Q1 2020 Earnings Call
You've known except where otherwise noted the company will speak to results from continuing operations, excluding restructuring costs and other significant items of a nonrecurring and or non operational nature, often referred to by management as other significant items before we get started just a few comments on the structure of the bid.
And our leadership team concurrent with the merger, we realigned the segments to create for industry, leading businesses Raytheon intelligence in space led by ROI as Aveo is a combination of the legacy Raytheon intelligence information and services and spacing airborne systems segments. The second Raytheon missiles.
Defense led by West Kramer is the combination of the legacy Raytheon missile systems and integrated defense systems.
Third is our Collins aerospace business, which is now led by Steve Tim and finally, Pratt and Whitney, which has led by Chris Kalliel.
When we speak to Raytheon technologies overall results for the first quarter, we will be referring to United technologies, Standalone, including carrier and Otis will speaking to Raytheon companies company level results separately.
At the legacy Raytheon company business unit level, we will be speaking to each segment on a pro forma basis as the go forward Raytheon technologies businesses.
The company also remind listeners that the earnings and cash flow expectation and any other forward looking statements provided in this call are subject to risks and uncertainties RTC SEC filings, including its 8-K 10-Q and 10-K provide details on important factors that could.
Actual results could differ materially from those anticipated in the forward looking statements.
Once the call becomes open for questions. We ask that you limit your first round to one question per color to give everyone. The opportunity to participate you may ask further questions by Reinserting yourself into the Q as time permits with that I will turn the call over to Greg.
Okay. Thanks skills and good morning, everyone. So just a few things going on and I recognize this is.
It's a little bit confusing.
Where we have started let me just one logistical item recovery or sort of already knows we completed the spends of the carrier and Otis.
Economic uncertainty and of course, a huge slow down and commercial aerospace.
But both Standalone U.T.C. and Raytheon began to here with a strong start it's clear the rest of the year is going to be under significant pressure as a result of the pen demick.
Notwithstanding those challenges whoever we expect the rest of the year Raytheon technologies continues to be well positioned to deliver value over the long term.
The same time, we're going to take immediate unnecessary actions to reduce costs and to ensure we maintain that position to financial strength and market leadership. So that we can emerge from this crisis stronger.
To that end, we're taking about $2 billion of cost reduction actions in about 4 billion of cash conservation actions on the commercial aerospace side and we'll discuss isn't further detail. The next few slides.
Okay, turning the slide three.
One of the underlying why just mergers even more important given the environment we face.
As the world's most advanced and D. systems provider, our portfolio is balanced and diversified against commercial aerospace and defense as well as across geography is.
This enables us to be resilient across business and economic cycles, evidenced by strong Q1 defense bookings at a record defense backlog of over $70 billion at a time when commercial aerospace is facing severe headwinds.
Interestingly rate the I'd had a great first quarter.
Look to Bill 1.44, and came into the merger with $50 billion of backlog.
Legacy U.T.C. Arrow businesses had about $20 billion of defense backlog, so stronger together clearly.
R.T. defense franchises are also well funded most importantly were well well well aligned with the National defense strategy, which is expected to shape future D.O.D. budgets and when aviation marketing and passenger traffic rebound and they will we will be even better position to deliver solid growth.
Additionally, the scale uncomfortable complementary nature of our can buy businesses allows us to continue to invest for breakthrough technologies for our customers as well as identify opportunities for technology revenue synergies.
With that just a few highlights from our for industry, leading segments, let me start with Collins aerospace.
<unk> sought continued captures synergies in the first quarter with nearly $60 million and that's on top of the 300 million. We realize last year Collins remains on track to achieve about 600 million of costs energies. That's from the U.P.C.'s acquisition of Rockwell Collins and late 2018.
Colleges, particularly well suited with its air management interiors business to also provide solutions to the airline industry to further enhance passenger health and safety.
At Pratt the G.D.F. engine program achieve two significant milestones as the first in service G.D.F. engine exceeded 10000 service hours and more importantly, the program reached 5 million revenue flight hours across the combined G.D.F. powered fleets.
Importantly, also at Pratt the joint strike Fighter program delivered the 500 production aircraft.
We're just getting started with both of these programs great future.
Everything on intelligence in space during the quarter. The U.S. Air Force awarded R.I.S. The force element criminal development program, that's expanding our family of advanced beyond lightest like terminal R.F. they'd be t. franchise to modernize and secure communication terminals and both of B. 52, and the R.C. 135 aircraft.
Finally, our missiles and defense business, but over $2 billion on the standard missile three one be multi year during the quarter.
Shortly after the quarter closed R. and D. was also selected by the U.S. Air Force to develop the long range standoff weapon strategic weapons that will replace the services legacy Airwatch cruise missile.
Great Great achievements for the company this franchise will be worth approximately $10 billion over its lifetime.
Like the most important take away, though is each of these businesses as a leader in their respective markets in our all will generate significant value over the long term by combining technologies to generate revenue synergies across all of our businesses.
Okay slight for.
Fundamental to our successes the strength of our financial profile and let me be clear the balance sheet as strong in our liquidity position is solid.
