Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter 2022 Textron Earnings Release Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Vice President, Investor Relations, Mr. Eric Salander. Please go ahead.

Thanks, Greg, 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 website. Revenues in the quarter were $3.6 billion, up $3.3 billion in last year's third quarter. Segment profit in the quarter was $317 million, up $7 million from the fourth quarter of '21. During this year's fourth quarter, we reported income from continuing operations of $1.07 per share. Manufacturing cash flow before pension contributions totaled $368 million in the quarter, up $70 million from last year's fourth quarter. For the full year, revenues were $12.9 billion up from $487 million from last year. In 2022, segment profit was $1.2 billion up $89 million from 2021. Income from continuing operations was $4.01 per share, compared to $3.30 in 2021. Manufacturing cash flow before pension contributions was $1.2 billion, up $29 million from 2021. With that, I'll turn the call over to Scott.

Thanks, Eric, and good morning, everyone. Our business closed out the year with another strong quarter. In the quarter aviation grew revenue and segment profit reflecting high record deliveries increased aftermarket volume and strong pricing net of inflation as compared to last year's fourth quarter. Also in the quarter, we continue to see solid order flow customer demand across our aircraft product portfolio ended the year with 6.4 billion of backlog. For the year we delivered 178 jets up from 167 last year, and 146 commercial turboprops up from 125 in 2021. Textron aviation defense delivered 10 T6 aircraft for the year up from five year a ago. Throughout 2022, strong aircraft utilization within the Textron aviation product portfolio resulted in a 16% growth in aftermarket revenues. At bell, as expected revenues were down slightly in the quarter on lower military revenue reflecting the continued wind down on the H1 program partially offset by higher commercial revenue. In December, U.S. Army announced the Bells V-280 Valor was selected as the winner of the future long range assault aircraft program competition. This award is a testament to the hard work of the Bell team that designed built and flew V-280 prototype over the last 10 years in support of this win. The initial flyer contract award of up to 1.3 billion over the first 19 months with an initial funding of 232 million for engineering and manufacturing development related activity is currently on hold pending the outcome of protest was filed at year-end by the competing vendor. On the commercial side of Bell, we delivered 179 helicopters in 2022, up from 156 in 2021. Moving to Textron systems revenues were essentially flat with last year's fourth quarter. During the fourth quarter systems awarded another anti-vehicle munition contract from the U.S. Army.…

Thanks, Scott, and good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.6 billion were up $223 million from a year ago, reflecting higher jet and defense volume and higher pricing. Segment profit was $169 million in the fourth quarter, up $32 million from last year's fourth quarter due to favorable pricing, net of inflation of $29 million and higher volume and mix, partially offset by an unfavorable impact from performance. Performance includes unfavorable manufacturing performance largely related to inefficiencies from supply chain disruptions and increased staffing associated with higher production, partially offset by lower selling and administrative costs. Backlog in the segment ended the quarter at $6.4 billion. Moving to Bell. Revenues were $816 million, down $42 million from last year, reflecting lower military revenues, partially offset by higher commercial revenues. Segment profit of $71 million was down $17 million from a year ago, primarily reflecting lower military volume and mix, partially offset by a favorable impact from performance. Backlog in the segment ended the quarter at $4.8 billion. At Textron Systems, revenues were $314 million, up $1 million from last year's fourth quarter. Segment profit of $40 million was down $5 million from a year ago. Backlog in the segment ended the quarter at $2.1 billion. Industrial revenues were $907 million, up $126 million from last year, reflecting higher in volume and mix of $95 million and a $59 million favorable impact from pricing largely at specialized vehicles product line, partially offset by an unfavorable impact of $28 million from foreign exchange rate fluctuations. Segment profit of $42 million was up $4 million from the fourth quarter of 2021, primarily due to higher volume and mix, partially offset by an unfavorable impact from performance. Textron eAviation segment…

[Operator Instructions]. Your first question comes from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

You've definitely had a busy quarter between FARA. So congratulations on that. And I think you threw in an Aerojet bid and [indiscernible] as well. So I wanted to focus on aviation margins. In Q4, I think you ended at 10.7%, potentially lower, including the recasting for LIFO. How do we think about the walk to the 12.5% margins in 2023?

