Q2 2020 Raytheon Technologies Corp Earnings Call
Name is Ursula and I will be your operator for today.
As a reminder, this conference is being recorded for replay purposes.
I when I went to turn the call over to Miss kill C. Diff, Brian Vice President of Investor Relations. Please proceed.
Good morning, and welcome to the Raytheon Technologies second quarter 2020 earnings Conference call with me on the call today are great Hayes, our Chief Executive Officer, Toby O'brien, our Chief Financial Officer, and Neil Mitchell, Our corporate Vice President of financial planning and analysis and Investor Relations. This call.
Being carried live on the Internet and there was a presentation available for download from the Raytheon technologies website at Www Dot Rts Dotcom. Please note, except where otherwise noted the company will speak to results from continuing operations, excluding that nonrecurring endorsed significant items and.
Acquisition accounting adjustment often referred to by management and other significant items. The company also reminds listeners that the earnings and cash flow expectation and any other forward looking statements provided in this call are subject to risks and uncertainties Archie sees FCC filings, including its form 8-K.
10-Q.
And 10-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements.
Once the call it becomes open for questions. We ask that you limit your first round to one question for 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.
[laughter], Thanks, Kelcy and good morning, everyone.
On slide two of the webcast here, let me, let's begin by providing an update on some of the current priorities and highlight.
You too.
Because everyone knows these last several mostly been incredibly challenging however, we remain focused on supporting our key stakeholders that starts wasn't sure into health and safety revolver employees that is our number one priority.
We also remain committed to delivering for our customers across commercial aerospace and defense.
The defense side that means regarding our customers with mission critical products and services in the U.S. and internationally.
On the commercial Aero side that means supporting customers. During this very difficult time to make sure the planes fly safely, especially as airlines begin to ramp up capacity again.
We also continue to engage with our suppliers ensuring that they have to support needed to maintain stability will also working with them to makes their processes more efficient.
Just a word on the merger we're just about 100 days into this and I would tell you that we remain focused on the integration across the organization and on delivering our cost and revenue synergies.
Well, we create a red Raytheon technologies during the pandemic that is causing it's causing every company to work in new ways I would tell you that the integration is progressing remarkably well.
There was of course significant planning underway before the pandemic of the two teams have come together seamlessly to figure out how we can operate more productively as an organization and how to better serve our customers.
I'm encouraged by what we've accomplished to date and I remain confident in our ability to deliver on our synergy targets, which is over a billion dollars in gross savings.
[noise] also it's important to note that our liquidity position and balance sheet remains very strong and of course, we remain committed to the dividend.
At the end of the second quarter, we had over $7 billion in cash and ample financial flexibility.
And this before the approximately $2 billion in net proceeds from the previously announced divestitures. The remaining two of which are expected to close before the end of the third quarter.
At the same time of course, we remain laser focused on those things that we can country.
That is cost and that is cash.
And we're on track to achieve $2 billion and cost savings this year and $4 billion in cash conservation actions by the end of the year. This of course is focused on our commercial aero businesses.
The good news is we've already completed nearly 30% or seen about $600 million in savings in Q2.
And our cost actions of our cost actions and about a billion dollars cash conservation or 25% of our target there.
That's of course better than we expected until he will give you more color on the expected cadence of these actions for the rest of the year really a kudos to the team on the commercial Aero side for their decisive actions and getting after all this.
Overall, while the pandemic continues to deeply impact our commercial Aero business. Our balanced portfolio includes a resilient defense business that'll help us offset near term commercial aero headwinds.
Wherever the effects of the pandemic on the economy and commercial aerospace has proven to be a lot worse than we originally projected even a few months ago.
And for that reason, we now expect it will take at least until 2023 for commercial air traffic to recover to 2019 levels.
As a result, revaluing, what further actions and structural changes, we need to make to our business to adjust for a prolonged recovery timeline.
And we'll be back later this year with some more details on that.
These are difficult actions the ones that are necessary to preserve our financial strength.
So we're focused on what we can control are proactively manage and we're going to wait for the upside to come and it will.
We do the right side of the page Raytheon technologies has several notable highlights in the quarter.
It was previously announced or missiles and defense business was selected by the US Air force to develop warm range standoff weapon or so it's a new franchise as a lifetime value over $10 billion.
And in June the missiles and defense business also booked at $2.3 billion award for the Tippi to radars for the Kingdom of Saudi Arabia.
These are significant franchises that will fuel our defense grows over the next several years and beyond.
On the commercial Aero side, the demand environment was weak as expected, but we did achieve some milestones in the quarter.
We continue to support airlines in the industry and efforts are which safe and healthy flying.
At Collins, which is a innovative company in their DNA, they're working with airline customers and across industry for us to develop solutions for enhanced aircraft in airport sanitation.
Looking at ways to enhance contact list travel with biometrics and health monitoring.
And we filed nearly 100 ideas for provisional patents associated with these technologies.
