Ladies and gentlemen, thank you for standing by. Welcome to the Textron Earnings Call. And at this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, today's conference is being recorded. I will now turn the conference over to your host, Vice President, Investor Relations, Eric Salander. Please go ahead.

Thanks, Kevin. And good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO, and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our Web site. Textron's revenues in the quarter were $4 billion, up $285 million from last year. During this year's fourth quarter, we recorded $72 million in pretax special charges, largely related to Industrial and Textron Aviation, or $0.24 per share after-tax. Excluding these special charges, adjusted net income was $1.11 per share compared to $1.15 in last year's fourth quarter. Manufacturing cash flow before pension contributions was $650 million, up $366 million from last year's fourth quarter. For the full year, revenues were $13.6 billion, down 2% from a year ago. Adjusted net income was $3.74 per share compared to $3.34 last year. And cash flow before pension contributions was $642 million, down from $784 million last year. With that, I'll turn the call over to Scott.

Thanks, Eric. And good morning, everybody. Revenues were higher in the fourth quarter, primarily driven by double-digit growth at Textron Aviation, Bell and Textron Systems. The bell revenues were up largely due to higher commercial deliveries of our 407, 429 and 505 models. We delivered 76 commercial helicopters, up from 46 in last year's fourth quarter. On the military side, the V-22 tiltrotor recently surpassed the milestone of 500,000 flight hours. With more than 375 V-22 aircraft in operation across the US Marine Corps, Air Force and Navy, as well as internationally with Japan, this increasingly large installed base continues to drive significant aftermarket opportunities to support this highly utilized fleet. In the fourth quarter, the Bell Boeing Program Office was awarded contracts totaling over $800 million across multiple support activities, including $375 million to provide maintenance repair and consumable material support to the US Navy, Air Force and Marine Corps operations; $218 million for logistics and engineering support for aircraft across US military fleet; $146 million as part of the Marine Corps CCRam modernization program; and $68 million for logistics and engineering support to Japan. Bell also received an $815,000 five-year performance-based logistics contract for the U.S. Navy for upgrades to their H1 Yankee and Zulu aircraft. On the new product front, Bell marked the second anniversary of V-280's first flight in December. In two years of highly successful flight demonstrations, the aircraft has flown more than 160 hours to collect data and inform requirements for the U.S. Army's future long-range assault aircraft program. In December, the V-280 flew anonymously for the first time, meeting all of Bell's demonstration flight goals, including automated takeoff and landing, conversion to cruise more and precision navigation. At Systems, revenues were up on higher volumes, largely within our unmanned systems product line. In…

Thank you, Scott. And good morning, everyone. Segment profit in the quarter was $340 million, down $57 million from the fourth quarter of 2018 on a $285 million increase in revenues. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.7 billion were up 11%, primarily due to higher volume and mix, largely reflecting Longitude's entry into service. Segment profit was $134 million in the fourth quarter, down from $170 million a year ago, primarily due to the mix of products sold and an unfavorable impact from inflation net of pricing. The resulting margin dilution in the quarter from the mix of the aircraft sold was largely due to the initial launch to deliveries and the associated higher cost basis that included rework for modifications required by the final type certification and lower legacy deliveries. Backlog in the segment ended the quarter at $1.7 billion. Moving to Bell, revenues were $961 million, up 16% from $827 million last year, primarily on higher commercial volume. Segment profit of $118 was up $10 million, largely on the higher commercial volume. Backlog in the segment ended the quarter at $6.9 billion. At Textron Systems, revenues were $399 million, up 16% from $345 million a year ago, primarily due to higher volume. Segment profit of $33 million was down $4 million primarily due to unfavorable performance, partially offset by the higher volume and mix. Backlog in the segment ended the quarter at $1.2 billion. Industrial revenues of $927 million decreased $81 million, largely related to lower volume and mix at Textron Specialized Vehicles, principally due to the shift in the timing of snow sales to the third quarter of 2019, reflecting the new business model that was implemented earlier this year. Segment profit was $44 million…

Thank you. [Operator Instructions]. And the first question in queue is from the line of Peter Arment of Baird. Please go ahead. One moment please. Mr. Arment, your line is open now.

Yeah. Good morning, Scott, Frank.

Good morning.

Hey, Scott. I guess I'll just start high-level, I guess, on Aviation. Just talking about the outlook, it feels like with Longitude ramping and finally getting across the goal line, that's a big step forward, but just kind of I see the legacy rates coming down. Is there an expectation on kind of unit volume you expect for 2020?