Well, I think, Sheila -- so first of all, the quarter, we knew that we were going to have some headwind with supply chain. And obviously, we brought a lot of new people on board which is a good thing but had a lot of impacts just getting all those folks on and training and those kinds of interruptions. So in the quarter, we did take a lot of those unusual impacts right to expense in the quarter rather than putting it into in inventory. So we did take a hit on that. LIFO was still in there, obviously, in that reported number. So obviously, on a recast basis going forward, that will be there. So I think when we think about what happens as we go into 2023, obviously, you're going to not have the LIFO in there. And I think we're going to see, again, we're guiding probably almost $0.5 billion of higher revenue, and that converts at good margins. So I think we're pretty bullish on our ability to drive higher margins as we go through 2023.

And maybe just as a follow-up to that longer term, like how do you think about peak trough margins in aviation? Is it just steady as it goes from here? Can it just be a 20% incremental margin business?

Well, as you know, Sheila, based on analyst pressures, we've been striving to get above 10% margins in the aviation business. And we feel pretty good about that. So look, I think it's going to be very much volume driven. You guys know we tend to convert somewhere in that 20%, 25% range. I expect we can continue that as we go forward. Certainly, we're guiding that in our conversion for 2023 and as we go beyond that, we'll just have to see where the market is. The good news is demand has remained strong. The fourth quarter demand remained strong, and with good bookings in Q4. So environment, I think we feel pretty good about. But in terms of what margins do on a go-forward basis. I think we would kind of remain in that neighborhood of expecting sort of a 20%, 25% conversion on our revenue growth.

Great. Thank you.

Your next question comes from the line of David Strauss from Barclays. Please go ahead.

Scott, could you just talk through the forecast at Bell, so up revenue, down margins, decent amount. You mentioned it includes FLRAA. So what exactly is your assumption for FLRAA? Does that assume you win it post protest? Just if you could help there.

Sure, David. It does. So the protest period ends at the first week of April. So we've baked that into our estimates, assuming that will be resolved by that period of time. Obviously, the dynamics in terms of margin is that we will continue to see a decline on the military revenue side. There'll be some offset on the commercial revenue side. We've had a good year in terms of bookings and expect to see nice growth on the commercial side. And then obviously, we'll have 3/4 of the FLRAA program coming in, which is good, but that is a lower margin business. I mean EMD programs tend to be lower margin, and that's what we've forecast in our guide for you for '23.

Scott, can you say specifically how much revenue is in there for FLRAA? And how would we expect to ramp beyond 2023 in terms of revenue? A - Scott Donnelly No. We're not going to break out the specifics of the individual programs, but I think clearly, it will ramp as we go into '24, '25 and obviously, I think probably for quite some time. I mean, I think this program will be a terrific boom for the business. It's going to start out, obviously, with a lot of the CMD, which as we said, is great volume and good revenue, but not a whole lot of margin. And then obviously, we'll expect to see it continue to grow and turn into better margins as you get into production programs and foreign military sales and all the things that we would expect will come along with a successful FLRAA program.

Okay. And last one on the aero supply chain. Could you just update us there? And your deliveries, I think, came in a fair amount later for the full year than we were originally anticipating at the beginning of the year. So how many additional deliveries could you have done this year if you didn't have supply chain bottlenecks. Thanks.