We expect these solutions to start entering service in the back half of the year and they highlight how Collins aerospace is poised to help the industry move forward well into the future.
At Pratt.
As announced to China Express Airlines has taken delivery of its first GTF powered Athree hundred Twentyneo aircraft that brings our total fleet to a milestone the 50 aircraft with 28 more Athree hundred 20 aircraft on order.
As I said before we're on track to deliver on over $1 billion of gross run rate synergies by 2024, we've already completed the consolidation of the legacy Raytheon segments for into too.
And the corporate restructuring is well underway.
We have more than 500 synergy projects that we've identified an agreed matured.
I remember this is on top of the Rockwell Collins synergies you recall, we had $600 million of synergies targeted we've achieved 300 million already.
We've got another 30 million in this quarter and $90 million year to date.
So we're well on our way too is achieving that goal I think importantly, though we've also booked about 300 million $350 million of revenue synergies accounts since the acquisition in late 2018.
Toby will take you through the second quarter results, but given the uncertainties, which still exists surrounding the pandemics and its effects, we will not provide a traditional outlook today until the that give you some color of how we're thinking about the rest of the year. So with that let me turn it over to Toby.
Okay. Thanks, Greg.
On slide three.
As Greg mentioned, no surprise Q2 was a challenging quarter.
Before going through the second quarter results, it's worth noting that since the merger completed on April 3rd our second quarter results include legacy Raytheon company from that point forward.
Adjusted sales were 14.3 billion and better than our expectations due to better volume at Collins Pratt and RMD.
Adjusted EPS was 40 cents also better than our expectations driven by accelerated progress on our cost mitigation actions in the quarter.
Favorable volume, primarily at Collins and RMD.
And the adjustment for certain charges driven by the impact of cobot 19 on the industry and economy.
On a GAAP basis.
EPS from continuing operations was a loss of $2.56 per share.
Down year over year.
Which included $2, a 96 cents of net nonrecurring and or significant items.
And acquisition accounting adjustments.
Of which $2.34 was related to charges due to the current economic environment.
Primarily driven by the Cobot 19 pandemic.
With the largest piece being 2013 cents related to an impairment of Collins aerospace goodwill and intangibles.
And the remainder attributable to customer bankruptcies and collection risk.
And contract charges from anticipated lower future flight utilization.
The other 62 cents consist principally of 28 cents that acquisition accounting adjustments primarily related to intangible amortization.
21 cents of restructuring and four cents of merger and integration related expenses.
Free cash flow is better than expected at an outflow of 248 million.
Including $165 million of merger cost and restructuring.
The better than expected cash flow was driven primarily by the timing of advances in collections as well as accelerated progress on our announced cash mitigation actions, including inventory reduction at Collins.
Moving onto slide four.
While the second quarter was as challenging as expected we continue to see a number of trends that confirm the resiliency of our balanced portfolio.
Our defense backlog was up versus the first quarter and grew to a new record of 73.1 billion.
Our I asked had a book to bill ratio in the quarter of 1.17, and RMD of 1.22, giving us a consolidated our I asked in R&D book to Bill ratio of 1.2.
Collins military and Pratt military also had strong sales growth in the quarter growing 10, and 11% respectively.
Positive news that our franchises are healthy and will support solid growth in our defense portfolio for the next few years.
With that I'll hand, it over to Neal to take you through the segment results and I'll come back and share a bit more perspective on the rest of the year.
Thank you Toby starting with Collins aerospace on slide five adjusted sales were $4.3 billion in the quarter down 36% on an organic basis down 35% on an adjusted basis, driven primarily by the adverse impact of covert 19 on the aerospace industry.
Commercial OEM sales were down 53% driven by lower volume across all platforms, including the continued 737, Max grounding any anticipated declines in legacy programs.
Commercial aftermarket sales were down 48% driven by a 45% decline in parts and repair a.
57% decline in provisioning and a 45% decline in modifications and upgrades.
Partially offsetting the headwinds in the commercial channels military sales were up 10% driven by strength across key platforms and product lines, including higher F 35 volume.
We also saw growth on development contracts in the quarter.
Adjusted operating profit of $24 million was down 1.3 billion from prior year.
Up through on higher military sales aggressive cost management actions, including lower DMD and continued synergy capture for more than offset by lower commercial OEM and aftermarket sales and fixed cost headwinds.
Shifting to Pratt and Whitney on slide six.
Adjusted sales of $3.6 billion were down 32% on an organic basis down 30% on an adjusted basis also driven primarily by the pandemics impact on Oems and operators.
Commercial OEM sales were down 42% driven by lower deliveries across Pratt's large commercial engine and Pratt Canada platforms.
Section of the PW 800, which saw a slight growth in the quarter.
Commercial aftermarket sales were down 51% in the quarter.