I think, overall, our unit volume will be fairly flat for the year. So, on a unit number, we'll clearly a lot more Longitudes. So, the revenue guide is obviously up. But as I said, the unit volumes will be kind of flattish, although it will have higher unit revenues driven by the fact that we'll have a significant mix of Longitudes.

Okay. And then, just on the Longitude itself, there was expectation that this was going to help a lot on the factory absorption side. Is there just a point in time or an inflection where we get through kind of the learning curves? What's your expectations around that?

Clearly. Look, the first quarter – really, most of the first half, we'll be selling all the aircraft that we were fabricating late last year. Obviously, a number of those have a lot of the rework that was basically inventoried and we'll deliver here particularly in the first quarter. The learning curve is going well. But for sure, we'll expect to see a more normalized margin rate on Longitude as we get into the back half of the year. So, that's the challenge in terms of the mix side is our going through sort of moving the aircraft that has incurred a fair bit of rework, certification process and then getting the learning curve under our belt, which we feel good about in terms of the early fabs and all the feeder lines that are coming into final. But we'll really start to see those aircraft that are going to deliver in the second half of the year in the final assembly line here as we get into the first half.

And just lastly on just overall demand in biz jets, just what's your current take? Obviously, you've had some fits and starts with trade and kind of the stresses last year. Can you maybe give us your overall environment?

I think it's pretty consistent with what we talked about going into the third quarter. The Longitude obviously being a brand new product and very well-received in the market, we feel good about how that's going. And, clearly, a new product like that will drive some demand activity, which is great. On legacy side, things continue to be sort of flat to down. And as we talked about in the third quarter, our approach here is that we would lower our volumes, bring back some of our production capacity, and make sure that we don't have to get into a situation where we've got a bunch of excess aircraft and start to drive pricing activity. So, I think we made those adjustments going into the fourth quarter and I think we'll hold those for our prospective – at this point, we'll hold that through 2020. If something starts to change or we see things strengthen – there's certainly a lot of conversation, Peter. It's not like the market is high out there, but getting people to commit has been a little bit softer and we saw that through the whole back half of 2019. So, I think the market has been pretty stable here for the last three to six months.

Appreciate all the color. Thanks.

Sure.

Thank you. Our next question is from the line of Sheila Kah of Jefferies. Please go ahead.

Good morning, guys. I'm dropping my last name. I just wanted to follow-up quickly on Peter's question. You had 7.8% margins in the fourth quarter, 13 Longitudes out the door. So, when we think about the quarterly aviation margin cadence, does it dip below that in the first half and also putting the incident in Plant 3 into the picture too? So, is this the kind of – do we expect a steeper drop in the first half?

Yeah. So, look, we don't normally go into a quarterly kind of progression, but considering particularly with the impact to Plant 3, I think that we will probably be somewhere in the 10 to 15 aircraft light in Q1 and Q2. We're still in the process of finalizing and understanding all the tooling, which everything appears to be repairable, but it will take some time to get the composite operation back up and running. So, given that and the progression we just talked about with Peter on the margin kind of going from a tougher margin on Longitudes and becoming more normalized as we get sort of exiting 2020, I think the progression at Aviation is going to start the year sort of low single-digit in Q1. It's going to move to a mid-single digit in Q2 and then high single-digit Q3 and double digit Q4. And again, that's really – normally, we don't kind of go into that level of detail, but I think we have to make sure people understand that we are going have lighter deliveries in Q1 and Q2 driven by the composite factory issue. And that compounded with the change of margin rate of Longitudes through the course of the year will give us that sort of progression. So, it's – again, our full year sort of intact and I think consistent with the guide that we've given you. But we clearly expect that Q3, Q4 are going to be at the more normalized margin rates that we expect out of this business. But it will be light in Q1 and Q2 given the Longitude mix and the light deliveries frankly of a lot of the legacy aircraft impacted by the Plant 3 situation.

Okay. Thanks. That's pretty clear. And sorry for all that detail in the quarter. But bigger picture question, you decided to keep Kautex. I guess what was the rationale behind deciding to keep it? And you've also announced some restructuring for two years in a row now. Where is that business today and what brings the profitability levels back up to that 6.5% range that you're guiding to?

