Q3 2021 Raytheon Technologies Corp Earnings Call

October 26, 2021

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies' third quarter 2021 earnings Conference call.

Name is Misty and I will be your operator for today.

As a reminder, this conference is being recorded for replay purposes on.

On the call today are Greg Hayes, Chairman and Chief Executive Officer, Neil Mitchell, Chief Financial Officer, and Jennifer Reed, Vice President of Investor Relations.

This call is being carried live on the Internet and there is a presentation available for download from Raytheon technologies website at Www Dot our T X dot com.

Please note, except where otherwise noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring ant or significant items, 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 T 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 to ask a question you will need to press star one on your telephone.

To remove yourself from the queue press the pound key.

You may ask further questions by re inserting yourself into the queue as time permits with that I will turn the call over to Mr. Hayes.

Well, thank you Missy and good morning, everyone.

As you saw from our press release. This morning, we delivered another solid quarter.

Your comments before I turn to the highlights.

We continue to feel good about the long term fundamentals of our business and our ability to drive growth and margin expansion over the next several years.

During the quarter, we made great progress on cost reduction and operational excellence through our businesses and achieved some notable milestones which will touch on in just a moment.

From a market perspective commercial air traffic continued to recover despite some regional impacts from the Covid variance.

Global ASM or available seat miles estimated to have grown about 30% sequentially in Q3.

And here in the U S passenger traffic through TSA checkpoints averaged about $1 9 million travelers per day in Q3.

From about 1.6 million per day in Q2.

International borders as we know we're starting to reopen and that's another pause.

And then on the defense side, the fiscal year 'twenty two budget request was in line with our expectations and as we've said defense spending is non-partisan we're encouraged to see Congress supporting plus ups to the President's budget, but are also aligned with our to our business and our investments in new technologies.

Overall, we continue to be cautiously optimistic on both the commercial and defense trends that we're seeing.

Okay, let's move to slide two.

Some highlights from the quarter.

Adjusted EPS exceeded our expectations free cash flow was in line with what we expected and we delivered another quarter of top and bottom line growth on both a year over year and sequential basis.

As we could capitalize on the commercial aftermarket recovery in our defense portfolio continues to grow.

Based on our strong performance year to date, we're again, increasing and tightening our adjusted EPS outlook for the year to $4 10 to $4 20, a share that's up from our prior outlook of $3 85 to $4.

Neil Mitchell will get you into the details on sales and free cash flow. We're also tightening our outlook in both areas.

On the capital allocation front, we repurchased about $1 billion of our T X shares during the quarter, bringing our total for the year to $2 billion, which was.

<unk> that we talked about back in Q2.

Before I turn it over to Neil.

More details on our results, let me cover some strategic and operational highlights for the quarter, where we continued to execute on our key programs.

Starting with strategic highlights we did announce the acquisition of Flightaware, which will become a significant accelerator for Collins connected ecosystem strategy and enhances our capabilities in growth areas like Aviation network services digital solutions and aerospace modernization.

We're organizing our business around optimizing these capabilities within Collins aerospace.

We also announced the acquisition of secret engineering, a leading provider of advanced space electronic solutions.

Secret strengthens our offerings to solve our customers' most complex problems by expanding our space based capabilities.

With the integration of Blue Canyon. This also enhances our I S as competitiveness and reliability of satellite bus hardware and customized space electronics.

At the same time, we continue to divest noncore businesses during the quarter, we announced an agreement to divest of our global training and services business, which is a part of our I S.

On the operational side, the missiles and defense team and their industry partner successfully completed the first test of our scramjet power hypersonic air breathing weapon concept or hot for DARPA and the U S. Air Force the Hawk successfully sustained hypersonic speeds offering faster time on target and greater maneuverability.

<unk>.

The successful tests puts us on track to deliver a prototype system to the U S Department of defense.

And lastly at Pratt the Columbus forged disk business continues to integrate critical operations to drive further quality performance and cost reduction.

Utilizing our core operating system tools the team in Columbus reduce the lead time of forgings by up to 35 days and reduce both cost and inventory.

As you can see driving operational excellence through our organization is a key to our success over the long term.

With that let me turn it over to Neil have you.

Take you through the quarter in detail Neil Thanks, Greg I'm on slide three so I'm pleased with our performance in the quarter, where we saw strong year over year sales growth adjusted earnings growth.

And free cash flow sales of $16 2 billion were up 10% organically versus prior year on an adjusted basis. Our performance was driven by the continued recovery of domestic and short haul International Air travel and continued growth in defense that was partially offset by some supply chain pressures and lower 787 OE.

Volume.

While we expect these headwinds to continue in the near term, we only see this as a timing issue. Nonetheless, we remain focused on our cost actions and program execution to drive continued earnings and cash flow growth.

Adjusted earnings per share of $1 26 was ahead of our expectations, primarily driven by Collins and Pratt and some corporate items.

On a GAAP basis EPS from continuing operations was <unk> 93 per share and included 33 of acquisition accounting adjustments and net to give significant <unk> nonrecurring items.

It's worth noting that both GAAP and adjusted earnings per share benefited from about 16 cents of lower tax expense related to previously disclosed actions, we took to optimize the company's legal entity and operating structure in the quarter as well as pension related benefit that was worth about five.

Free cash flow of $1 $5 billion was in line with our expectations keeping us on track for the full year.

Before I hand, it over to Jennifer Let me give you a little color on our synergy progress during the quarter, we achieved about $165 million of incremental merger gross cost synergies and given our strong performance. We are again, increasing our 2021 target and now expect to achieve over $700 million of cost synergies this year.

This will bring us to nearly $1 billion in cumulative gross cost synergies since the merger and we're well on our way to meeting our $1 $5 billion commitment so with that let me hand, it over to Jennifer to take you through the segment results.

Thanks, Neal starting with Collins Aerospace on slide four sales were $4 6 billion in the quarter up 7% on an adjusted basis and up 9% on an organic basis.

And then primarily by the continued recovery in the commercial aerospace end market by channel commercial aftermarket sales were up 38% driven by a 44% increase in parts and repair a 43% increase in provisioning and a 22% increase in modifications and upgrade.

Commercial aftermarket sales were up 4% roughly in line with our expectation.

Commercial OE sales were down 3% with strength in narrow body more than offset by lower white wide body deliveries, primarily seven eight setting and military sales were down 5% on an adjusted basis and down 1% organically on a tough compare recall Colin military sales were up eight.

Sent in the same period last year.

Adjusted operating profit of $480 million was up $407 million from the prior year.

Higher commercial aftermarket sales.

And synergy capture more than offset lower military volume.

Looking ahead due to the expected supply chain pressures and 787 O E delivery headwind, we now expect Collins full year sales to be down mid single digit. However, given the continued recovery in the commercial aftermarket and the benefit of cost containment measures, we are increasing full year operating profit.

Outlook to a new range of up $250 million to $300 million versus 2020.

Shifting to Pratt <unk> Whitney on slide five sales at $4 7 billion were up 25% on an adjusted basis and up 35% on organic basis, primarily driven by the continued recovery of the commercial aerospace industry.

Commercial aftermarket sales were up 56% in the quarter with legacy large commercial engine shop visits up 49% and Pratt Canada shop visits up 18%.

Sequentially commercial aftermarket sales were up 17%.

OE sales were up 22% driven by higher G. T F deliveries within Pratt large commercial and business.

The military business sales were up 2% on another tough compare recall Pratt military sales were up 11% in the same period last year.

In the quarter was driven by a continued ramp in F 135, Sustainment, which was particularly offset.

Input on production and classified development programs.

Adjusted operating profit of $189 million was better than expected and was up $232 million from the prior year.

Drop through on higher commercial aftermarket sales more than offset the impact of higher commercial OE volume and higher SG&A and M. D. Looking.

Looking ahead due to the continued commercial aerospace recovery, we now expect full year sales to be up mid single digits. In addition, we are increasing full year operating profit outlook to a new range of flat to up $50 million versus 2020.

Turning now to slide six our U S sales of $3 7 billion were in line with prior year results on an adjusted basis and down 1% on an organic basis, driven primarily by the timing of material input from suppliers.

Adjusted operating profit in the quarter of 391 million was in line with expectations and was up $41 million year over year on an adjusted basis, driven primarily by higher program efficiencies.

Alright, Yes had $2 9 billion of bookings in the quarter, resulting in a book to build of 0.84 as expected and our backlog of $18 7 billion.

Significant bookings included approximately $1 billion on classified programs, it's worth noting that we expect our full year book to bill to be greater than one.

Turning to RF full year outlook due to the timing of material inputs from suppliers, we now see ARIA sales growing low single digit. However, as a result of improved productivity. We continue to expect our S. As operational operating profit to grow 150 to 175.

