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Textron Inc (NYSE:TXT)

Q4 2009 Earnings Call

January 28, 2010 09:00 a.m. ET

Executives

Doug Wilburne - VP, IR

Scott Donnelly - President and CEO

Frank Connor - CFO

Analysts

Cai von Rumohr - Cowen & Company

Heidi Wood - Morgan Stanley

Noah Poponak - Goldman Sachs

David Strauss - UBS

Shannon O'Callaghan - Barclays Capital

Steve Tusa - JPMorgan

Brian Jacoby - Goldman Sachs

Steve Levenson - Stifel Nicolaus

Operator

Welcome to the Textron fourth quarter 2009 earnings call. At this time all participants are in a listen-only mode. (Operator instructions). As a reminder this conference is being recorded. And I would now like to turn the conference over to your host Vice-President, Investor Relations, Mr. Doug Wilburne. Please go ahead.

Doug Wilburne

Thank you Rachel and good morning everyone. Before we begin I would 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 President and CEO and Frank Connor, Textron’s Chief Financial Officer. Moving now to fourth quarter’s results which appear on slide 3 of the earnings call presentation. Revenues in the quarter were $2.8 billion, down 21% from a year ago which yielded a GAAP loss of $0.23 per share. Adjusted earnings from continuing operations, excluding special charges were $0.15 per share, down from $0.37 a year ago.

We recorded fourth quarter pretax special charges of $114 million. This included an $80 million charge to reflect impairment of goodwill at our Golf and Turf Care businesses. The impairment reflects our expectation of a slower recovery in these markets than previously anticipated. The remaining $34 million of special charges were associated with our restructuring program.

For the year, manufacturing operations provided $424 million of cash flow compared to our target of $300 million to $400 million. This included a $132 million in manufacturing restructuring cash outflows. And with that I will turn the call over to Scott.

Scott Donnelly

Thank you, Doug. Good morning everyone. I think we’ve brought a solid close to what for us has clearly been a challenging year. We have faced volume challenges throughout the year, ultimately delivering 289 [Jet numbers] to 467 in 2008. Our industrial volumes finished the year approximately 29% below the 2008 level and obviously in our financial services market, we faced too many of the same challenges that the financial industry has faced across the board.

I guess what I would like to do at this point is focus on the actions we’ve taken and how we take our company forward. In response to the challenging financial markets, we decided and announced early in the year to exit the non-captive finance businesses at TFC and I think our team has made a very good progress in executing the strategy. We’ve also taken a number of actions to reduce overhead and restructuring actions to match our production to the actual market demands.

From late 2008 through 2009, this resulted in a headcount reduction of over 10,000 people, almost one quarter of our work force. And all these actions have been difficult for our company and for our employees. I do believe we created a cost structure that should allow us to leverage volumes as market returns.

We have been focused on cash generation throughout the year, particularly with respect to working capital improvements primarily related to inventory. These programs have yielded real results as inventories were down $820 million. We have made a number of important capital structure changes to strengthen our balance sheet and we’ve restored access to the public capital market as we demonstrated through new term debt, convertible debt and equity offerings.

By the end of the year, we reduced our net debt, including securitizations by over $4 billion. And while we are not finished, I think we are on track to have a capital structure over the next couple of years which support a solid investment grade rating for manufacturing company with a relatively modest captive finance business. So let’s discuss each of the segments in detail.

In finance, as we mentioned earlier, our team at TFC, did a perfect job of shifting the focus from portfolio growth to liquidation and cash conversion. We reduced our managed receivables by $3.8 billion, compared to our initial 2009 goal of $2.6 billion. And we did this as you can see on slide 4 with high cash conversion with 94% for both, the fourth quarter and for the full year of 2009.

Slide 5 shows our full breakdown by portfolio, as you see the large reduction of $2.3 billion was in our distribution finance portfolio. As we look forward to 2010, we’re targeting a further reduction of $1.6 billion bringing our two year target to $5.4 billion. That’s $900 million higher than our original target of $4.5 billion. We are also upto a good start of 2010 as we recently completed the transfer of another private brand [four] plan account which included both the forward-funding commitments and the current receivables.

