberg (Chairman,President&CEO):
Oh,I'msorry.That'sallbusinessaviation.Thisiswherewedotrips,internationaltripsupport.Sowhenabusinessaircraftmakesaninternationaltrip,weprovideservicetothemforthattrip.Andthat'swherewe'reseeingtheweakness.Hasnothingtodowithairtransport.
JasonGursky(Analyst-Citigroup):
Perfect.Thankyou.
Operator :
HowardRubelfromJefferies&Company.
HowardRubel(Analyst-JefferiesLLC):
Thankyouverymuch.Iwanttotalkaboutimplementationforamoment.You'vegotalotofthingsthataregoingonthisyear,Kelly.Maybeyoucouldaddressacouplethings.Howareyoudoingintermsofimplementingthisrestructuringprogram?Youdidmakeachangetothegovernmentbusinessunit.
The737MAXisatthecriticalpointbeforefirstflightandyouhavetobalancewhatI'llcallcertrequirementsandproductionrate.Andthenyou'vegotCSeries.Andthentofinishonthatisthechangeintheglobalandwhetherinfactyoufeellikeyouunderstandthedepthandthemagnitudeofthatchallenge.
KellyOrtberg (Chairman,President&CEO):
Well,okay,alotinthatquestion.Firstofall,Ithinktherestructuringhasgoneverywell.It'smainlyaheadcountreductionforusandtheheadsallwentoutinthefirstquarter.SoI'mverypleasedwithwhereweare.Wedohavesomeconsolidationandrestructuringofourbusinesstorunmoreefficientlywithfewerheads.That'swhatdrove,forexample,thechangethatwemadeinourGovernmentSystemsportfolio.
Ourdevelopmentprogramsaregoingverywell.We'reingreatshapeonMAX.I'mveryexcitedaboutthe
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supportandgettingthataircraftintofirstflight.Everythinglooksreallygood.Sodevelopmentprogramsaretrackingquitewell.ImentionedtheCSeriescertification.Nowourteam'sfocusedwithsupportingBombardiertogettoentryintoserviceheremiddleoftheyear.
Asfarasbusinessaviationandtheglobals,wesawglobalimpact,asImentioned,thisquarter.Thatimpactactuallyincreasesalittlebitthroughouttheyear.ThatwasanareathatwesawsomeadditionaltruingupfromBombardierhere,aswewentintothefiscalyear.Soyes,Ithinkthatwe'regoingtobechallengedwiththatproductionrate.ButIthinkwe'vegotitwellsizednowfortheyear.
HowardRubel(Analyst-JefferiesLLC):
Thankyouverymuch.
Operator :
(OperatorInstructions)
DavidStraussfromUBSSecurities.
DavidStrauss (Analyst-UBS):
Thanksagain.Kelly,youhadmentionedtheupsidefromtheFY16budget.WantedtoseeifyouwouldcaretospeculatewhatthatcouldmeanforGovernmentSystemsgrowthlookingout2017,2018,2019.Ithinkyou'vepreviouslysaidgettingbackto2%,3%growthrate.Couldyoutalkaboutthekindofupsidewecouldseefromthe2016budgetoutinthoseyears?Thanks.
KellyOrtberg (Chairman,President&CEO):
Theteam'sstillgoingthroughtheactualprogrampedsandhowthatallisgoingtoflow.ButIwouldhopethatwe'llseeapointortwoofhighergrowththanwehadpreviouslyanticipated,becausethat'swhatwe'reseeingoutofthisbudgetenvironment.Again,Ithinkwe'reprettywellpositionedtoatleastgetourfairshare.Long-term,Ithinkit'scertainlyfirmsupourabilitytogetthisbusinessbacktolowtomidsingle-digitgrowth.
DavidStrauss (Analyst-UBS):
Thankyou.
Operator :
SamPearlsteinfromWellsFargo.
SamPearlstein (Analyst-WellsFargoSecurities,LLC):
Hi.Patrick,canyoutalkalittlebitaboutthepreproductionengineering?Witha$40millionincreaseinthefirstquarter,youtalkedabout$100millionfortheyear.Areyoustillseeingthatkindofanincrease?Doesthatmeanitincreasesmoreearlierintheyearandthenitstartstoactuallyreverse?Orisitjust--
PatrickAllen (SVP&CFO):
Iwouldsayyes.Whatwe'regoingtoseeisoverthecourseoftheyear,theamountthatgoesintothedeferralisgoingtoreduceovertime.AndactuallyIthinkImentioneditwithGeorge'squestion.You'regoingtoseeCompany-fundedtickupalittlebit,Company-fundedR&Dtickupoverthecourseofthequarter.You'regoingtoseealittlebitofamixshiftoverthecourseoftheyear.Andwe'reonplanwithrespecttodeferred.SoIstillfeelverycomfortablewiththat$100millionnetincrease.
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SamPearlstein (Analyst-WellsFargoSecurities,LLC):
Thanks.
Operator :
SethSeifmanfromJPMorgan.