Versus adjusted pro forma 2020.

Turning now to slide seven.

R&D sales were $3 9 billion up 7% on an adjusted basis and up 5% on an organic basis, driven by liquidations of pre contract cost.

Loss on an M. Ram award received in the quarter and the expected ramp in our Nissan franchise.

Adjusted operating profit of $490 million was in line with our expectations and was up $59 million versus the prior year, primarily on higher sales volume.

R&D as bookings in the quarter were approximately $3 9 billion, resulting in a book to bill of one point or two and our backlog was $29 6 billion.

Significant bookings in the quarter included an round lot 35 for $570 million, a patriot gem T order for $432 million as well as several other other notable awards. We also expect R&D as full year book to bill to be greater than one.

We remain confident in our full year outlook for our M. D with sales growing low to mid single digits and operating profit growing 50 to 75 million versus adjusted pro forma 2020.

And now I'll turn it back to Neal to provide some color on the rest of the year.

Thanks, Jennifer I'm on slide eight as we look ahead at the fourth quarter. We continue to be encouraged by the recovery of commercial air travel that has driven sequential aftermarket growth. So far this year. However, the recovery of long haul international traffic continues to lag expectations and on the OE side 77 build rates have come down more than we had expected.

<unk>, resulting in a significant impact to our top line outlook for the year.

Additionally, we aren't immune to the global supply chain pressures that are seeing some isolated impacts from the supply chain.

Primarily at Collins and our S. However, we are working with our suppliers to mitigate these timing issues and finally well.

We anticipate the pending vaccine mandate may put further pressure on the supply chain in the near term higher vaccination rates will continue to build confidence in the safety of air travel going forward.

So with that backdrop, we're adjusting our sales outlook and now see full year sales of about $65 billion slightly higher than the low end of our prior outlook. However, given the strong performance on cost control synergy capture and program execution, we are raising and tightening our adjusted EPS range to $4 10.

<unk> to $4 20 per share are up about 22 cents from the midpoint of our prior outlook about seven cents of the increase comes from the segments Collins and Pratt and the remainder comes from improvements in corporate items and on the cash side. We are also raising the low end of our free cash flow outlook and now see free cash flow of <unk>.

<unk> $5 billion for the full year.

It's worth mentioning that we've included an updated outlook for the segments and some below the line items in the webcast appendix with that I'll hand, it back to Greg to wrap things up.

Okay. Thank you Neil So we're on slide nine this is just to kind of our view of the operating environment that we're facing and going into 2022, and we're not going to give specific guidance on 2022 today.

Other than to say that the trends that we've talked about in our May Investor conference have proven to be pretty much on track with what we're seeing for next year.

On the positive side, obviously, we expect the commercial aerospace recovery to continue.

We feel good about our ability to grow our defense franchises with a robust $65 billion backlog and the bipartisan support for the fiscal 'twenty to fiscal year 'twenty two budget.

Of course, the international demand for our products and technologies continues to be strong.

We're also laser focused on driving operational excellence to deliver cost reduction and further margin.

This is really a part of our core operating system rollout getting it gives us confidence that we can continue to grow the margins along the trajectory that we talked about.

On the challenges side, no real surprises here and we anticipate that global supply chain pressure will continue and that lower 787 build rates will carry into next year.

Again, none of these are I guess, new to us we will manage through them.

But something I think everybody is going to face in the in the industry.

And of course, we are watching and monitoring if you will the reopening of international borders all looks to be positive so far but again.

Covid variance can change that in a hurry.

Global tax an inflationary environment are also a concern as we think about next year.

And lastly, the impact of the Covid vaccine mandate.

As you know all federal contractors are required.

By December eight to have all of our employees vaccinated.

Certainly expect that there will be some disruption as both the supply chain and with our customers as a result of this but we're going to work our way through it.

Alright, so before we get to the Q&A, Let me just close by saying that I'm really pleased with our performance in the quarter.

And I'm confident in the strength of our businesses as we look ahead.

I want to reiterate we remain focused on supporting our employees customers suppliers and our communities.

Most important mission is keeping our employees safe.

Finally, the strength of our balance sheet, along with the cash generating capabilities of our business will continue to provide us with financial flexibility to support investments in our business, while still returning capital to shareowners, including our commitment to return at least $20 billion to shareowners in the first four years following the merger.

With that let's open it up for questions.

At this time, if you would like to ask a question press star one on your telephone keypad in the interest of time and to allow for broader participation.

You are asked to limit yourself to one question.

Your first question comes from the line of Peter Arment with Baird.

Yes, good morning, Greg Neil Jennifer.

Okay.

Hey, Greg maybe you could just talk a little bit about the lost sales in defense, maybe how youre thinking about how that how that recovers do we expect to get all that back in 2022, and maybe just any color about you know the.

The supply chain challenges that you're seeing in defense.

Yeah. So the loss sales on the defense side I would.

Category III three categories of issues there one I think the pull out of Afghanistan.

It was about a $75 million impact to full year revenue not huge but meaningful that will not recover obviously those are services that we were providing to the U S government or the Afghan government prior to the pull out so 75 kind of goes away you've got another.

$275 million of actual supply chain and people issues, it but people issues.

The fact is we haven't been able to bring in enough people onboard to generate the revenue that we were expecting.

Does that the other is actual supply chain.

Pressure, where we're not getting the material and as you know Peter when we get the material in the defense side, we that that gets build right away to the customer and we recognize the revenue so that piece will come back the hiring piece will come back.

Afghanistan piece won't come back so think about that $275 million.

Don't expect were not going to see it clearly in the fourth quarter, but we're not going to lose <unk> of next year I can't tell you what quarter its going to be in but we will get that back.

I appreciate all the color thanks, Greg.

Your next question is from the line of David Strauss with Barclays.

Okay.

Thanks, Good morning good.

Good morning.

Greg wanted to ask you a couple of questions on the Aero rates I guess first of all on on Max. This year you had talked about 161 are you actually going to hit that.

On 77, where where are you exactly today or are you actually producing anything in on.

<unk> hundred 20.

I know Airbus is talking about a big ramp up there, but if you look at their deliveries. It doesn't look like much is actually happening and can you talk about where you are on on <unk> through 'twenty rates as well. Thanks.

Alright, let's just try and unpack that let's start with 737, we still believe.

Boeing is going to deliver those aircrafts keep in mind for the first half.

Half of this year, we were not really delivering material to Boeing because they had it in inventory and so we've just really started to ramp up the OE deliveries out of columns again.

That's about $2 $5 million roughly a ship set of revenue on 737, So we fully expect but we won't be taking production up there on <unk>.

As they work through their backlog of undelivered aircraft and they go through the ramp up process as far as 787.

I think as maybe the big question that we have right now.

We are not shipping anything today on <unk>.

787.

We had expected to be delivered at about five a month.

Keep in mind, that's a $10 million.

Revenue per aircraft impact so if you think about the.

As part of the problem of Collins, and Q4 will be 787 deliveries now yeah, they'll they'll catch back up but probably not this year.

As it relates to the <unk> hundred 20.

Again, we I think are probably building at a rate of about 43.

Three a month going up we think a little bit next year.

Continuing on.

Towards <unk> goal I believe of reach 75.

Not clear, we're going to get all the way to reach 75, but clearly we see demand strengthening for the <unk> hundred 20, it's a great aircraft.

And it's got great performance characteristics that keep in mind. So the GTS today, we've got just over 900 aircraft delivered.

Florida about nine and a half million hours, we've got 99 nine.

Special liability rate the engine is great and we continue to see opportunities.

To grow our market position on the <unk> hundred 20.

But we don't see any any shortage of demand in the near term on the <unk> hundred 20.

Thanks very much.

Your next question is from the line of Ron Epstein with Bank of America.

Hey, good morning.

Good morning, Ron.

Can you guys talk a little bit about the F 35 mm reengineering Ah theres been a lot of I guess noise and discussion and the defense community around around the re engineering the adaptive engine transition program.

You know theres been some talk on it on the Hill.

Yeah.

Where are you guys on that and how do you defend yourself against the the G E offering.

[laughter].

Okay. So, let's let's go through that so the adaptive engine GE and Pratt Whitney both have adaptive engines on test.

We're going into related ground test. This summer, we'll be doing flight tests early next year.

There is a thought of reengineering Z a I'm sorry, the F 35 sometime in the 2027 2028 timeframe, which is extremely aggressive the issue right now is the adaptive engine as it does not fit on the.

Carrier based version that Navy version or the Marine Corps version.

It was stable so the air force would have to fund the entire development cost of a new engine.

The other issue you've got with the adaptive engine. This is brand new technology. Unlike the F 135, which has millions of flight hours on it on the core.

And you're talking about a single engine fighter I think it's going to be a tough putt to think about putting a brand new.