As we begin to liquidate an increasing proportion of our golf course and our resort portfolios, and properties this year, we would expect a different mix also in our remaining distribution finance asset, so in total we are expecting a cash conversion ratio of somewhere in the mid 80s. This is well within our five-year liquidation plan which we discussed earlier. In the business jet market, environment remains difficult but stable and we believe that we will begin to see improvement in order flow through the second half of the year.

In the meantime, we did have a $1.7 billion in cancellations for the quarter primarily driven by a single large customer account as we announced late last year. On the order front, we did see a pickup in activity as we had 32 gross orders in the quarter compared to 38 for the first three quarters combined. New Citation aircraft available for sale continued to decrease and in the year at 15.4% down from a peak of 17.3%.

Used pricing was essentially flat compared to the third quarter, but we are seeing more examples of planes being sold above prevailing rates. Usage on Cessna aircraft also increased slightly to 0.66 hours from 0.65 in the previous quarter. We delivered 68 jets this quarter which for the total year as I mentioned at 289 including 125 Mustangs. This contributed a strong cash flow assessment in the fourth quarter.

So as we look forward to 2010 we are targeting about 225 jet deliveries including 105 Mustangs and a much improved cash flow outlook. We currently have order for about 70% of the delivery plan. We expect to see low first quarter order rates as the number of the fourth quarter activities were driven primarily by tax incentive buyers, but we would expect that order rate to pick up throughout the course of the year.

With additional order activity we saw in the fourth quarter, we have actually increased our production plan slightly from where we had initially set it back in July timeframe. In the meantime, we continue to work on ways to reduce our costs including consolidation facilities and moving certain activities to lower cost countries.

In industrial segment, volumes were down 8% in the quarter, however our improved cost structure led to a $42 million increase in the segment profit despite the fact that revenues were down $26 million. The segment also generated a strong cash flow over 3.5 times segment profit. Looking to 2010, we are expecting a modest topline growth in the segment led by strong sales of Kautex.

We saw automotive volume increase in the fourth quarter and the consensus view in the auto industry is to continue to see that growth throughout 2010. The sales growth should generate a significant improvement in profits in our industrial segment.

Systems also had another strong quarter, sales were up nearly 11% from a year ago and we posted 13% margins. This growth is driven primarily by a diverse array of products we are producing, critically supporting our troops in today’s regional conflicts. We will talk more on our February 9 Analyst Day, but we clearly see more opportunities for future growth in this business as increasingly we look to foreign military entities for demand in this business.

Bell also had a good quarter which capped up a very solid year of operational execution. We delivered six V-22s bringing our full year total to 20. We delivered four H1s for a total of nine last year. We delivered all 29 of these military aircrafts ahead of schedule despite the six week labor disruption. In the quarter, we also delivered 50 commercial units bringing the total year number to 153.

While revenues were flat for the year, we boosted margins into double digits and we significantly increased our cash flow. 2009 was also an important year for Bell because we began to work [necessary] to support substantial growth over the next several years. For example in the commercial side we received certification of our new 429 light twin and started production processes of our 25 planned deliveries for this year going to 50 in 2011. We also ramped up our V-22 and H1 lines to deliver 28 V-22s and 20 H1s in 2010. Those backlog increased $1.3 billion in the quarter primarily reflecting the next installment of V-22 multi-year funding.

So we ended the year with a $6.9 billion backlog. Clearly growth is going to be very solid for Bell going forward. So in summary I would say we had a good quarter as we finished a year of transition. Looking forward, we still are going to continue our focus on cash generation and further reducing our debt and enhancing our liquidity and capital position. We still have work to do at Cessna on our costs, but we have seen the market stabilize and we do expect improvement as the economy progresses.