Growth in the GTF aftermarket was more than offset by the impact of a 64% reduction in legacy large commercial engine shop visit inductions and an approximate 40% reduction in Pratt Canada shop visits.
Wrapping JSF production continued to drive sales growth at Pratt's military business.
Military sales were up 11% due to higher aftermarket sales across key platforms and increased from 35 production volume.
Adjusted operating profit of a loss of $151 million was down $603 million from the prior year.
Significant aftermarket volume reductions fixed cost headwinds and unfavorable military contract adjustments more than offset drop through on higher military sales cost mitigation actions and slightly lower negative engine margin.
Turning now to slide seven.
All right, Yes reported sales were 3.3 billion pro forma sales, including the four days stub period were 3.5 billion.
Sales were primarily impacted by expected declines in the Warfighter focus program, which represented a little over four points of sales headwind and that was partially offset by higher airborne systems sales and broad growth across other aren't our I ask programs.
As a reminder, all legacy Raytheon company long term contracts, where we set to zero percent complete on the merger, which is impacting both sales and operating profit.
So adjusting the prior year sale to remove the favorable productivity impact to be a season and the current year sale to include the stub period, our sales grew 1% in the second quarter.
Reported operating profit was $311 million adjusting the prior year to remove the favorable productivity impact of the season and the current year include the stub period.
Operating profit growth was up approximately 4% in the second quarter.
Of note our is had over 1.4 billion of classified bookings in the quarter.
Yes also booked a $166 million for the global ascent program for the US Air Force and as Toby mentioned had a strong book to bill ratio in the quarter.
Turning now to slide eight.
R&D reported sales were 3.6 billion.
Pro forma sales, including the four day stub period were 3.8 billion.
Sales benefited from growth on an international Air and missile Defense system program in the second quarter.
Adjusting the prior year sale to remove the favorability and productivity impact of Vcs and the current year sales to include the stub period RMD sales grew almost 3% in the second quarter.
Reported operating profit was $397 million.
Adjusting the prior year to remove the favorable productivity impact Vcs and the current year to include the stub period RMD operating profit was up approximately 4% in the second quarter.
In addition to the awards, Greg highlighted RMD also booked approximately $300 million for the standard missile free for the M. da and an international customer in the quarter and as Toby mentioned R&D also had a strong book to bill ratio in the quarter. So let me turn it back to two.
Thanks, Neil I'm on slide nine now.
As you know there are number of factors some headwinds some tailwinds.
And the number of unknowns affecting the macro environment and our business going forward.
Let's start with the positives.
Military program growth remains robust both domestically and internationally and is contributing to our strong defense sales growth and a record defense backlog.
Nothing really changing here from our previous expectations.
We also continue to execute on important actions to position the business for long term value creation.
Our merger synergies are progressing well and we remain on track to deliver nearly $200 million of gross our TX synergies and an incremental 150 million of Rockwell Collins acquisition cost synergies this year.
Which will bring the total for Rockwell the 450 million of our 600 million dollar target.
We are also on track to deliver our previously discussed 2 billion of cost savings and 4 billion of cash conservation actions in 2020.
And we will continue to manage the business proactively to respond to the current and developing environment.
We now expect to realize approximately 30% of our announced cost actions in Q3.
And approximately 40% in Q4.
This is after we already achieved around 30% of our cost actions in Q2.
And as Greg highlighted our liquidity position remains very strong and we have ample financial flexibility.
It's no surprise, however that given cobot 19.
The overall macro environment and commercial air traffic in particular are significant unknowns.
We are tracking air travel trends across the globe on a daily basis.
And while they are generally improving recovery is slow.
And.
While we continue to monitor these trends as Greg said, we now see the recovery being protracted over several years at least through 2023.
We also continue to monitor the financial condition of global Airlines and the health of the supply chain.
Given the significance of these factors on our business there continues to be too much uncertainty to provide an outlook.
Let me tell you how we're thinking about the second half of the year.
Let's start with Collins.
We continue to see commercial OE sales down in line with OEM production levels and aircraft delivery schedules.
Generally consistent with the decline we saw in Q2.
We see Collins commercial aftermarket sales.
Down in line with expected RPM declines and the impact of the Ats be mandate headwinds.
Where we expect Q3 sales will largely be in line with Q2, plus or minus and expect to see a gradual recovery in Q4.
For Pratt we continue to see commercial OE sales in line with our main OEM customers.
Similar to what we saw in Q2.
Well GTF overhaul activity continues as we upgrade to the latest configuration.
We expect pratt's aftermarket sales to be down given the more than 50% decline in legacy shop visits.
We still expect that Pratt, Canada will be down in the back half of the year.
But not as severely as the large commercial engine business due to the differences in their end markets with business jet and general aviation markets showing better recovery.
Moving to the military portion of columns and Pratt, we continue to see strength and military sales.
And still expect to see mid single digit growth, excluding the impact of the two pending Collins divestitures. So again no change here.