Paper engine on the F 35 in the near term.

We have to talk to the J P O about enhanced engine offering of the 135, where we can upgrade the current.

F $1 35 to provide more cooling and more thrust and at a significantly lower cost than a brand New center line engine.

So we're going to continue to work with the services on this again I think it's the thought of a brand new engine is going to be a tough putt. So not to say, we're not going to look for ways to improve the current version I think it's just a question of finding the funding because as the block four gets introduced we are going to need more cooling we are going to need more thrust.

But we have a plan to address that with the J Paul.

Alright, great. Thank you.

Your next question is from the line of Sheila <unk> with Jefferies.

Hey, good morning, guys. Thank you so much for the time, Greg Neil and Jennifer.

I wanted to maybe ask about the after market. When we look at the two year stack basis had aftermarket seems to be at 76% of 2019 levels and Collins is that 66% also at a lower growth rate and can you talk about what's driving some of that growth differential.

And Jen personal airframe and overall program mix.

Sheila let me start good morning.

We're very pleased obviously with the aftermarket performance in the quarter, you saw Pratt up 6% year over year, 17% sequentially and Collins at 38% also up.

In line with our expectations sequentially, almost almost 5%, 4% so.

The difference I think comes down to the product mix of offerings and frankly as we've talked about Collins has a fair share of wide body.

And that hasn't yet recovered as.

As we all know we do expect that to be sort of the next growth driver for Collins as we get into next year and the international routes start to reopen.

On the Pratt side very good shop visit induction.

We saw 49% year over year legacy shop visits.

Come in that's a little higher than the 30%, 35% that we thought we would see some of that upside probably about $75 million of sales is contributing to a full year of $100 million increase in the Pratt outlook for the rest of this year. So pleased with the narrow body recovery.

As we look to fourth quarter, we'll continue to see <unk>.

<unk> visits at Pratt on the legacy side up year over year, probably in the neighborhood of 20% down a little bit sequentially. Because we had some pull ahead into the third quarter, but still very solid there.

We are well positioned to support those inductions with parts and aftermarket and then is it calling same thing we will continue to see.

The narrow body performed quite well as Greg just talked about 737, Max stepping up probably by the middle of next year, we'll start to align the rates of our deliveries with boeing's deliveries and that will come with aftermarket as well and then we'll see the wide body.

Thanks, so much from the detail you bet.

Your next question is from the line of Seth Sigman with J P. Morgan.

Hey, thanks, very much and good morning, everyone.

Maybe I'll.

On the aftermarket.

Your line of questioning I guess.

The sequential growth of Collins was in line with what the outlook, but I think Greg you've spoken in September.

And I think correctly or not.

People came away with maybe a little bit more optimism and.

What's the pace of growth and it did it kind of slow toward toward the end of the quarter.

And then if you could give us a call ends are you still looking for that mid single digit in the fourth quarter is there any kind of provisioning ahead of international travel.

Returning in the U S that that might help the way that domestic did earlier this year or any kind of update on how much the.

Trends in Collins aftermarket improvement are being affected by both kind.

Kind of demand and.

Supply issues.

Yeah, So let me.

So as Neil said I think sequentially Collins was up about 4% we were expecting 5%. So it was a little bit slower than what we'd expected and I think I would attribute that mostly to that kind of slowdown in the middle of the summer.

We saw in August and September as the Delta variant of Covid.

Became more problematic as we closed out the quarter and as we move into October we see that kind of low single digit for a 5% growth again sequentially.

Sequentially that is in Q4.

I think the real issue at Collins and Neil hit on this is there exposure to wide body, that's 40% to 45% of their aftermarket and.

We were hoping we were gonna see faster reopening of the international markets. They are reopening, but I would say at a rather tepid pace and so that's really the governor I would tell you on Collins aftermarket growth the narrow bodies all good that is.

Operating 320 fleet out there is operating about 80% of pre COVID-19.

Similar to like 70% on the V 2500 fleet so.

That's all good the real issue is wide body and until we see a.

Approved.

Reopening of the international routes and right now, we're seeing north Atlantic opening up which is great, but we're still not seeing the Asia routes and that is the the thing that we really don't expect to see until 2023, which means you're not going to get a full recovery until probably the end of 2023 back to 19 levels.

Collins.

Alright, thanks very much.

Okay. Your next question is from the line of Noah <unk> with Goldman Sachs.

Hey, good morning, everybody.

No.

The updated full year 'twenty one guidance.

I think has the March the segment margin down sequentially in every segment.

Just sort of wondering broadly how much of that is conservatism versus.

Specific headwinds and I guess in Collins in particular.

The margin and the EBIT dollars have to be down a decent amount in <unk>, even with revenue is still up.

Notwithstanding the headwinds you've cited here.

If you could walk us through why that happens.

Sure. Thanks, not conservatism I don't believe I think we've got this reasonably calibrated, but let me take you through each business unit.

At Collins, if you are doing the math, which it looks like you've done Noah you'll see margins in the 9% range in the fourth quarter. There were a couple of items in the third quarter that helped Collins to the tune of about <unk> <unk>. We had a land sale. We also had a worker's comp adjustment that was favorable those two items. If you adjust for them would get caught.

<unk> third quarter Ros in the neighborhood of 9%. So I think we see a flat.

Flattish margins for Collins between Q3 and Q4.

Recall, we've been talking about the ramp in R&D and some of the discretionary spend we saw some of that happened in the third quarter, we will see more of that in the fourth quarter. So that's the calling story at Pratt it's a different story.

The margins are sequentially down that's largely on higher.

<unk> hundred 20 Neo in fact, all of our GTS deliveries will be higher in the fourth quarter than the third quarter. So the negative engine margin headwind will persist and then similarly, we will see continued <unk> and SG&A grow just a little bit to both those companies colleagues are proud have done a really nice job to control the spending but it was back.

And loaded as we positioned ourselves to adjust depending on how the year turned out.

For RIS, we'll see margins around 10%.

Should see continued productivity there so.

So no major changes there in R&D.

They will exit the year around 12%.

Much in line with the third quarter I'll point out for both RIS and R&D. There are four fewer days in the fourth quarter of this year than there were in last year, and so that will give us a little bit of just headwind but of course, that's just that's just timing.

Given your comments on wide body, and then what's happening with the <unk> hundred 20.

Do we need to all be calibrated too.

With respect to the aerospace business margins do we need to be calibrated too.

A non linear path to the 2025 targets I guess, specifically next year, if if wide body is still a bit slow in <unk> hundred 20 is ramping and craft.

No I think we've been talking about this for almost two years now since the pandemic started the recovery is going to be I'll call. It lumpy in fact.

That depends on the routes the airlines and clearly wide body is going to be a big piece of that so I do think there will be a little lumpiness to the margin trajectory.

Keep in mind that Greg just talked about the 77 Thats a huge revenue contributor not a big margin contributor until you get into the aftermarket. So I think thats a fair assumption I will certainly be back here in January to give a little more color on what 'twenty looks like for US based on what we see during the fourth quarter.

Okay. Thanks, so much you bet.

Your next question is from the line of Robert Stallard with vertical research.

Good morning, good morning.

Greg a couple of months ago, you signed it perhaps a little bit skeptical about <unk> hundred 20 ramp plans, but today, you said a bit happy about it. So I was wondering if you could maybe elaborate on your latest thoughts on this and whether you do feel more comfortable on the <unk> hundred 20 now.

You know, Rob I would tell you.

I remain somewhat skeptical about reach 75, I think thats just natural I think you'll you'll hear it from the leasing companies.

Out there theres, probably not demand unless it comes up.

Boeing's.

Good.

Airbus ramps up production Boeing will ramp up for <unk>.

<unk> is are we really going to see.

A market that will support that.

Call It 50 $737 75.

<unk> hundred Twenty's on a monthly basis at a 125.

Airplanes a month.

Again.

It could happen, we'll be ready to support Airbus our customer if indeed, it does but I would tell you that our plans are five year plans do not anticipate getting to that kind of rate and.

By 2020 for 2020 again, maybe we're being conservative.

But again, we will support the customer.

Demand is there.

That's great. Thank you very much.

Your next question is from the line of Doug Harned with Bernstein.

Good morning, Thank you.

Doug.

I just wanted to follow up on on what.

Rob was talking about there because if you look at the <unk> hundred 20 family I guess there are two things here.

You said.

Expressed some skepticism about the planned rate increase.

Your CFM counterparts have also done that some in the customer community have.

Boeing has everybody could have different motivations here.

But when you go forward.

They are.

They are holding fast to this production plan.

How does this break in other words, when do you or your counterparts say, okay. We will facilities for 70, a month and make that investment.

How does this process move forward.

So keep in mind on the a 320 family.