Well, look, Kautex, as we've always talked about, is a good business. It's been a good cash generator for us. It generates a very good ROIC, solid returns. We were asked and sort of heard from a lot of investors that maybe this is something that within the portfolio holds back our PE and our ability to generate a better stock price. So, we said, look, we're going to go look at this. We went into the process knowing that considering the profitability of that business and sort of where things were in the automotive sector that we would probably see some dilution. But some dilution versus a potential re-rate on the multiple could result in something good for our shareholders. As we went through the process, the reality was that what was the pricing in terms of what anyone would be willing to pay for that business would have created a level of dilution that there's, in our view, would have created enough of a re-rate on the multiple that would have been good for our shareholders. So, we went through the process. It was very rigorous. We looked at a lot of different alternatives and options. And in the end, there was no way for us to get our head around this being something that would be accretive for our shareholders. Again, it's a good business. It generates good cash. It generates good earnings. Look, we're also sitting at kind of a low part of an automotive cycle, but that team has done a really nice job of managing through that. And it has stayed a solid business. Obviously, we did some restructuring because we think that there's – you're probably towards the bottom of the auto cycle, but it's not going to come snapping back. So, we wanted to make sure that we make sure we adjusted the right cost, so that as we go through a period of, relatively speaking, lower volumes, we maintain good margins in the business, and I think we'll do that.

Okay, thank you.

Sure.

Our next question is from the line of Carter Copeland of Melius Research. Please go ahead. Your line is open.

Carter, you there?

Okay. Mr. Copeland, your line is open.

We'll go to the next one, Kevin.

One moment please. Next question is from the line of Pete Skibitski. Please go ahead, sir.

Scott, sorry to beat on this, so the Plant 3 issue, that's more of a revenue issue in the first half than a margin issue. Am I understanding that right? So, the margin pressure in 2020 is almost wholly due to the Longitude, is that accurate?

No, Pete. I think that the lower volume, obviously, in Q1, Q2, considering that we period-expensed all of our R&D and our SG&A, our costs are going to be more evenly spread over the course of the year. So, when you pull 10 or 15 aircraft out, that's a big chunk of revenue. And particularly, it's a lot of our legacy good margin business. So, I think that it's a combination of both the progression of Longitude profitability through the course of the year. But the Q1, Q2 impact of missing that revenue is not trivial. And that's why I thought it would help to try to guide what we expect that margin rate to look like through the course of the year.

Yeah. No, that's helpful. Thank you. And so, if things stay on track, I know you've said in the past you've wanted this business to be a double-digit business, is there any reason to think that can't be true in 2021 assuming – obviously, [indiscernible] on Longitude, but – and assuming Plant 3 doesn't happen again.

Look, we're going to be careful, Pete. We're not quite ready to guide 2021 just yet.

Of course.

But, yeah, look, as you get into the third and fourth quarter, I would expect to see margin rates in aviation that are indicative of how that business should perform in a normal place. As I said, that should be in that high-single digit, low-double digit range.

Okay. Thanks, guy.

Sure.

The next question is from the line – one moment, please. That is David Strauss of Barclays. Please go ahead.

Thanks. Good morning.

Good morning, David.

You noted in Q4 at Aviation, inflation net of pricing was a headwind. Could you maybe break the pieces out there, inflation versus pricing? And then also, how you're thinking –or what you've got baked in for inflation versus pricing in the 2020 guide for Aviation?

The dynamic in Q4 was price was pretty flattish, and so that's why we have a negative because, clearly, there was some inflation in Q4. And we didn't have price to offset that. So, it was fairly flat. Again, part of our dynamic and rationale for pulling back on the volume, particularly on those legacy aircraft is to make sure that we can maintain the price levels that we have in the industry. So, I don't think we'll probably get into breaking out sort of the components of the guide around the price inflation number, but clearly we would you like to drive to get that back in balance.

Okay. And following up on a question couple quarters ago I asked, was on the potential upside for MAX simulators. Obviously, now it looks like there's going to be mandatory simulator training. Could you just talk about what you see maybe in terms of order interest there and potential upside from this?

Well, we have certainly continued to see order interest, I think, particularly now with – what you're seeing out there publicly around the need for MAX sim training in some capacity associated with a return to service. That's picking up. So, we've largely been following the lead of Boeing who is our biggest customer in this space and we are going to increase the number of MAX simulators that we have in production. So, I think that's good. Look, for our total company, it's not going to be a material impact, but we will certainly see a little bit of an upside on the number of MAX sims.

Okay. Thanks very much.

Sure.

Our next question is from the line of – one moment please – Jon Raviv of Citi. Please go ahead.