I'll also note there aren't any changes to the R.I.S. or RMD sales or adjusted operating profit outlooks that we gave on our first quarter call.
As we think about what this means for our business as a whole. We continue to think Q2 will likely be the lowest quarterly sales and EPS in 2020.
Looking at sales in the back half of the year.
I would expect sequential sales improvement.
Modest in Q3, and then better in Q4.
For EPS, we'd expect Q3.
To generally be in line with Q2.
With some puts and takes.
And then a gradual recovery beginning in Q4 as demand begins to return and more of our cost actions are realized.
A couple of other items to keep in mind for the second half of the year.
As we have discussed we've implemented significant coded protocols across our businesses.
And are encouraged a number of incremental expenditures associated with the pandemic.
Including enhanced facility cleaning.
Employee temperature scanning.
Higher freight cost and other cobot related inefficiencies.
We expect around eight cents of EPS headwind related to these costs for the rest of the year.
More than initially expected, bringing the full year total costs to approximately 16 cents of a headwind.
For free cash flow, we still expect pro forma 2020 free cash flow for the full year of roughly $2 billion.
This includes an outflow of 1.2 to 1.4 billion for merger cost restructuring.
And cash taxes on dispositions as we have previously discussed.
As we think about our cash actions, we still expect to realize the majority of the benefit in the back half of the year with approximately 30% of our cash actions in Q3 and approximately 45% in Q4.
In summary.
We expect the rest of the year to be challenging for our commercial aerospace segments, but continue to expect good growth from our defense businesses and we're positioning the company for a strong recovery.
With that I'll hand, it back over to Greg to wrap things up.
Okay. Thanks, Toby for on Slide 10 now.
Maybe just a couple of points I think.
Obviously, a lot going on in the quarter a lot of uncertainty out there I think.
Just to be clear on a couple of things well as one of uncertainty we're going to remain focused on supporting our employees customers and our suppliers. This includes assuring the health and safety of our workforce first and foremost, but also delivering advanced technologies and innovative products for our customers and working with our suppliers to maintain the stability of the supply chain.
[music].
I guess important to remember in the quarter, we still invested $500 million.
And the other commercial Aero side. This is an important as we think about the long term, we're not going to sacrifice long term for short term, we're going to take some tough cost actions, where do we need to do what we're going to continue to invest for the future.
And of course are going to continue to execute on the integration of the merger and the Rockwell acquisition as Toby said and we've got a clear path to meet or exceed those expected synergies.
Also I think it's important when we're going to remain disciplined with our capital ensuring that we maintain financial flexibility, while prioritizing capital areas that will maximize value for our customers and shareowners.
Despite all the uncertainty out there we still remain committed to return $18 billion to $20 billion of cash to our shareholders in the first four years. After this merger.
As I said, we're also taking a hard look at the businesses given the environment and the prolonged recovery and we're going to take additional actions as we think is our appropriate.
We'll be nimble Waterville remained focused on what we can control and we're going to adapt to the current environment and position, our commercial or businesses for growth.
While also maintaining solid growth of the defense portfolio.
Overall, the opportunities and photos remained significant.
And I'm confident we're going to emerge from this crisis in a position of strength and deliver sustainable long term value for our customers for our employees or shareholders.
So with that Ursula the open it up to questions.
Ladies and gentlemen.
Ladies and gentlemen to ask your question. Please press star one at this time.
The interest of time until now for broader participation you have to limit yourself to one question. The first question will come from Sheila ULA with Jefferies.
Hi, good morning, everyone and thank you.
I guess, Greg or Toby your biggest EBIT driver Collins declined 98% year over year, Yes free cash flow was essentially breakeven. So can you maybe talk about free cash flow trends, you're seeing an arrow, our commercial and what you're seeing in terms of working capital and cost savings. Toby you mentioned is running at 30% ahead of your 10% target so any thoughts on those moving pieces and.
However, as it relates to free cash flow in 2020 and going forward.
Yes, so I'll take the last part of that first Sheila.
2 billion of cost actions 4 billion of cash.
Preservation conservation actions.
Our assumed and they were assumed back in Q1 in the 2 billion for the year. The good news is we're seeing.
Accelerated exit execution on those and realization, obviously that helps to de risk the back half of the year.
In the quarter.
Honestly, the drop through of 30% versus we'd expected about 10% that 20% incremental improvement helps cash flow at both Pratt and call and so that was a good guy in the quarter compared to our expectations and I believe that both Pratt and Collins are also doing a really good job managing their inventory.
Yeah.
No I think Collins held flat through the first part of the quarter and actually saw a little bit of a reduction.
As we move through to the ended June which contributed to some of the favorability of the Q2 cash flow. There. So things are on or ahead of schedule, but again really timing related relative to the the work the Pratt in accordance teams have done to accelerate those actions and the other thing I'd throw in there we saw real strong collections.