That is a shared platform between CFM and Pratt Whitney.

Our goal here is to make.

Make sure that we have the most.

Profitable share of that business and so again, we will.

Continue to sell the engines, where we think we can make the most money.

But again, we're not going to chase every last engine campaign.

Just to get to a higher rate so we want to be disciplined on pricing.

And again, if the demand is really there.

We're out talking to customers every single day.

If the demand is there if gilman Airbus are correct.

We will get our fair share maybe it wont be 50%, maybe it would be 45%, maybe it would be 40%, but we will get our fair share of whatever the ultimate demand is.

And if I can just follow on on that because one other thing that's going on right now is that Airbus deliveries are lagging production today, and they've probably 130 plus airplanes parked.

And the majority would be in the <unk> hundred 20 family how does that affect.

<unk> you if you have this gap in deliveries and production at Airbus in terms of your deliveries of engines to them and then you're planning for the next few quarters.

We do not foresee a gap in our delivery profile for.

For the Airbus engines were continuing to produce and in fact as I just said in the fourth quarter I expect them to go up sequentially.

As you know Airbus has a huge backlog for the <unk> hundred 20.

And they're working with their customers as we are.

To make sure they take delivery not going to get into predicting how many they will deliver but we don't foresee any gaps in our engine delivery profile.

So you can think about that.

<unk> got thousands of 730, <unk> hundred Twenty's and backlog and the fact that Theres a few parked that's just really the state of the airline industry today that some of the some of the airlines are looking for financing, but we don't see any interruption in the production rate as Neil said it will continue to go up both this year and next.

Okay very good thank you.

Your next question is from the line of Myles Walton with UBS.

Thanks, Good morning.

Gregg or Neill I was wondering how are you quantifying.

<unk>.

The risk around the vaccine mandate doesn't your operation and in the supply chain and also.

What's the bigger supply chain issue, that's hitting you know is it people.

Is it raw material is it.

Chips.

And sort of what's the growing whereas can what's the fading risk. Thanks.

So myles and that $275 million.

Number we threw out before in terms of supply chain impact to the year.

The people part of it its about a third so that's we are expecting some level of disruption some level of challenge in the supply chain just because keep in mind, it's not just the prime contractors, but it's also all of our subcontractors that need to follow the mandate as well so we are expecting.

Some minor level of disruption that this is not huge.

A grand scheme of $64 $5 billion of revenue, but there will be some expected impact and as we get closer to the.

The deadline date of December 8th.

This could pick up so were monitoring it we are out talking to all of our key suppliers are talking to our customers.

And we're just share trying to stay on top of on top of that as far as shortages.

People are a piece of it but I would tell you.

It's also raw materials and while we have good coverage under long term agreements, we've seen lead times double.

Some of these raw materials.

Chips, not a huge issue for us I think again, we've got adequate supply.

But it's always a watch item out there.

Logistics.

Getting trucks.

To pick up material getting the material in has also proven to be a challenge but look.

In the Grand scheme of our T X I just don't think that's a it's going to be a meaningful or material impact on us for the year, we're managing it pretty well we've got a <unk>.

A robust team and supply chain and operations that are all over this.

We'll just we'll keep managing through it.

Alright, thank you.

The next question comes from the line of Mark <unk> with Wolfe Research.

Hey, good morning, Thank you for the time.

Neil can you spend a little bit more time on cash flow and working capital.

Through the end of the year.

And then how that sets up for your working capital into next year, and then related on the Capex trend. This year is that pushing capex or is that capex going away.

Good morning. Thanks for the question. So let me just share a couple of thoughts around.

The free cash flow, we obviously took the range up the bottom end by <unk> 5 billion.

On a couple of things one improved profit and to slightly lower Capex issue as you pointed out year to date working capital has been an outflow and that's pretty typical for us. So we're expecting the fourth quarter.

At least 1 billion and a half of positive working capital again, a lot of that comes from the defense side of the business as we receive receipts from our customers cash receipts that is.

So we feel pretty good that we'll continue to see.

Our net working capital.

It could be.

Yeah.

The number we talked about at the beginning of the year as we make sure we have an appropriate amount of buffer stock.

In some places for the issues, Greg just talked about but all in all really good progress you know just to give you a couple of thoughts inventory has been a real bright spot frankly, calling sequentially. Their inventory was only up $30 million from Q3 Q2 to Q3 and Pratt is in fact down nearly $100 million sequentially. So the teams are doing fine.

Tastic job of managing inventory as we recover through this this this cycle. So I'm very happy with that in terms of the timing of the Capex, We've got a big ramp in the fourth quarter.

Which is also typical for us I.

I do think that some of the savings we're seeing this year it could slip into next year, particularly around our large structural projects.

But the good the good news is were completing those projects within budget.

It's all kind of contained in our in our cash outlook I won't get into where we see free cash flow next year, but I do expect it to grow as we've talked about back at the Investor day, and we'll be back in January with more detail on how thats expected unfold.

Thank you.

You bet.

Your next question is from the line of Matt Akers with Wells Fargo.

Hey, Thanks, good morning.

Good morning, guys can comment a little bit about fuel fuel prices and just sort of the uptick.

Year to date is that starting to flow through at all into your customer behavior on the commercial side either.

Kind of flying some of the the older aircrafts differently or maybe potential demand for new aircraft to kind of get the fuel efficiency savings and anything youre seeing from your customers there.

Not really any impact except we have seen pricing going up I think if you were out buying a ticket today.

Play any place Youre going to see the prices have gone up significantly from what we saw this summer so while fuel.

Prices are up oil north of $80 a barrel.

We believe that the airlines are able to pass along those higher fuel cost in the form of higher ticket prices.

Obviously, if it's a prolonged increase it does drive demand for next generation aircraft.

And right now of course, there's a lot of a lot of aircraft out there still sitting on the ground. So I wouldn't expect it would be a near term impact like that but clearly.

The airlines.

Raising prices to compensate for the for the higher fuel costs.

Got it thank you.

Your next question comes from the line of Cai von <unk> with Cowen.

Yes. Thank you very much so great results so.

The F 35 peak production target as you know has been brought down.

And supply chain has emerged as a bigger issue recently, you mentioned 275, but maybe could you give us color on where the supply chain issues are.

The biggest worry.

And secondly, kind of what the F 35 rate impact does to you because clearly it looks like it does quite a bit to the prime.

Okay. So as we think about them going down from roughly what 16 engines are months down to 13 engines a month it will have an impact on Pratt.

But again, it's a.

As I think about the $1 35, it's a small piece of our overall defense budget, it's not.

You are talking.

Call it $10 million in engine, so you're going to lose $30 million.

A month. So you may lose 350 $360 million of revenue going forward again defense backlog of 65 billion. It's just not that significant obviously, it's a much more.

Important to the to the prime on that particularly.

You'll see those kinds of reductions.

A specifics on supply chain I don't know that I could point to a single supplier that is.

Other than again, it's components raw materials.

Think about aluminum.

Prices going up.

Steel all of the the basic raw materials lead times are pushing out and it's just harder to get material in the door on time.

And we're also seeing of course labor shortages in our supply chain, which is also slowing down input.

That's a that's going to be a continuing problem into next year and the vaccine mandate, probably not going to help that although a vaccine that it probably will help us on the commercial aerospace side, if everybody gets vaccinated. So.

We're all for that.

Got it.

Let me just yes.

Yeah.

Let me just add one thing on F 135 rates.

Keep in mind that.

The production engines, but Theres also power mods and pieces that Pratt makes that.

Support the aftermarket and so you'll get one one and a half equivalent engines.

Per month on top of sort of production rate. So it will be a little below the 16, a month, but all of that has been calibrated in our long term outlooks and we talked about earlier this year. So.

Certainly a little bit lower on the production side, but not not a full drop.

So I just wanted to kind of add that extra point there for you.

Terrific and then on the supply chain, Greg you mentioned raw materials to what extent do you have raw material price escalators in your contract.

So typically as you know we've got.

The protection from I'd say abnormal escalation in our contracts. So there's a dead band in terms of inflation.

For most of the contracts, but we also for most of those raw materials. We also have long term supply agreements, which cover us.

For the vast majority of the materials. So we're not seeing the impact today of all of the I would say spot prices.

Materials that you might otherwise be thinking about most of that is coming in under LTA.

These prices persist long term then we will see.

See an impact it again.

The extent to the extent that that is greater than these dead bands will be able to pass it on to recover that through our through our contracts right.

Some numbers on that Cai, 90% of <unk> products are under LTA.

Probably 70% at Collins and so on average we're about 80% protected so.

As Greg said in the near term.

Not a major issue for us.

Terrific. Thank you very much.

Welcome.

Your next question is from the line of Kristine <unk> with Morgan Stanley.

Hey, good afternoon guys.