SethSeifman (Analyst-JPMorgan):
Thanksverymuchandthanksfortakingthefollow-up.IfwecouldgobacktothecommercialaftermarketandyoucouldtalkalittlebitmoreaboutIntertrade.You'vetalkedforawhileaboutthestructuralfactorsdrivinggrowththere.Butfromacyclicalstandpointwithlowoilprices,alotofthedatathatweallhaveseenshowsretirementsweredownlastyear.Inanenvironmentwheremaybenotasmanyaircraftarebeingretiredandmaybeolderaircraftareflyingalittlebitmore,howdoesthatcyclicaldynamicaffectIntertradeandplayoutagainstthestructuraldynamicofmoreairlineslookingtoharvestusedparts?
KellyOrtberg (Chairman,President&CEO):
Well,Idon'tthinkIcanpointtoexactlyhowmuchthatdynamicwouldchangeourIntertradebusiness.Thefocusofthatbusinessisallaroundmakingsureyouhavetherightdemandfortherightassetandyougobuytherightassetthatyoucanturn.Andsoitreallygetsdowntoaprogram-by-programaircraft-type-by-aircraft-typespecificdynamicthatthatteamworks.
Intheend,iftheyslowtheretirementrate,thatwillmeanthatthere'sprobablyfewersparesoutthere.Butitalsomeansthere'sprobablylargerdemandforthoseusedspares.Sothetrickwillbeourabilitytogettothoseusedpartsinthemarkettocontinuetogrow.Ifeelprettyconfidentthatwithinthebusinessthatwe'reforecasting,weshouldbeabletogrowthatagaindouble-digitherefortheyear.
SethSeifman (Analyst-JPMorgan):
Great.Thanksverymuch.
Operator :
GeorgeShapirofromShapiroResearch.
GeorgeShapiro (Analyst-ShapiroResearch):
Justwantedtopursuealittlebitmore.Thebusinessjetaftermarket'sup17%.Youweresayingthattheinorganicwasallairtransport.Sowhatdoyoulookforbusinessjetaftermarketgoingforward?Lastyear,Iguessit'saprettyeasycomp,butstill,that'saprettyhealthyincrease.
KellyOrtberg (Chairman,President&CEO):
Well,remember,we'veguidedthatbizjetaftermarketwouldbefairlymuted,kindoflikewhatwesawlastyear.Obviously,17%isagangbusterstartto--Ithinkwesaw2%lastyearingrowth.AsImentioned,Idon'tthinkwe'regoingtocontinueatthat17%ratebecausesomeofthemandateactivitieswillcomedowninbusinessaviation.ButI'mhopefulthatifwecontinuetosee,likewe'veseenthisquarterwithgoodsalesofavionicsmods,thatwe'llbeabletocreatesomeopportunitytoourforecastthere.
GeorgeShapiro (Analyst-ShapiroResearch):
AndKelly,Idon'tknowwhetheryouwanttoforecastornot,butbasedoneverythingyousaid,wouldsecond-quarterrevenuesagainbelowerthanlastyear'ssecondquarter?Likethefirstquarterwaslowerthanlastyear'sfirstquarter?
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KellyOrtberg (Chairman,President&CEO):
Ithinkitwillbemuchclosertoflat,butmaybedownalittlebit.
GeorgeShapiro (Analyst-ShapiroResearch):
Okay.Thanksverymuchagain.
Operator :
RobertSpingarnfromCreditSuisse.
RobertSpingarn (Analyst-CreditSuisse):
Hi,justafollow-uponthecommentontheARINCandthebizjetsoftnessthere,ifthat'stherightcharacterization.Wasthatfromtheservicedemandorwasitfromthevolumeofflights?
KellyOrtberg (Chairman,President&CEO):
Itwasfromthevolumeofflights,whichdrivesthedemandfortheservices.Ifyouthinkaboutthat,wegetpaidtoprovidetripsofportforaflight,iftheydon'ttakethatflight.Bytheway,it'sbyleg.Eveniftheytakeaflight,butit'sfewerlegs,thatmeanslessrevenueforus.Themoretrips,themorelegstothetrip,thehighertherevenue.
RobertSpingarn (Analyst-CreditSuisse):
Sothisisnon-discretionaryservice.Thisisn'tsomethingthattheyselectbyflight.Thisistiedtothenumberoftrips,asyoujustsaid.
KellyOrtberg (Chairman,President&CEO):
Yes,generallyanybodywhoisflyingalargebizjetlikethathascontractedwiththeflightsupportservicesorganization,ortheymaydosomeofitthemselves.Butit'sthingstheyhavetodotosupportthatflight.
RobertSpingarn (Analyst-CreditSuisse):
SotyingthattoGeorge'squestiononthestrongaftermarketbizjet,areweactuallyseeingaflightactivitydeclineherethat'sworrisome?