Leverage will increase as we see more volume coming through our industrial business and systems has a steady outlook for growth. And as I said Bell we believe is in the first of several years of significant growth driven by our backlog particularly in our military product lines. Across the board, we certainly expect to continue to invest in new products and services that are critical to future business growth. With that I would like to turn it over to Frank to go through some of the details.

Frank Connor

Thanks, Scott and good morning everyone. Let’s start with the major factors that drove the $0.22 year-over-year reduction in adjusted EPS which are outlined on slide 6 of the earnings presentation deck. As you would expect the largest driver was lower manufacturing volume which reduced EPS by $0.63. Taxes reduced earnings by $0.10 primarily as a result of the foreign tax credit benefit from the repatriation of foreign cash during last year’s fourth quarter.

Higher share count and interest expense cost $0.05. And inflation rate of 1.2% cost $0.07 per share, slightly up raising pricing of $0.06 which reflected a rate of 1%. On the positive side, overall cost performance including lower SG&A and lower used aircraft losses benefited the quarter by $0.43. And TFC’s lower operating loss contributed $0.14 on a year-over-year basis. Now let’s look at the results for each of the segments starting with Cessna.

Cessna’s revenues decreased $642 million from the fourth quarter of 2008 reflecting lower volumes across the board. Cessna’s segment profit decreased $170 million due to lower sales volume which was partially offset by favorable cost performance. The favorable cost performance included lower selling and administrative expenses largely due to workforce reductions in 2009, the benefit of forfeiture income from order cancellations and a decrease in writedowns of pre-owned aircraft inventory.

The absolute impact of used aircraft for adjustments was minimal for this quarter. Cessna’s backlog at the end of the fourth quarter was $4.9 billion, a decline of $2 billion from the third quarter.

Moving to Bell, Bell’s revenue decreased $51 million due to lower sales volume partially offset by higher pricing. Bell’s segment profit decreased $10 million due to the lower volume and a change in the commercial helicopter product mix partially offset by higher pricing.

At Textron Systems, revenue increased $49 million due to higher defense volumes which were partially offset by lower aircraft engine volumes. Segment profit increased $8 million again due to higher defense volumes, partially offset by the lower aircraft volume. Backlog at the end of the fourth quarter was $1.7 billion, down $183 million from the third quarter.

Looking at the industrial segment, revenue decreased $26 million due to lower volume and lower pricing partially offset by a favorable foreign exchange impact. The industrial segment profit increased $42 million, due to the improved cost performance partially offset by lower volume and pricing. Our cost performance reflected workforce reductions, employee furloughs, temporary plant shutdowns and lower selling and administrative expenses.

Results at the finance segment reflected continuing financial challenges among our customers and the execution of our liquidation strategy. Looking at slide 7, 60 day plus delinquencies of finance receivables held for investment increased to $569 million from $440 million at the end of the third quarter. Non-accrual finance receivables increased to $1.04 billion from $838 million last quarter.

Charge-offs were $22 million compared to $23 million for the third quarter bringing total 2009 charge-offs to $115 million. Loss reserves ended the year at $341 million. In addition to loss reserve, the mark-to-market valuation allowance at the end of the year was $185 million. Collectively the loss reserve and valuation allowance reflects 7.6% of managed receivables.

Now let’s turn to our 2010 outlook. Looking at slide 8, we expect our EPS from continuing operations before special charges will be in the range of $0.30 to $0.50 per share based on a fully diluted share count of about 300 million shares. We expect that restructuring charges primarily for Cessna will cost about $30 million pretax or $0.06 per share on an after-tax basis.

We are anticipating a strong year on the cash front with manufacturing free cash flow of between $500 million and $550 million. A quick point on pension, we are estimating 2010 pension expense will be about $155 million which is about $65 million higher than our 2009 expense.

Now let’s move to our segment detail on slide 9. Our outlook at Cessna is based on reaching the 225 deliveries target that Scott mentioned. We expect deliveries to be lower in the early part of the year and build throughout the year. Specifically, we are planning for 30 to 35 deliveries in the first quarter which will result in a segment loss for the quarter. As volumes recover through the balance of the year, we expect margins will follow accordingly. As we previously indicated, we expect full year margins at Cessna in the low-single digits.

