Q1 2021 Raytheon Technologies Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the Raytheon Technologies' first quarter 2021 earnings conference call.
My name is Deborah and I will be your operator today.
As a reminder, this conference is being recorded for replay purposes.
On the call today are Greg Hayes.
<unk> Executive Officer, and Neil Mitchell, Chief Financial Officer.
This call is being carried live on the Internet.
And there is the presentation available for downloads from Raytheon technologies website.
At Www.
Got Archie ex Dot com.
Please note, except where otherwise noted the company will speak to results from continuing operations, excluding net nonrecurring and or significant items.
It was the accounting adjustment.
Often referred to by management as other significant items.
The company also reminds listeners that.
The earnings and cash flow expectations and any other forward looking statements provided in this call.
Are subject to risks and uncertainties.
Our T six S E SEC filings, including its forms 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 becomes open for questions. We ask that you limit your first round to one question per caller to give everyone the opportunity to participate.
You may ask further questions by re and starting yourself into the queue if time permits.
With that I'll turn the call over to Mr. Hayes.
Okay. Thank you Deborah and good morning, everyone.
Before we jump in I, just like the take a couple of minutes to acknowledge the news are the most of you saw yesterday of Dr. Kennedy is the retirement as executive Chairman of the board effective June one of this year.
So as you've all heard me tell the story. It was just over two years ago. The DUC count he called me.
The suggests that we merge our two companies.
He could see then letting combining of their talent technologies and capabilities that we would have the breadth and scale to meet any industry challenge and aerospace and defense.
All of those either of US realize the then of course, how quickly a global pandemic would put that value proposition to the test.
And yet here, we stand today, one of your post merger and we've made substantial progress not only of integrating their two heritage companies, but also managing through an unprecedented downturn in commercial aerospace all the while identifying new technology synergies and establishing the operational rhythm.
It allows us to meet many of the goals sooner than what we had expected just a year ago.
So I want to thank Dr. Kennedy for his leadership partnership and stewardship throughout this merger and congratulate him on a distinguished 38 year career with Raytheon.
We wish you well Tom.
I'd also like to officially welcome Neil Mitchell and his new role as Chief Financial Officer. The most of your of of course already know Neil is not new to the call.
Toby O'brien stepped down earlier this month, we thank him for all of his contributions as we formed the Raytheon technologies.
Many of this call also note that Neal.
As our interim CFO of U T C. Prior to the merger and since then he's led the IR and financial planning functions I'm very pleased to have Missouri, CFO and look forward to working together as we continue the integration and cost initiatives that will capture the full value of the Raytheon technologies company.
Lastly, I'd also like to welcome our new head of Investor Relations Jennifer Reed.
Jennifer for the past year has led our integration team and she was vice president of integration. She was responsible for the financial and operational planning activities related to the merger and the wonderful job and we'll hear more about that later.
No I think that completes the HR section of the call. Let me move on to the numbers, let's take a look at slide two please.
So as I mentioned earlier this month of marked the one year anniversary of the merger's closing and I'm proud of the major accomplishments and progress made by our employees and business leaders, who came together from across our businesses to execute as a single team.
Our ability to adjust for the unique circumstances and stay nimble in this very dynamic operating environment for served us and our investors and customers of well.
With that let me take you through the performance of some highlights from the quarter.
I'm pleased to say say that we've had a really strong start to the year and we're seeing continued momentum with signs of economic recovery of incremental improvements in domestic aerospace markets with international markets of course remaining challenged.
As you saw from the press release. This morning, we delivered strong quarterly quarterly sales of adjusted EPS and free cash flow.
All of which exceeded our expectations from earlier this year.
And while it is still earlier in the year the rate of vaccine distribution and signs of travel recovery within key domestic markets, specifically the U S and China are better than what we expected just three months ago.
In the U S daily TSA traffic has averaged about $1 4 million people of day since the beginning of April nearly double the levels of January of this year.
So we're headed in the right direction with key metrics improving.
But we continue to monitor recovery indications around the world and engage with their customers as the.
To prepare for this recovery.
On the defense side happy to say, our backlog remains remains robust at more than $65 billion.
These encouraging trends in commercial aerospace and our Q1 performance gives us confidence of raised the low end of our full year sales range by of half a billion dollars to $63 9 billion, bringing our new sales range for the year of 63, 9% to 65 point for.
We're also going to raise the low end of our full year adjusted EPS range by the dime to $3 50, that's up from $3 40, So the new range that we expect for the year somewhere between $3 50 and $3.70.
We're going to also maintain our free cash flow outlook for the year of at least for $5 billion and Neal will give you a little color on all of this later in the call.
On the capital deployment front after a better expected start too.
To earnings and cash in Q1, we're also going to increase our share buyback plan by of half a billion dollars it'll take it up to $2 billion for the year during.
During the first quarter of of course, we did resume our share buyback and we repurchased about $375 million of our stock, giving us a good start to our full year commitment.
You'll also is probably saw yesterday that we increased our dividend by more than 7% yesterday, just 51 cents from 47 and a half cents.
Since the merger last April we've already returned over $3 2 billion to shareowners between share buyback and dividends and we remain on track to return at least 18 to 20 billion to shareowners from the first for years following the merger.
We also continue to execute well on our synergy programs during the quarter, we achieved nearly 200 million of incremental.
