Q4 2021 Raytheon Technologies Corp Earnings Call

Good day, ladies and gentlemen, and welcome to the Raytheon technologies fourth quarter 2021 earnings Conference call.

My name is Lisa 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.

Www Dot Archie X dot com.

Please note, except where otherwise noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments.

Non reoccurring and or significant items, often referred to by management as other cities.

Difficult items.

The company also reminds listeners that the earnings and cash flow expectations and any other forward looking statements provided in the call are subject to risks and uncertainties.

Rtc's SEC filings, including its form 8-K.

Q and 10-K provide details on important factors that could cause actual results to differ materially.

As anticipated in the forward looking statements.

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With that I will turn the call over to Mr. Hayes.

Alright, Thank you Lisa and good morning, everybody.

Tuesday.

2021 was an important year for Raytheon technologies as we laid out our strategy at the beginning of last year and that strategy of course is to drive topline growth margin expansion and robust free cash flows through 2025 and beyond while at the same time continuing to invest in our businesses and returning significant capital to shareowners.

Our continued focus on operational excellence and program execution, along with our industry, leading technologies positions us well to continue to capitalize on the commercial aerospace recovery and to grow our defense franchises.

As you saw from our press release. This morning, we delivered another solid quarter with strong full year financial results with both top and bottom line growth and $5 billion of.

Free cash flow, that's more than double of what we delivered in 2020 on a pro forma basis.

Our performance in 2021 gives us confidence in the long term fundamentals of our businesses and that we're able to.

We're on track to deliver to the 2025 targets that we outlined last may at our Investor Conference.

Before I turn to the highlights let me first provide some comments on the current market environment.

During the quarter commercial air traffic remained resilient. Despite the omicron variant with global available seat miles ASM is growing about 1% sequentially in Q4.

That's reflecting a continued recovery in air traffic despite the typical seasonal trends.

Here in the U S passenger traffic through TSA checkpoints also remained steady.

We had about $1 9 million passengers per day.

That's up almost a 125% versus the fourth quarter of 2020, a remarkable recovery.

On the defense side, we're pleased to see the President signed a bipartisan defense authorization Bill into law at $740 billion, that's about $25 billion higher than the original presidential request.

And given the global threat environment, we continue to see strong demand internationally for our products and services.

Our focused aerospace and defense portfolio, along with our $156 billion backlog gives us confidence in our ability to grow the business in 2022 and beyond.

Okay, turning to slide to some highlights from the fourth quarter.

As I said, we delivered strong financial performance in 'twenty, one organic sales grew 1%, which is in line with our expectations.

Adjusted EPS and free cash flow for the year were both above our initial expectations and importantly, we saw margin expansion in all four of our businesses with strong commercial aftermarket.

Our defence backlog remained robust at over 63 billion.

We're RIS an RMT both ended the year with book to Bill slightly above one point, though.

In addition to several large awards earlier in the year. We also had several notable awards during the fourth quarter, including over $1 $3 billion in classified bookings.

Plus over $670 million for the electro optical infrared awards at RIS as well as $730 million in standard missile tube production awards at RMB.

We also remain focused on operational excellence and program execution to drive structural cost reduction and productivity in our operations.

In 2021, we achieved about $760 million of incremental cost synergies from the <unk> merger, bringing us to over $1 billion since the completion of the merger in April of 2020.

That meets our original merger cost synergy target two years ahead of schedule and there is always of course more to come and more to do there.

It's also worth noting that the Rockwell for the Collins aerospace team achieved over $600 million in total Rockwell Collins synergies since the acquisition in November of 2018.

We're meeting their commitment a year ahead of schedule. Despite the significant downturn in our commercial aerospace business.

We also continued to fine tune our portfolio during the year.

As you know we completed the acquisition of CCAR engineering, and Flightaware, which will expand and enhance our capabilities in key growth areas.

And we completed the divestitures of forced point and in December we completed the sale of Ris's Global training and services business.

On the capital allocation front, we returned $5 3 billion to shareholders in 'twenty one for a total of seven 4 billion. Since we closed on the merger well on track to the $20 billion plus that we've committed to in the first four years after the merger.

As you saw in December our board of Directors also authorized a $6 billion share repurchase program positioning us to continue returning significant capital to shareowners, including at least $2 5 billion of repurchases that we expected to complete in 2022.