Always emerged we had about $8 billion of cash net debt of about 25 billion in a solid investment grade credit rating.
Combine these were the 5 billion dollar revolver, and a new $2 billion revolving credit facility and we have plenty of financial flexibility.
And that's before an additional $2 billion or so or proceeds from the previously announced divestitures. The majority of which are anticipated the second half of the year.
And as I mentioned earlier, we're taking immediate actions to reduce costs by 2 billion and preserve liquidity with $4 billion, Okay <unk> cash actions.
Reducing capital expenditures and even the investments we've differed merit increases across the commercial businesses and we're cutting discretionary spending just to name a few.
Well many of these did measures of and difficult. It is the right thing to do for the business.
We're also attracted delivers a billion dollars in gross costs energies that we committed to and we announced the merger last June.
We've got a strong execution track record in an excellent playbook from Rockwell Collins and Goodrich acquisitions.
After months of integration plantings or teams are working seamlessly is one company and we're already executing on the detail work plans to drive or send any commitments.
Regarding share runner returns as you might expect we will not be repurchasing shares this year given the current environment.
However, we do remain committed to return significant capital to share orders.
As a result of return to the $18 billion to $20 billion that we outline last June or more likely take place over a four year versus a three year timeframe.
We also remain committed to the dividend, which are aboard prove last week, and we have sufficient cash and liquidity to maintain a competitive did the dividend even in this very difficult environment.
Finally, before I turned over until they take it through the results.
To make a common at how we're thinking about our outlook.
Given all the uncertainty in our commercial arrow business, we're not going to provide a raytheon technologies outlook at this time for 2020.
Totally we'll give you some important information on how we're thinking about the business back later in the or to provide more color as a situation continues to evolve.
Let me turn it over to Toby to take you through the first quarter results. Okay. Thanks flag looming to fly five.
Oh, great fall in spite of the developing pull that 19 pandemic. He won was a good stocks in the air for writing on technologies.
<unk> spans and merger occurred on April 3rd.
Are recorded one results for right handed technologies reflect the legacy United Technologies Standalone results, which include carry a notice.
Going forward <unk> noticeably reflected as discontinued operations and making on his legacy business will be included from April 3rd onward.
Recorded sales were 18.2 billion.
And 1% bars prior year, including flat organic sales and one point at Backpedaling.
Adjusted he P.S. was $1.78.
7% less the prior year, which you'll recall is above our expectations for the court.
Within a quarter segment profit well was more than offset by approximately 10 cents of public 19 related charges.
Majority of which was noncash within Pratt and Whitney and call.
Except for interest below the line items were higher versus priority or as expected.
On a gap basis E.T.S. was the last person yeah 10 cents.
Down year over year and included $1.88 of net nonrecurring charges and other significant items of which abolished 66 related to the portfolio separation chagas.
18 cents I'm noncash impairments primarily related to carry notice.
And t. sense of restructuring.
Just a quick comment on our tax write in a quarter you.
You know the reported effective tax rate for the first quarter with 98.5%.
Which was the result of tax separation expenses.
I mean adjusted basis effective tax rate was 22.4%, which is closer to the effective tax rate that we expect for our cat's going forward in 2020.
Free cash flow is better than expected at approximately $250 million and included about 700 million of one time cat separation payments.
Telecasts separating separation payments in the quarter or approximately 1.5 billion.
Of which approximately 700 million.
It <unk> financing outflow.
Civilly associated with May call payments in connection with the early retirement of debt.
Turning to fly sex.
Raytheon company, while not included in writing on technologies first quarter results.
Had a strong first quarter with walking of 10.3 billion.
Both the bell ratio of 1.44, leading to Iraq, there'd backlog 51.3 billion.
Net sales are better than expected at 7.2 billion up 6.5% year over year.
Not on the page, but cash flow from operations was also better than expected and then I'll flow of 98 nine in the first quarter or 313 million dollar improvement versus the prior yet.
Solid start to 2020.
What's that Oh handed over to any able to talk through the segment results and I'll come back and share a bit about how we see the parent environment.
Thank you Toby.
Starting with Collins aerospace on the slide seven.
Sales were 6.4 billion in the quarter down 1% on one panic basis.
Commercial Oh, we M. sales were down 12% driven by the 737, Max grounding and anticipated declines in legacy programs, partially offset by new program growth driven by the eight 320, Neil 77, and eight to 20.
Commercial after market sales boot, 3% driven by provisioning, which was up mid teens and parts and repair which was a mid single digits.
Actually offset by high single digit declines in modifications and upgrades driven by anticipated lower 80, S.B. mandate volume.
Military sales were up 10%.
Higher at 35 volume.
We also saw continued solid performance in our mission systems Communications navigation and guidance solutions and I.S.R. businesses.
Operating profit of 1.1 billion was up 3% from prior year with 80 basis points margin expansion.
Drop through and higher military and commercial after market sales and continued synergy capture of an incremental 60 million as well as favorable F.X. and contract settlements in the quarter, partially offset by headwind from lower commercial we m. sales and approximately 40 million in coping related charges.
[noise] shifting to Pratt and Whitney on slide eight.