Hey, thank you. Good morning. Apologies, if you'll jump back to the Aviation margin, I appreciate that high-single digit, low-double digit in second half is normative. But really just still thinking about the overall underlying earnings power of this business. At some point, we were always thinking that this could be a pretty strong incremental margin business. Clearly, with rates down, you'd beat some of that this year, but as you kind of reemerge out of what could be a tough year this year given some of the dynamics, is it still fair to think about this as a double-digit type business going forward, given some of the changes you've made?

Absolutely. That's our expectations. I think that – look, we obviously had a fair bit of dilution here in Q4 and expect that in the first half of next year. If you set the Plant 3 thing aside, which is an unusual circumstance, obviously, Longitude, we fully expect to be a strong margin product. It's an outstanding product. We've got a bunch of them in the field now. It's been well received by customers. It's flying beautifully. Feedback on those who have taken delivery. Several customers who are flying this thing hard is outstanding. So, I think this thing is going to a great part of the business. But, clearly, there was a lot more cost in 2019 in getting through on the certification process and all that was entailed there. And we still have costs as we go into 2020 in pursuit of certifications around the world and the entry into service. There's always some costs associated with these things as you roll them out into the marketplace. But this thing is going to be an outstanding product. It's going to be a product that has the kind of margin rates that we expect across our jet line and this is a transient problem. I think we end up in a very good place and we have very good expectation for this business to be a double-digit margin business.

Thanks. And then, you talked about how some of the restructuring is based on lower development plans going forward. Something that I think has helped you guys recently is investing in new products and the ability to drive some growth in what could be a flattish market. How do you think about that going forward? There's still parts of your portfolio, some would suggest, could use some upgrades here and there. So, how are you thinking about the skyline beyond SkyCourier and Denali?

Look, I think if you look at the product portfolio right now in Aviation, obviously, the last five years of driving Latitude and Longitude have completely transformed our jet product line and positions in a very good place when you think the SkyCourier which is a fabulous product in a new market segment for us really. It's going to be a great growth driver. We've not been in the high-performance single. That's our rationale for Denali. It's a great market, which I think will get very good participation. Beyond that, we obviously always have some things that we're looking at. I think there's clearly opportunity to do some upgrades and refreshes across some of the core Industrial product line in both the jet and the turboprop side of things. And so, we'll pursue those. They just won't be of the magnitude of a clean sheet, brand-new airplane like a Latitude or a Longitude. So, when we talk about pulling back on some of the R&D, I think that's just reflecting that you don't have two major 525 aircraft that are in process. So, I think we'll continue to have a robust product lineup, both in the SkyCourier/Denali and other upgrades. So, I'm not at all concerned that we're going to underwhelm the R&D side. We know you have to do and refresh products to continue to drive growth here. Well, the same is true across the rest of our portfolio. We've obviously made massive investments in things like the V-280 program, the 525 program, put a lot of money into the FARA program, you'll actually see some R&D come down in that business as we go into next year, but that's really driven because you have things like FLRAA and FARA that have been virtually all funded under our R&D that will now start to move into a larger cost share on a couple of the government programs and clearly 525 is winding down in terms of the level of R&D to support its certification. So, those two businesses drive the bulk of our R&D, obviously. Systems is just a smaller number, but still if you look at things that are the new programs that are happening and starting to drive growth, which we're seeing in 2020, it's as a result of the investments that we've been making in some of those product lines around everything from the next generation of unmanned air vehicles, like FTUAS. Obviously, ship-to-shore was a huge investment. As that turns to production, that's going to help to drive some growth and much improved profitability. The M5, this RCV, again, this is a lot of R&D that we've been putting into these businesses and, in some cases, small acquisitions over the last few years that are starting to turn around and drive growth in those businesses.

Yeah, I appreciate all that color, Scott. Thank you.

Sure.

And our next question is from the line of Seth Seifman of JP Morgan. Please go ahead.

Thanks very much. And good morning.

Good morning.

Scott, when you talked about the outlook being for flattish overall delivery volumes with Longitude adding and the legacy portfolio coming down, there's generally not a ton of visibility. Is that expected decline in the legacy portfolio kind of a view of what you're seeing in the spot market? Or is it the majority of Latitude deliveries go to one customer and that customer is changing its mix of deliveries from Cessna?

I'm not sure I understand entirely, Seth.

If legacy deliveries are coming down, a lot of the legacy deliveries are Latitudes to NetJets. Is NetJets coming down significantly and making a transformation from Latitude to Longitude, and that's why legacy deliveries are down? Or is it your sense of the spot market being weaker and that's why legacy deliveries are down?