In addition to our strong financial performance during the year. We also achieved several notable strategic and operational milestones that I'd like to highlight.

Let me start with Collins aerospace.

The business completed more than 750 lean events in 2021.

By utilizing our best practices from our core operating system. The team was able to reduce labor content on the F 18 heat exchanger by over 30%.

Reducing cost and importantly, creating capacity to <unk>.

To support increased demand.

At Pratt the team introduced the <unk> advantage engine, which reduces fuel consumption and cotwo emissions by a total of 17% compared to the prior generation engines.

It extends the GTS lead as the most efficient power plant for the <unk> hundred 20 Neo family.

The engine will also be compatible with 100% sustainable aviation fuels supporting the aviation industry's goal to significantly reduce emissions in the coming decades.

At both RIS, an RMT they achieve significant program milestones in the quarter ahead of schedule through.

Through strong program execution in RIS, the joint precision approach and landing system program completed delivery on the first L. Rip units 60 days ahead of schedule.

This achievement is given the navy the confidence to certify J pills on the CV and carrier and two amphibious ship classes.

R&D team also successfully completed the initial integration of the spy six radar and the USS jet Jack Lucas in the quarter. This was the first time power simultaneously applied to the entire radar system completing a critical milestone for integration of the ship its combat system and the spy six radar.

So with that let me turn it over to Neil and I will come back at the at the end for a wrap up in Q&A Neil.

Thanks, Greg I'm on slide three I'm pleased with how we finished the year as well as our performance in the quarter, where we continued to see solid growth in organic sales adjusted earnings per share and free cash flow.

Sales of $17 billion were in line with our expectations and were up 4% organically versus prior year on an adjusted basis. Our performance was primarily driven by the continued recovery of domestic short haul international Air travel, partially offset by continued supply chain pressures and lower 787 OE volume.

It's worth noting that the global training and services divestiture at Rs closed in early December resulting in a sales headwind of about $100 million versus our prior outlook.

<unk> earnings per share of $1. Eight was ahead of our expectations, primarily driven by commercial aftermarket strength at both Collins and Pratt as well as favorability in our effective tax rate.

On a GAAP basis EPS from continuing operations was <unk> 46 per share and included 62 of acquisition accounting adjustments and net significant <unk> nonrecurring items and.

And finally free cash flow of $2 2 billion was in line with our expectations and resulted in full year free cash flow of $5 billion, which was $500 million better than our expectations at the beginning of the year, primarily driven by higher net income and lower capex.

With that let me hand, it over to Jennifer to take you through the segment results and I'll come back and share our thoughts on 2020 to Jennifer.

Thanks, Neal starting with Collins aerospace on slide four.

Sales were $4 9 billion in the quarter up 13% on both an adjusted and organic basis, driven primarily by the continued recovery in commercial aerospace end market by channel commercial aftermarket sales were up 47% driven by 59% increase in parts and repair a 52 per.

<unk> increase in provisioning and a 17% increase in modification and upgrade.

Sequentially commercial aftermarket sales were up 10% driven by strength in parts and repair.

Commercial OE sales were up 4% with strength in narrow body offsetting headwinds from lower 787 delivery and.

Military sales were down 3% on another tough compare.

Cowen military sales were up 7% organically in the same period last year.

Decline in the quarter was driven primarily by lower F 35 volume.

Adjusted operating profit of $469 million was up $380 million from the prior year.

Drop through on higher commercial aftermarket sales more than offset higher <unk> and SG&A expense.

Shifting to Pratt <unk> Whitney on slide five sales of $5 1 billion were up 14% on an adjusted basis and up 15% on an organic basis, driven primarily by the continued recovery of the commercial aerospace industry.

Commercial OE sales were up 32% by higher GTS deliveries within Pratt large commercial engine business as well as general aviation and Biz jet platforms at Pratt Canada.

Commercial aftermarket sales were up 28% in the quarter with legacy large commercial engine shop visits up 30% and Pratt Canada shop visits up 37%.

Sequentially commercial aftermarket sales were up 17%.

In the military business sales were down 6% as expected on another difficult compare recall Pratt military sales were up 18% in the same period last year.

The decrease in the quarter was driven by lower spare sales and legacy program.