Sales with 5.4 billion were up 12% on an organic basis.
<unk>, Oh, M. sales were up 25% driven by G.T.S. and P.W. 800 deliveries.
Partially offset by anticipated declines in V., 2500 production and lower deliveries and other pwc engines in March driven by covert 19 impacts.
Commercial after market was up 4% in the corner.
Wrote in the G.D.F. after market was offset by reduction in legacy shop does it in adoptions.
Whitney Canada after market. So I grew up from higher shop does it content and a customer contract clothes out partially offset by lower shop visits.
Ramping J. a set production continues to drive growth that Pratt's military business military sales were up 16% on higher after market sales across key platforms and increased at 135 production volume.
Adjusted operating profit on 439 million was down 2%.
Operating profit benefited from dropped through on higher military sales.
Tenure, GTF cost reduction lower E.N.D.N., a customer settlement. These benefits were more than offset by higher G.N.A., which was primarily driven by Kobe related reserves of approximately $60 million.
<unk> headwind any absence of the Q1 2019 domestic during licensing agreement for approximately $30 million.
Commercial after marking after market operating profit was flat.
By a customer contract clothes out offset by G.T.F. and legacy sales tax.
Turning now to slide nine.
Talk through the legacy Raytheon businesses Q1 results as till we mentioned while these results are not included in Raytheon technologies first quarter reported results. We thought it would be helpful to share how these businesses performed.
You will find a reconciliation from the former legacy Raytheon seconds to our pro forma new segments in the appendix.
That said starting with R.I.S. Q1 already up sales were 3.6 billion operating profit was 379 million and Ross was 10.6%.
All right, Yes also bucked approximately 350 million on the G.P.S. next generation operational control system or G.P.S.O.C.X. program, and it's worth mentioning the former reiki on S. They ask business grew sales, 15% driven by higher volume across numerous programs.
Only the former rate the N.I.A.S. business saw operating profit declined 45 million, primarily due to 34 million of gains from the first quarter of 2019 did not with P.
Moving to R.M.D. He wants sales were 3.9 billion operating profit was 573 million and Ross was 14.9%.
Legacy missiles operating profit was up 49 million or 26% driven by higher net program efficiencies.
At like a C.I.D.S. operating profit was up 79 million or 31% driven by higher net program efficiencies, including 35 million from a contract settlement.
In addition to what Greg mentioned looking highlights in the segment. During the quarter also included approximately $500 million to provide advanced Patriot Air missile defense capability for the kingdom up bearing.
That I'll hand, it back to Toby to provide an update on the current environment.
Thanks, now I'm on flights on now.
Right mentioned, we are clearly and uncertain times, particularly for industry.
Said not everything about our feature is unknown.
Several factors, we know or getting comfortable with right now.
And there are certainly a number of elements network monitoring closely.
Let me take you through how we see it today.
First for some known that should serve as tailwinds.
They are defense businesses on solid ground.
Record backlog and visibility to grow our defense businesses over the next few years.
Franchises, I'll, well aligned with the National defense strategy, which should shape future budgets and we see demand far advanced solution internationally.
We have a robust synergy play book that will utilize to create additional left from Rockwell Collins acquisitions energies as well as generating Raytheon technology sentences.
And as you heard from Greg.
Had taken aggressive cost reduction in cash conservation actions in response to the current environment.
Now as I mentioned.
Optimistic about our defense business growth and our expectations largely consistent with when we began to yes.
Yeah monitoring our defense supply chain and any potential disruptions that can occur.
However.
Have good visibility into the demand side of our defense business and as a result.
Provided a detailed outlook for I.S.N.R. and D. segments in the appendix.
At a high level or R.I.S., an arm game.
<unk> guided to 6% to 8% sales well versed 2019, and discuss the ability to improve operating income.
As a result of the covert 19 impacts lowering our I.S. an R.N.D. sales.
$200 million or a little less than 1%.
Operationally and on a whole year 2020 basis.
For the remaining cared of cute to to queue for 2020.
No changes to the previous defense outlook provided for legacy Raytheon businesses other than the covert 19 impacts.
No. There are few changes to the way, we'll report on numbers for R.I.S.R. and D.
Driven entirely by the merger unrelated accounting.
Including the stopped period.
The A.C. recess and purchase accounting impacts.
You'll note that the appendix slide highlights the expected effects. These items will have on these segments.
It is important to know the E.S.T. reset is merely a matter of timing and not a permanent loss of profit.
Profit improvements will now be recognized over the remaining life of each program.
We are confident in our defense growth in the future, although we're not providing an outlet for 2021.
Say is that we are in a strong position to.
Continue to blow these businesses and will not see the merger related impacts on the accounting beyond next year.
And finally as you know the fence made up a little less than 30% of sales within columns and pride in 2019.
Continued to expect Collins and press the fence sales to grow mid single digit organically in 2020.
As we discussed at the beginning of the year.
Now for a lot more monitoring.
As we discussed the covert 19 pandemic clearly has and will continue to impact our business and the aerospace sector as a whole.
Yeah. It can unfold in multiple ways, but we'll certainly result in significant headwinds far commercial aerospace segments.