Well, I don't know if we'll go into express numbers, David. But look, we've been kind of forecasting here since the mid part of the year that we expected we would end up a few hundred million dollars light versus our initial guide based on the fact that we continue to see supply chain challenges and some labor issues. I think labor has certainly improved through the balance of the year, although a lot of that is new folks and training and it has an efficiency impact, but at least we're making some progress on that front. I think we've had a number of suppliers that were challenged or getting better, but you always have a couple out there that are still struggling. So we kind of anticipated that in the back half of the year. That's why we kind of try to provide some color that we expected this to be a few hundred million off of our guide. But I think that we've taken that into consideration. So as we think about next year's guide for '23, there are still going to be supply chain challenges all along the way. But we think we've taken that into proper consideration in terms of the '23 guide.

Thanks very much.

Your next question comes from the line of Robert Stallard from Vertical Research. Please go ahead.

I'll start with Frank. I was wondering if you could give us some sort of walk on the manufacturing cash flow and why you expect it to modestly decline in 2023?

Yes. It's a reflection of an expectation that we'll continue to see good performance from a working capital standpoint. But we do have the continuation of higher cash taxes associated with the R&D tax credit change. And also, we're just expecting a slightly lower V in deposit activity from commercial volume. So we're kind of framing it in terms of kind of 1:1 book-to-bill type expectation as it relates to deposit activity, and that kind of has a little bit of a headwind on cash relative to where we have been.

Okay. And then maybe one for Scott. Also, been a lot of commentary around about in the business jet industry about some of the lead indicators starting to slow. Have you seen any impact of, say, activity leveling off of used inventory increasing having any impact on order activity for you?

No, we haven't seen that, Robert. I mean, I think our order rate in the fourth quarter was consistent with the third quarter. It remains quite healthy. I think when people look at some of these leading indicators, like it's hard to keep track of what -- when you see a little bit of an increase in used available for sale, what kind of aircraft are those? What are their vintages? We think, obviously, the market has been very strong. So people are looking to put some aircraft on the market. They're still at very low levels. So we're not seeing the knock-on effect into market for new aircraft. So we haven't seen a material change in the level of activity that's going out there in terms of order activity. I mean, there's lots of people ready reports. It's frankly hard to understand. Sometimes there's so many comparisons of flying by region, by size of aircraft compared to '19 compared to last quarter, compared to '22 but it's in the round. So we haven't seen any of that have a meaningful impact on order activity.

That's great. Thanks so much.

Your next question comes from the line of Peter Arment from Baird.

Scott, just circling back on David's question regarding just the supply chain and maybe just tacking and inflation. So it sounds like -- I mean, it sounds like things are holding in there? Or are they getting a little better? And then just also, just could you maybe talk a little bit how you're passing in the higher input costs right now?

Well, on the supply chain side, Peter, I think we have some suppliers where we've had challenges, and we clearly see them getting healthy and getting better. But we have other areas where suppliers are still struggling. I mean, I don't want to go into too much detail, but it's very specific components, very specific suppliers. Obviously, we're working with them and trying to get them healthy and do a better job in terms of getting parts into the factory. And obviously, from our standpoint, we do lots of out-of-sequence work and swapping parts around. We'd like to stop doing that. It's an efficiency hit to us. Our guys have to work through every day. So I think it's about the same, right? As I said, there are some suppliers that are getting better but then you got one that's just having a hard time catching up. I don't know that we're seeing a lot of new suppliers coming in and say, hey, I got a big problem. We have a couple there we've been struggling all year, and we're trying to get them back on schedule. They're working at it, but they're just not quite there yet. And again, we factored that into how we think 2023 will play out. In terms of the pricing side of things, Peter, we continue to get price, net of inflation. We're very focused on that. As these input costs increase, we got to drive price to get that back. I think the guys are doing a pretty good job of that.

And just as a quick follow-up on systems, I mean, just could you talk a little bit post the [indiscernible] bill and defense kind of looking funding pretty robust as we go forward. How are you looking at, we're showing modest growth for systems this year, but how do you think longer term?