Thank you.

Hi, good morning.

Boy with defence stable and aerospace recovery coming along nicely can you discuss your capital deployment priorities and how are you thinking about the portfolio and M&A at this point in time.

Sure I think.

For US right now there is there is no news there is no change I would say in the focus on the.

The portfolio, we're going to continue to look for investments like seeker engineering, like Florida, where that can enhance the offerings that we already have especially in software and in the space business.

At the same time, we're going to continue to look at lower margin lower growth businesses for divestiture and nothing to announce today, we will keep looking at the portfolio as we always do as far as capital allocation I think first and foremost we are going to invest in R&D and Capex and as you think about that number this year would be about.

$5 billion next year will probably be closer to $6 billion of investments between Capex and A&D.

That is the first priority is to invest for the future of the business at the same time, we will continue to pick up share buyback over the next couple of years, we've got to do another $6 billion of share buyback to hit that $20 billion tar.

Target that we've got out there and we fully expect to be able to do that if not a little bit more.

And again, we've got a lot of flexibility with the balance sheet at $7 5 billion of cash sitting there at the end of the third quarter.

And we've got plenty of liquidity, if we decide we want to make some other investments, but for the time being we're going to focus on generating cash investing in A&D.

Investing in the business and growing it.

Great. Thanks, Greg.

Okay.

I would now like to turn the call back over to Mr. Hayes for closing remarks.

Okay. Thank you Mister and thank you everyone for listening in.

Good quarter, I hope everyone would agree.

Neil and Jennifer and the team will be available all day to day to take your questions. So thanks very much for listening in and take care.

Bye bye.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

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Good day, ladies and gentlemen, and welcome to the Raytheon Technologies' third quarter 2021 earnings conference call. My name is Misty and I will be your operator for today.

As a reminder, this conference is being recorded for replay purposes.

On the call today are Greg Hayes, Chairman and Chief Executive Officer, Neil Mitchell, Chief Financial Officer, and Jennifer Reed, Vice President of Investor Relations.

This call is being carried live on the Internet and there is a presentation available for download from Raytheon technologies website at Www Dot our T X dot com.

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 C S T 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.

To remove yourself from the queue press the pound key.

You may ask further questions by re inserting yourself into the queue as time permits with that I will turn the call over to Mr. Hayes.

Well, thank you Missy and good morning, everyone.

As you saw from our press release. This morning, we delivered another solid quarter.

Your comments before I turn to the highlights.

We continue to feel good about the long term fundamentals of our business and our ability to drive growth and margin expansion over the next several years.

During the quarter, we made great progress on cost reduction driving operational excellence through our businesses and achieved some notable milestones, which I'll touch on in just a moment.

From a market perspective commercial air traffic continued to recover despite some regional impacts from the Covid variance with global ASM or available seat miles estimated to have grown about 30% sequentially in Q3.

And here in the U S passenger traffic through TSA checkpoints averaged about $1 9 million travelers per day in Q3, that's up from about 1.6 million per day in Q2.

International borders as we know are starting to reopen and that's another pause.

And then on the defense side, the fiscal year 'twenty two budget request was in line with our expectations and as we've said defense spending is non partisan and we're encouraged to see Congress supporting plus ups to the President's budget that are also aligned with our to our business and our investments in new technologies.

Overall, we continue to be cautiously optimistic on both the commercial and defense trends that we're seeing.

Okay, let's move to slide two.

Some highlights from the quarter.

Adjusted EPS exceeded our expectations free cash flow was in line with what we expected and we delivered another quarter of top and bottom line growth on both a year over year and a sequential basis.

As we could capitalize on the commercial aftermarket recovery in our defense portfolio continues to grow.

Based on our strong performance year to date, we're again, increasing and tightening our adjusted EPS outlook for the year to $4 10 to $4 20, a share thats up from our prior outlook of $3 85 to $4.

We will Miss you will get you into the details on sales and free cash flow. We're also tightening our outlook in both areas.

On the capital allocation front, we repurchased about $1 billion of <unk> shares during the quarter, bringing our total for the year to $2 billion, which was.

Our commitment that we talked about back in Q2.

Before I turn it over to Neil a couple more details on our results. Let me cover some strategic and operational highlights for the quarter, where we continued to execute on our key programs.

Starting with strategic highlights we did announce the acquisition of Flightaware, which will become a significant accelerator for Collins connected ecosystem strategy.

It enhances our capabilities in growth areas like Aviation network services digital solutions and aerospace modernization.

And we're organizing our business around optimizing these capabilities within Collins aerospace.

We also announced the acquisition of CCAR engineering, a leading provider of advanced space electronic solutions.

Secret strengthens our offerings to solve our customers' most complex problems by expanding our space based capabilities.

With the integration of Blue Canyon. This also enhances our ISS competitiveness the reliability of satellite bus hardware and customized space electronics.

At the same time, we continue to divest noncore businesses during the quarter, we announced an agreement to divest of our global training and services business, which is part of our I S.

On the operational side, the missiles and defense team and their industry partners successfully completed the first test of a scramjet powered hypersonic air breathing weapon concept or hawk for DARPA and the U S Air Force.

The Hawk successfully sustained hypersonic speeds offering faster time on target and greater maneuverability with.

The successful tests puts us on track to deliver a prototype system to the U S Department of defense.

And lastly at Pratt the Columbus forged this business continues to integrate critical operations to drive further quality performance and cost reduction.

Utilizing our core operating system tools the team in Columbus reduced the lead time of forgings by up to 35 days and reduce both cost and inventory.

As you can see driving operational excellence through our organization is a key to our success over the long term.

With that let me turn it over to Neil have you.

And free cash flow sales of $16 2 billion were up 10% organically versus prior year on an adjusted basis. Our performance was driven by the continued recovery of domestic and short haul international Air travel and continued growth in defense.

Partially offset by some supply chain pressures and lower 787 OE volume.

Adjusted earnings per share of $1 26 was ahead of our expectations, primarily driven by Collins and Pratt and some corporate items.

On a GAAP basis EPS from continuing operations was <unk> 93 per share and included 33 of acquisition accounting adjustments and net to give significant <unk> nonrecurring items.

It's worth noting that both GAAP and adjusted earnings per share benefited from about 16 of lower tax expense related to previously disclosed actions, we took to optimize the company's legal entity and operating structure in the quarter as well as pension related benefit that was worth about <unk> <unk>.

Free cash flow of $1 5 billion was in line with our expectations keeping us on track for the full year.

This will bring us to nearly $1 billion in cumulative gross cost synergies since the merger and we're well on our way to meeting our $1 5 billion commitment so with that let me hand, it over to Jennifer to take you through the segment results.

Thanks, Neal starting with Collins Aerospace on slide four sales were $4 6 billion in the quarter up 7% on an adjusted basis and up 9% on an organic basis.

Essentially commercial aftermarket sales were up 4% roughly in line with our expectation.

Commercial OE sales were down 3% with strength in narrow body more than offset by lower white wide body deliveries, primarily 787 and.

Military sales were down 5% on an adjusted basis and down 1% organically on a tough compare.

Call Colin military sales were up 8% in the same period last year adjust.

Adjusted operating profit of $480 million was up $407 million from the prior year higher commercial aftermarket sales favorable mix and synergy capture more than offset lower military volume.

Looking ahead due to the expected supply chain pressures and 787 O E delivery headwinds, we now expect Collins full year sales to be down mid single digit. However, given the continued recovery in the commercial aftermarket and the benefit of cost containment measures, we are increasing full year operating profit.

Outlook to a new range of up $250 million to $300 million versus 2020.

Commercial aftermarket sales were up 56% in the quarter with legacy large commercial engine shop visits up 49% and Pratt Canada shop visits up 18%.

Sequentially commercial aftermarket sales were up 17%.

Commercial OE sales were up 22% driven by higher GTS deliveries within Pratt large commercial and business.

The military business sales were up 2% on another tough compare recall Pratt military sales were up 11% in the same period last year growth in the quarter was driven by a continued ramp in F 135, Sustainment, which was particularly offset.

Inputs on production and classified development programs.

Adjusted operating profit of $189 million was better than expected and was up 232 million from the prior year.

Drop through on higher commercial aftermarket sales more than offset the impact of higher commercial OE volume and higher SG&A and M D.

Turning now to slide six RIS sales of $3 7 billion were in line with prior year results on an adjusted basis and down 1% on an organic basis, driven primarily by the timing of material input from suppliers.

Adjusted operating profit in the quarter of 391 million was in line with expectations and was up $41 million year over year on an adjusted basis, driven primarily by higher program efficiencies.

Alright, that's had $2 9 billion of bookings in the quarter, resulting in a book to build of 0.84 as expected and our backlog of $18 7 billion.