We are monitoring several factors that we'll have a direct impact on the commercial aerospace market, including opium production levels airline financial condition fleet groundings.
Revenue passenger miles and after market data.
A few comments on these factors.
No that Oh, we production rates have been significantly reduced.
Aircraft fleets around the globe apart and I out his latest forecast estimates 2020 R.P.M.
Will be down 48% year over year.
All of which will have a significant impact on the commercial markets in our segments.
And the commercial aerospace industry as a whole, including our commercial supply chain.
While we have and will continue to see disruptions in the supply chain working very closely with our suppliers to ensure they remain financially stable.
Able to meet our production requirements.
So let's discuss calls while I can't provide an overall view on commercial Oh, we are at the market sales and operating profit at this time.
Evolving market conditions, here's what I can tell you.
We would expect a sharp deceleration in both Oh, we and after market on the sale side, we expect Oh, we sales to decline in line with O.M. production and airline delivery schedules.
After market equally it's difficult to quantify but we generally expect sales declines to be in line with RPM declines with a poll on rebound that there's not recovered at 2019 levels within 2020.
We also continued to expect point of headwind from lower 80 S.P.C.S.
Moving on to pry as with Collins, we expect to shop D. celebration in both we in after market.
<unk> Oh, we we expect our sales to decline in line with our main Oh, U.M. customers, which is primarily Airbus for a large commercial ones.
On the aftermarket side.
T.F. overhaul activity will continue.
Upgrade engines to the latest configuration.
However, legacy shop visits are not likely to be down 50% or more over the prior yeah.
As you're aware Pratt and Whitney Canada was approximately 25% of Pratt's total sales and 2019.
Crack, Canada, we'll see a significant sales impact, albeit not as large as we expected decline in the large commercial engine business.
With respect to free cash flow, we expect to generate positive fleet cash flow for the year.
Which will be driven by our defenses.
Given the range of outcomes that could materialize within our commercial arrow businesses. We would expect these businesses to be about right even for the year.
And that's despite taking $4 billion of cash to x. into this year as we see hadwin at the commercial arrow businesses, largely due to working capital impacts as we work to ensure the help of our supply base and address under absorption.
The song operating results and Keyuan highlights the performance capability of Pratt and Whitney in Collins Aerospace and is indicative of the potential and growth the segments will see again as we rebound from the temporary market impacts, resulting from Cogut 19.
But for now they are clearly a number of moving pieces more unknown unknowns.
Will continue to provide updates as the situation develops.
We have a clear understanding of the pandemics effect on our operations.
Has for some two two color as we have already said.
We expect sales to be down significantly at Pratt and columns.
<unk> two two operating profit at Pratt to be a loss and operating profit at Collins be approximately break even.
And for R.I.S.N.R.M.D. operationally.
As usual.
But for the previously mentioned E.A.C. reset and stop area that will impact the results.
Finally, we expect adjusted D.P.S. and to to to be positive.
As it relates to the full year outlook, we we'll reevaluate our ability to provide our traditional sale E.P.S. and the cash outlook aptitude too.
Planning to slide 11, we've provided you with some information to help with your model.
You will say our current thoughts on 222 to four ranges, but these line items.
No cap X. four columns and Pratt will now be over 800 million lower than we expected at the start of the year.
Mitigate covert 19 pressures.
Additionally, as far as corporate expenses.
Two to queue for approximately $400 million will be allocated to Pratt and Collins, leaving about 250 to 300 million of residual corporate costs, which primarily related to L. <unk> corporate project for the company.
Lastly, we are making a few changes to the way we measure our results and therefore speak to them externally.
We will continue to discuss our sales and earnings on a job on adjusted basis.
Consistent with U.T.C. legacy approach of excluding significant and non recurring items with a few changes.
Given the considerable acquisition merger activity, we won't be reporting a segment profit adjusted earnings and adjust the D.P.S.
Excluding the non cash net expense associated with amortization.
P p. any step up and parity adjustments.
We believe this will provide investors with a better understanding of our results in relation to cash performance.
With respect to our segment operating profit, we will now be allocating the majority of corporate costs to our segments.
And finally.
Reflect the bass cats pension adjustment at R.I.S.N.R.M.D. restructuring low segment operating profit in our statement of operations.
Okay with that I'll hand, it back open to gripe.
[noise] <unk> I know, that's a lot to digest a lot going on let me just maybe summarizing.
My own way I think everybody used to step back and take a deep breath I know a lot of change a lot of uncertainty.
At the end of the day. The reason, we're Raytheon and U.T.C. came together were three simple reasons. It was technology. It was talent and it was balance.
Technology is self evident.
I would tell you. The talent is also self evident with the fact that we've got great leaders that are business from west to Roy Steve to Chris experience leaders, who know how to work in this in challenging environment will do the right thing as we always would we've also got a great corporate stuff you know about half of the from Raytheon half of it from legacy U.T.C.
And again, we've lived through these crises before and we will support the businesses and some of the hurry difficult things that they're going to have to do.
But at the end the day, we'll get through this as we always have.
Because you think about the <unk> remainder of 2020 or priorities are pretty clear.