At Bell, our military ramp is expected to drive an overall increase in revenues of about 16%. Our margin expectation in the 10% to 10.5% range reflects increased military mix, higher pension costs and higher R&D. At Textron Systems, we are expecting mid-single digit revenue growth, primarily reflecting growth in unmanned aircraft systems and intelligent battlefield products.

We are projecting margins will compress slightly to a range of 11% to 12% as program lots are completed and the favorable productivity performance is rolled into forward contracts. For the industrial segment, we are anticipating an overall revenue growth rate of 6% and margins in the range of 3% to 4% as we get volume leverage from our improved cost structure.

Moving to our finance segment. As Scott discussed, we expect to liquidate about $1.6 billion of finance assets during the year and we are estimating a 2010 pretax loss in a range of around $250 million. I would note that these levels are fully consistent with our liquidation plan. So that concludes our prepared remarks for today. We look forward to providing more color at our Analyst Day on February 9 and operator we are now ready to take any questions.

Question-and-Answer Session

Operator

(Operator instructions). And our first question comes from the line of Cai von Rumohr from Cowen & Company. Please go ahead.

Cai von Rumohr - Cowen & Company

Scott, can you tell us a little bit about expected trends in R&D at Cessna for 2010 and I guess you mentioned that used aircraft losses and forfeitures were about offset, but if we could have those numbers for the 4th quarter, that would be great.

Scott Donnelly

Cai, I can you give you some color on the Cessna on R&D, we are increasing R&D spending next year and obviously considerably as a percent of sales and it’s focused primarily at our core light to mid -size aircraft. So we have a number of programs going and it’s been sort of a gamut of update, block point type changes to a even a couple of aircraft that ultimately we would envision as new entries into the family of our products at Cessna.

So, we don’t have anything at this point that we would be publicly announcing. Obviously, we wouldn't do that for each of the given model types until we thought it was the right time commercially to announce those new products in the market. But there will be a significant trend and particularly with respect to a percent of sales of R&D spending.

Cai von Rumohr - Cowen & Company

What are the rules you are going to look to in terms of when you would expect to announce those products?

Scott Donnelly

Cai, as you know when you announce a new product, it usually generates a pretty strong order flow and so really the gauge that we have to use as we go through the course of the year for each model type is understanding what the receptiveness is going to be out there in the market place.

So in other word, we don't want to announce, a new upgrade or block point change or a new aircraft if we don't think there’s going to be a reasonable level of commercial demand out there, again I think we saw some strength in the level of orders in the fourth quarter.

I would say generally speaking, we do feel a higher level of interest, more inquiries y across the board in terms of new aircraft, but until we really feel pretty confident that there is going to be a strong receptivity, we wouldn't announce a new aircraft in the market.

Operator

The next question comes from the line of Heidi Wood, Morgan Stanley. Please go ahead.

Heidi Wood - Morgan Stanley

Can you talk a little bit on Cessna, how much are you sold out in 2010 vis-à-vis the deliveries that you have given us and also talk a little bit about the mix?

Scott Donnelly

Sure, Heidi. The sold-out slots are approximately 70% going into the year. I don't know if there’s a whole lot of variation as we go through the different models, obviously there is some, but in terms of our view of the strength of the plan, it’s pretty consistent across the various models, but in general it’s about 70%.

Heidi Wood - Morgan Stanley

What’s the update on the [white tails], where do you stand as of year end there.

Scott Donnelly

Well, with the white tails, we ended up delivering about 14 of them through the fourth quarter, more than we expected. So, we have about a similar number as we look into next year and obviously we consider that as part of the delivery forecast for next year 225s that we would liquidate all those, the balance of that white tails through the course of the year.