Well, look, I think when we look at the [indiscernible] numbers, they seem fine to us. When you look at what came through on the omnibus in terms of this current fiscal year's budget, was in line with our expectations. So I think we're fine. The growth, the good news at systems is it's really kind of across almost all the product lines. It's not just one particular thing. Obviously, we've had some new wins in the munition side, which is great. That's put that business back to growth. Sentinel program continues to do well. Our ship-to-shore, as I said, we've made deliveries. We'll start negotiating the next production by here shortly, but we'll finish the DD&C this year and start production deliveries. The ATAC business has had nice growth. Our electronics business has had a nice growth. It really is kind of across all of the businesses within systems. And the omnibus budget that was appropriated is consistent with obviously what we're guiding to you guys.

Appreciate the color. Thanks, Scott.

Your next question comes from the line of Pete Skibitski from Alembic Global. Please go ahead.

Scott, fair to say, I think some of your businesses have a cyclical component to them. And I'm just wondering I'm sure you guys see, I think the consensus out there for the macro guys is that we'll have some sort of mild recession this year, maybe later this year. So as you guys see that and whether you agree with it or not, is it prudent for you to maybe even kind of slow the top-line growth in those type of businesses in maybe like Citation, maybe TSV to kind of protect your margins and not over hire? Are you guys thinking about your businesses that way or not necessarily right now?

We absolutely look at that, Peter. I mean, as I said, there's cyclicality in almost every business, right? So some have more than others. Those that we think are going to be more recession sensitive we've kind of factored in thinking we'll have a mild recession. I don't think it's going to be dramatic. We're certainly not thinking about something in the scope of back in the 2009, '10 kind of time frame. But I don't think we have an economic situation that's going to lead to something like that. I'd say, look, I think when you look back at previous modest recessions, the area that has always impacted us the most difficult has been a slowdown in the aviation business. And I think we're in a very different place than we've been in those previous sessions because we have a pretty significant backlog. So I think that the nature of that will allow us to -- even if you were to see a slowdown in bookings which is entirely possible. I would expect it if you really go into a modest recession, you'll see a slowdown in booking. But you've got almost 2 years of backlog sitting there that you'll continue to execute on. And I think that will help you ride through it. And we haven't had that for a bunch of years, Peter, as you know. So I think that it's one that would translate to a slowdown in bookings, but not something that would slow us down in terms of our revenue and margin generation.

Okay. That's fair. Just one last one for me. Scott, are you guys any closer to signing that AH-1 deal with Nigeria?

Well, I mean it's in the kind of government contracting process, right? So that ends up being -- because of the FMS nature of that, that would be signed between ourselves and the U.S. government. And as you know, Peter, that can take a little while.

Okay. Fair enough. Thank you.

Your next question comes from the line of George Shapiro from Shapiro Research. Please go ahead.

Frank, if you could just fill in a couple of numbers. How much was aftermarket up in the quarter?

Well, at aviation, aftermarket as a percent of the sales was 27%. So you can kind of do the V based on that, it was 11%.

[Indiscernible] for the year, and I think it was [indiscernible] in the quarter.

Yes. And aftermarket was 33% of total sales for the year at aviation.

Okay. And Scott, you didn't specifically mention, but I assume you're looking at deliveries based on the revenue forecast for '23, somewhere 200, 205 deliveries. Is that fair?

Yes. It's going to be in that neighborhood, George. And we've got a lot of dialogue and think about when you back to '19 and obviously, the mix of aircraft is quite different, right? I mean we're certainly heavier on the super mids and the mids than we would have been a few years ago, but that's -- if you look at our revenue guide, it's probably going to be somewhere around that couple of hundred aircraft.

And Scott, I looked at the fourth quarter and even if I added back the $16 million that you mentioned for supply chain issues, the margin was still weaker than the last couple of quarters. So what else was going on there?

Well, I don't know where the 16 -- the inefficiencies that we took through and LIFO, which was around probably about $10 million or something impact is largely what drove us to the margin rate that we reported.