Our T ex merger synergies, bringing the total since the since the merger of up to $440 million.
And given our strong synergy capture the date and the growing opportunities that we see in the pipeline, we're going to increase our cost synergy target by 300 million from 1 billion to $1 3 billion and I don't think we're done yet.
Collinson importantly, also achieved an incremental $40 million in acquisition cost synergies in the quarter, bringing their total acquisition related savings to 510 million since the deal closed in November of 2018.
Yeah.
Lastly, we continue the strategically shape our portfolio.
For the focus on higher growth higher technology businesses.
We did close on the force point divestiture earlier this year that brought in about $1.1 billion in gross tax for gross proceeds without the tax benefit.
It will be continue to be disciplined in M&A as we evaluate both strategic acquisitions as well as strategic divestitures and with that let me turn it over to Neil Mr. Mitchell. Thank you, Greg I'm happy to be on the call today in my new capacity as CFO and I look forward to our continued partnership as we continue to capture the full value of our TX.
With that I'm on slide three let.
Let me take you through our financial results I am pleased with where we landed for the quarter exceeding expectations on our key metrics.
And as we've mentioned previously Q1 will be the last quarter of tough compares for our commercial Aero businesses.
<unk> from the onset of the pandemic last year.
Q1 sales were $15 $3 billion above the midpoint of the outlook we provided in January adjust.
Adjusted EPS was <unk> 90 per share ahead of our expectations driven by better than expected operating profit at all four of our businesses as well as favorability and some corporate items.
On a GAAP basis EPS from continuing operations was 51 per share and included 39 <unk> of net nonrecurring <unk> significant items and acquisition accounting adjustments.
Free cash flow of $336 million exceeded our expectations, primarily due to better than expected working capital timing, most notably the timing of collections across the businesses.
So with that let me take you through the segment results.
Starting with Collins aerospace on slide for.
Sales were $4 4 billion in the quarter down 32% on an adjusted basis and down 31% on an organic basis, driven primarily by the expected adverse impact of COVID-19 on the commercial aerospace industry.
The channel commercial OE sales were down 45% again, driven principally by the impact of the current environment.
Aftermarket sales were down 43% driven by a 39% decline in parts of the repair of 66% declined provision and provisioning and of 32% decline in modifications and upgrades.
Sequentially. However, commercial aftermarket sales were up 11% driven by growth in parts of repair and modifications and upgrades.
Defense sales were down 3% on an adjusted basis, but up 4% organically.
Organic growth was driven by F 35, as well as growth in several avionics product lines.
Adjusted operating profit of $332 million was down $952 million from prior year and better than our expectations for the quarter driven by continued cost control and favorable sales mix on a year over year basis cost control as well as lower A&P and SG&A for more than offset by lower commercial aftermarket and OE.
Sales volume volume.
Looking ahead to the rest of the year or the solid start in Q1 and improving trends on the commercial side. We are increasing the low end of Collins sales outlook from a prior range of down high to low single digit to a new range of down mid to low single digit and based on our first quarter cost containment measures and those improving trends on the commercial side.
We're also increasing the low end of Collins operating profit outlook by $75 million to a new range of down 200 million to up $25 million.
Shifting to Pratt <unk> Whitney on slide five.
Sales of 4 billion were in line with expectations year over year sales were down 24% on an adjusted basis and down 25% on an organic basis also driven by the expected adverse impact of the current environment on the industry.
Commercial OEM sales were down 40% driven by lower deliveries across most of the Pratt large commercial engine and Pratt Canada platforms commercial aftermarket sales were down 35% in the quarter driven by an expected decline in shop visits.
Growth in the GTS aftermarket volume was more than offset by the impact of a reduction in legacy large commercial engine shop visits of 38% and a 28% reduction in Pratt Canada shop visits.
And our military business sales were up 1% on higher F 35, aftermarket, partially offset by lower volume across certain development programs.
Adjusted operating profit of $40 million was down $475 million from the prior year significant aftermarket volume reductions in fixed cost headwinds more than offset continued cost containment measures including reductions in G&A.
A&D.
Looking ahead with a solid start in Q1 and improving trends on the commercial side of the business here too. We are also increasing the low end of <unk> full year sales outlook from a prior range of flat to up mid single digit to a new range of up low to mid single digits.
And we are increasing the low end of Pratt's operating profit outlook by $50 million to a new range of down 75 to up $25 million.
Turning now to slide six for.
First I'll remind everyone that the percentage of completion reset at the merger day continues to impact the compares for both sales and operating profit at the legacy Raytheon businesses with that Raytheon intelligence <unk> space sales were $3 8 billion up 2% versus the prior year on an adjusted pro forma basis and better than our ex expectations for.
For the quarter, driven by higher volume and sensing and effects, particularly airborne ISR.
Operating profit in the quarter was $388 million down $11 million year over year on an adjusted pro forma basis, and a little better than expected due to higher sales volume, it's worth noting that sequentially. The Ross at <unk> improved 110 basis points to 10, 3%.
RIS had bookings in the quarter of $3 7 billion, resulting in a backlog of $19 2 billion significant bookings included approximately $1 4 billion on classified programs as well as several other notable awards are Q1 book to Bill was 1.08 and looking ahead, we remain calm.
<unk> and our full year outlook for RIS with sales growing low to mid single digits and operating profit growing $125 million to $175 million versus adjusted pro forma 2020.