From a cash flow point of view on some large international collections that R&D not the commercial aero side of the house, but R&D that favorably impacted Q2, and those were expected in the back half of the year as well.
She'll its Greg just to highlight just a couple of things again, we've got a billion dollars of cash actions in the first quarter and that was without or second quarter, rather less without really impacting our inventories yet we're really just starting to see the benefits of inventory reduction in the supply chain.
If you think about the by the fourth quarter, we would expect probably a half a billion dollars of tailwind from reduced material input and you're also going to see a ramp up in savings from headcount actions again about half of this cost savings in the first quarter second quarter were headcount related that number's going almost double.
By the end of the by the end of the year. So again, we're taking the actions in really confident we're going to see these.
These improvements throughout the rest of the year.
Great. Thank you.
Sure.
Your next question comes from Robert Stallard with vertical research.
Thanks, So much good morning on Europe Europe.
Despite one for Greg.
More of a conceptual question.
Basically we seem to Q airline activity for the Rpms, Sam's down a huge them 80 or 90%.
You are often markets any down around 50% Wolf the risks that aftermarket could actually get worse from here. Given this disconnect between the revenues you seed and what the airlines have seen in Twoq.
Well I think Rob would you need to think about is what is the actual number of aircraft flying today. We think it's the total flights are down about 50% and so while air passenger traffic is down 80%, which was better than maybe 5%. It was theres still plays out they're flying around it around the get down 50% Thats really what.
We're basing the the outlook on.
Obviously, as we think about the pieces of the aftermarket some pieces are more impacted if I think about spare parts for instance that Collins aerospace, which is a key driver profitability that was down almost 75% in the quarter repair was down like 55%.
The forecasted Toby was talking about for the back half of the year assumes a modest recovery.
Picking up in Q4, and I think thats. The that's the key is we think about the back half of the years will we see that that modest recovery and get the recovery is going to take several years, but.
Right now, it's hard to imagine probably getting anything worse than what we saw in Q2, assuming together. This that we still see about 50% of the current aircraft flying out there.
That's great. Thank you.
[music].
Your next question comes from Peter I met with Baird.
Yes, good morning, Greg Toby Greg just a quick question on sort of when you talk about the cost reductions.
Have you kind of been able identify what you think is ultimately going to be permanent versus kind of the temporary actions.
Real benefit when we think about exiting 2020.
So look I think is we think about.
The cost reduction that we saw in the quarter.
About $200 million if the actions.
It took about a $100 million of discretionary spend and the other 300 million was really employee related.
Some of that employee related cost will come back those are furloughs for those of those corporate office Theres, a 10% for low or 10% salary reduction we've deferred merits some of those costs will come back.
I think it's important to note the commercial aerospace reduced about 8000 positions.
Some of those will come back with volume.
Some of them, we'll be permanently reduced what are the things that I'm really focused on right now as we think about the recovery that may will take into 2023 is we need to take a look at some of the more structural costs that we have at our aerospace organization that is cost and some high cost manufacturing locations.
What can we get after to restructure those businesses later this year. So we'll come back the guys are looking at it.
And it's going to be some tough things to do but I think this is the opportunity.
To alter.
The overhead structure of the commercial Aero businesses again I think this is it's it's unfortunate, but it's absolutely necessary given the given the market.
Appreciate the detail thanks.
Yeah.
Your next question comes from Carter Copeland with million research.
Hey, good morning team, Florida girder.
Greg I wondering if you could maybe just give us some color on the customer conversations I mean, it's got to be especially at Pratt tough conversations around cash management for most of the airlines and what have you just give us some color on what it is that those customers are seeking to due to the extent that you're collecting.
By the hour you have power by the hour arrangements or are you collecting all of those payments or is there any deferment. There any anything you can give us there would be helpful. Thanks.
You know kind of look we're working with each one of our customers.
To make sure.
They've got the financial flexibility.
To stay in business for the long term so were I won't give you any specifics other than any individual customer, but I would just say, we're trying to be as flexible as we can.
Payment terms with cash flow, obviously, you're part of the charges. We took this quarter were a recognition that some of the receivables out there probably are not collectible because where the industry is today I think was important though is we think about pratt's customer base.
Of all the GTF powered Athree hundred Twentys out there 65% of those are flying today, 75% eight to 20 as or fly those deals C series, while only about 45% of the views are flying. So if you think about your most of the power by the hour contracts like 80% of the GTF powered aircraft or.
Or under long term maintenance agreement or power by the hour those those contracts remain in place and people are flying the airplane. So.
It's not all Doom and gloom out there I would tell you know there were some there's some green shoots we're seeing.
And we're going to continue to work with our customers to make sure that they remain viable.
Great. Thank you for the color.
Sure.
Your next question comes from David Strauss with Barclays.
Thanks, Good morning wondering.
Wanted to ask about.
Call and so the the OEM decline.
Were down 3% honestly more.