<unk>, it's supported or employees, keeping them healthy and safe.
Supporting our customers and importantly, our suppliers.
So delivering technology and product innovation for our customers will get a lot of work to do and executing on the merger integration delivering synergies that we know how to do this.
You know throughout our history, we've whether a lot of challenges and we'll whether this one and come out stronger around the other side.
I remain excited about the future of our company and I'm confident that the teams we haven't place will drive sustainable long term value creation little benefit customers employees shareowners and our communities.
But that actually let's go ahead and open it up for questions.
And the interest that time and kind of laugh a broader participation you're asking them interest ask one question.
<unk>.
Yeah, it's good morning, guys.
So.
Completed call although.
Just maybe starting off with the fence cause I'm certain you're going to going to bombarded with commercial questions.
About international.
Markets in particular, Saudi in what's going on with oil prices and how important Saudi is too.
The legacy defense businesses <unk>, how should we think about their news or any risk to those contracts and is there any risk to the to the the middle of these particular Saudi business.
<unk> Yeah, there's there's always the uncertainty when oil is here 20 or $30 a barrel obviously came to the Saudi Arabia's is challenged his or her most of the middle east customers. During this time.
Same time, I don't think pieces breaking out anytime soon in the middle East and providing a solid defense posture to our customers over there remains a priority both for the U.S. government as well as for the other kingdom of Saudi Arabia, and all of our over customers over there. So look I'm, it's about 30% of legacy racy.
Business was international.
Thing is it's not all middle East is obviously, a big piece in the U.K.. We we support we've got the Patriots system and pool, when we got big operations in Australia, It's not just a middle eastern business, it's an important that element of it but it's not the whole thing. So so far we have continued to see good cash come in from from the middle Eastern customers there during the first quarter.
Surprisingly, even loyal out there they need the equipment. They want the equipment that we need to help them or defend themselves they'll be anything on it yeah. I think the only thing I'd add Ron as you know where whereas looking at a Big award here in Q. too late to to maybe early Q3 the.
And for the Tippy too.
System for K.S.A. right, that's on track and it falls in line with what Greg said, the the threaten environment hasn't changed the need for equipment is still there and then you know if you remember back it was so I'm going to be off three four years ago right. When when oil was down and you know same logical type of questions and you know we came out of that strong.
On with no implications.
And you know that that's how we see this playing out as well.
Yeah next question answering machine that can you.
Hi, My name I'm thinking that we went to the <unk>, Greg you're right. That's a lot to digest I realize you want fighting about you gave us the key pieces together. So I think you said you T.X.M.L. free cash flow was Prinkey then.
If we if the Raytheon free cash flow is 3.5 million as a baseline because that's what it was last year and new T.X. generate spring cash flow that bad a belly young stand alone does not provide a framework for about 4.5 billion combine does the bottoming a free cash calling 2020 or are there other items like tax pension working capital that think about.
Yeah. She she'll I think that's probably a little aggressive from the different modeling and the scenarios that you know where we're coming up with here you know right now.
I think what you got to take into account is with these type of volume drops that were seen and and how they're hitting us all at once there are significant absorption impacts that we're dealing with and trying to you know at least start to mitigate with the costing cash reactions that Greg mentioned in his opening comments.
And the you know the drop through margin on this type of volume loss, especially when you look at the entire mix. It a business between you know heavy after market at Pratt about 50% of their business about 35% of Collins is after market you know when your piece that all together, including the.
Other parts were talking about you know north of 50 per cent type of.
Drop through combined with managing inventory levels with suppliers right and sharing the health of the supply chain working with customer request on extended terms, we seem a little bit more you know Morehead. When then I think given here, you're you're thinking there yeah sure I think <unk> the thing to keep in mind is it's really working.
Capital you, we've got a lot of inventory of you know typically as you know on a commercial arrow side lead times or somewhere between 12 and 18 months.
So even as you know rolling an Airbus reduced production schedules, we we're not going to be able to take out all the working capital associated with that we've also assumed.
Some slower payments from some of our customers, which will put pressure on cash so with all that I think you know you're you're you're you're four and a half million is optimistic I would say <unk> it'll be a decent year, we'll be able to fund the dividend, but I wouldn't I wouldn't get too much above that.
Your next question catch him Carter Copeland.
Hey, good morning, newly merged team I hope everybody is getting along nicely.
No no no blood yet.
[laughter] well you know you've got plenty of work to work on Greg I I wondered if.
You could just kind of give us a a little bit more specificity and helped map to the the 2 billion in cost out <unk>. If you know from.
What we've heard from you know a lot of other folks you know it seems like your production plan now is probably you know 30, 40% down on <unk> 50, 60 per cent down on aftermarket military still holding in you know volumes that you know our down I don't know call it 40% on a year or something like that.
Is that about how you're thinking about production and how do you think about the cost structure in that now that 2 billion maps to that in terms of you know, what's a a runrate saving versus a you know a one time or somewhat temporary costs out any color there would be helpful. Thanks.