Operator

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

Noah Poponak - Goldman Sachs

I wanted to just dive into Bell a little further. Can you tell us what kind of military growth versus commercial growth you are looking for in '10. And maybe you touched on the margin a little bit, but you are guiding to margin compression here. Why not better with the V-22 ramp coming in?

Doug Wilburne

First of all, on the mix of military and commercial, it kind of follows more or less with the unit forecast that we gave in the prepared remarks.

Scott Donnelly

So military is going to be a bigger contributor to that growth given as Doug said that unit mix. And that mix shift to military is one of the reasons that you are seeing the margin impact, that the military business has lower margins than the commercial business and the margins on V-22 continue to come up, are doing quite well, but it’s that mix shift.

Doug Wilburne

And it’s primarily on the H1 because we are still in a very low single digit [blocks] on that program.

Scott Donnelly

Yes, if you looked at the margin on V-22 is I would say at this point a very healthy military margin business. so we’re going to expect that to be sort of high single digit kind of numbers.H1 which has you know historically for us in the early lots was actually a negative margin program at one time and that is strengthening but and I would expect it overtime, we will get it up to be a healthy margin business.

It will be positive for us next year, but from the mixed perspective as we ramp that volume is the lead one on margin and the other issue that we have is we have a brand new launch of the 429.

And unfortunately and typically, a lot of these commercial programs, that one is not at the cost position that we would like it to be right now. But clearly it’s the very beginning of a learning curve. So ultimately I would say that would be a good margin, a very successful product for us, but it is going to be dilutive as we introduce the first 25 next year.

Doug Wilburne

And similar to Cessna we are ramping up R&D as well as we look forward to new model introductions on the future.

Noah Poponak - Goldman Sachs

If I think a little longer term and I’m going out beyond 2010 and you’ve got all those programs continuing to ramp in the commercial business recovery and maybe the mix going back the other way. Can you maybe frame what kind of longer-term margin goal we could have here, could this be in the mid teens?

Scott Donnelly

Mid teens would be tough, just because we are going to have for the next three or four years as V-22 continues to grow. As H-1 continues to grow. Again I think if you think about those businesses, those product lines they are going to be strong, high single digit margin businesses. Clearly as the market recovers and you see more utilization that will help drive our commercial service business which is good margin business and we would need to get the margins improving on 429.

So, I think the way to think about it is that we will have higher and higher mix shifting towards the military on V-22 and H-1, but the recovery on the commercial side of the business in both service and cost performance would kind of offset that growth and so we think we can we can hold these margins in the kind of guidance that we are giving you at this point as we look over the next two or three years.

Operator

And the next question comes from the line of David Strauss, UBS. Please go ahead.

David Strauss - UBS

Scott and Frank, when would you expect to see a turn in the non-accruals and the delinquencies at TFC turn lower?

Scott Donnelly

Obviously we would like to think this is kind of plateauing at this point. The reality is of course as you look at the non-accrual is that the team is working very hard and I think we always have to keep in mind this is a liquidating portfolio right. So everyone of these accounts, whether it’s in non-accrual or not a non-accrual or worse delinquency is getting a lot of a pretty direct attention in terms of the path forward via restructuring activity, a sales activity.

So we are working through these things sort of hand-to-hand combat, if you will regardless of whether it’s non-accrual or not. I think what’s important to note is that regardless of the non-accrual status, be it there because of delinquency or be it there because of our judgment that over the long-term we don’t think we will get full principal interest back, that this is all still well within the context of what we showed you guys in terms of the alternate liquidation of TFC i.e. the losses that we guided you towards and we presented and obviously we will give you an update to go through the full details again in the Analyst Day on the 9. That this all falls within that. So there is no material change to our view of what the ultimate total losses are going to be as we liquidate this portfolio.

David Strauss - UBS

Okay and then with your guidance today, does it imply any change to your forecast by segment for 2013. The growth rates you had given out for 2013 specifically looking at the defense business and systems, it looks like that’s a little bit light in terms of the guidance.

Scott Donnelly

From our growth perspective?