And then I think the decline we're seeing a manufacturer production rates can you talk about kind of how that breaks down between your manufacturer production rates being down the Max impact for stocking you're seeing and then Greg maybe can you touch on that the Decrementals that saw Akorns I know columns remain profitable bought.
The Decrementals were pretty Big do you think this is the kind of a low kohinoor works going for her decrementals there. Thanks.
Let me talk about the Decrementals to start out with a decremental margins as you would expect because of the aftermarket down so significantly we're north of 50% of the almost 55% decremental margins.
Clearly.
The should improve as we go through the quarter, especially as we take additional cost actions to take out some overhead but.
The aftermarket is tough I think if you think about the other issue that you've got a Collins is they have been disproportionately impacted by the slowdown of 737.
Recall, we've got about two and a half million dollars of content per 737.
With the latest production schedule.
From Boeing 737, with this kind of slow slow ramp in production I dealt will be shipping any 737 related inventory probably until the next half of next year.
So while the.
Overall I would say you know, we expect the commercial Oems to be down roughly 40% or so.
You're going to see a bigger impacted Collins in the near term as they're going to be more impacted by the 737 than anybody else.
And I think.
I'd add to write the question about the Max and 80 SP right there about a point each of headwind going forward.
Pretty consistent with our prior expectations and just.
Piling on a little bit with Gregg said about the Decrementals.
Not inconsistent with what we had outlined back at Q1, we said north of 50% as Greg said about 55% in the quarter. That's for overall right. When you take into account aftermarket would be greater effects of the absorption.
We do expect that will improve a little bit as we move through the year at especially as the cost reduction actions take further hall and maybe just a complete the equation Pratt saw about 40% Decrementals again pretty much as we expected not as severe because of course, they don't have margin on the.
Large and engine shipments.
From from an OE point of view, so again, even there with Pratt nothing unexpected compare to what we outlined back on the May call. David just one other point to keep in mind too. If you think about the Collins numbers or is $100 million of cost or charges in the quarter associated with idle facilities that is the plants that we had that our operating net.
Full capacity.
So again those those detrimental margins are all in so I think together they are taking cost out, but we got to get after the overhead still.
Great. Thanks very much.
Your next question comes from Ron Epstein with Bank of America.
Hey, good morning, guys.
It took it becomes dig down a little bit more in the cash just trying to.
Sort out.
When we think about what portion of the cash came from the defense business versus what portion came from.
The commercial business I think on a pro forma basis, if you look at last year.
Is it safe to assume about two thirds of the pro forma cash was was from defense.
Just one third from commercial.
Yes, I mean, I think in the way to think of it Ronnie in the quarter here right.
Collins.
And Pratt consume cash right.
The two combined.
North of $2 billion right. So the the favorable performance again that those results were favorably impacted by the cost actions are they would have been worse.
And then we saw real strong collections on the defense side as I mentioned with the.
Pull in of some large international payments on the R&D side, and I mentioned it earlier, but our I saw some good.
At quarter end collection Paul.
As well, so thats kind of big picture the the two sides of the house and how the cash flow played out in the quarter.
And how would you expect that to go maybe for the rest of the year.
So anyway, yes, yes, so we'd expect obviously the defense businesses the legacy RMBS in R&D to continue to generate positive cash flow both in Q3 in Q4.
More biased.
Towards Q4.
Consistent with the traditional cadence that the legacy Raytheon had seen.
I'd expect collins to be able to generate.
Albeit maybe a little bit but positive cash in Q3, Pratt will still be a little bit negative and then bulk Collins and Pratt positive cash flow in Q4, and when you bring that all up to the company level.
For the balance of the year consistent with the pro forma 2 billion dollar outlook.
Three.
Neutral ish, plus or minus maybe a little bit positive here.
Remember we have some below the line items. Some of these non recurring items, we've got 500 million plus or minus of tax payments on the to the divestitures that Greg alluded to in his opening comments.
And the like so cute Q3 breakeven maybe a little positive in the balance of the cash billion Adas positive in Q4.
Great. Thank you very much.
Yeah.
Your next question comes from Myles Walton would you be us.
Thanks, Good morning.
I'm wondering if you can maybe in pratt's commercial aftermarket, but down 51, what was large engine versus Pratt Canada and then the other question Toby maybe can just talk about to the working capital that you are building. This year and you talked about previously as billions of the headwind in this year just curious you can.
Any comments about the relief of that into 21 22.
Yes, So let me start with the.
The working capital.
Some encouraging sign I'll start initially some encouraging signs from an inventory point of view.
In Q2, with both print and Collins as I alluded to.
A little bit earlier from an overall working capital point of view. We also are pleased with the collections we saw.
Working capital did grow in the quarter really because of disbursements that outweighed the benefits that we saw from the collections in the management of the inventory.
We would expect.
Based upon the actions right as a subset of the 4 billion dollar cost related cost in cash conservation actions.
A meaningful benefit in the back half of the year from.