Adjusted operating profit of $162 million was up $57 million from the prior year.

Through on higher commercial aftermarket sales volume more than offset lower military volume higher SG&A A&D and the impact of higher commercial OE volume.

Turning now to slide six alright.

Alright, yes sales of $3 9 billion were down 2% versus prior year on an adjusted basis and down 1% on an organic basis, reflecting four fewer workdays in the fourth quarter of 2021 versus the prior year.

Adjusted operating profit in the quarter of $400 million was up $39 million versus prior year, primarily driven by higher net program efficiencies.

<unk> had $3 4 billion of bookings in the quarter, resulting in a book to build of <unk> 97, and a backlog of $18 billion. In addition to the significant bookings that Greg discussed.

<unk> also booked $227 million for the next generation Jammer mid band program in the quarter RIS is book to Bill for the year with 1.01.

Turning now to slide seven R&D sales were $3 9 billion down 10% on an adjusted basis and down 8% on organic basis, primarily driven by four fewer workdays in the quarter as well as lower material receipts and expected declines in several international production contracts adjusted op.

<unk> profit of $486 million with $93 million lower than the prior year, driven by lower net program efficiencies and lower sales volume.

RMB bookings in the quarter were approximately $3 2 billion, resulting in a book to build of eight 3% and backlog of 29 billion.

In addition to the SMT bookings, Greg mentioned, RMB also but $269 million for evolved sea Sparrow missile black too.

R&D is book to build for the year with 1.0 to.

Before moving on I would also like to comment on the previously disclosed Doj investigation into cost accounting matters at legacy Raytheon company's former integrated defense system business or Ibs, which is now part of R&D.

As youll see in our upcoming 10-K filing we have made progress in our internal investigation into the matter and we now have determined that there is a probable risks of liabilities for damages interest and penalties. In addition to the amount recorded in the first quarter of 2021 in connection with the Finalization of purchase accounting we record.

And an incremental accrual in the amount of $147 million during the fourth quarter relating to the matter, bringing our total reserve to approximately $290 million.

We still do not currently believe the resolution of this matter will result in a material adverse impact to our financial condition and we will continue to cooperate with the government's investigation with that I'll turn it back to Neal to provide some color on the rest of the year.

Thank you Jennifer I'm on slide eight.

So before I get into the specifics of our 22 financial outlook. Let me give you some perspective on how we're thinking about the environment as we look ahead. So.

Let me start with the positives despite the impact of Covid variance, we expect the commercial aerospace recovery will continue into 2022 with continued growth in commercial aftermarket and narrow body OE deliveries driven by further strength in domestic traffic and growth in international traffic.

By the end of the year, we are assuming global rpm's recovered to about 90% of 2019 levels with domestic travel recovering to be approximately in line with the 22019 levels and in international travel recovering to between 75 and 80% of 2019 levels.

The reopening of international borders specifically in the Asia Pacific region, and the related widebody traffic will be a significant factor in the timing and extent of the related aftermarket recovery ultimately the timing and trajectory of the overall recovery this year isn't likely to be linear and it will depend on our customers' fleet decisions and buying behavior.

Looking longer term, we continue to expect commercial traffic to returned to 2019 levels by the end of next year.

On the defense side, we expect continued organic growth in 2022, as we deliver on our $63 billion backlog continued bipartisan support for the fiscal 'twenty, two defense budget and international demand for our products and technologies.

And across our TX, we remain laser focused on driving operational excellence to deliver cost reduction and further margin expansion, including $335 million of incremental RPX merger cost synergies during 2022, and this keeps us on track to achieve $1 $5 billion in gross cost synergies by Q1 of 2024.

On the challenges side, we anticipate the global supply chain and inflation pressures will continue and that 787 build rates will remain low with respect to the supply chain, we anticipate that COVID-19 related.

Labor disruptions will persist through the first half of the year, but will ease through the second half of the year.

And as we've discussed a significant portion of our material spend is under long term agreements that said, we're assuming a level of inflationary pressure across our businesses and our outlook that will be partially offset by productivity improvements and of course, we're continuing to monitor the U S and global tax environment, and the current and potentially protracted continuing resolution.

So with that backdrop, let me tell you how this translates to our financial outlook for the year.

Let's turn to slide nine.

At the <unk> level, we expect full year 2022 sales of between 68, 5% and $69 5 billion.