KellyOrtberg (Chairman,President&CEO):
Well,that'saverysmallsegment.Ithinkifyoulookatbizjetoverallflightactivity,itwasuplowsingle-digitgrowth.AndifyoulookatourcommercialMRO,ittracksverycloselytothatoverallflightactivity.Soyes,Ithinkwe're--wewatchthatverycarefully.Wesawlowsingle-digitinourbizjetMROherethisquarter.Andthattracksprettyclosetothatactivity.Iftheactivitypicksup,ourrevenueswillpickup.Iftheactivityslowsdown,we'llseeheadwinds.
RobertSpingarn (Analyst-CreditSuisse):
Okay.Andthenswitchinggearsslightly,commercialOE.Last,Idon'tknow,yearorso,you'vehadthis--ontheairtransportside--about$180millionto,callit,$210millionquarterlysales.Butofcourseyoutalkedearlieraboutallofthesenewprogramsthatyou'vewon,Max,777X,A350,soon.Whenshouldwestarttoseethatquarterlynumberreallystarttomovenorth?Inotherwords,whendoes--
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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KellyOrtberg (Chairman,President&CEO):
Inthesecondhalfofthisyear,we'llseetheproductionrateincreasesatAirbusforthenarrowbodies.Andwe'reseeingA350consistentlyrampup.WewillstarttoseesomerevenuesverylateinthefiscalyearonMAX,butitreallyticksupinFY17.
RobertSpingarn (Analyst-CreditSuisse):
Okay.Andyou'llgetthe78benefitatsomepointhere.
KellyOrtberg (Chairman,President&CEO):
Yes,yes.
RobertSpingarn (Analyst-CreditSuisse):
Areyoualreadyrunningthatat12?
KellyOrtberg (Chairman,President&CEO):
No,Ithinkthatstartstohitussecondhalf.Secondhalfoftheyeariswherewe'llseethebenefitfrom87,alongwiththe320s.
RobertSpingarn (Analyst-CreditSuisse):
SoitsoundslikethatJuneorSeptemberquarterwecouldseeameaningfulmoveinthatcommercialOEairtransportfigure.
PatrickAllen (SVP&CFO):
YoushouldseemuchbettergrowthinthesecondhalfoftheyearinairtransportOE.
RobertSpingarn (Analyst-CreditSuisse):
Okay.Thankyou.
KellyOrtberg (Chairman,President&CEO):
Absolutely.
Operator :
HowardRubelfromJefferies&Company.
HowardRubel(Analyst-JefferiesLLC):
Thankyouverymuch.ChinaAviationhasbeenaveryimportantdriverforyourbusinessforquiteawhile.There'stwopartstoit.OneisyouarticulatedtheHUDpickup,butalsofromtimetotime,thosecarriersalsoadjusttheirsparesandtheirdemandandotherthings.Andthenlast,growthhasbeenprettygood.Andalsorelated,you'vehadsomeR&Dprogramsinthere.SoKelly,couldyouaddressthemarketandprovidesomecolor,please?
KellyOrtberg (Chairman,President&CEO):
Well,themarketdemandforourservices,forourproductsandfortheaircraftcontinuestobeverystrong.Whereweareseeingweaknessistheoverallthingsthatarerelatedtotheeconomicslowdown,thingslikeflightactivityasanexample.ButI'mnotseeinganysoftnessintheirdemandforaircraft,numberof
CompanyName:RockwellCollinsIncCompanyTicker:COLSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q12016EarningsCallMarketCapasofEventDate:10.86BPriceasofEventDate:85.24
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flightstheyaredoingintheairtransportmarket.Theaftermarketremainsveryrobust.TheyarecontinuingtofundHUDretro-fitstomeettheirmandatedservice.Theoveralleconomyisslowingdown,butIthinkit'sstillaveryrobustmarketforairtransport.
HowardRubel(Analyst-JefferiesLLC):
Soyoucanstillseevaryinganywherefrommidtohightoevenlowdouble-digitgrowth?Isthatfair?
KellyOrtberg (Chairman,President&CEO):
I'msorry,inwhatsegment?
HowardRubel(Analyst-JefferiesLLC):
Ifyouweretocharacterizeit,itstillprobablyrangessomewherebetweenmidorhighsingle-digittomaybeevenlowdoubledigit.Isthat--
KellyOrtberg (Chairman,President&CEO):
Oh,yes.ForourChinabusiness,ifIputall-in,yes.Idon'thavethenumberinfrontofme,Howard,butIwouldsaythat'sadouble-digitgrowthbusinessandcontinuestogrowatthatrate.
HowardRubel(Analyst-JefferiesLLC):
No,that'skindofthereadIhaveandIjust--youseeitandtouchitmorethanIdo.Sothankyou.
Operator :
Thisconcludesthequestion-and-answersession.IwouldnowliketoturnthecallovertoRyanMillerforanyclosingremarks.
RyanMiller (VPofIR):
Thankyou,Sean.Weplantofileour10-Qlatertoday,sopleasereviewthatdocumentforadditionaldisclosures.Thankyouforjoiningusandparticipatingontoday'sconferencecall.
Operator :
Thisconcludestoday'sconferencecall.
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