Okay. Very good. That's it for me. Thanks.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Scott, you've alluded to it, but your backlog is several multiples of what it was just a few years ago and the production is not. So what's the average wait time at this point? And how are you thinking about managing how long you're making customers wait for an airplane?

Well, look, I mean it does vary from model to model, right? When you look at the longitudes and latitudes the larger aircraft in the family, and we think those should be out a couple of years. And that's generally where they are. When you get into some of the smaller aircraft. Those tend to be a shorter cycle order deliveries. But again, those probably should be in that 12- to 18-month kind of window. So when we think about production volumes and what we're laying into our forecast which is then, that then drives what our sales team has in terms of available slots and time frames, that's kind of how we're managing it.

Okay. How does pricing that's entering the backlog now compared to pricing that's hitting the P&L now in the aviation jet business?

It's better.

Increasing or stable?

I'm not sure. I mean, we don't measure a gap. You mean pricing of inflation, is that --

I guess what I'm wondering is, I know you've been taking price as the market's been stronger. Was there a period of time as the market was strengthening, where you were not taking as much price to allow the backlog to extend first before you now take more price? Is that the strategy? Or has it been pretty consistent for the last few years?

It's been pretty consistent, Noah. I think like the pricing, obviously, demand is strong, right, which is very helpful from a pricing standpoint. But our opinion, this market has been mispriced for a long time. I mean, this is a business which, as you guys know, it's a lot of R&D. It's expensive to develop these things and get them through certifications and you need to have fair pricing to generate these kind of margins. We always believe the business had to be back as a double-digit profit margin business, and we've been driving price to make sure that, that's the case.

Okay. And what would be a credible protest case on FLRAA from your competition?

I don't think there would be one.

Okay. Thank you.

Your next question comes from the line of Ron Epstein from Bank of America.

Just a quick one. Can you help me think through this LIFO adjustment you guys are making. I mean, isn't it sort of unfair to not include inflation in your costs?

Yes. So Ron, that's a good question. Look, just to make sure we understand the LIFO -- so actual inflation is still in the segments. That's very much a cash impact. It remains in the segment. The only thing we're taking out of the segment is this LIFO provisioning, right? So by full accounting, which -- again, I'm just a simple engineer Ron, but the LIFO provisioning phenomenon is that I've bought parts at one price. And now I have a new contract with a supplier. I have a higher price for that part. As soon as that first part shows up, the LIFO provision is basically taking the actual price I paid for those other parts and raising them up to the price of that new part. So it's an accounting provisioning process. It's not an actual cost. So when I get to where that higher dollar part gets consumed by an aircraft, that's going to be in my cost. That real inflation is in the segment. It is cash and it is in performance. It's only that provisioning of that -- the nature of this last-in, first-out accounting that is what we're pulling out of the segment.

So I guess another way to frame the question though is if we were to look at your margins pro forma back to GAAP for 2023, what would they be if you didn't do that adjustment?

Well, you'll have that full disclosure, right? You'll see that LIFO number.

You'll see the total LIFO. But, Ron, there are no one else in our space is on LIFO. So we're on LIFO. For accounting, you need to conform that between tax and accounting. So we derive a benefit from a tax standpoint in an inflationary environment by essentially accelerating those costs for book and tax purposes. But as Scott said, it's not a true economic cost. And we have basically hung up about $600 million of effectively LIFO provision on our balance sheet that was profit never realized because of this accounting that is not consistent with everyone else in the space. So as inflation has accelerated here and LIFO has become a bigger number, we felt it was important to highlight that. And certainly, from a segment performance, take it out of the segment performance because it is not a true economic cost to the business. It is essentially a function of the accounting treatment that we have, but that LIFO inflation will never turn into true economic cost in the business.