Well, I think in general, as we talked about in Q3, we expect legacy deliveries just to be down given the outlook of the overall market. You're right. When you look at a Latitude, yeah, we do expect lower levels of delivery to NetJets on Latitudes next year versus this year. And you're right, I don't think it's necessarily trade. Just where the market is right now. With Longitude coming as a brand new product, you'll see a lot more deliveries to NetJets of the Longitude class aircraft in 2020. So, yes, you're right, there are certainly – we certainly expect to deliver fewer Latitudes next year to NetJets than we had previously, but the dynamic of the legacy is it's just a somewhat softer market. Not inconsistent with how we saw it back in Q3.

Yeah, understand. Understand. And then, at Bell, you've kind of traditionally talked about Bell as a 10% to 12% margin business. Starting the guide this year at 12.5%. The business has executed very well for probably like five years or so now. Is the baseline margin for Bell kind of maybe higher than you thought?

Look, I would still say we're in that 10% to 12% range, right? So, I think at 12.5%, obviously, that's very strong performance for that business. We feel very good about it, particularly we still have a very high level of R&D. Again, we'll benefit a little bit from having higher levels of cost share as we move some of the military programs and do – in this year, real military acquisition programs as opposed to straight IRAD funded. But, yeah, look, I think the position that Bell is in right now is quite strong. If you had a large EMD program, which tends to be at a lower margin, that's going to mix it down a little bit. But I think you're going to stay in that 10% to 12% margin rate even in that circumstance, which obviously would be a terrific news story, right, that you're driving what will be a very large EMD program with a lot of future growth in the production phase. So, I would kind of leave that 10% to 12% out there.

Okay. Thanks very much, Scott.

Sure.

And next question is from the line of Robert Spingarn of Credit Suisse. Please go ahead.

Hi. Good morning. I wanted to, Scott, go back to the higher level view here. And you touched on valuation and your desire to improve it when you were answering Sheila's question on Kautex and disposition. And I wanted to go to the valuation and think about cash flows. You've got sales growth in 2020, but we've gone through a period here, let's say, from 2018 to 2020 where earnings and cash flows have been somewhat flattish. And that's the case in the forecast again. You've talked about a number of the reasons. What needs to happen to get the cash flow return on sales above this kind of 5% level? Other than learning curve on Longitude and some of the other puts and takes you've talked about, what is the potential for this business? And then, separately for Frank, just regarding the extra week, I guess, in the fourth quarter and in the year, how does that play out 2020? Are we back to where we were?

Well, from a high level, we've had Bell that has gone over the last few years from a $4.5 billion business in the peak of the V-22 world down to $3.2 billion, $3.3 billion business. At the same time, it's been investing heavily in things like 525 and things like V-280. And obviously, V-22 has done a significant ramp down from the 40 a year to 20 a year to low double digit a year. So, I think our focus in that business has been making sure that we're investing for the future, while still maintaining strong execution and strong margin rates. And I think we've been able to do that. And I certainly think we're at a point here, as we go forward into 2020, there's some really important milestones around where the acquisition process goes, on things like the V-280 program. Finally going through and completing certs on 525. So, things that have been costs with no revenue or margin over the last few years have certainly been pressure points, right? So, the margin has stayed good, but the absolute number has certainly come down owing to the reduced revenue. But I think we're in a really, really good place to see that turn here as we go through the next few years. Systems is a similar sort of…

You could get the revenue turn a little bit here. You've got decent revenue growth in 2020. Are you saying you catch up on the other end, 2021, 2022?