Significant bookings included approximately $1 billion on classified programs, it's worth noting that we expect our full year book to bill to be greater than one.

Turning to RIS full year outlook due to the timing of material inputs from suppliers, we now see ARIA sales growing low single digit. However, as a result of improved productivity. We continue to expect our S. As operational operating profit to grow 150 to 175.

<unk> versus adjusted pro forma 2020.

Turning now to slide seven RMB sales were $3 9 billion up 7% on an adjusted basis and up 5% on an organic basis, driven by liquidations of pre contract cost on an Amram award received in the quarter and the expected ramp in our <unk> franchise.

Adjusted operating profit of $490 million was in line with our expectations and was up $59 million versus the prior year, primarily on higher sales volumes.

R&D is bookings in the quarter were approximately $3 9 billion, resulting in a book to bill of one point or two and our backlog was $29 6 billion.

We remain confident in our full year outlook for our M. D with sales growing low to mid single digit and operating profit growing $50 million to $75 million versus adjusted pro forma 2020.

And now I'll turn it back to Neal to provide some color on the rest of the year.

Thanks, Jennifer I'm on slide eight as we look ahead at the fourth quarter. We continue to be encouraged by the recovery of commercial air travel that has driven sequential aftermarket growth. So far this year. However, the recovery of long haul international traffic continues to lag expectations and on the OE side, seven eight and seven build rates have come down more than we would expect.

<unk>, resulting in a significant impact to our top line outlook for the year.

Additionally, we arent immune to the global supply chain pressures that are seeing some isolated impacts from the supply chain.

Primarily at Collins and IRS. However, we are working with our suppliers to mitigate these timing issues and finally, while we anticipate the pending vaccine mandate may put further pressure on the supply chain in the near term higher vaccination rates will continue to build confidence in the safety of air travel going forward.

<unk> to $4 20 per share are up about 22 from the midpoint of our prior outlook.

<unk> seven <unk> of the increase comes from the segments Collins and Pratt and the remainder comes from improvements in corporate items and on the cash side. We are also raising the low end of our free cash flow outlook and now see free cash flow of approximately $5 billion for the full year.

It's worth mentioning that we've included an updated outlook for the segments and some below the line items in the webcast appendix with that I'll hand, it back to Greg to wrap things up.

Okay. Thank you Neil So we're on slide nine this is just to kind of our view of the operating environment.

We're facing going into 2022 now were not going to give specific guidance on 2022 today.

Other than to say that the trends that we've talked about in our May Investor conference are proving to be pretty much on track with what we're seeing for next year.

On the positive side, obviously, we expect the commercial aerospace recovery to continue and we feel good about our ability to grow our defense franchises with a robust $65 billion backlog and the bipartisan support for the fiscal 'twenty to fiscal year 'twenty two budget.

Of course, the international demand for our products and technologies continues to be strong.

We're also laser focused on driving operational excellence to deliver cost reduction and further margin.

This is really a part of our core operating system rollout and it gives us confidence that we can continue to grow the margins along the trajectory that we talked about.

On the challenges side no real surprises here, we anticipate the global supply chain pressure will continue and then lower 787 build rates will carry into next year.

Again, none of these are I guess, new to us we will manage through them.

But something I think everybody is going to face in the in the industry.

And of course, we are watching and monitoring if you will the reopening of international borders all looks to be positive so far but again.

Covid variance could change that in a hurry.

Global taxes inflationary environment are also a concern as we think about next year.

And lastly, the impact of the Covid vaccine mandate.

As you know all federal contractors are required by December eight to have all of our employees vaccinated.

Certainly expect that there will be some disruption in both the supply chain and with our customers as a result of this but we're going to work our way through it.

Alright, so before we get to the Q&A, Let me just close by saying that I'm really pleased with our performance in the quarter.

I'm confident in the strength of our businesses as we look ahead.

To reiterate we remain focused on supporting our employees customers suppliers and our communities.

But our most important mission is keeping our employees safe.

And finally, the strength of our balance sheet, along with the cash generating capabilities of our business will continue to provide us with financial flexibility to support investments in our business.

While still returning capital to shareowners, including our commitment to return at least $20 billion to shareowners in the first four years following the merger.

With that let's open it up for questions.

At this time, if you would like to ask a question press star one on your telephone keypad in the interest of time and to allow for broader participation.

You are asked to limit yourself to one question.

Your first question comes from the line of Peter Arment with Baird.

Hi, Yes, good morning, Greg meal, Jennifer nice.

The supply chain challenges that youre seeing in defense.

Yes, so the lost sales and other defense that wood.

Category three to three three categories of issues. There one I think the pull out of Afghanistan.

Probably $275 million of actual supply chain and people issues isn't by people issues I mean are there.

The fact is we haven't been able to bring enough people onboard to generate the revenue that we were expecting.

Does that the other is actual supply chain.

Pressure, where we're not getting the material and as you know Peter when we get the material in the defense side. We that's it gets build right away to the customer and we recognize the revenue so that piece will come back as the hiring piece will come back.

Afghanistan piece won't come back so think about that $275 million.

Don't expect were not going to see it clearly in the fourth quarter, but we're not going to lose of next year I can't tell you what quarter its going to be in but we'll get that back.

I appreciate all the color thanks, Greg.

The next question is from the line of David <unk> with Barclays.

Okay.

Thanks, Good morning.

Good morning.

Greg wanted to ask you a couple of questions on the Aero rates I guess first of all on on Max. This year you had talked about 161 are you actually going to hit that.

77, where where are you exactly today are you actually producing anything and on $83 20.

I know Airbus is talking about a big ramp up there, but if you look at their deliveries. It doesn't look like much is actually happening and can you talk about where you are on an <unk> hundred 20 rates as well thanks.

Yeah.

Alright.

Unpack that let's start with 737, we saw.

Still believe.

Boeing is going to deliver those aircrafts keep in mind for the first half of this year, we were not really delivering material to Boeing because they had it in inventory and so we've just really started to ramp up the OE deliveries out of columns again.

Keep in mind, that's about $2 $5 million roughly a ship set of revenue on 737, So we fully expect but we won't be taking production up there on <unk>.

Tier as they work through their backlog of undelivered aircraft and they go through the ramp up process.

Far as 787.

That I think is maybe the big question that we have right now.

We are not shipping anything today on 787.

Expected to be delivered at about five a month and keep in mind, that's a $10 million.

Revenue per aircraft impacts so if you think about the.

Part of the problem of Collins, and Q4 will be 787 deliveries now yeah, they'll catch back up but probably not this year.

As it relates to the <unk> hundred 20, <unk> again, I think they are probably building at a rate of about 43.

Three a month going up we think a little bit next year.

Continuing on.

Towards <unk> goal I believe have reached 75.

Not clear, we're going to get all the way to reach 75, but clearly we see demand strengthening for the <unk> hundred 20, it's a great aircraft.

And it's got great performance characteristics that keep in mind, so the GTS.

Today, we've got just over 900 aircraft delivered.

<unk>.

Florida about nine and a half million hours, we've got a 99 nine.

Dispatch reliability rate the engine is great and we continue to see opportunities.

To grow our market position on the <unk> hundred 20.

But we don't see any any shortage of demand in the near term on the <unk> hundred 20.

Yes.

Thanks very much.

Your next question is from the line of Ron Epstein with Bank of America.

Hey, good morning.

Good morning, Ron.

Could you guys talk a little bit about the F 35.

Re engineering Ah Theres been a lot of I guess noise and discussion and the defense community around around the reengineering the adaptive engine transition program.

You know theres been some talk on it on the Hill.

Yeah.

Where are you guys on that and how do you defend yourself against the the GE offering.

Yes.

Okay, well, let's so let's let's go through that so the adaptive engine GE and Pratt Whitney both have adaptive engines on test.

We were going into the ground tests. This summer we'll be doing flight tests early next year.

There is a thought of reengineering Z a I'm sorry, the F 35 sometime in the 2027 2028 timeframe, which is extremely aggressive the issue right now is the adaptive engine as it does not fit on the.

Carrier base version of the Navy version or the Marine Corps version.

With stable so the air Force would have to fund the entire development cost of a new engine.

The other issue you've got with the adaptive engine. This is brand new technology. Unlike the F 135, which has millions of flight hours on it on the core.

And you're talking about a single engine fighter I think it's going to be a tough putt to think about putting a brand new <unk>.

<unk> engine on the F 35 in the near term.

We have to talk to the J P O about and enhanced engine offering of the $1 35, where we can upgrade the current.

F $1 35 to provide more cooling and more thrust and at a significantly lower cost that a brand New center line engine.

So we're going to continue to work with the services on this again I think it's the thought of a brand new engine.

That's going to be a tough put so not to say, we're not going to look for ways to improve the current version I think it's just a question of finding the funding because as the block four gets introduced we are going to need more cooling we are going to need more thrust but.