So Ron, this has been an issue. We've always been on LIFO. Textron has always been on LIFO. So in a non-inflationary environment, it's relatively small. It's always been a bit of a drive. It's a small number. It's not been an issue. But with an inflationary environment, all of a sudden, you have these big non-economic bookings. Again, as Frank said, other companies -- everyone else in our space, does FIFO accounting instead of LIFO accounting. So we get a lot of questions from investors about what are these differences. And so, I think taking this out make sense. And look, the reality is we don't manage the business that way, right? I mean, when we sit down with the business, when we're doing our plans, we're managing, we do our operating calls that like it's not something they control, right? It's not economic. And so, that's not how we manage the businesses, right? We don't look at that. So it makes sense to also not report that in that segment since that's not how we manage these guys either. They don't control that LIFO. They do control and they do get held accountable for actual real inflation on that -- on those higher part counts, right? So that's -- we're not taking anything operational out of the segment but managing it on what they control and the real financial impact.

Got it. Okay. Thank you.

Your next question comes from the line of Cai von Rumohr from Cowen.

So as Sheila mentioned, allegedly, you guys went after AJRD. You did buy Pipistrel. You've won FLRAA. So it looks like your business is becoming more A and B. If we kind of look at valuations across the space, it looks like valuations tend to be higher for pure plays, either you're doing aerospace, you're doing air conditioning, whatever. So as you think of your business, Scott, are you thinking of any strategic initiatives? At one point, I think you considered spinning off Caltex. How are you thinking about that now?

No, Cai, I don't think we're going to talk about portfolio shaping or changes as part of the earnings call. It's something we're always looking at. And I think we'll leave it at that.

Okay. Great. And can you give us any help on the -- I don't know, but what Lockheed's -- what the case Lockheed is making as to why they're protesting because certainly, on paper, it looks like your vehicle is very substantially better than theirs.

Look, I mean, obviously, that process is going on between the Army and Lockheed. So we probably can't comment too much. I guess I would just say that this -- as you all know, this process has been going on for a decade, right? There's been an enormous amount of work between both suppliers and the Army from design, development, test, prototype, flight. It's been an unbelievably robust process. And so, I don't -- it's hard for me to understand what flaw would have been in the process. It's kind of inconceivable to me, but we'll leave that to the Army and Lockheed. And needless to say, we think they made the right choice. I'm proud of what our team did, and we're excited to get this thing behind us and get on with the program as I'm sure the Army is.

Terrific. And the last one is cash deployment. I mean, you've got good cash flow, even though down year-over-year. You've got a good balance sheet. You've basically and heavily focused on share repurchase. I mean, really a lot of leverage there. But you also bought Pipistrel. As you think about where the cash is going, maybe give us some thoughts about M&A versus share repurchase, dividends, all of that.

Well, look, I mean we always look at opportunities that are out there, Cai. And I would say relative to your earlier question, comment, yes, we would view our focus in the world to be within the A&D space in terms of most of our capital deployment. Pipistrel has turned out to be a great little business. Bought some great technology into the company and is now kind of important to us in terms of the future of sustainable flight. But if opportunities like that come along, then that's great. We've done some other smaller deals, again, in the A&D space, and we would continue to look at that. But our principal deployment of our capital has been for the last number of years in the share buyback. We've been doing kind of 5%, 6%. We did another 5%, 6% this past year, and I would expect that's probably the track we're on in 2023 as well.

Thank you very much.

Your next question comes from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

Scott, for the demand environment for aviation, can you give us an update in terms of the customer profile that you're seeing that are placing these aircraft orders? Are they corporate, individual fractionals? Are they -- more for growth, replacement? Or are they new buyers? Any additional context would be helpful in understanding the demand environment?

