Rockwell Collins Q4 2010 Earnings Call Transcript

Rockwell Collins Q4 2010 Earnings Call Transcript
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Rockwell Collins (COL)

Q4 2010 Earnings Call

October 29, 2010 9:00 am ET


Clayton Jones - Chairman, Chief Executive Officer, President and Member of Executive Committee

Dan Swenson - Vice President of Investor Relations

Patrick Allen - Chief Financial Officer and Senior Vice President


Cai Von Rumohr - Cowen and Company, LLC

Carter Copeland - Lehman Brothers

Jason Gursky - Citigroup

Carter Leake - Davenport & Company, LLC

Robert Stallard - RBC Capital Markets Corporation

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

Ronald Epstein - BofA Merrill Lynch

Samuel Pearlstein - Wells Fargo Securities, LLC

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Myles Walton - Deutsche Bank AG

David Strauss - UBS Investment Bank

Peter Arment - Gleacher & Company, Inc.



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Good morning, and welcome to the Rockwell Collins Fourth Quarter Fiscal Year 2010 Earnings Conference Call. [Operator Instructions] For opening remarks and management introduction, I would like to turn the call over to Rockwell Collins' Vice President of Investor Relations, Dan Swenson. Please go ahead, sir.

Dan Swenson

Thank you, and good morning, everyone. With me on the line this morning are Rockwell Collins' Chairman, President and CEO, Clay Jones; and Senior Vice President and Chief Financial Officer, Patrick Allen; as well as our incoming Vice President of Investor Relations, Steve Buesing.

Today's call is being webcast, and you can view the slides we will be presenting today on our website at under the Investor Relations tab. Please note, today's presentation and webcast will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties including, but not limited to, those detailed on Slide 2 of this webcast presentation and from time to time in the company's Securities and Exchange Commission filings. These forward-looking statements are made as of the date hereof, and the company assumes no obligation to update any forward-looking statement.

With that, I'll now turn the call over to Clay.

Clayton Jones

Thanks, Dan, and good morning, everybody. Before I begin my formal remarks on the quarter and the year, I would like to acknowledge something that I think most of you already know, and that is today marks a transition in our Investor Relations position. Dan Swenson, who served us very well for the last two and a half years, is going to be moving to another important position in the corporation, working with our Commercial Systems group and strategic development. And I want to just formally thank Dan for the work he's done, both for our company and for our stake owners. I get a lot of feedback from many of you about the very professional job that Dan has done over this past period, and I'd like to publicly acknowledge that great work you've done for us, Dan.

And in his stead, filling that role, is going to be Steve Buesing. Steve comes out of our finance organization, and has also done an extraordinary job in the position he's held before this. And he and Dan have been working together very closely over the last month and a half, and my expectation is that we won't miss a beat in terms of providing the kind of service that all of you on this call and others expect from our company. So Dan, thank you, and good luck. And Steve, congratulations, we look forward to working with you.

With that, I'd like to proceed with the call. As our fiscal 2010 comes to an end, I would tell you that I'm very pleased with how we closed out the year. And there are a couple of key items that I'd like to highlight. First, we demonstrated very balanced growth as both government and Commercial Systems posted substantial year-over-year increases in fourth quarter revenue and earnings. That strong performance drove growth in our quarterly EPS for the first time since the first quarter of 2009. Additionally, our continued focus on cash flow management has enabled us to achieve another record year in operating cash flow of $711 million.

As we expected, it was a year of two halves, with the commercial market recovery beginning to kick in over the second half of the year. And in spite of some pretty good volatility across the year, we were able to deliver results at the upper end of our earnings per share and cash flow guidance that we laid out over a year ago. And I think the key takeaway from our performance in this quarter and for all of 2010 is our ability to execute and deliver against expectations even in a time of great uncertainty.

What we saw on the fourth quarter has also further strengthened our confidence relative to the guidance we've provided last month for fiscal year 2011. So let me add some color relative to the market environment and how we're positioned to grow as we move into 2011.

Now if we've learned anything to this point, if that this commercial air transport market recovery is very different when compared to previous cycles. In virtually every previous recovery cycle, passenger traffic increases drove the need for increased capacity, which airlines historically satisfied by bringing post-warranty aircraft out of retirement, fueling higher product service revenue. Then as the airlines realized greater profitability, we would typically see a resurgence in retrofit activity as they put in place discretionary upgrades that had been deferred during the down cycle.

All of this preceded OEM recovery and stimulated very strong aftermarket growth. However, in the current recovery cycle, airline is taking a much different approach, satisfying the increased passenger traffic demands through record high load factors and taking delivery of many more new aircrafts. These two factors have delayed the onset and are dampening the rate of aftermarket growth. Now despite all of this, we did realize a healthy aftermarket growth of 6% in the fourth quarter of 2010, although it came a bit later and was a little lower than we were thinking at the beginning of the last fiscal year. For 2011, that trend should strengthen with air transport aftermarket growth of around 8%. And if you exclude wide-body IFE service, it should actually grow in double digits.

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