David Strauss - UBS

So D&I systems, you laid out any 10% growth forecast out for 2013 and relative to that kind of ramp, the guidance looks a little bit light on the sales side for 2010.

Scott Donnelly

Again this is one we will probably give you more information when we do the Analyst Day, but I don’t think it’s a huge change.

Frank Connor

I think at that time we indicated that most of those numbers were kind of backend loaded, certainly on the commercial side and I think that applies at Systems as well. So as Scott says, it’s really not a big departure.

David Strauss - UBS

Your cash restructuring spend, what was that in 2009, what are you looking at for 2010?

Scott Donnelly

About $50 million.

David Strauss - UBS

For 2010?

Scott Donnelly

Yes.

Operator

Next question comes from the line of Shannon O'Callaghan of Barclays Capital. Please go ahead.

Shannon O'Callaghan - Barclays Capital

First on the restructuring you mentioned for 2010, the $30 million mostly at Cessna, can you give us a sense of kind of the big things you are going after there that are left to do, to the extent you can.

Scott Donnelly

Sure, the vast majority of that money is driven by the move of our Columbia storage facility to Mexico and also some of our back shop activity, facilities in Wichita and in Mexico.

Shannon O'Callaghan - Barclays Capital

Then on finance, can you give a little sense of what the environment is like out there in terms of alternative lenders or people interested in parts of this portfolio. You took some of the securitization back on in the quarter, started to unload it, give us a feel for what you are seeing out there.

Scott Donnelly

It’s evolving obviously across the different asset classes, Shannon, the fact that we have done another movement with the private label or the private financing where we took, both the forward funding obligation as well as all the current receivables shows that there are more companies coming back into that space.

So we saw a series of those transactions over the course of 2009, particularly late in 2009 and now at the beginning of 2010.

So there clearly are more banks and financial institutions now that are wanting to move back into the space. There is yet to be seen as you think about the golf and the resort. Those are very different assets. We did see some securitizations that were done by some companies in the timeshare space in the latter part of 2009. So there is some money starting to come back into that. I think that’s very much something that we will watch closely as we go through the course of 2010.

Shannon O'Callaghan - Barclays Capital

As you are thinking about the conversion going down to the mid-80s and how do you expect that to proceed, is this you know people prepaying earlier or actually exiting parts of the portfolio in bigger chunks, how do you see that. What’s envisioned in going down to the mid-80s on cash conversion.

Scott Donnelly

I think if you looked at 2009 where an awful lot of the liquidation came out of the distribution finance business. While we did some discount programs to move some of the assets, an awful lot of those assets moved apart. As people sold things as foreplanned and they were all collateralized and we got our money at par. So you had a mix that allowed us to keep in that mid 90s kind of range.

As you look at more golf, you look at more resort, I think those were assets where we will do more discounting for someone to go refinance somewhere else or in some cases there might be, we anticipate people coming and saying, hey they would like to buy that asset in which case we would expect that would be something that we would do with some degree of discount associated with it.

Operator

Next question comes from the line of Steve Tusa, JPMorgan. Please go ahead.

Steve Tusa - JPMorgan

On the Cessna side, how many Mustangs are in the Q1 and for the full year?

Scott Donnelly

It’s 105 for the full year, Steve and we haven't broken out the exact mix on a quarter-to-quarter basis. But it’s pretty uniform across the year.

Frank Connor

Yes, it’s a little lighter than uniform in the first quarter given kind of the low volume in the fiscal quarter, but the first quarter, a higher Mustang mix than the other quarters.

Steve Tusa - JPMorgan

Okay and then just price cost in the fourth quarter, from Cessna, how is pricing holding up there?

Scott Donnelly

We were ever so slightly positive on the comparison.

Frank Connor

Yes. On the used side, as we said, we there was no kind of used writedown.

Scott Donnelly

We are still trying to be cautious obviously because it’s a fairly commercially sensitive area, but we’ve been hanging in there on the price side.