Sure. We haven't seen much of a change. It continues to be that same mix. There's still new buyers coming into the marketplace. Fractional is certainly strong. There's a lot of buyers on the fractional side. That's a particularly attractive place for I think for new people to go. It's not easy to necessarily know how to own this asset. The fractionals provide a great option for people that want to get in. That's doing well but we still see robust whole aircraft sales. It's a mix of public companies, private companies, family held companies. It really is kind of our usual customer base, I would say. It remains also kind of the same as we've seen around jets largely being driven by the North American market, probably 70-30 to 80-20 in that range, which is normal. Turboprops are more robust internationally. Again, we see stronger activity, again, like 60% plus international versus domestic on King Air for instance. So the trend in terms of that, who is that customer is kind of our traditional buyers.

Great. Thanks for the color. And maybe following up on the supply chain issues that you mentioned. I mean for some of these suppliers that continue to struggle for a few years now, what's the long-term solution? What can you do to mitigate their problems so you can actually deliver on the strong demand for bizjets? Are there other solutions, like you need to vertically integrate your supply chain or anything like that to alleviate some of the pressure? What other actions can you take?

Yes, that's a good question. Look, it's a mix. I mean, in some cases, we have some smaller suppliers and technologies where they basically kind of were us and we did acquire them and integrated them as part of our business. We have a good track record of doing that in the past around some critical areas, interiors we did. That's been a home run for us. We just did a deal this past year in the actuation space. Again, a very unique aerospace technology. Most of the volume was ours. It's a critical supplier and a critical technology for us in the future. And these aren't big numbers, but it was a great acquisition. And so far, it's working out really, really well for us. It's helped to get us back on track. But there's always going to be some guys out there that are suppliers where we're a small percentage of their sales. It's very capital intensive. It's a technology that doesn't make sense for us to vertically integrate that. And so in those cases, we just keep working on those folks. I think those suppliers are all trying to get back up to speed. Obviously, it's a good business for them. I'd say we don't have suppliers that I'm aware of that are abstinent or don't want to perform. It's a matter of them getting the resources back in place and some tier suppliers getting in place and those are folks that just take a fair bit of work. But I think they will get there. Again, we've seen some of them have already recovered. But there's still a couple of problem children out there that are working on getting there.

Great. Thanks, Scott.

Your next question comes from the line of Seth Seifman from JPMorgan. Please go ahead.

I'll just stick to one here. Kind of a follow-up on the last question Kristine asked. I think from a mix perspective, while the deliveries in total are still down from 2019, I think the deliveries to NetJets are probably higher. And so as you think about delivery growth from here, do you think about the incremental growth coming more with that top customer or more kind of diversifying the mix a little bit more? And then, I'd also imagine that like the order for [200] [ph] latitudes, the NetJets has probably come into a conclusion pretty soon. And whether you think about -- how you think about expectations for the next slug of latitudes from them?

Well, so first of all, I don't know what percent of sales back to 2019, what it was on fractional versus today. But look, I think fractional, when you think about diversification, the sale of a fractional aircraft is a more diversified sale, frankly, than a single jet. Remember that this is not a concentration of a buyer in NetJets. Remember, NetJets is out there selling that aircraft to eight or so people. So every sale that we make to NetJet is a sale from NetJet to a whole bunch of different customers. So it's quite diversified. So I don't expect NetJets or any fractional for that matter to track wildly different than the overall market demand. If the market is strong and people are wanting to fly private, you're going to see this mix of people that choose to do it through a fractional, which is actually a lot more people because, again, they're buying a fraction of an aircraft, not a whole aircraft. So when I look at our mix, I think of the mix associated with the NetJet business as being very good mix. That's a very diversified sale. It's a very diversified market. And that's kind of that's what they do every day. They're out and working and talking to lots and lots of customers in a broad range of customer base for selling that fraction of an aircraft. And obviously, as you guys know, one of the things we do now is we work very closely with NetJets and looking out roughly about a year that these things come into backlog based on how their sales team is doing out there selling these aircraft. So it's a great part of our backlog, and it's a great part of our business. It is as you guys know, it tends to be at a lower margin because it's kind of a wholesale sale, but they're the ones that are out there, spend the money on sales forces and reaching out and selling to that large customer population. So NetJets remains as through other fractionals as a really important part of the business, and it's a really, really important part of our customer base are these fractional owners. As far as the deal with NetJets, we are in constant discussions in terms of forecasting unit volumes. As you get to where you get towards the end of a particular quantity buy, obviously, we'll work with NetJets to work on what comes next. But that's kind of a business arrangement between the two of us, obviously. But the actual forecast and backlog that's reflected in our numbers is really kind of a rolling one-year process regardless of what the size of the overall arrangement is between ourselves and NetJets on latitude and longitude volumes.