Yeah Carter. So look there's there's obviously are you send a lot of moving pieces here I would think about it more broadly right just think about commercial Oh, we probably down about 50% for the rest of the year. That's in the line was a 48% reduction in traffic that I had a forecast now it will vary by platform.
Here's your work it you know 737 or versus a 320. So we were trying to match Oh, Yeah production was what the customers Boeing and Airbus and Liberty and others are telling us today, but.
Please speak and you can think about Oh, we doubt about 50 per cent for the rest of the.
It after market down probably in that same range.
So those are big numbers now what are we going to do about it. So <unk> is Steve other commercial side they've identified a number of actions are the biggest of course is probably a reduction in indy, but 450 million.
No. It still seems like a lot of money, we spend about two and a half a billion dollars a year on the commercial arrow site on N.D.. So it's roughly a 20% reduction in handy about 300 million to that's going to come out of <unk> about $150 million that comes out of college. So just to give you an idea.
<unk> also we we have stopped hiring or put a hiring freeze in place.
Deferred merits were furloughing folks are both at the corporate office and across the commercial businesses.
Also we we're we've we've furloughed people are the factories and I expect there there will be further reductions as we sort through all of these volumes. The key is you know we don't want to cut the talent so deep that when the recovery happens we don't have the right people. So we're trying to be judicious, we're trying to <unk>.
Trying to keep as many jobs as we tended to that in you know their legacy Raytheon businesses have 2000 openings today for folks and we're actively working to try and take engineering talented other towns that we've got in the legacy U.T.X. business and move those folks over to programs on the Raytheon side. So there's a lot of pain.
Come you had a lot of very tough decisions ahead of us in terms of production volumes, but just generally speaking and think about you know 50, and 50 and you're going to be in the ballpark.
Yeah, and ask questions because I'm Robert <unk>.
[noise]. Thanks, so much money [noise].
<unk>.
I question, the Boeing 737, Max you guys I see shipping any product to the moment and I see look food from here are you in line angle call space and Pastie in line with <unk> production rates heading back over 13 next year. Thank you.
So you know we continue support Boeing is the return to service for the 737, Max the folks out there in Cedar Rapids had been doing software turns and continuing to to to work with Boeing to make sure that we've got a a certification standard that.
They will approve here right now and we were should be anything today to bowling we are aligning with their plans to ramp up production later this year. It into the next year again, you know the lead time on that roughly 12 18 months. So we've been pause here for a couple of months.
Well, what Boeing has his paws production will ramp up as they ramp back up I think they probably have plenty of inventory today.
They're going to need to work through so we're trying to match R.E.R.P. demand or with with wouldn't Boeing is out there forecasting but right now we're I think we're pretty well in lock step across all the platforms, whether it's 787 or or or seven three sevens.
Yeah, and it's quite shame comes from my asthma Okay.
Thanks to boring and Greg good timing is everything definitely definitely.
First a clarification then a question so Toby the the clarification on recorded Morgan's How's the Raytheon business is relate the A.C. It I think you said something to be effective you effect would be gone. After 21. So just can you elaborate on what that we should think about it at the margins looking.
From 21, I guess into 22 on the accounting side and then the real question, maybe your Greg is on Pratt and the after market now you can have whole types of fleets retired accelerated over the next year or so how much of pratt's after market is not be 2500 at this point.
So I'll I'll hit the first one miles on the P.A.C.'s.
You know that the V.A.C. re set to zero percent complete you know that's not purchase accounting, but it's really reflective of the acquisition accounting around the merger.
And the go forward right. So effectively the merger reflects that to go part of the programs that Raytheon has we still expect just to be very clear you know the same types of productivity that historically.
You know on an analyze basis have been close to 200 basis points. You know 180 200 basis points a margin, they're just going to be spread out over the next call. It you know 18 to 24 months given that everything is reset.
Two zero percent complete post 21, you know, we'd expect margins more in line with what the historical Raytheon businesses, though has been delivering you know with the same focus on where he used to improve those into and took roll the the segment.
And contribution from R.I.S. and our I'm day.
So let me try and address the question <unk> and again I'll give you. Some some broad outline if you think about it you know there's really four engine families that contribute to the after market you're the G.P.A.D. for the old M.D. eighties, and such which would be the adult is retiring don't really have a significant impact at all anymore.
That's all all going more years ago.
The biggest obviously is is the the V. 2500 is you know there's about 7000 inches that we sold about 6000 of those are still in active service.
You of course got the G.D.F., which isn't really contributing much in terms of of after market today in terms of profit their sales associate with it and then of course, you've got the legacy Press 2000, which is under 757, then you've got the legacy for P.B.W. 4000, which powered some of the first triple seven some 83 third uses et cetera.
The v. accounts for about 50% of the aftermarket today.
The 2000 4000, roughly together with about a thousand aircraft up there you're talking maybe 20% or so of of the after market for Pratt. So some of that will go away. So that natural where I think is we think about those things are been onto a decline for the last 10 years.
They will continue to decline, we'll see what comes back into service with fuel prices as low as they are the need for new aircraft is probably somewhat lesson and or people will probably apply some of the old or less efficient aircraft for a few more years to save on the capital of buying new airplanes, which is you'll probably see these things come back into.