Turning now to slide seven Raytheon missile and defense sales were $3 8 billion up 3% versus prior year on an adjusted pro forma basis and better than expected due to higher volume across multiple mission areas.
Adjusted operating profit was 496 million also better than expected and down $43 million year over year on an adjusted pro forma basis due to the absence of of favorable prior year contract settlement and the EAC reset impact that I mentioned.
Rmt's bookings in the quarter for approximately $2 $5 billion, resulting in a backlog of $27 7 billion.
Significant bookings in the quarter included an award of approximately $520 million for Amiram for the U S Air Force, the Navy and international customers and an award of about $250 million to provide Patriot engineering services support for the U S Army and international customers.
It's also worth noting the rmg's industry team was down selected for the next generation Interceptor Award and we expect the book that award in the second quarter for over $1 billion.
Book to Bill was <unk> six eight in the quarter as expected as we continue to deliver against the previously awarded multiyear production contracts.
Before moving on I would also like to make a comment on the previously disclosed ongoing Doj investigation into cost accounting matters that legacy Raytheon company's former integrated defense systems business or <unk>, which is now part of R&D as Youll see in our upcoming 10-Q filing later today the <unk>.
<unk> includes potential civil liability for defective pricing for three contracts entered into between 2011 and 2013 by Ibs.
We provided for our best estimate related to this matter in connection with the Finalization of purchase accounting during the quarter. Additionally, as part of the same investigation. We recently received the second subpoena relating to a different ideas of contract from 2017, we do not currently believe the resolution of this matter will result in a material impact to our financial condition and we will continue to.
Operating fully with the government's investigation.
Turning back to <unk> full year outlook, we continue to expect R&D sales to grow low to mid single digits and operating profit of <unk> $25 million to $75 million versus adjusted pro forma 2020, and finally for your reference we've included an updated outlook for each segment and the webcast appendix.
With that.
Moving to slide eight let me update you on how we see the current environment as we look ahead at the rest of the year.
Starting with our merger synergies as Greg said, we are increasing our gross merger cost synergy target to $1 $3 billion and that's due to higher expected.
Synergy capture in our corporate office segment consolidation as well as additional opportunities we've identified in the supply chain and footprint consolidation and in it and.
And keep in mind, that's on top of $600 million of Rockwell Collins acquisition synergies.
Additionally, we continue to see the benefits of the cost actions, we took last year.
Solid progress on the structural cost reduction actions, we previously announced all of it the same time working additional opportunities to drive further cost out of the business.
And moving to the commercial side of the business the shape of the commercial Aero recover remains critical to our outlook as Greg mentioned, we're encouraged by the pace of the vaccine distribution and we're seeing signs of increasing travel demand, particularly on many domestic routes. However, we continue to watch the Europe and international border reopening.
While we've seen slightly better than expected results to start the year, particularly at Collins as customers prepare for a strong summer travel season, as well as evidence of increasing future travel demand, we still need to see this demand translate to strong sequential growth in rpms and ASM as we head into the into and through the peak summer travel season as <unk>.
Such the second quarter remains of critical period in determining the recovery profile for the rest of the year.
Looking longer term, we continue to expect that it will take until at least 2023 for commercial traffic to return to 2019 levels.
For the defense side of our business, we continue to expect both domestic and international program growth to remain robust as evidenced by our over $65 billion defense backlog, our strength with international customers, our innovative technologies and our positions in high growth areas gives us confidence in our ability to grow these businesses even in the current domestic budget environment.
And finally, our financial strength is underpinned by the strength of our balance sheet and supports our capital deployment commitments.
Moving to slide nine following our strong start to the year, we remain confident in our full year outlook and as Greg mentioned, we're bringing up the low end of our sales range by $500 million in bringing up the low end of our adjusted EPS range by <unk> 10.
It was about <unk> <unk> coming from the segments and the remainder of coming from improvement and some corporate items.
Now let me just give you a little color on Q2.
At the company level, we see sales in the range of $15 5 billion to 16 billion adjusted EPS in the range of 90 to 95 per share and we see sequential improvement in free cash flow.
It's also worth mentioning that we've included an updated outlook for some of the below the line items and an updated pension outlook that includes the impact of the latest COVID-19 relief Bill in the webcast appendix and so with that I'll hand, it back the Gregg to wrap things up.
Okay. Thanks Neil.
So no surprise here as we think about our 2021 priorities first and foremost it's going to be the continued to support our employees our customers suppliers and communities.
All the while continuing to invest in new technology and innovation to drive industry leadership for the long term.
Yes.
Confidence in the outlook for our company.
<unk> is well positioned to deliver strong sales earnings growth.
And cash flow for not just this year, but for the foreseeable future.
Before we get to the Q&A just a note.
We are going to have a investor day coming up on May 18th So you get a chance to hear from our business unit leaders as well as of our transformation initiatives for Mike Dumais I look forward to sharing a lot of information also on our revenue synergies in our long term growth strategies with you at the meeting.
So with that let's the let's turn it over to Q&A Debra.
[noise] Deborah Deborah we're ready for the Q&A and the interest of time and to allow for broader participation.
Mr Yourself to one question.
I would like to ask a question. Please press star one on your telephone keypad.
We'll pause for just a moment.
Q and a roster.
The first question comes from the line of Carter Copeland with Melius research.
Gentlemen.
Sure.