Steve Tusa - JPMorgan

And then one more question, you have a 1Q loss at Cessna. How about the second quarter, you limit your losses to the first half here and then does that ramp up in the second half or is it pretty linear from the first quarter to get to that modestly positive margin through the rest of the year?

Scott Donnelly

Let’s talk about that at the end of the fiscal quarter after we get a better sense for how things are going volume wise because obviously it is going to depend on the volume.

Operator

Next question comes from the line of Brian Jacoby, Goldman Sachs. Please go ahead.

Brian Jacoby - Goldman Sachs

A couple of quick questions. One, can you just walk us through a little bit about the debt reduction that took place in the fourth quarter. Specifically it looks you know TFC had some bonds that came due, but it looks like you paid back a little bit more. Is that securitizations or what is the number of the debt reduction side, at both the [Ink] and the Finco. Did you pay any bank debt back. That's the question.

Frank Connor

No, we have not reduced the bank debt.

Scott Donnelly

We did have a securitization that we paid off in full in the fourth quarter that would have amortized into this year. So there was if you think of it as a prepayment in that sense on a securitization.

Brian Jacoby - Goldman Sachs

Okay so it’s all no-bank debt reduction. And then as you are looking at the line down on the portfolio, and you are saying you are going to come down closer to that mid to high 80s. Are you assuming a certain percent is just run off and a certain percent is potential just sales of the portfolio, can you give us any color on what’s behind that assumption with that because it sounds like in the recent past you really weren’t counting on much in the way of outright liquidation to sales of the portfolio in 2010 and that maybe 2011, 2012 you could have that, but can you just give us some color there.

Frank Connor

That’s not changed and we do still expect the vast majority of the 2010 liquidation to come from runoffs. And we do kind of as you alluded to and we look at each one of the portfolios. So we make assumptions around what losses we are likely to encounter in terms for instance the balance of distribution advancements, which still has an awful lot of liquidation in 2010, but then we looked at more coming from golf, we would expect to see larger discounting to get people to refinance those properties.

So, it is very much a mix of that, but generally speaking we still expect to be holding to the strategy that we had which was the 2010 will be predominantly a year where it’s more runoff, but I think there will be higher loss associated with some of the balance of what we have with distribution and finance and we’ve always assumed that we would have higher discounting or losses associated with things like the golf mortgage portfolio.

Brian Jacoby - Goldman Sachs

Last one related to TFC with the [XM Financing], if you could just update us on of the $500 million, how much you’ve utilized and there’s just been some stories out talking about potential for other types of options at the XM bank where they could offer guarantees to customers and so forth similar to what they have done with Boeing. Is there any opportunity for additional financing options offered by XM?

Frank Connor

Sure, at year end, the number at XM was about $180 million. And we have a very good relationship with XM and this program has gone extremely well. We have regular dialogue with them and others about other financing alternatives. We are hopeful that we will in fact be able to get additional capacity out of XM over time. Our XM facility is structured differently than what XM has traditionally done where they have done for specific asset. This is in fact the facility and so we’ve already kind of moved with them to a different nature of a relationship than they have historically done and we would expect to kind of continue with the structure because it’s working well for us and it’s working well for them.

Scott Donnelly

This XM structure which as Frank said it works very well for us and we are very, very happy with it. It is different than what you typically see with [Boeing] where these are very large ticket kind of transaction. This has been set up as a facility that fits better with our line of business which is more of a flow, relatively speaking smaller tickets and a lot of different customers, now that [recourse] obviously comes back to us.

But it’s proven to be very, very effective for us in the international markets and I think it works well for XM in terms of achieving the goals. We are not concerned frankly about getting to a point here where we don't have enough capacity into the XM line to support what we think is required for us in terms of international financing.

Brian Jacoby - Goldman Sachs

Credit guarantees were about let’s say a third party bank could lend, whoever buys the jet and then they backstop that. There’s been chatter that that could be an option for business jets and helicopters that XM would pursue something like that. Is that anything you’ve heard or that could be in the works or no?