Absolutely. I think as we said, part of what we see here in the interim on Bell is this transition from unit deliveries to a very large and growing installed base which starts to drive more aftermarket, and that's what we're seeing. What's driving the growth in 2020 is that you're starting to see the significant growth in the aftermarket side of the business, largely military, but also some on the commercial side, owing to the fact that we have a very large installed base now out there on the V-22 and the H1 programs. What really then will drive that next tranche of growth is driven around some of these new platforms in which we've been investing, like the V-280s and the 525s. So, that is the dynamic in Bell. Systems is a similar story. We had some great platforms, the platforms that were sort of on the downside of their program of record as they phased out, but just start to see the new program wins. Again, the investments that we've been making that are now positioned and are awarding in winning some of these contracts that will get them this year delivering 10% plus margins, forecasting 10% plus margins. That's a good business. The issue for us has been to get the overall business to start to drive positive revenue and we're going to see that in 2020 as we've guided and talked about. So, I think that one is already making that turn. Aviation, again, we've gone through a very heavy period of investment that has resulted in the Latitudes, the Longitudes. It's been frustrating to see that sort of in many cases just sort of replace legacy platforms. But without having that portfolio with a Latitude and Longitude, you'd be in a really tough spot. So, I feel great about where that business is positioned. The team has historically executed very well. As we have just withdrawn production, obviously, we have a challenge around Longitude and just getting those margins where they need to be, but we clearly have a line of sight to get there as we work our way through 2020. Obviously, that business is much more dependent on what does the end market do beyond 2020, into 2021 and we have no idea how to make that call yet. But I think we have a really good product lineup and a couple of other things in the pipeline, obviously, that will help that. So, our earnings have been growing, but we have had too much pressure on not enough revenue growth, and I think we're seeing where the opportunities are here in 2020 as we saw at the end of 2019 that we can get the top line to start growing.

Okay. Thank you for all that color.

Thank you. Next question is from the line of Noah Poponak of Goldman Sachs. Please go ahead.

Hey, good morning, everyone.

Good morning, Noah.

Scott, any new revelations into why the business jet market deteriorated over the last 3 to 6 months? And specifically, why used inventory keeps going back up every month? You just typically don't see this in the middle of an economic cycle. Is it just – PMI, has it been weak and global growth just hasn't broken out and it's as simple as that or anything new you've learned there?

I don't think we've seen as much growth over the last 6 months. I think there's certainly been plenty of reasons for smaller biz size business guys which is the bulk of our customer base in the jet market to have some pause. Look, you've seen is in CapEx spending, right? They've been holding back a little bit. So, I think as some of the trade things are starting to get – that noise is sort of settling down, the Brexit noise which again shouldn't have a huge direct impact on us, but it does create uncertainty in the market, that seems like it's on a path to at least becoming resolved and certain. And, look, we're in the middle of a very political cycle right now. So, I think as we work our way through the year and the politics and where things are going to land become more clearer, then I'd be optimistic that businesses would get back to a more aggressive move in terms of willingness to spend CapEx and invest in their businesses, not just in aircraft, but in general which is certainly what drove a lot of the growth if you went back into late 2017, early part of 2018. So, we're hopeful that that happens, but we need to see that happen.

Do your customers specify to you that an election is particularly concerning to them and kind of puts it on pause or not necessarily?

I'd rather not get into the politics of it, Noah. But, certainly, there's differing views about what the business climate looks like depending on the outcome of the election. So, it's kind of natural that there be some reflection on that. But people that are businesspeople.

Yeah. And then, Frank, on the cash flow outlook for 2020, can you help us out with the net Longitude related working capital assumption you're making in there because I think you had a decent amount to unwind, but you're also still ramping the production rates. So, I would just like to understand that piece and then therefore the underlying total company piece outside of that.

Yeah, kind of overall the guide, at least at the upper end, reflects one to one cash conversion on net income. So, we're generally expecting good working capital performance. There isn't anything extraordinary in there kind of relative to Longitude. They kind of continue to expect maybe some ramp in the Longitude, but there's nothing significant from a working capital standpoint kind of embedded in that. I have to say that kind of certainly 2019, we did work our way through all the headwind associated with multiyear 2, transitioning to multiyear 3. So, as it relates to 2019 cash performance, we absorbed hundreds of millions of dollars of that reversal in 2019 that did kind of reflect on that 2019 performance and kind of we put that behind us as we move into 2020. So, we're expecting that we'll see good cash flow performance in 2020.

I thought you had been saying 2019 was pretty substantially impacted by Longitude buildup and that that would release beyond 2019.

Well, there's some of that, but kind of there's – you can see some inventory build if there is kind of payables from overall working capital standpoint that also go to offset some of that build. The biggest drag on 2019 was this – at Bell with the kind of government payments timing where we were ahead on multiyear 2 and then we – the multiyear 3 structure has us kind of incurring costs before we receive cash. And so, that was a big reversal that impacted 2019 that we will not see in 2020.

Okay. Thanks so much.

The next question is from the line of Robert Stallard of Vertical Research. Please go ahead.

Thanks so much. Good morning. Scott, first of all, on the business jet pricing environment, I was wondering if you're seeing any of your competitors acting in an even more irrational manner in response to the demand environment? Or perhaps you are seeing any change in response to the Longitude and its entry into service?