Greg I'm going to resist the the <unk>.
<unk> to ask a numerical question and instead ask you about.
Good with numbers.
I know I'm going to take you away from there, but in light of Toby's departure, and Tom's announced retirement and wary.
A year on into the merger. This is the biggest integration in the history of aerospace and defense mergers.
<unk> been obviously trying to do a lot of that virtually.
With respect of what still needs to be done and what what has yet to be accomplished.
Where do things stand in that regard.
Where do you want them to go have things surprised you along the way that.
The led to any change relative to where the plan was just anything you can give us to help us understand where that is.
It's the process aside from the.
The cost synergies and some of the numerical pieces, but more the.
The integration of the two companies culturally.
Carter, it's it's something that we have spent a lot of time on or release of these past 12 months. We're fortunate I got of Gen. <unk> sitting here with me who has been leading that integration effort I would tell you you know we've realized over 400 million of cost synergies, but there is a lot of work yet to do.
We've done many of the hard things in terms of reducing staff.
Making sure of the policies are consistent but again not done with that I think the the biggest opportunities we still have around the digital front, where we have a lot of work to do to reduce the number of data centers. We've just made a big investment to try and reduce the datacenters for more than 32.
The lesson. It doesn't we're also working on the what we call. The digital thread that is how do you connect everything from product development through operations supply chain and Sustainment.
And lastly, I would tell you it is rolling out our common.
Operating system, you'll hear more about this in may, but we do need a common operating system. We have of 178 manufacturing facilities around the world and we have to work to do to consolidate those yet we're making good progress, but it is going to take us. Some time it will take us the full for four years to realize the 1 billion three of the synergy savings we're making.
Progress on identifying savings related to.
Procurement, both product and non product.
Cost reduction all of those things are on track, but I would just remind you of its too early to declare victory.
And just like Collins has gotten over 500 million of synergies on their way to 600, there's still there's still work to do there and it's we're not going to declare victory.
And did you find anything in the process that has I guess surprised I'm just thinking about some of the the.
The charges in the the.
The legacy Raytheon defense segments, and the comments you made around the Doj.
Subpoena regarding the pricing I mean are these things surprising to you.
Well first of all of this is just to be clear. This is these are contracts from 2011 through 2013, So there's always.
The surprises like that out there when the Doj suggested that we'd effectively price some contracts, where we've been doing an investigation of been working with the Doj and.
And I think we've appropriately provided for for those exposures of as Neil mentioned.
Wouldn't call that a big surprise, but I would tell you that people think about the culture.
And it was not that different between the aerospace businesses legacy UTC in the defense business at Raytheon. The fact as many of our customers of the defense side. We're the same in the cultures were the same.
Again, that's that has been a pleasant surprise in terms of how easily we have been able to integrate the two businesses culturally and the other process will continue but the I would tell you.
It's.
It is going remarkably well for what is probably the largest aerospace and defense merger River.
Great. Thanks for the color Greg.
Your next question comes from the line of Robert Spingarn with credit.
Hi, Good morning, Greg Neil Jennifer Good morning.
Neal for you.
Guiding EPS of around 90 cents in each quarter. This year at least if I think about what you said for Q2 against Q1.
Theyre more improvement from the first half to the second.
Specially given the buyback and.
Maybe even a slightly lower tax rate you mentioned Q2 is going to be key for assessing the pace of the recovery.
Could you elaborate a little bit on what you were expecting or is this just the conservative second half guide.
No I don't think its that I think there is still three quarters ahead of us.
Need you to keep that in mind as we look at the rest of the year, we did see.
Some promising uptick as we were in March of first quarter at Collins and Pratt.
Some pre buy I would call. It for the airlines ahead of the summer travel season, but let me give you a little bit more color on Q2, specifically, we do see segment operating profit growth somewhere between 3% and seven.
For Q2, if you think about that sequentially.
We do have some headwinds on the corporate side. So one of the things that we benefited from in the first quarter was a reduced corporate expenses in part on interest as we had better than expected cash flow and so that will lower our interest for the year as well as we are being more efficient with our synergy investment spend.
But those.
That spending on the synergy investment will pick up here in the second quarter and so you've got a few two.
<unk> of headwind on that front in the second quarter as well as it relates to the second half of the year, we will have to wait and see a bit but certainly the back end of our plan.
Contemplated a real strong summer travel season, and that's why I think Q2 is going to be so important.
And then just on the cash flow cadence throughout the year.
You touched on it there, but if you could just go into perhaps a little bit more detail sure.
You know our cash flow tends to be backend loaded as well.
Ramp and then deliver through the year as I think about the first quarter, our free cash flow was better than we expected probably by about $600 million all of that attributable to improved working capital if I break that down for you think about $300 million of that coming from better than expected customer collections, we were.
Happy to see some customers pay.
Early at the end of the quarter, we had a couple of hundred million dollars of improvement in disbursements timing and 100 million dollar of better improvement better than expected performance on inventory. So still a long ways to go to get to our full year of 400 million dollar working capital improvement, but good progress.
As I think about Q2.
I would expect to see clearly some sequential growth probably at least doubling.
And then more of that in the back half of the year as the sales continue to ramp and collections as the seasonally do.
Ramp up.
Thank you.
Youre welcome.
The next question comes from the line of Jon Raviv with Citi.
John.
Hey, good morning, everyone on.