Working capital initiatives, primarily around inventory.
Ill 567, even 800 plus million dollars, obviously driven by.
Pratt and Collins, so things are on track for that.
Moving forward into next year, we're not going to quantify anything today, but we still expect to make further improvement from a working capital point of view.
In 2021 as we.
Size it right to reflect the demand that we see and obviously there is variability in there.
As we talked about on in the opening comments around the shape of the recovery in the cadence of it.
And then the Pratt commercial can you just the subdivide the large engine versus Pwc, yes. So you think about the large commercial aftermarket was down about 55% and that was really.
Of course, Peter maybe 2000 was way down like 80% V was down like 60% so.
GTF was actually not down, but then I look at Pratt, Canada again, there their business was down 40%, but.
I agree with your aftermarket it was down 40% most of that and of course to high profit Spears area, but 55%.
Okay. Thanks, guys.
Your next question comes from Jon Raviv with Citi.
Thank you and good morning.
So just onstage pitching the defense side first second.
Toby Bakken rates on you guys talked about there being good visibility in you're talking about again on the call today, good visibility of gross sustaining for several more years I Wonder if you just give us an update on high on what specifically how how do you see that goes sustainability playing out based on what's in your backlog and pipeline and then also how is the company position to manage it.
Potential defense recession, if you will if you do see some of this worried.
Budget pressure slip through thank you sure. So on the first part of the by about the visibility into future growth I'd say things haven't changed right.
We talked about a record another record backlog.
The legacy defense businesses strong book to Bill in the quarter. The 1.2 that we mentioned.
You know they've strung together three really strong quarters going back to Q4, you know about 1.55 book to Bill 1.46 in Q1.
And the and Pratt and Collins as we talked about are growing nicely. This year. So we remain very confident.
Based upon the strength of the backlog.
Recalling that backlog.
Little bit of a shift to longer duration longer term programs with the multiyear awards for SM three one be and also SM six that help provide more visibility into the future combine that with the pipeline.
Our programs are well funded the alignment to the National Defense strategy.
Our continued strong position with classified bookings, we talked about 1 billion forward, our I asked in the quarter.
We're on track for the year with north of 20% classified which provide.
The development in the funding of future technologies that lead to new franchises.
International remains strong still about 30% of the business Greg mentioned, the 2.3 billion dollar award for Ks say Tippi to.
And we're performing well on our El Tams program, which.
Before you know it will be moving into the initial production in 2022, So we continue to be very.
Optimistic about the ability to continue to grow the defense business for the next several years.
Ill, which I would you say that we know defense spending is that going to be going up in the in the near term given the deficits that are out there and I think its Toby said, we're uniquely positioned because of the backlog at $73 billion, but also I think importantly in those areas, where we have real strength, which is in the classified in the site.
And in the space businesses again lots of opportunity there.
Again, we don't expect we're going to see much growth through the defense budget at all but we still think defense is a strong national defense is a bipartisan issue. So no matter who is in the White House matter, who is leaving Congress, we still expect the need for a strong national defense will remain so I'm not the forecast here, we're not fourq.
Assuming gloom and Doom scenarios here for defense in the next few years.
Thank you.
Your next question comes from Noah Poponak with Goldman Sachs.
Hi, good morning, everyone I know.
On the aerospace original equipment side of the business can you just give us a little more detail on.
Whether or not the.
Pool from Boeing and Airbus into their production plan has changed meaningfully versus three months ago, and if you could speak to manufacture or in particular Max versus non Max.
Very helpful.
Well I would tell you I don't think anything has changed materially in the last three months, obviously as Boeing has firmed up its 737 Max production schedule. That's obviously had an impact, especially in the near term on the Collins outlook for OEM deliveries.
I would tell you that Pratt is fully aligned with Airbus.
Deliveries this year and next year, we've been we've talked to every single one of our customers would it be taking GTF powered aircraft and I think we're fully aligned there I mean thats about as we would say roughly a 40% reduction and GTF volume for the Athree hundred Twentys in the next.
Year to half here.
So again I don't think there's been any change beyond really beyond the 737 Max.
And that Max change is it more of a refinement around the specific timing of the returned to service or is it a more substantial change than that well. It's really it's two things. Its first of all its just a refinement of the schedule in terms of we expect sometime here in the probably ended the third quarter early fourth.
After that.
Their ticket back.
Obviously, we're working with Boeing to make sure that happens, but also it's the ramp that we're going to see in the production is slower I think that anybody had anticipated.
But that is Boeing has gone through it looked at the inventory levels that they have for all of our equipment. That's what really caused us to take a pause and so you know what we were probably aren't going to be should be much 737 hardware until the back half of 2021.
Yes, thats really been the refinement. If you will it's the inventory on hand, as well as a little bit slower ramp.
And I would just add know when when we look at OE volumes altogether, taking Boeing Airbus The Pratt Canada customers.