This represents organic growth of between seven and 9% year over year.

Keep in mind, the sale Ras's global training and services businesses creates about $1 billion of sales headwind year over year as well as the associated profit.

From an earnings perspective, we expect adjusted EPS of $4 60.

To $4 80 up 8% to 12% year over year.

And we expect to generate free cash flow of about $6 billion.

That's up about 20% versus 2021.

It is important to note.

That this free cash flow.

<unk> flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is deferred beyond 2022, which as we've said before the free cash flow impact of this legislation is approximately $2 billion.

It's also worth noting that if the legislation does not differed youll see about a <unk> <unk> EPS benefit as well from the impacts of the R&D capitalization that would have components would have on components of our U S taxable income.

And as Greg mentioned, we expect to buy back at least $2 $5 billion of <unk> shares over the year subject to market conditions.

With that let's move to slide 10 for the segment outlooks.

At Collins, we expect full year sales to be up low double digits and adjusted operating profit to grow between $650 $800 million versus last year. This was primarily driven by higher narrow body OE deliveries and growth across all three commercial aftermarket channel supporting both narrow and wide body aircraft.

And military sales at Collins are expected to be up low single digit for the year.

Turning to Pratt and Whitney, we see full year sales growing low double digits versus prior year, principally driven by higher OE deliveries in both perhaps large commercial engines and Pratt Canada businesses as well as continued growth in legacy large commercial engine and Pratt Canada shop visits.

Military sales at Pratt are expected to be down mid single digits, driven by lower F 35 production inputs, partially offset by higher F 35, Sustainment volume.

With respect to operating profit, we see perhaps adjusted operating profit growing between 500 $600 million versus last year, primarily on higher aftermarket volume and partially offset by higher large commercial OE engine deliveries and lower military volume.

Turning to RIS we.

We expect full year sales to be down slightly versus prior year on a reported basis and to grow low single digit on an organic basis with strength coming from classified programs and production ramps and airborne ISR in AWS.

And we expect year over year adjusted operating profit at <unk> to be flat to up $50 million driven by higher net program efficiencies and volume.

In R&D, we see sales growing low single to mid single digit driven by growth across multiple programs and for adjusted operating profit to be up in the range of $150 million to $200 million versus prior year, driven by improved program performance and the volume.

It's worth mentioning that we expect both <unk> and R&D to again have a book to bill greater than one point over the year and.

And finally, we expect intercompany sales of <unk> to grow in line with total company sales I will note that we've included in our outlook some of the below the line items and pension in the webcast dependencies.

So turning now to slide 11 for our 22 adjusted EPS walk.

Starting with the segments, we expect the segments to generate about 83 cents of EPS growth at the midpoint of our outlook range from their pension will be a headwind primarily due to lower Cas recovery and higher discount rates.

<unk> rate in 'twenty, two is expected to be between 18, 5% and 19% versus the 15, 5% in 2021, primarily due to onetime tax benefits associated with the prior year optimization of our legal entity and operating structure that we realized in the third quarter that will not repeat this will result in a <unk> 19 headwind.

We expect corporate expenses to be a <unk> <unk> headwind year over year due to higher investment related RPX synergy projects and digital transformation initiatives that are partially offset by lower <unk> spend.

And finally lower share count interest and other items are expected to be a <unk> <unk> tailwind.

All of this brings us to our outlook range of $4 60 to $4 80 per share.

Now turning to free cash flow on slide 12.

We expect strong operational growth along with lower restructuring to contribute about $1 5 billion of free cash flow growth in 2022.

These will be partially offset by expected pension headwinds and higher cash taxes to get to our free cash flow outlook of about $6 billion again. This outlook assumes the legislation requiring R&D capitalization for tax purposes is deferred and lastly, before turning it back to Greg a couple of comments on the first quarter.

With respect to sales, we expect sales to be up mid single digit organically versus prior year, driven by the continued commercial aerospace recovery and partially offset by lower defense sales driven by continuing supply chain pressures and the impact of almond crop.

And again just to remind you. The prior year included Q1 sales of about $200 million as well as the associated profit for the divested <unk> services business.

The adjusted EPS side, we see low double digit to mid teens growth in the quarter versus prior year and for cash we expect to see an outflow of about $500 million in the quarter due to typical seasonal factors and the timing of collections. So with that let me hand, it back to Greg to wrap things up.