On the some of it is going back to the Doj items can you clarify the estimates total seeing the 10-Q those are not material and the second subpoena you didnt unexpected of material either.
Any kind of Colorado and the connective tissue.
And the narrative of rhythm.
Our theme I'd say between these items for.
And so the all Fms.
Or tied to a particular person or team or incentive structure.
And then any comments on what the functional impact of those settlements is going to be on the ongoing business for which.
On those contracts referenced of the 11% to 13 and also the 17 items. Thank you.
Yes, John I appreciate the question I am not sure. We can really answer the I will say this is an ongoing investigation by the Doj.
We have begun our own investigation and as we discover facts, we have been sharing all of those facts with the Doj.
I would tell you again, the dollar amounts are not going to be material in our view today.
These again these are older contracts, where the it was alleged that we'd effectively price some contracts.
Again, I can't get into much more detail than that but again, we've looked into it.
There is a potential liability for defective pricing clearly we've provided for that this quarter.
And we're going to continue to work with the Doj to bring these things to a resolution I would tell you. These investigations take time.
We're still going through doing some work, but we don't believe theres going to be any ongoing impact of any of the businesses. As a result of these investigations. We think these were one off events that occurred should not have occurred but they did and we're going to clean it up and move on.
Thank you Greg for that all six of the one.
Sure.
Next question comes from the line of Ron Epstein with Bank of America.
Hey, good morning, guys.
Good morning.
So just maybe on Pratt.
I think of the hearing on Thursday on F 35 per Atwood mentioned 39 times.
So.
I guess the question of this.
How are you guys in reminiscent of the issues that the.
Air Force has with the F 35 engine and do you fear that kind of all the rhetoric around the engine could offer an entre for you to try to get that engine in there because they've been raising their rhetoric on that at least they have been with the investment community.
Well Ryan first of all of its nice to COVID-19 mentioned 39 times no publicity of all publicity is good in some respects but.
I would tell you the the issues and I think you know Matthew Bromberg Who's the president of our military engine business explain this pretty well, we've actually done a good job on the production of the OEM for us in terms of delivering engines, where we ended the year on contract and the fact, there were about 50 engines sitting at the final Assembly line.
For the F 35 today, Unfortunately, where we didn't do a great job was at the the.
Sustainment Center, and we did not provision.
Enough in terms of test equipment and personnel to deal with the volumes that we saw coming into the shop.
As a result of about 20.
Aircraft today that are sitting there that do not have a serviceable engine.
Now one.
The one of the solutions I think Matthew pointed this out of the last week and it's just the way we can take some of those engines for the final Assembly line and put them over at the at the Sustainment Center and solve this problem tomorrow, but as you know the color of money for procurement is different than it is from operations and maintenance so it's not that easy but.
But we have committed and working with the customer with the <unk> to put the put the equipment in place necessary to service the engines, especially if we get back on I'll say contract performance levels by the end of this year a lot of work to do.
But again, we were caught by surprise in terms of the amount of hours that were being flown we were surprised of the scope of the work that was required on some of these but again, we will we will catch up as far as does this give an entre to GE to build the the F 136 engine.
I can't answer that question completely.
Completely I would tell you, though that is a multibillion dollar multiyear effort.
To bring that engine back in line and I think again, given the cost challenges on the program seems unlikely.
The that any of the services are going to spend that kind of money for a extra engine.
Whether that in fact, our engine is actually performing quite well in service for meeting of the reliability targets maybe of the fuel burn targets.
The issue with the F 35 is not capability, it's sustainment cost and that's the other thing that we've committed to work with the the JP of one is how do we reduce working with Lockheed the sustainment of cost because that will ultimately be the the bigger cost of the initial procurement.
Great. Thanks, guys.
Sure.
Your next question comes from the line of Sheila <unk>.
<unk> with Jefferies.
Good morning, guys. Thank you.
Okay.
Maybe I'll ask one on Collins Decrementals are still in the 40% range. There what are the moving pieces of that and how do we think about the trajectory of <unk>.
Margin improvement in that business, just given the commercial OE starts stops on the 77 in the Mac.
Thanks, Sheila I'll take that one so yeah.
You saw the Decrementals today, 47% at Collins slightly better than what we were seeing last year. So that's good the cost containment actions that we've implemented are taking hold and continuing.
As you think about the rest of the year, we continue to see the incrementals being very strong.
Probably in the 75% range, if you'd average Q2 to Q4, but as you look at Q2, they should be in excess of 100% because you'll recall that last year Q2 was our our deepest deepest quarter.
I'm happy with what the team is doing there in terms of.
Maintaining that cost control.
E&E SG&A in the factories, they took some difficult steps last year as you know.
And as we started the year. The college team has done a nice job of containing the growth in those costs, we will see a little bit of that come back in the second half of the year at Collins, as we reinstate merits and furloughs or reduced.
And volume and volume picks up but.
It should be of really good story for the back of <unk>.
Three quarters of the year.
Can you just comment on what's going on with the Max and the seven what kind of range do you expect for the year, yes, sure. So starting with the 787, we are aligned with the Boeing production schedule. So you can think about that being around five ship sets per month.
On 737 also aligned with with Boeing I think they are out there where the 161.
Deliveries expected for the year as we've talked about Sheila we have produced and delivered a fair amount of that a third two of half of that so the the uptick in the 737.
OE deliveries will start in the.