But we have a plan to address that with the <unk>.

Alright, great. Thank you.

Your next question is from the line of Sheila <unk> with Jefferies.

Hey, good morning, guys. Thank you so much for the time, Greg Neil and Jennifer.

I wanted to maybe ask about the after market when we look at the two year stack basis, Pratt aftermarket seems to be at 76% of 2019 levels and Collins is that 66% also at a lower growth rate and can you talk about what's driving some of that growth differential.

And Jen personal airframe and overall program mix.

Sheila let me start good morning.

We're very pleased obviously with the aftermarket performance in the quarter, you saw Pratt up 6% year over year, 17% sequentially and Collins at 38% also up.

In line with our expectations sequentially, almost almost 5%, 4% so.

The difference I think comes down to the product mix of offerings and frankly as we've talked about Collins has a fair share of wide body.

And that Hasnt yet recovered.

As we all know we do expect that to be sort of the next growth driver for Collins as we get into next year and the international routes start to reopen.

On the Pratt side very good shop visit induction.

We saw 49% year over year legacy shop visits.

As we look to fourth quarter, we'll continue to see shop visits at Pratt on the legacy side up year over year, probably in the neighborhood of 20%.

Down a little bit sequentially, because we had some pull ahead into the third quarter, but still very solid there.

We are well positioned to support those inductions with parts and aftermarket and then is it calling same thing we will continue to see.

The narrow body performed quite well as Greg just talked about 737, Max stepping up.

By the Middle of next year, we'll start to align the rates.

Our deliveries with boeing's deliveries and that will come with aftermarket as well and then we'll see the wide body.

Thanks, so much from the detail you bet.

Your next question is from the line of Seth Sigman with J P. Morgan.

Hey, thanks very much.

Everyone.

Maybe I'll.

On the aftermarket.

Your line of questioning I guess.

The sequential growth of Collins was in line with the outlook, but I think you know Greg you've spoken in September.

And I think correctly or not.

What's the pace of growth did it did it kind of slow towards towards the end of the quarter.

And then if you could give us a call and you know are you still looking for that mid single digit in the fourth quarter is there any kind of provisioning ahead of international travel.

Returning in the U S that might help the way that domestic did earlier this year or any kind of update on how much the.

Trends in Collins aftermarket improvement are being affected by both kind.

Demand and.

Supply issues.

Yeah, So let me.

So as Neil said I think sequentially Collins was up about 4% we were expecting 5%. So it was a little bit slower than what we had expected and I think I would attribute that mostly to that kind of slow down in the middle of the summer.

We saw in August and September as the Delta variant of Covid.

Became more problematic.

As we closed out the quarter and as we move into October we see that kind of low single digit for a 5% growth again sequentially.

Sequentially that is in Q4.

I think the real issue at Collins and Neil hit on this is there exposure to wide body, that's 40% to 45% of their aftermarket and.

We were hoping we were going to see faster reopening of the international markets. They are reopening I would say at a rather tepid pace and so that's really the governor I would tell you I am Collins aftermarket growth the.

Narrow bodies all good.

Operating 320 fleet out there is operating about 80% of pre COVID-19.

Similar to like 70% on the V 2500 fleet so.

That's all good the real issue is wide body and until we see a.

Approved.

Reopening of the international routes and right now, we're seeing north Atlantic opening up which is great, but we're still not seeing the Asia routes and that is the.

The thing that we really don't expect to see until 2023, which means you're not going to get a full recovery until probably the end of 2023 back to 19 levels at Collins.

Alright, thanks very much.

Okay. Your next question is from the line of Noah <unk> with Goldman Sachs.

Hey, good morning, everybody.

Morning Noah.

The updated full year 'twenty one guidance.

I think has the March the segment margin down sequentially in every segment.

Yes.

Sort of wondering broadly how much of that is conservatism versus.

Specific headwinds and I guess in Collins in particular.

The margin and the EBIT dollars have to be down a decent amount in <unk>, even with revenue is still up.

Notwithstanding the headwinds you've cited here.

If you could walk us through why that happens.

Sure. Thanks.

Not conservatism I don't believe I think we've got this reasonably calibrated, but let me take you through each business unit.

So at Collins, if you are doing the math, which it looks like you've done Noah you'll see margins in the 9% range in the fourth quarter. There were a couple of items in the third quarter that helped Collins to the tune of about <unk> <unk>. We had a land sale. We also had a worker's comp adjustment that was favorable those two items. If you adjust for them would get <unk>.

<unk> third quarter Ros in the neighborhood of 9%. So I think we see flattish margins for Collins between Q3 and Q4.

The margins are sequentially down that's largely on higher.

<unk> hundred 20, Neo in fact, all of our GTS.

Deliveries will be higher in the fourth quarter than the third quarter. So the negative engine margin headwind will persist and then similarly, we will see continued <unk> and SG&A.

Just a little bit to both those companies colleagues are proud have done a really nice job to control the spending but it was back end loaded as we positioned ourselves to adjust depending on how the year turned out.

For RIS, we'll see margins around 10%, we should see continued productivity there.

So no major changes there at R&D <unk>.

They will exit the year around 12%.

Pretty much in line with the third quarter I'll point out for both RIS and R&D. There are four fewer days in the fourth quarter of this year than there were in last year, and so that will give us a little bit of just headwind but of course, that's just that's just timing.

Given your comments on wide body, and then what's happening with the <unk> hundred 20.

Do we need to all be calibrated too.

With respect to the aerospace business margins do we need to be calibrated to.

A non linear path to the 2025 targets I guess, specifically next year, if if wide body is still a bit slow in <unk> hundred 20 is ramping and craft.

No I think we've been talking about this for almost two years now since the pandemic started the recovery is going to be I'll call. It lumpy in fact and that depends on the routes. The airlines and clearly wide body is going to be a big piece of that so I do think there will be a little lumpiness to the margin trajectory.

Keep in mind that Greg just talked about the 77 Thats a huge revenue contributor not a big margin contributor until you get into the aftermarket. So I think thats a fair assumption, we will certainly be back here in January to give a little more color on what 'twenty looks like for US based on what we see during the fourth quarter.

Okay. Thanks, so much you bet.

Your next question is from the line of Robert <unk> with <unk>.

Vertical research.

Good morning, Ralph Good morning.

Greg a couple of months ago, you signed it's perhaps a little bit skeptical about <unk> hundred 20 ramp plans, but today you said I've been happy about it. So I was wondering if you could maybe elaborate on your latest thoughts on this and whether you do feel more comfortable on the <unk> hundred 20 now.

Yeah, Rob I would tell you.

I remain somewhat skeptical about reach 75, I think thats just natural I think you'll you'll hear it from the leasing companies.

Out there theres, probably not demand unless it comes up.

Boeing's.

Good.

Airbus ramps up production Boeing will ramp up for <unk>.

It is are we really going to see.

A market that will support.

Call It 50 $737 75.

<unk> hundred Twenty's on a monthly basis at a 125.

Airplanes a month.

Again, it could happen, we'll be ready to support Airbus our customer if indeed, it does but I would tell you that our plans are five year plans do not anticipate getting to that kind of rate.

And by 2020 for 2025 again, maybe we're being conservative.

But again, we will support the customer.

Demand is there.

That's great. Thank you very much.

Your next question is from the line of Doug Harned with Bernstein.

Good morning, Thank you.

Honda.

I wanted to follow up on on what.

Rob was talking about there because if you look at the <unk> hundred 20 family I guess there are two things here.

I know you you said.

Expressed some skepticism about the planned rate increase.

Your CFM counterparts have also done that some in the customer community have.

Boeing has everybody could have different motivations here, but when you go forward.

They are.

They are holding fast to this production plan.

How does this break in other words, when do you or your counterparts say, okay. We will facilities for 70, a month and make that investment.

How does this process move forward.

So keep in mind on the a 320 family.

That is a shared platform between CFM and Pratt Whitney.

So our goal here is to make.

Make sure that we have the most.

Profitable share.

Share of that business.

So again, we will.

Continue to sell the engines, where we think we can make the most money.

But again, we're not going to chase every last engine campaign.

To get to a higher rate. So we want to be disciplined on pricing and again, if the demand is really there.

We're out talking to customers every single day.

If the demand is there if the Gilman Airbus are correct.

We will get our fair share maybe it wont be 50%, maybe it will be 45%, maybe it would be 40%, but we will get our fair share of whatever the ultimate demand is.

Well if I can just follow on on that because one other thing that's going on right now is that Airbus deliveries are lagging production today, and they've probably 130 plus airplanes parked.

And the majority would be in the <unk> hundred 20 family how does that affect.