Service, although not in the numbers that we saw so that's all contemplated in this this this reduction that we've we've been talking about for the aftermarket upright.
Mmm.
Yeah, and ask why can't catch on day they Strauss.
[laughter].
<unk>.
Okay.
One do a one to ask about what you saw out of the out some marketing needle maybe spleen out between between <unk> and then Greg can you comment on me what all this does you know the lower production rates on E. 320, what that does to the G.T. or.
Los profile balance scene, you know you'll be delivering pure engines, but you also I assume.
Coming down the learning learning curve more slowly thanks, though.
So on the down the G.D.F., obviously, because everybody knows we lose money every time, we we ship it engine.
And so there's actually good news from of the lower production the on the G.P.S.
That is offset somewhat by the lack of absorption. So all the the negative engine margin that we would typically see is not all going to Florida the bottom line.
You got lack of absorption and you know importantly, or you're coming down the learning curve, you're taking you know 5% to 10% of the cost out every year, that's going to be slower as volumes go down you don't have the leveraging the supply chain. So overall, you're probably gonna get about $100 million of pick up as a result of the lower volumes on G.T.
But I think that's a you know it's it's it's a relatively modest number because of the absorption impact.
The first part of the <unk>.
After marking in April Oh, I'm, sorry, after Mark <unk>, Yeah, Let me give you two data points that I think are indicative of where the after market is going so pratt typically gets about a thousand engine inductions a year.
For the V. 2500, and you know most of those inductions. We're we're right about online we were seeing me or roughly 80 or so a month January February even into March.
April not so good there was about 20 called 25 or so engines inducted into the overhaul shopping so we'll see that revenue impact here in the second quarter, because typically as we repair. These engines you know they consume spare parts. We recognize the revenue that's going to be the probably the biggest place where you'll see the n.
Pack.
On the coinciding again, a similar number if you think about repair input that is the things that come back to our shop around the world. We've got a lot of shops repair input for the month of April his doubt about 55%.
Again, you know this week. We think you know this is this is probably as bad as it gets but it's happened very very quickly and so hopefully we'll see a slow recovery.
Yeah. This is the best thing into you know that you you track the flight <unk> every every day I get your little note. There that's appreciated but the the China business actually is coming back slowly, but it is coming back passengers are coming back and fly in and trying to get it I suspect you know two months out of the road, we'll see a slight recovery start maybe it's.
Three months or four months, but you know there is some white at the end of this it's just going to take a little while but we certainly have already seen the impacts in April of airline slowdown.
Yeah.
Yeah, I can't catch on Peter on it.
Yeah. Thanks, the morning crank Toby you know yeah, Gregg maybe just to ask the a question on the V. 2500, a different way that 6000 engines that you have out there what do you haven't got like an average age are we talking that this is still you know in the 911 proteins 11 year. So so you're still has a long so.
Yeah. So they think about in about half of the visa rout. There have not had it's first major overhaul and the other half or only had one. So if you think about you and you know those those life cycle <unk> go through to sometimes three major overhaul. So yeah. We're still in the third any and I would say of the life of the V. 2500 terms of the after market.
Mm.
Yeah, Nice guy shame catch any sense site.
Oh, thanks, Thanks, very much the morning.
<unk>.
So I I that's fine.
I notice that there was kind of a small intangible apparently <unk> <unk> <unk> <unk>, how do you think about the rest no further impairment and now what are the pieces that was a cause business. Thank you see as most at risk here how much of that after market is discretionary you know how you see things playing at at at that.
Business and.
The places where he's getting crater spread because the more more permanent kind of <unk> you know reduction.
But as you can expect set we we took a hard to look at all of the intangible assets as we were closing out first quarter.
And we.
He ran a bunch of different sensitivities in L. <unk>. There was a small impairment I think it was 40 $40 million at Collins.
Later to some small businesses that they had that we're we're part of the original acquisition Rockwell Collins, but we have looked at all of the other intangibles, even with a worst case scenario after market for the next two years, we did not see any potential for impairment there was plenty of [noise] plenty of a runway their kid additional cash.
Close.
Again, assuming to to even a three year kind of recovery here, so I'm not expecting a big big impairments here now again is the real changes we evaluate this thing every single quarter, but we did a pretty good screw up when I guess nila desk year. He was.
I would just add to that I mean, when you think about the the Rockwell Collins acquisition, which didn't happen that long ago, though it's worth the assets that were you know mark a fair value. Most recently and so they're the ones that are most susceptible but all of this is non cash and so you know we will go through a process will continue to monitor you know the the near term midterm long term.
And update that accordingly, but I agree with everything that he just had their Greg.
Okay.
Yeah, and ask questions Gosh, I'm no up half an hour.
Hey morning, everybody I.
I know you know.
Hey, Toby since you.
Sort of spoke to you know a kind of floor in the 2023 cash and I know you know a lot of your investors are focused on.
The the 2021 target that that had been provided a and and maybe there's less you know sort of abnormal below the segment working capital of type of disruption.
I wanted to see if I get it can get you to kind of speak to that and I had you know outside of a a bottoms up model I had kind of top down. This crudely been thinking you know in the slides from from the deal you had though.