Okay. Thanks, Neil we're on slide 13, so a lot of moving pieces as always but I would tell you.

Actually exited 2021 was really good momentum across the businesses.

And we expect to make further progress on our priorities here as we enter into 2022.

First and foremost let me repeat that we're focused on keeping our employees safe keeping our commercial customers flying and protecting the warfighter wildly defend our country and allies and of course supporting our suppliers.

Speaker 1: We're also going to continue to invest in differentiated technology and innovation to maintain our industry-leading positions, which will drive growth over the long term, and of course, to capitalize on our growing end market.

We're also going to continue to invest in differentiated technology and innovation to maintain our industry, leading positions, which will drive growth over the long term and of course to capitalize on our growing end markets.

Speaker 1: At the same time, our leadership team is making significant progress to reduce structural costs, drive operational efficiency through our core operating system, and to deliver on our synergy commitments. Finally, we remain...

At the same time, our leadership team is making significant progress to reduce structural costs drove operational efficiencies through our core operating system.

And to deliver on our synergy commitments.

Finally, we remain disciplined with capital allocation, but.

Speaker 1: We've got a very strong balance sheet, along with our cash-generating capabilities, supports investments in our businesses, and our commitment to returning capital to shareholders, including at least $20 billion in the first four years following the merger, as I said earlier.

So a very strong balance sheet, along with our cash generating capabilities supports investments in our businesses.

And our commitment to returning capital to shareholders.

<unk> at least $20 billion in the first four years following the merger as I said earlier.

Speaker 1: I'm confident in our ability to deliver both top and bottom line growth and margin expansion across our businesses this year as we continue to leverage the growth opportunities that you heard from the CEO andsellers today can be hyped with Descent Governor TimWhereas the trying to be skilled and knots out there may seem Noscomments in preparing top and bottom

I am confident in our ability to deliver both top and bottom line growth and margin expansion across our businesses. This year as we continue to leverage the growth opportunities are in front of us. So.

Speaker 1: So with that, let's turn it over to Lisa, and we'll take whatever questions you might have.

So with that let's turn it over to Lisa and we will take whatever questions you might have.

Thank you.

Speaker 2: At this time, I would like to remind everyone, if you would like to ask a question, please press star 1 on your telephone keypad. In the interest of time, and to allow for broader participation,

At this time I would like to remind everyone. If you would like to ask a question. Please press star one on your telephone keypad.

Of time to allow for broader participation.

To limit yourself to one question.

The first question will come from the line of Sheila <unk> with Jefferies.

Speaker 3: Hi, good morning, Greg, Neal, Jennifer, thank you. Morning. So, free cash flow is guided to $6 billion this year, up from $5 billion last year, and 20% growth. And you have a pretty consistent cadence of free cash flow growth for your 2025 target of $10 billion, despite, you know, pension headwind of $1.3 billion. Maybe if you could get into the different buckets and different impacts as we get into that 2025 $10 billion free cash flow number.

Hi, Good morning, Greg Neil Jennifer Thank you.

Good morning.

Free cash flow guidance this year up from five last year.

20% growth and you have a pretty consistent cadence of free cash flow growth for your 2025 target.

<unk> 10 billion, despite no pension headwind of one three.

Maybe if you could get into the different buckets.

And definitely.

Impact as we get into that $2025 $2 billion of free cash flow number.

Speaker 4: Thanks, Sheila. Good morning. It's Neil here. You know, as we think about the walk from where we are today to 2025, as we've said before, the majority of that is going to come from the operating profit growth that we'll see in the segments as we continue to go through the

Thank you Sheila good morning, Neil.

Here.

As we think about the walk from where we are today to 2025 as we've said before the majority of that is going to come from the operating profit growth that we'll see in the segments as we continue to go through the.

Speaker 4: We go through the recovery here, probably a little bit north of $7 billion. If you were to strike 2021 as a starting point, you'll see there's $1.6 billion of pension headwind and we'll probably have somewhere in the range of $600 to $700 million of capex headwind. And that'll be partially offset by a couple hundred million of corporate and other items. So still see a clear path to the $10 billion of free cash flow as we get into 2025 and we get through the recovery here. Feeling very good about that.