<unk> you if you have this gap in deliveries and production at Airbus in terms of your deliveries of engines to them and then you're planning for the next few quarters.

We do not foresee a gap in our delivery profile for.

For the Airbus engines were continuing to produce and in fact as I just said in the fourth quarter I expect them to go up sequentially.

As you know Airbus has a huge backlog for the <unk> hundred 20.

And they're working with their customers as we are.

To make sure they take delivery not going to get into predicting how many they will deliver but we don't foresee any gaps in our engine delivery profile.

So you can think about that Doug they've got thousands of 730, <unk> hundred <unk> and backlog and the fact that there is a few parked that's just really the state of the airline industry today that some of the some of the airlines are looking for financing, but we don't see any any interruption in the production rate as Neil said it will continue to go up both this year and next.

Okay very good thank you.

Your next question is from the line of Myles Walton with UBS.

Thanks, Good morning.

Gregg or Neill.

I was wondering how are you quantifying.

<unk>.

Sort of the risk around the vaccine mandated within your operation and in the supply chain and also.

I guess, what's the bigger supply chain issue, that's hitting you know is it people.

Is it raw material.

Chips.

And sort of what's the growing whereas can what's the fading risk. Thanks.

Yeah.

So Myles and.

And that $275 million.

Number we threw out before in terms of supply chain impact to the year.

The people part of it is about a third so that's.

We are expecting some level of disruption some level of challenge in the supply chain just because there keep in mind, it's not just the prime contractors, but it's also all of our subcontractors that need to follow the mandate as well so we are expecting.

Some minor level of disruption that this is not huge in the Grand scheme of $64 $5 billion of revenue, but there will be some expected impact as we get closer to the.

The deadline date of December 8th.

This could pick up so were monitoring it we are out talking to all of our key suppliers were talking to our customers.

And we're just share trying to stay on top of on top of that as far as shortages.

People are a piece of it but I would tell you.

Also raw materials and while we have good coverage under long term agreements, we've seen lead times double.

So some of these raw materials.

Chips, not a huge issue for us I think again, we've got adequate supply.

But it's always a watch item out there logistics.

To pick up material getting the material in has also proven to be a challenge but look.

In the Grand scheme of our T X I, just don't think it's going to be a meaningful or material impact on us for the year, we're managing it pretty well we've got a <unk>.

A robust team and supply chain and operations that are all over this.

We'll just we'll keep managing through it.

Alright, thank you.

The next question comes from the line of Mark Mcgarry with Wolfe Research.

Hey, good morning, Thank you for the time.

Neil can you spend a little bit more time on cash flow and working capital.

Through the end of the year.

And then how that sets up for your working capital into next year, and then related on the Capex trend. This year is that pushing capex or is that capex going away.

Good morning. Thanks for the question. So let me just share a couple of thoughts around.

The free cash flow, we obviously took the range up the bottom end by half a billion dollars on a couple of things one improved profit and to.

Lately lower Capex issue as you pointed out year to date working capital has been an outflow and that's pretty typical for us. So we're expecting the fourth quarter.

At least 1 billion and a half of positive working capital again, a lot of that comes from the defense side of the business as we receive receipts from our customers cash receipts that is.

So we feel pretty good that we will continue to see.

Our net working capital.

It could be a little.

Yeah.

The number we talked about at the beginning of the year as we make sure we have an appropriate amount of buffer stock.

Tastic job of managing inventory as we recover through this this this cycle. So I'm very happy with that in terms of the timing of the Capex, We've got a big ramp in the fourth quarter.

Which is also typical for us I.

I do think that some of the savings we're seeing this year could slip into next year, particularly around our large structural projects.

But the good the good news is were completing those projects within budget.

Thank you.

You bet.

Your next question is from the line of Matt Akers with Wells Fargo.

Hey, Thanks, good morning.

Good morning, guys can comment a little bit about fuel fuel prices and just sort of the uptick.

Year to date is that starting to flow through at all into your customer behavior on the commercial side either.

Kind of flying some of the the older aircraft differently or maybe potential demand for new aircraft to kind of get the fuel efficiency savings and anything youre seeing from your customers there.

Not really any impact except we have seen pricing going up I think if you were out buying a ticket today.

Fly any place youre going to see the prices have gone up significantly from what we saw this summer so while fuel prices are up oil north of $80 a barrel.

We believe that the airlines are being you are able to pass along those higher fuel cost in the form of higher ticket prices. Obviously, if it's a prolonged increase it does drive demand for next generation aircraft.

And right now of course, there's a lot of a lot of aircraft out there still sitting on the ground. So.

I wouldn't expect it would be a near term impact like that but clearly.

The airlines.

Raising prices to compensate for the for the higher fuel costs.

Got it thank you.

Your next question comes from the line of Cai von <unk> with Cowen.

Yes. Thank you very much so great results.

So.

The F 35 peak production target as you know has been brought down.

And supply chain has emerged as a bigger issue recently, you mentioned 275, but maybe could you give us color on where the supply chain issues are.

The biggest worry.

Secondly, kind of what the F 35 rate impact does to you because clearly it looks like it does quite a bit to the prime.

Okay. So as we think about going down from roughly what 16 engines amongst down to 13 engines of months. It will have an impact on Pratt.

But again it is.

As I think about the $1 35, it's a small piece of our overall defense budget, it's not.

When you were talking.

Call it $10 million in engine, so you're going to lose $30 million.

A month. So you may lose 350 $360 million of revenue going forward again, the defense backlog of $65 billion is just not that significant obviously, it's a much more.

Important to the to the prime that particularly.

You see those kinds of.

Our reductions in terms of specifics on supply chain I don't know that I could point to a single supplier that is.

Other than again, it's components raw materials.

Think about aluminum.

Prices going up.

Steel all of the the basic raw materials lead times are pushing out and it's just harder to get material in the door on time.

And we're also seeing of course labor shortages in our supply chain, which is also slowing down input.

That's a that's going to be a continuing problem into next year and the vaccine mandate, probably not going to help that although we've actually made it probably will help us on the commercial aerospace side, if everybody gets vaccinated. So.

We're all for that.

Got it.

Let me just yes.

Yes.

Let me just add one thing on F 135 rates.

Keep in mind that.

The production engines, but Theres also power mods and pieces that Pratt makes that.

Support the aftermarket and so youll get one one and a half equivalent engines.

Per months on top of sort of production rate. So it will be a little below the 16, a month, but all of that has been calibrated in our long term outlooks and we talked about earlier this year. So.

Certainly a little bit lower on the production side, but not not a full drop.

So I just wanted to kind of add that extra point therefore, you.

Terrific and then on the supply chain, Greg you mentioned raw materials to what extent do you have raw material price escalators in your contract.

So typically as you know we've got.

The protection from say abnormal escalation in our contracts. So there is a dead band in terms of inflation.

For most of the contracts, but we also for most of those raw materials. We also have long term supply agreements, which cover us.

For the vast majority of the materials. So we're not seeing the impact today of all of the I would say spot prices.

For materials that you might otherwise be thinking about most of that is coming in under LTA.

These prices persist long term then we will see.

See an impact it again.

The extent to the extent that that is greater than these dead bands will be able to pass it on to recover that through our through our contracts right.

Some numbers on that Cai, 90% of pratt's products onto our LTA.

Probably 70% at Collins and so on average we're about 80% protected so.

And as Greg said in the near term.

Not a major issue for us.

Terrific. Thank you very much.

Welcome.

Your next question is from the line of Kristine <unk> with Morgan Stanley.

Hey, good afternoon guys.

Thank you.

Hi, good morning.

Boy with defence stable and aerospace recovery coming along nicely can you discuss your capital deployment priorities and how are you thinking about the portfolio and M&A at this point in time.

Sure I think.

For US right now there is there is no news there is no change I would say in the focus on the.

$5 billion next year will probably be closer to $6 billion of investments between Capex and A&D.

That is the first priority is to invest for the future of the business at the same time, we will continue to take up share buyback over the next couple of years, we've got to do another $6 billion of share buyback to hit that $20 billion a ton.

Target that we've got out there and we fully expect to be able to do that if not a little bit more.

And again, we've got a lot of flexibility with the balance sheet at seven $5 billion of cash to be there at the end of the third quarter.

And we've got plenty of liquidity, if we decide we want to make some other investments, but for the time being we're going to focus on generating cash investing in A&D.

Investing in the business and growing it.

Great. Thanks, Greg.

Okay.

I'd now like to turn the call back over to Mr. Hayes for closing remarks.

Okay. Thank you Mr. Han and thank you everyone for listening in.

Good quarter, I hope everyone would agree.

Neil and Jennifer and the team will be available all day to day to take your questions. So thanks very much for listening in and take care.

Bye bye.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

Q3 2021 Raytheon Technologies Corp Earnings Call

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