In the back half of the year.
Thank you.
You bet.
Your next question comes from the line of Seth.
Gentlemen, with J P. Morgan.
Alright, thanks, very much good morning.
Okay.
Alright.
Just a follow up on sales last question the guidance for for Colin.
To imply kind of this continued.
Continuation of the mid Sevens.
<unk> that we saw in the.
In the first quarter, but.
There is potential for the.
In an era of recovery.
The continued efforts on efficiencies and so why wouldn't we see that margin expand off of that level.
As we move through the year.
Yeah, Thanks, Seth I'll take that the.
Youre right as you think about the guide for the rest of the year for Collins, particularly given some of the strength. We saw here in the first quarter. Those margins are contained in that range. However, I will say, we're being really smart about the timing of when we.
Spend our A&D and when we reinstate some of the discretionary spending so those will be natural offsets to what we expect to see in terms of aftermarket growth.
But as that aftermarket growth comes I would expect if it's better than our plan then you'll see it drop through.
Okay, and then just on that I think you mentioned the sequential aftermarket growth in the quarter, 11%.
Can you talk about what pieces of the aftermarket are showing the most strength right now and where you expect that accounts for the remainder of the year.
Sure Yeah, it's coming from the two places you would expect at parts and repair and mods and upgrades provisioning is lagging a little bit, but again that tracks more closely to the commercial OE deliveries, so I'm not surprised to see that but we are seeing.
Call it cautiously encouraging signs as we exited March and started April on the repair intake in particular.
Great. Thanks, very much yes youre welcome.
Next question comes from the line of Noah <unk> with Goldman Sachs.
Hi, good morning, everybody.
Good morning law.
Hey, Neal could you just add a little more color to the last question there just in.
With this all of these questions about how the guidance implies some flattish things through the year.
Despite.
Some signposts for improvement with the aftermarket being the shorter cycle of lever just how did you how did you tackle how the decide what to include for the aerospace aftermarket given the signposts are positive, but it is still uncertain and then could you also tackle.
What happened with your pension cash flow inputs, it looks like those changed of less than.
Maybe we thought based on.
How the inputs were revised there.
Sure, let me try to build upon the aftermarket as I think about the year and we think about the recent IATA data on Rpms Janney.
January and February were a little bit of a slow start that definitely picked up in March.
And I think about the change in the RPM forecast that we and the industry are looking at today.
I think we're pretty well aligned it looks a little bit different today than it did three months ago, you know clearly the domestic routes U S and China in particular are much stronger.
So thats, helping us but on the international side.
It's a little slower than we thought of.
On the SK, our ASM side, you know the available seat miles those are tracking pretty consistently with what we saw in January our thought we would see in January.
Think the thinking that we've had as we look at the rest of the year and there is still a long way to go is that we really need to see those <unk> and corresponding rpms increase here in the second quarter and we're thinking about a 40% sequential growth in rpms from Q1 21 to Q2, and then again to Q2 to Q3.
And then corresponding on the ASM side think about 25% to 30% sequential growth between Q1, and two and two and three if we see that kind of growth that we will likely see a stronger second half, but I think at this point, it's just too early to call that so.
So that's how I'm thinking about that a little bit more <unk>.
Shifting to the paint market, if I could just interject there really quickly just to make sure I have it correctly.
Your guidance does not imply those types of sequential moves were really really close so.
Hearing you correctly that the sign posts are saying that could be what happens, but just given how much uncertainty there still is with the virus and the vaccine rollout and restrictions to travel you're feeling the need to keep the guidance fairly conservative in case things are more volatile from that yeah. I think you said that exactly correctly no I mean the.
Fact is theres still a lot of lots of it has to go right in the back half of the year of these next eight months of the year and so while we were optimistic based upon the other vaccine rollout here and what we've seen in China. There is still a tremendous I mean keep in my 40% of colleges aftermarket is wide body.
And that market is down significantly and it has not recovered nearly as fast as what we thought it was going to so domestic markets better international markets worse overall, though still confident in the full year guidance and to Neil's point, if the recovery happens faster if the vaccine rollout and we start to see travel to Europe for instance of the summer season.
Start to improve these numbers could be better and you'll see that in the bottom line and so again.
We debated yeah, we could there could be upside on the topline and bottom line, but it's April and so when we when we see you guys. In May we'll talk about it again, you'll have a chance to talk to Steve Tim in the.
Chris <unk> to see what they're seeing in the marketplace and then we'll have a better view, obviously by the end of the second quarter, but right now we're optimistic but still cautious.
Sensible, Okay, let me take the pension question too so.
Thanks for bringing it up so yes, we did put out some new numbers there as you know the relief Bill that was passed reduced pension funding. We currently don't see the need to do any domestic funding in the near term as a result of that Bill Youll recall that we pre funded $800 million in 2020 that would've been our 2020.
<unk> contribution so theres nothing in 'twenty, one that changed as a result of the Bill. However, looking forward would you get a little bit of improvement. So we will have to fund a little bit less into our pension plans will get a little bit less on the casualty coverage, it's about $75 million next year, and I think $50 million in 2020, so good.
Good news here of the last thing I'll add is we got a little bit of of P&L benefit.
Here in Q1, as we've rolled this lower cash cost into our forward pricing.
Probably about 70 basis points of margin.