We go through the.

Recovery here are probably a little bit north of $7 billion.

You were to strike 2021, as the starting point Youll see Theres, a $1 billion six of pension headwind and we will probably have somewhere in the range of $6 to $700 million of Capex headwind and that will be partially offset by a couple hundred million dollars of corporate and other items. So still see a clear path to the $10 billion of free cash flow as we get into 2020.

Five and we get through the recovery here feeling very good about that.

Speaker 2: Your next question comes from the line of Robert Stoller with Vertical Research.

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

Thanks, so much good morning.

Speaker 5: This might be a question for Greg. I was wondering if you could maybe give us some more colour on the supply chain situation. Have things got any worse since what you experienced in Q4? And then in relation to that, how are you getting all the supply chain in place for the A320 ramp that's planned for this year? Thank you.

Alright.

This will be a question for Greg I Wonder if you could maybe give us some more color on the supply chain situation, if things got any worse since what you experienced in Q4 and then in relation to how you are getting all the supply chain in place for the <unk> hundred 20 ramp. This plan for this year. Thank you.

Speaker 1: Yeah, Rob, that's a really good question. And I think RTX, just like many other...

Yes, Rob that's a really good question and I think <unk> just like many other.

Speaker 1: large companies has seen its share of supply disruptions, I would say, and it's really, I would bucket it in two different ways. One is in our supply chain, we see some labor shortages and with skilled positions, and I can think of probably the most important one right now is in the casting.

The large companies has seen its share of supplier supply disruptions I would say.

And it's really I would I would bucket it in two different ways. One is in our supply chain, we see some labor shortages.

With skilled positions that I can think of probably the most important one right now is in the casting.

Speaker 1: castings where we see a shortage of welders and so we're working with our with our suppliers to make sure that we can get demand or get supply back up to to demand. It's not going to happen here in the first quarter. We see that we're going to have a slow Q1 as Neil said primarily at Pratt that'll also impact a little bit at

Casting is where we see a shortage of welders and so we're working with our with our suppliers to make sure that we can.

Demand or get supply back up to demand its not going to happen here in the first quarter, we see that we're going to have a slow Q1 as Neil said.

Primarily at Pratt that'll also impact a little bit at Collins.

Speaker 1: We're also seeing, I think, as we talked about, a slowdown of receipts.

We're also seeing I think as we talked about a slowdown of receipts on the defense side of the business. We saw that in December that's gotten a little bit worse than what we had seen at the end of the third quarter I would say, there's two pieces to that obviously, the omicron variant had a significant impact or not.

Speaker 1: On the defense side of the business, we saw that in December . That's gotten a little bit worse than what we had seen at the end of the third quarter. And I would say, again, there's there's two pieces to that. Obviously, the Omicron variant had a significant impact on our work, not just our workforce, but our suppliers workforce.

Not just our workforce, but our suppliers workforce.

Speaker 1: But also again, the labor shortage that we're seeing, as well as the need to continue to drive wages up to attract talent.

But also again the labor shortage that we're seeing as well as the need to continue to drive wages up to attract talent.

Speaker 6: Just to put it in perspective, we've got about 13,000 product suppliers. We are monitoring the supply chain on a daily basis. There are less than 100, I would say, out there that are giving us real concern. But, you know, it only takes one to make us miss a shipment. So we're actively trying to manage this. I think we're doing a good job. But we will see some impact here in the first quarter from supply chain. Thank you.

Just to put it in perspective, we've got about 13000 products suppliers.

We're monitoring the supply chain.

Daily basis. There was listed 100, I would say out there that are giving us real concern.

But it only takes one to make us Miss of shipments. So we're actively trying to manage this I think we're doing a good job, but we will see some impact here in the first quarter from from supply chain.

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

Okay.

Thanks, Good morning, everyone.

David pointed David.

Greg Neil maybe could you touch on the.

The moving pieces.

The implied incremental margins at Collins, and Pratt looks like Collins kind of in the mid Thirty's proud in the mid <unk> I guess on Collins, what youre assuming for A&D.

What's hitting the range that we might have expected and then on Pratt.

The negative engine margin that youre expecting in 2022 relative to 2021.

Speaker 4: Thank you, David. Let me start with Collins. So you're right on the incrementals. We're expecting incrementals in that mid 30s, you know, percent range as we go through the year.