Scott Donnelly

Well, we’ve heard and talked about it and I think that’s driven by the fact that other people, other manufacturers obviously would like to have some ability to access XM financing. But given that they don't have a financial service business, it’s trickier in terms of how you do that. So we’ve heard those things and frankly that would be great if that existed. We don’t have a third party financing in there rather than us doing it, but these things aren’t easy because on a transaction-by-transaction basis, that’s a lot of work to you know provide a $10 million financing whereas the facility we have set up with XM is pretty efficient, it’s more amenable to the kind of flow of a series of relatively small financings.

Brian Jacoby - Goldman Sachs

Okay, all right. I was just thinking of having from the credit side because credit side rather see less debt right, because when you borrow from XM, it’s still debt.

Scott Donnelly

If such a facility was put in place where there was a way of doing it, that would be terrific but it’s not something that being in place or not being in place doesn’t have a huge impact on us right now because we do have the existing XM.

Operator

Next question comes from the line of Ron Epstein, Bank of America. Please go ahead.

Unidentified Analyst

This is Elizabeth for Ron. I just wanted to follow up on Heidi's question regarding the Cessna filled out orders for the year. It’s 70% of the 225 anticipated deliveries are sold out, what percentage of those are Mustangs?

Scott Donnelly

You know, we are not providing that. It awfully commercially sensitive to us frankly to give too much data around each of the particular models with respect to either available or pricing. So I think we would probably like to stay away from that level of detail.

Operator

(Operator instructions). Question from the line of Steve Levenson from Stifel Nicolaus. Please go ahead.

Steve Levenson - Stifel Nicolaus

On V-22, what do you see is the maximum build rate and when do you expect to hit it?

Scott Donnelly

The current multi-year program ramps up to a total number of units that’s about, when we go to 34 in ’11, ultimately ramps can ramp up to the size of about 40 units. That’s out on say 2013.

Steve Levenson - Stifel Nicolaus

Right and are you seeing international interest, is there some point when you think that can kick in?

Scott Donnelly

Well, I fully expect that we will see international interest. Right now given the capacity, being pretty tied up at least through 2013, and that is not something that’s imminent, but clearly we are expecting that there will be international opportunities. I think that the Marine Corps and the Air Force obviously from an interoperability perspective wasn’t [realized], we would like to see this as a platform that goes international at some time. So absolutely we do see international opportunities for the aircraft, but I would only be cautious, there’s not something imminent in that regard.

Steve Levenson - Stifel Nicolaus

In your expected deliveries for Cessna, do you have CJ4s built in and when do you expect them to start going in?

Scott Donnelly

Yes, the CJ4s, we expect first commercial deliveries in the second quarter and that will ramp up significantly from the second quarter through the third and ultimately fourth quarter.

Frank Connor

There’s about 15 of those in the year.

Steve Levenson - Stifel Nicolaus

Could you give any more thoughts about outsourcing, given the plans for the Columbus plants?

Scott Donnelly

I would make a particular comment with respect to outsourcing, there’s certainly a lot of work going on with respect to our cost structure and where and how do we manufacture in the most efficient way. The things that we have announced are moving things out of some of our higher cost facilities into our own facilities down in Mexico. So that’s a significant move. And technically it’s not outsourcing, because it’s a Cessna run facility in Mexico but we look at all avenues. If they can result in a better quality and lower cost, it’s on the table.

Steve Levenson - Stifel Nicolaus

And is that the same thought at Bell too?

Scott Donnelly

Absolutely.

Doug Wilburne

All right ladies and gentlemen, thank you very much for joining us today. We look forward to seeing you on April 9 and we will talk to you then. Thank you.

Operator

Thank you. Ladies and gentlemen, this conference will be made available for replay after 11:00 a.m. today until April 30 at midnight. You may access AT&T executive play back service at any time by dialing 1-800-475- 6701 entering the access code 994808. International participants dial 1-320-365- 3844 and again, that access code is 994808. And that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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