Hey, Coincidently isn't in about that 40% ballpark relative to a year over year decline that Greg reference relative to proud. Obviously, there is some puts and takes in there and as Greg explained with the Boeing situation because of the in inventory on hand.
Our future revenue may look a little bit different than their deliveries, but it's for that factor there.
That's all really helpful. The inventory alignment is not demand and the Rcs is not demand. The slower ramp is is end demand, but am I hearing you correctly that that that has been a modest change versus a major change yes, that's really a modest change I think you guys just a refinement of the schedule based upon.
We have returned to service and keep in mind that every aircraft that gets delivered today. Some results are retiring aircraft. So we're trying to work with the customers to understand exactly who is going to take what win.
Super helpful. Thank you.
Thanks, Don.
Your next question comes from Robert Spin gone with credit Suisse.
Hi, good morning, and just on that last note.
The visibility Toby looks like you're backing out on favorable contract adjustments bad debt expense from Collins and Pratt to get to your adjusted operating profit. So I wanted to ask you how much visibility you have into the sufficiency of those charges and how nonrecurring they may actually be in the cobot environment.
Yes, no. Good question, so you're right, we did backout charges in those categories cost in those categories. It's about 21 cents.
They do relate to the economic impact of co bid and the effects on Pratt and Collins.
I will tell you a small portion of these were in our original estimates, okay, but as the quarter evolve.
New information came to light as we've talked about around the timing of recovery pushing out to 23.
More airline bankruptcies.
And so the reserve amounts in the C. said, a threshold, where it was significant enough to be adjusted out of our earnings given the magnitude and the you need nature of things.
I would look at this is being rare and not indicative right of our underlying business performance because when you look at that you're talking $400 million in the aggregate roughly 200 in each of the two segments.
And then on top of that you mentioned the bankruptcies right.
Probably off but it was at least five in the quarter right. So in normal periods of time, we're not looking at five bankruptcies and in a quarter right. If you go back to pre pretty cobot.
You know we we've made these estimates with the best information available taking all the facts into consideration around bankruptcies collectability.
The effect of the lower flight hours that it has on our EA c. So we're confident in the.
The values that we recorded here in the quarter and then subsequently adjusted out I.
I think our yes.
Yes.
Just because I think would you seem to keep in mind, we tried to take a conservative view over the customer's ability to pay and so again. This is an unusual thing to do in terms of taking the charges or this bigger charges of is very unusual but again, it's obviously an unusual time of the industry. So I wouldn't expect that there would be more big charges, but you can never if somebody.
The Big goes bankrupt you know you just don't we can't forecast right. So we've tried to be conservative.
But not draconian here.
Greg on that have you seen customer health improve in July, let's say or toward the end of Q2 is the trend up in terms of bad debt and and customer ability to to pay in demand. If you asked me that question early in June I wouldn't say things are getting better.
I would tell you the advanced bookings or not.
Not looking up right now given what's going on with the the infection rate in this country and around the world. So.
If anything as we as we looked at this at the end of the second quarter.
We do that with keeping in mind that this is going to be a tough year for the commercial aerospace customers and again.
Most of the airlines their financial health is going to be stretched as as these passenger volumes that remain low so again.
I don't have a crystal ball to tell you whether or not theres more out there I just think we've tried to do a best job. We kept in terms of the environment as we see it today.
Okay. Thanks, well, we have time for one more question.
Your next question comes from Seth Sigman with Jpmorgan.
Okay, Thanks, very much and good morning.
I wanted to dig in a little bit more on the on the working capital so.
On a net basis, including defense.
The build was fairly modest in the quarter and it sounds like you're expecting some significant improvement.
On the aerospace side in the backend half of the year. So.
Should we still be thinking about a working capital build of.
Billions across the company by year end 20, and also on the flip side of that about a working capital relief opportunity that magnitude in.
The coming years, or if you guys been able to flatten that out so I think where I won't say that were totally flatten it out but again consistent with accelerating.
The underlying actions to support the $4 billion of cash conservation.
We have started to flatten that out.
Here in Q2.
We do expect again, primarily in the back half of the year, maybe even a little Q4 biased.
A reduction in our working capital right as these initiatives continue to take hold.
You know Pratt and Collins are doing a good job balancing and managing their supply chain inputs.
In a very balanced way taking into account that we need to maintain the health of.
The supply base. So we would expect as a subset of the $4 billion up.
Cash conservation to see a benefit from inventory and working as a subset of working capital and overall working capital reduction.
But by the ended the year.
That said at the company level, obviously part of that's from R&D in our I asked defense side of it.
And we still think that Theres an opportunity in 2021.
To further reduce working capital and adjust more with demand signals.
To the shape in the cadence of the recovery.
Great. Thanks, very much thanks up okay. Thanks to everyone for listening in today as always Neil and Kelcy in the Investor relation teams will be around all day to answer questions you might have.
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