Three plus three from each business pro forma six goes to eat so if I just copy U.T.C. three three and half I take out one and a half or if I looked at the S. for you know an elaborate basis. It was kind of boring poor split to get to that eight not quite but so if I just took that foreign cut in half I was too so if I just.
Took one and a half the two out of the eight can I think of you know six to six and a half as the free cash kinda floor in 2021 or would you still have some of these working capital disruptions or something else.
Yeah, So I I understand the question no right. Obviously, we we haven't guided 2020. So we we we need to figure that out first.
You know, stating the obvious the 2021 number here referring to write certainly didn't consider there would be this type of environment because it a pandemic.
And I think the two things two or three things you know to to help you a little bit right. Obviously, we expect defense to continue strong right. So that that's you know that should be a tail wind for us going into next year. The variable on the commercial outside in any of the math that you're referring to is really the shape of the.
Covering and what type of trajectory we come out at 2020, you know in in that call exam Pratt going into 21, and you know too early to tell at this point, but you know as you mentioned some of the the the figures ripe old businesses have a a strong history.
You know delivering strong cash flow just go back to you know 2019 results and you'll see it there. So we'll get back there at some point right what what a good you know we're not seeing any changes to the underlying fundamentals of the proud or the Collins businesses evidence by the even you know the Q1 results. It's just too early to you know.
Speculate more on 2021.
Yeah, I can't kind of Sam Roberts benign.
Good morning.
I'm, Greg I wanted to follow on the commercial error questions asked so far because it seems like you see after market leading the recovery.
Overall, we and I want to ask you first if I'm interpreting that correctly and second how you differentiate the recoveries in your commercial after market versus commercial Oh, we businesses in terms of timeline and then how that translates to Collins and Pratt's recoveries.
Well I guess, the the way I would think about it is as long as the airlines continue to fly.
You're going to see after market demand and I think again as I mentioned earlier with fuel prices, where they are we would expect to see after market demand pick up a little bit more quickly than Oh, we demand just because today, you've got 55% of the world fleet parked. We good news is if you think about is really about 40% of those.
Coded related back in January before all this started you had roughly 15% of the 30000 fleet Park. So that means shape at 40 per cent park as a result, <unk> those planes will come back into service slowly and I think what you're going to see his those planes will come back before you see a lot of new old E.M. demand come back.
And so that's why we're thinking you're probably going to see a much.
Much you will see a quicker return on the after market than you will the over east side over the next couple of years, you know as as you know it to every it's tough right now for Boeing and Airbus to place planes because of the financing constraints of some of their customers are under.
Obviously, you know, we'll work with Boeing and Airbus on that but I really think it's it's it's that parked fleet returning to service first before you see a lot of new aircraft out there.
Actually we have time for one more question. Please.
Yeah, Alaska can cause <unk>.
Yes. Thank you very much. So if you look at 2090 after market for the industry was down in the mid teens, essentially you know 67% less.
Traffic decline, if you expect traffic to be down 50%.
Why won't be aftermarket be down more because this time, we also had 80 S.D. going against us.
Airlines talking more retirements.
So much weaker Oh, we backdrop and therefore less traditional so why isn't the after market.
If you're down 50 per cent in traffic gonna be down 70.
<unk>.
You know how much is actually going to be down is is is the question of the day I would tell you know the 80 S.B. mandate that was over at the end of December So we actually already factor E.D.S.B. into our forward looking guidance for Aftermarkets I would tell you. That's that's really outside of the the 50 per cent drop that we're talking about for after market you know it.
Really just depends if you look and take a snapshot of where we are today.
Usually after Murray is going to be down a lot more in April and May then the 50 per cents of where we are expecting a gradual recovery through the course of the year and keep in mind you know many of these love most many of the after market contracts are we able to press side or hours base. So even a planes are flying full if they're if they're flying regenerating.
Revenue generating aftermarket so that will help here as well to offset so thinking about 70% probably of the fret sleek today is power by the hour. Yeah. I think if you look at where China is today, where they're they've started this kind of slow recovery back up to about 40%.
Time to up from 20, we expect to see a kind of that that same gradual recovery. During the course of the year I'll tell Ya you know we aren't going to know what the after market looks like until we probably get to December 31st.
You know, we'll continue to give you guys update as we as well as we speak yeah looking at this really month by month to see what the recovery profile looks like it's it's not a sharp v.
It was more like a a you shape, but I still I think it's going to be a full two years before we see a recovery close to what we saw in terms of 2019 levels of of after market and you know that could be could well be three years.
The day you know we'll survive this we'll get through it but it's gonna be painful because as you know that is relatively high margin business, which affords us the opportunity to make these big investments and engines and and other technologies across the the portfolio.
Okay <unk>.
Okay.
Right.
Thank you actually and thank you everyone for listening to it I recognize a lot of data here a lot of change going on kneeled, Kelsey and team will be around here today to answer your questions.
Thank you all for listening and or I would just ask everybody be healthy and safe take care.
That can cause they said he's conference thing he their participation remain on disk.
[noise] Oh I was.
Yeah.