Well, in general, I guess, I don't know that we have seen a huge change, Robert. This is – again, I think we probably all want to be cautious about, making sure that we're not running production greater than demand. That always will create some bad behavior in the market. Of course, it always the other guy, right? We just want to make sure we're not participating in that process. And I think we have fought to get pricing back to a reasonable level, which represents the value of the product. And I think we got that back over that 2017, 2018 time frame. So, we just want to make sure that we hold pricing and get the increases that are reflective of inflation going on. It's a perfectly reasonable business position to take I think. So, I think, in general, that's the overall dynamic as the way we see it and how we think we should behave. Look, our Longitude pricing, I think we're pleased with that. We're getting the value that we expect to get from an aircraft that's performing very well. Customers love the cabin, the range, the speed and the price levels in there are appropriate and we're continuing to make sure that we're getting the right value of aircraft.

Okay. And then, as a follow-up and on a different matter, actually, on Kautex, and the decision there to not sell the business, if the automotive environment were to improve multiples that have moved higher, would you reconsider this sale in the future?

I don't think we will make – we don't make any comments about M&A. We went out and we had to do this in a public way which was very difficult, as you can imagine, on our team to go through that. But our general view is we don't really want to forecast or comment one way or the other on M&A. And I think given where we are in that process, we'll go back to that practice. So, it's a good business. Does really well for us and we're going to focus on running it.

Thanks very much, Scott.

And next we have George Shapiro of Shapiro Research. Please go ahead.

Yes. Good morning.

Good morning, George.

Scott, I was just wondering we had talked about if the economic environment got more stable towards the end of the year that you would see some improvement in the business. It sounds like from your comments that you haven't. I was just wondering why you might think that is. We certainly have a pretty good environment, economic and stock market wise.

Well, George, I don't know. I'm not trying to be an economic forecaster, but I think there's still a fair bit of uncertainty. And a lot of it at this point is – I think the trade things seem like they're quieting down, but there's still enormous amount of political uncertainty that is in front of us every day. So, I think in large part, people want to see how all this plays out. It makes a big difference when you think about tax policies and things of that nature. So, I think that the market hasn't stopped. There is still a fair bit of activity going on. There's lots of conversations going on, but it's – I think that it still does – that uncertainty does create some friction to people going ahead and doing a deal, and that's fine. Again, that's why we pulled back little bit on production and our position is that customers are going to make their decision, we're not going to just priced it – to go accelerate the decisions if they don't make that decision yet.

And have you seen any tougher competition from Lombardier given the state that they are in and would you ever have an interest in their aviation part of the business?

George, I don't think we've seen any dramatic change in the dynamic – look, lots of deals are competitive deals. And price activity and whatnot seems like it's been fairly stable. So, I don't see a big change in that. And with respect to the M&A side, again, we hope we see the articles and hear all the noise, but we would not comment on any M&A activity.

Okay. And, Frank, one for you. The inventories are up like $250 million for the year. So, what is still an inventory that effectively wasn't delivered in the fourth quarter?

Well, that's across the entirety of the corporation, George. But, again, \we are ramping Longitude, and so there is additional inventory at Aviation that reflects that ramp.

I was just wondering because the cash flow turned out a little bit weaker than you were expecting. And so, I thought maybe there's something else going on there.

No, cash flow was right in the middle of our guide. And kind of again, as I said before, the cash flow is impacted certainly for the year by a significant headwind at Bell associated with the military programs.

And then, I guess one last one. The profit mix at Industrial between Special and Kautex, you've alluded to that in the release that it was primarily Special Vehicles. If Kautex wasn't down much, it would imply that Special Vehicles didn't earn much in the quarter. Is that a correct assumption? And if so, if you can expand on why.

George, generally, we don't get into the margin mix in the segment. I think the commentary was that, as it relates to vehicles, we certainly had a lower volume year-over-year. And as Frank said, a big part of that was snow because we delivered snow product largely in Q3 versus Q4 a year ago and we should be delivering them in Q3. So, it's a good thing that we did them in Q3 versus Q4. So, the overall volume was lower, which certainly has an impact on margin, but we don't – we're not going to breakout any more detail on the margin splits between the different sub segments.

Okay, thanks very much.

And next question is from the line of Cai von Rumohr of Cowen and Company. Please go ahead.