Great. That's very helpful. Thanks, Scott.

And your last question today comes from the line of Doug Harned from Bernstein. Please go ahead.

I wanted to go back to the discussion around the size of the backlog as it clearly has grown quite a bit over the years. And when you look at backlog as it slowed sequentially in this quarter? How do you compare the -- how do you contrast the demand you're seeing for new aviation sales to basically the wait time that's there? In other words, there's a point where you just flat out are going to lose customers if they have to wait too long. So do you see a constraint on the growth from that at this point?

Well, we really haven't seen that. I mean I think the whole industry is in a similar situation. If we were in a situation where you couldn't get an aircraft for 18 months to 2 years and somebody else had an aircraft they can get tomorrow, then yes, you could lose that customer. And I think, obviously, somebody could go buy a used aircraft or something in that nature. But I think right now, the whole industry is in this situation. And frankly, it's where this industry should be. I mean these are complicated assets. There are a lot of times, customers already have aircraft. They need to sell their used aircraft. So look, remember, this industry actually worked like this way for a very, very, very long time. The aberration has been since 2008 to the last 2 years ago where you didn't have much of a backlog in this class. Generally speaking, this industry has been a backlog business. It should be a backlog business. By the time you specify your craft and configure aircraft and customize the aircraft, this is -- really where we're sitting today is what normal should look like, not what we've seen in the past 10, 12 years.

Now when you get to the situation, though, which is clearly a good situation, the solution always is to add capacity, and we've seen that happen in past cycles as well. When you look out today, what things would you want to see to make material increases in your production capacity?

Look, I don't think it's our production capacity so much. I mean obviously, we're struggling through some of these supplier issues, and you don't hear it tactically. But remember, as we talk about the delivery times, what our team is out there selling as we look at that backlog, they're selling aircraft and serial numbers that are delivered at certain dates. So that's how you manage this backlog and then you've got to make sure that you dial in your production schedule to match what those committed delivery dates are. So if you start to see a softening in the order rate, then you're going to sell out fewer of those slots in the future and then you would adjust your production. If you all of a sudden say, hey, 2025, it looks like you could have 5 more latitudes or 10 more M2s, then you do that and you modulate your production capacity accordingly. But I think as long as you're out there looking at these sort of 12, 18-month, 2-year kind of timelines, it gives you the ability to do that. And again, how this industry has always worked.

And just one last thing. When you look at the constraints coming from the supply chain, are there some specific areas right now that you would point to as most difficult?

Yes. I mean I can tell you a couple of part numbers that are our biggest challenges. We're not going to do that. I'm not going to throw particular suppliers under the bus. But yes, there's a couple of particular products, a couple of particular technologies from a couple of particular suppliers that are our biggest constraint. I mean there's always a bunch of little stuff going on, but for sure. If you get a couple of these guys back in line, that would be very helpful. And again, that doesn't mean we turn that into, all of a sudden, delivering a lot more aircraft because, again, we've committed dates to our customers. It's a lot more for us right now about getting rid of all the inefficiencies in our production runs where we're having to build aircraft and swap parts around and do things out of sequence. It's very, very harmful running a good, smooth production operation when you've got to go chase all the stuff around.

Okay. Great. Thank you.

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