Improvement at the R&D segment is where it really showed up going forward for the rest of the year I don't expect to see much more of that and we've rolled that into our foreign pricing.
How far into the future did it take down the domestic funding.
It's pretty far out I'd say for the next three to five years right now and of course that depends on a lot of other assumptions that could change, but all things equal for the next several years at least.
Okay. Thank you Youre welcome.
Your next question comes from Myles Walton with UBS.
Thanks, Good morning, I was wondering though if you're speaking of.
Where he left off on R&D it outperformed on margins.
Thanks for the the clarity on the pension contribution there, but still I think it was running hot and obviously no change to the for year and then maybe talk about the bookings trends, there, which obviously the lighter and when do you think that that can turn around and give more confidence to at least stability in the segment from them.
From a revenue perspective run rate.
Sure no problem. So yeah as you saw 13, 1% R&D margins from the quarter. We are very happy with that as I mentioned, just a minute ago I think about 70 basis of that as the whole pension tailwind that that wont repeat.
We also had about 40 basis points I'd say of international mix. Some acceleration of award timing that came through with the CFR liquidation that helped RMT here in the in the first quarter and so.
If you can kind of adjust for those two items, you'll see continued margin progression again as the productivity improves through the year.
So we're still seeing that margin growth that we would expect absent those couple of items.
And I'm, sorry bookings trends the bookings trends, yes. So.
Listen a year ago and in the past 18 months of RMB has had some significant.
Multiyear buys.
So as we burn down the backlog there are book book to Bill is a little bit lower.
But later this year, we do expect.
Next generation.
Interceptor, we talked about that that'll be over $1 billion booking that we'll book here in the in the second quarter Al RSO and some other international.
Patriot awards that are forthcoming.
In the year. So all in all I still expect out of full year basis. The book to Bill of about one point for R&D and <unk> for that matter.
Okay alright, thank you.
Welcome.
Your next question comes from the line of Peter Arment with Baird.
Hey, Greg good sequential improvement in at the end.
Pratt <unk> Whitney on the kind of the large engine inductions, how are you thinking about or at least planning of our visibility wise.
Second half or at least as we move for from the recovery and then also maybe you could just highlight.
Pratt Canada is doing just given that we're seeing kind of a resurgence in biz jet flying activity.
Peter So if you think about engine inductions vs. I think we had about 118 views into the shop.
In the first quarter, which is exactly on plan and we accept that will accelerate we think throughout the year as domestic travel.
It covers right now only about 60% of the V fleet is flying.
It will come back and compare that to the to the G. T F powered fleet, which is in the high eighties.
So again, there's a little bit of a of a lag in demand, but we fully expect we're going to see the big sequential or a sequential improvement.
We're not going to get back to 1000 engines. This year, probably not for two more years of the V. But we're clearly going to trend that way as people need more lift in these domestic markets.
So that's actually.
Very encouraging.
As far as the rest of the aftermarket it was talking about.
For Canada.
Again, good traction in the aftermarket we are seeing a biz jet flying hours are up as you would imagine significantly and that's translating into some higher aftermarket keep in mind. Most of the engines that we have out there were out of power by the hour.
Arrangement, so we don't actually recognize the revenue or the cost until we see those engines come back in so flight hours are up aftermarket is up but it's not as much as you might think just because of the the nature of the contracts. The one area at Pratt Canada continues to be of challenges in the regional marketplace. You know the PW one hundreds of PW $1 50 for regional.
Transport.
That market has been slower to recover.
It's again, something we expect to see next year, but certainly not a big uptick this year.
Net deliveries engines are very very solid helicopter engine deliveries of solid it's really just the regionals that are there that are the challenge right now for Pratt Canada.
Appreciate the color.
Peter just it's Neil just to go back and.
On the on the Pratt shop visits we still expect Q2 to queue for shop visit growth of in the 25% to 30% range. So all of that is holding as Greg mentioned good good start to the first quarter and then we will see that back half growth. The other point I would throw out there is we're watching Europe.
Obviously, but the majority of that V fleet, and our planning around those shop visits I'd say, 80% or more of <unk> 85 per cent or more is not in the Europe.
The region, so feel pretty good about debt that outlook I appreciate those comments. Thanks Neal.
Your next question comes from the line of David Strauss with Barclays.
Thanks, Good morning.
David.
So I think you mentioned that the calling of the aftermarket was up 11% sequentially I would imagine January February Werent Werent very good can you talk about what you saw in March in terms of.
How quickly the airlines can turn it back on and then maybe also what Youre seeing in April.
Yeah, Dave I don't know that we want to get into the month by month compares I would say that directionally that is absolutely correct.
January and February were a little scary because again, we saw an uptick in China in the vector and the ease of virus.
And you know the U S was going through the last wave.
Air traffic was not picking up as fast as what we had expected it to that I'll turn it around in March with the vaccine Rollouts.
The trying to getting the can be independent of that make under control.
Things got remarkably better and what surprised us a little bit it was typically when we see of recovery and rpms, it's usually three to six months before we see a recovery in demand for parts and repair but in this case because you've got so many parked aircraft out there think about 11000 of out of 30000 per round the world of park today.
And yet demand is coming back very quickly in.
In the U S and in China, The airlines are actually being proactive and getting the aircraft ready for service in the summer selling season, and Thats really what drove March what's driving April and I think which will which will benefit second quarter as the airlines are not waiting to see the rpms. They see it in the advanced bookings and they know they need the lift there.
