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Monday, July 27, 2015

Rockwell Collins Sees Softening Aftermarket Amid Rising Connectivity

Juliet Van Wagenen

Rockwell Collins connectivity segment looks to offset other market softness
Rockwell Collins connectivity segment looks to offset other market softness. Photo: Rockwell Collins

[Avionics Today 07-27-2015] Rockwell Collins has tightened its 2015 full year forecast as a lacking commercial aftermarket and slowing business aviation programs pump the brakes on top line growth. In the company’s third quarter 2015 conference call on Friday, Rockwell Collins Chief Executive Officer Kelly Ortberg spoke to the lagging market, which has also impacted United Technologies Corporation’s (UTC) most recent revenues, as well as how growth in aviation connectivity is offsetting the market softness.

“It's quite obvious that all eyes are on the commercial aftermarket and, unfortunately … we too have some soft aftermarket results for the quarter,” Ortberg said. “Based on our aftermarket performance to-date, there's no doubt we'll fall short of our high single-digit guidance we set beginning of the year. I'd now expect our aftermarket sales for the year to grow more in the low single-digit range when all is said and done.”

The company reported a 2 percent increase in sales alongside a 12 percent increase in earnings when compared to fiscal year 2014, although numbers failed to meet the revenues set out for the quarter. The company also narrowed earnings in its full year outlook from a previous range of $5.10 to $5.30 per share to $5.15 to $5.25 per share. The CEO attributed the slowing aftermarket to a number of factors across the industry.

“The commercial aftermarket has not lived up to our expectations this year, and we're seeing a couple dynamics play out here,” explained Ortberg. “First, in business and regional systems, business jet flight hours are just not growing. We came into the year expecting that flight activity would continue to recover at last year's rate and, unfortunately, it just hasn't. This past quarter, the activity was relatively flat. Interestingly, we are seeing relatively reasonable flight activity grow in the newer jets, but really weak utilization in the older models.”

The air transport aftermarket business was also down in the third quarter by about 4 percent, according to Ortberg, primarily due to lower entry into service spares for Boeing’s 787 Dreamliner

“This surprised us a little bit, but we do know why it's happening, and it's not all bad news here. We knew going into the quarter that there weren't a lot of new airlines taking 787 aircraft, but we did expect some additional spare sales that didn't materialize. The reason they didn't is that airlines are now recognizing that they don't need as many spares, as first estimated, supporting their aircraft. And why is that? Well, it's because our products are performing very well in service, and are exceeding even our reliability expectations,” said Ortberg.

When an analyst on the call suggested that Rockwell Collins adjust sales prices for displays on the 787 to offset the increase in reliability and decrease in sales, Ortberg attributed the loss to something of a learning curve.

“I think you have to recognize we kind of skipped a generation. We didn't do the 777 displays. We didn't do the 737NG displays. So, as we're putting these new systems in, we're finding that the new technology is really performing well,” said Ortberg. “We'll just iterate that into our business cases.”

Business aviation is also taking a hit as new aircraft programs slow. While the company is looking for profits in its new deal with Cessna to supply the Pro Line Fusion avionics suite for the manufacturer’s King Air fleet, the business market is seeing a significant slowdown with issues such as Bombardier’s Learjet 85 pause and a further delay in C Series production. Rockwell Collins also expects the Bombardier Global 7000/8000 scale back announced earlier this year to take its toll on sales, but the rate reduction may not figure in until next year.

“In addition, the discretionary side of our [Business and Regional Systems] BRS aftermarket continues to be soft and underperform our expectations. One bright spot has been cabin updates, but the flight deck updates are just still not picking up,” said Ortberg. “As we enter the year, we thought discretionary spending in the business jet aftermarket was ready to rebound, and it was showing some signs of early recovery. I also thought that lower oil prices would help accelerate the recovery in the second half. And as it's turned out, we just aren't seeing anything tangible in the marketplace that would indicate that the bizjet aftermarket is ready to make a run.”

Its government systems division has remained fairly flat for Rockwell Collins, although Ortberg did note the impact that foreign currency exchange rates are taking on profits, as the government division is most vulnerable to currency fluctuations. Ortberg estimates the company has encountered “about $40 million of headwinds for the year” in this respect. However he anticipates the company will be able to offset the headwinds through modest improvements in legacy hardware sales and a sizeable increase in development program sales, such as data link and modernized GPS programs, which may allow Rockwell Collins to see flat revenues for fiscal year 2015, on target with previous estimates.

The most solid region for the company’s growth seems to be the newly established Information Management Systems (IMS) division, which aims to provide secure aircraft communications, leveraging the growing In-Flight Connectivity (IFC) market and bolstered by the company’s acquisition of ARINCDirect, which was fully integrated late last year. For the quarter, IMS sales saw an increase, primarily as a result of 8 percent growth in aviation-related businesses, including GlobalLink and ARINCDirect.

“The revenue synergies [are] going to come primarily from the business jet service consolidation, as we leveraged our strengths of Rockwell Collins' legacy international flight support services group with ARINCDirect. This is going really well and, in fact, is even offsetting some of the bizjet utilization headwinds,” said Ortberg. “To give you a sense of that, year-to-date we're seeing a 10 percent reduction in the number of international trips being flown, yet our revenues in this area are up 8 percent. The reduced flights are primarily in and out of China, Russia and the Middle East due to the dynamics in those regions.”

“What that means is that we're getting more revenue per flight, or we're gaining additional customers, and a little of both of that is happening,” he added.

The company is flexing its muscles in the connectivity market and is currently working with Inmarsat on its Global Xpress network as well as OneWeb and Iridium Next. The recently released flight tracking solution, ARINC MultiLink, which unites six different data feeds from both the aircraft and air traffic sources to enable flight-tracking capabilities, also does much to bolster the company’s connectivity profile. Ortberg anticipates ARINC Multilink to begin contributing to profits next year.

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