Scott, maybe update us on the upcoming down selects for FARA and FLRAA. And if you win one or both of them, what's – because, essentially, a win just a ticket to the next level of competition. What's the chance that you will be spending some of your own money? And I know the dollars that they have for you are not huge. But you'll be spending some of your own money and, therefore, that would be an earnings drag because you want to win what's really a very sizeable potential.

So, our guide incorporates that, Cai. So, we have been spending our IRAD money with really no match on FARA and little match over the years on FLRAA. There certainly has been some government money on the V-280 program, but again largely that's been funded through our IRAD numbers. So, what we have in our plans is, if you look at 2020, the amount of R&D actually increases in Bell, but you have a much higher level of participation of government co-funding than we had just under straight IRAD funding. So, it takes something like a FARA. FARA, I think they will down select to the two companies to go do the fly off. We expect that to be in the February to March time frame is what they're saying. We love our offering. We've talked a lot about – we're thinking that this is a fabulous performance. It clearly meets the requirements. We think it's taking great new technology that we matured on 525. The army – remember, the way they are running that program is they provide a few very high level critical requirements, but they're not prescriptive in terms of how you accomplish that. So, the down select process from 5 to 2 will happen again probably in that February, March time frame. If it does happen, we will have a lot more R&D effort in the business, but it will actually be less R&D in terms of IRAD than we spent in previous periods because, again, you do have a very large portion of government cost share where we had none before on the program. So, it's relatively neutral to the overall plan, even though it's a lot more R&D because of the dynamic of the cost share. The FARA program, again, you're right. The anticipation is that sometime probably in the March timeframe, what they're saying is they would award two contracts in all likelihood. They don't say it has to be two, but sort of the expectation I suppose is it's two. With V-280, we obviously have the expectation that we would be one of those. That's not a huge program because it really is going through and sort of crossing Ts and dotting Is and working on risk reduction towards the ultimate EMD or OTA decision which is probably still in late 2021 is what they're saying. So, that's not a big mover for us one way or the other in the year, but the FARA program is. But, again, it's not a headwind because even though you have a much higher level of R&D on that program, it does have a large cost share.

Terrific. Great answer. And then, second one. The coronavirus clearly becoming a bigger issue. Have you done any preliminary thinking in terms of what this might mean, i.e. taking a look at 2003 and the SARS virus and was this a benefit to biz jets because people didn't want to travel on public air transport or were not allowed to? Was this a negative? What does it do for Bell? What are your thoughts?

Well, Cai, it's a good question. Look, I've not gone back to 2003 to try to do that. So, I don't know that I – I certainly don't know the answer to that question. In terms of the direct impact of the company, obviously, we do business in China largely in the automotive side. So, of course, automotive volumes have already been down pretty dramatically in the last couple of years. So, weather it has a further impact on that or not is hard to tell. And I think, look, like everyone, we've got to watch and wait to see what happens after they get through the Chinese New Year and does this thing get contained and start to settle down or has it become a bigger problem. So, at this point, I think we're more or less in a watch and wait.

Thank you.

Thank you. And our final question on today's conference is from the line of Carter Copeland of Melius Research. Please go ahead.

All right. Good morning, gentlemen. I have figured out how to use the mute button. So, for anybody who's been on A&D calls for years, this isn't my first screw up. So, thanks for having me back. Scott, I wondered if you could give us some color on the board decision around the changes to the incentive compensation plan, the addition of TSR to that and just what we should take from that in terms of what you see as the relative risks and opportunities for the corporation?

Look, Carter, the genesis of that thing is that for many, many years, this company has been on a long term plan that kind of rolled through three years, okay? So, it was a three year plan that had TSR as kind of a wrapper, if you will, around that three-year performance. So, TSR was absolutely a factor. But the goals and objectives were set annually. And that really stems back to just enormous volatility around business jets and can you really put together a three year plan that has any credibility to it. So, the new plan obviously still has TSR. It is a direct factor as opposed to a wrap around. So, it remains a very important part of our performance objectives and, ultimately, our compensation. But we try to put together something that could do a three year forecasted plan rather than a series of one year plans that built that three year plan. So, when we try to do longer term metrics, like things around ROICs and long-term cash, and we just have to adapt and consider a lot of unknown around one of our biggest businesses, is the biz jet business where it's just hard to predict what that end market looks like over a period of three years. So, I think we've come up with a set of metrics that can accommodate some of that volatility and have a more conforming, if you will, three-year plan, of which TSR still remains an important metric.

Great. Thanks, Scott.

Sure.

Thank you. Kevin. And thank you all. With that, we can end the call.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.