This is.
This is a very different kind of recovery than what we have seen in the past.
Okay, and I wanted to ask about the the legacy Raytheon businesses and the the margin expectation there so.
Those businesses were around 13% on average blended together pre the accounting adjustments and all of that is there anything structurally in terms of.
Different about how we should think about where those margins can get to as you are able to start booking the Acs again.
Yes, let me give you a couple of thoughts I mean first of all you've got to keep in mind that as we implement all of the synergies which are great. They do come with.
I'll give back to our customer which is great. Because it also makes us more competitive so that that's a factor of that you've got to think about in the margins but.
Both of those businesses are laser focused on driving productivity and cost reduction throughout their their businesses. We do see the opportunity for margin expansion, it's going to be of great question for western ROI at our upcoming.
The Investor day in May where they'll talk a little bit more about that we've talked about the EAC reset we do expect that to be that issue to be largely behind us as we exit the year. So you could see a little bit more margin expansion throughout this year.
But these.
These are great businesses as we get into longer term production contracts from the R&D side in particular, you'll.
You'll see margin expansion there, but you do have a replenishing of some of the the programs.
We've had the Patriot missile program very good program for us that will get replaced with the <unk> in the future. So there'll be a little bit of a mix shift as the margin sort of transitions between those early L. Rep contracts when you get into late 'twenty three of four.
And we get out of the the more mature programs that we've been in today, but a lot of potential there.
Alright, thanks, very much Neil and Greg.
Welcome.
Your next question comes from the line of Robert Dodd with vertical research.
Thanks, so much good morning.
Yes.
I just wanted to follow up on that Peter's question about Pratt and Whitney and the.
The other side of the engine portfolio. There I was wondering if you could tell us what you'd be seeing on some of the older aircrafts. There means of engine variants that are out there and some have freight has perhaps been helping those older aircraft that thank you.
Yeah. So if you think about the sort of the freighters. If you think about <unk> installed base of 11000, plus engines or so of about 10% of that is freighters, whose role PW for thousands of those or the 94 inch.
760 Sevens 740 Sevens that has actually been a pleasant surprise I would tell you because for traffic as everybody knows is up significantly.
Significantly year over year given the.
E Commerce and global supply chain so.
As we think about the aftermarket for Pratt, it's not all bad news for.
<unk> traffic is good at the same time.
We are starting we started to see some retirements of some of the older engines out there, but not a significant number of this year, but pretty much in line with what we had expected.
Especially I think of 112 inch that's the triple seven.
J L retiring their fleet.
Not a surprise the 12 months before we originally we had.
If they were going to retire it but that'll be putting those aircraft down but those engines will still end up in service of someplace else probably in the freighter configuration. So again, it's the.
The older stuff is still out there its still a meaningful piece of the aftermarket I think it's about 2025 percentage points.
It's still very significant.
Frankly that cargo traffic that you all know is considerably higher than it was even pre pandemic has helped the shop visits.
In 'twenty one.
And the quick follow up if I may the tough question, but how sustainable do you think these freight demand is likely to be.
Look.
As I look at you know how sustainable.
Hannibal as e-commerce and this trend towards.
The.
Global supply chain. So I think this is this is here to stay.
The fact is global supply chains are stretched thin today and freighters are the most efficient way to get parts from point a to point B. So I think.
This is not just a temporary phenomenon.
That's great. Thanks, Greg.
Thank you for Deborah will take one more question. Please thank you.
Your final question comes from the line of Cai von <unk> with Cowen.
Yes, thanks, so much so.
At our conference in February talked Toby talked of 15% to 30% growth.
And commercial aftermarket of Collins over Q2, Q for that kind of seems like it fits with your full year guide, but it implies the commercial aftermarket moves up from the first quarter by something like $250 million.
If there's an orderly build.
Could you give us some more color on kind of maybe the margin headwinds we look at because you had this huge profit gain at Collins on basically lower volume sequentially from Q4 to Q1 and as Seth brought out you know your guide for the rest of the year assumes day.
The safely not much margin improvement at all sequentially.
Sequentially and yet you should have very strong growth in your more lucrative part of your business.
Thanks, guys just a couple of thoughts here, so as I think about the sequential growth in commercial aftermarket Collins commercial aftermarket for the rest of the year, it's a little bit lower than what we talked about.
In the first quarter and that's because we've derisked that a bit by the performance. We've seen so think about 5% in Q1 to Q2, maybe 10% Q2 to Q3 and.
Another five or 8% in the three to four in terms of growth in terms of thinking about the strength that you saw in the first quarter a lot of really good work on the cost containment A&D and SG&A combined about $60 million of of.
<unk>.
Improvement and that will come back because the team is phasing that investment during the year, because we've tried to be very prudent about.
The discretionary element of our of our spending.
Until we see the the Ric.
Coverage take a strong hold so that's what I can share with you there I appreciate the question.
Thanks, so much debt.
I would now like to turn the conference back over to Mr. Hayes for closing remarks, Okay. Thank you everyone for listening in today I know, it's a busy earnings day for out there, but the appreciate everybody's time.
Jennifer Kneale of the whole IR team will be available all day to day to answer your questions and we look forward to seeing you or talking to you on the 18th of May take care Bye Bye bye.
This does conclude today's conference call. Thank you for participating you may now disconnect your lines.
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