Thank you David.

Let me start with Collins, So youre right on the Incrementals were expecting incrementals in that mid <unk> <unk>.

<unk> range as we go through the year.

Speaker 4: Recall we called out a few one-time items last year that probably helped margins by about 50 basis points. So good strong incrementals there Just hitting on a few of the components of our Collins outlook. We do expect

Recall, we called out a few one time items last year that probably helped margins by about 50 basis points. So good strong incrementals there just.

Just hitting on a few of the components of our Collins outlook, we do expect that our commercial OE will be up sort of high teens on the sales line.

Speaker 4: that our commercial OE will be up sort of high teens on the sales line, commercial aftermarket up around 20 percent or so, probably a little north of that, and military up low single digits. As you think about Pratt, same thing, the incrementals there in the mid 20s, as you expect, you said commercial, are we expected to be up between?

Shall aftermarket up around 20% or so probably a little north of that and military up low single digits as.

As you think about Pratt.

Same thing the Incrementals there in the mid Twenty's as you expect you said commercial OE is expected to be up between.

Speaker 4: 20 and 25 percent of the aftermarket side also between 20 and 25 percent and as we said military down mid single digits, so You know again great growth at Pratt. We do expect to ship probably about 200 more engines

20%, 25% on the aftermarket side also between 20, and 25% and as we said military down mid single digits. So.

Again, great growth at Pratt, we do expect to ship, probably about 200 more engines and.

Speaker 4: And as I think about the NEM headwind, it's in the range of $100 to $150 million. So we're seeing good absorption as we ramp that volume back up.

And as I think about the <unk> headwind, it's in the range of $100 million to $150 million. So we're seeing good absorption as we ramp that volume back up.

Speaker 4: over the course of 2022. And as Greg said, those supply chain issues at Pratt with respect to castings could result in a little bit of, you know, lower deliveries here in the first quarter, but we do expect that full year we will be up a couple hundred engines.

Over the course of 2022 and as Greg said the supply chain issues at Pratt.

<unk> with respect to castings could result in a little bit of.

Lower deliveries here in the first quarter, but we do expect that full year, we will be up a couple of hundred engines.

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

Hi, good morning, everyone.

No.

Speaker 7: Could you spend another minute on sort of how you built the aerospace aftermarket forecast for the year and how you expect it to progress?

Could you spend another minute on it.

Sort of how you built.

The aerospace aftermarket forecast for the year and how you expect it to progress through the year obviously.

Speaker 7: through the year, obviously when Omicron lets up is a huge question mark and there's a wide range of possible outcomes of where travel could be exiting the year versus starting the year. And Neil, last year you kind of framed what you were expecting for the broader ecosystem and then how you layered your own forecast on top of that and the degree of conservatism or lack thereof. So it'd be helpful to hear that from you again today.

<unk> is a huge question mark.

There's a wide range of possible outcomes of where travel could be exiting the year versus starting the year and last year, you kind of framed what you were expecting for the broader ecosystem and then how you layered your own forecast on top of that and the degree of conservatism or lack thereof. So it would be helpful to hear that from you again today.

Speaker 4: Yes, no, let me give that a shot here. So let me start with the macro outlook here. So we talked about our RPM and an ASM assumptions as you get to the end of the year, but a little bit of color on the on the way we see that coming through the year. So if you think about

Yes, let me give that a shot here so let me start with the macro.

Outlook here, so we talked about our RPM in an ASM assumptions as you get to the end of the year, but a little bit of color on the on the way, we see that coming through the year. So if you think about I'll start with ASM sequentially sort of low single digit sequential growth in the first quarter hitting.

Speaker 4: start with ASM sequentially sort of low single digit sequential growth in the first quarter you know hitting the mid 30s q1 to q2 mid-teens you know q2 to q3 and then actually down seasonally in the fourth quarter mid single digit call it

Hitting the mid Thirty's.

Q1 to Q2 mid teens Q2 to Q3, and then actually down seasonally in the fourth quarter mid single digit call. It.

Speaker 4: So, you know, the crux of our outlook as we think about the year really depends on the wide body recovery.

So.

The crux of our outlook as we think about the year really depends on the wide body recovery.

Speaker 4: Last year, I would say about 75% of our aftermarket.

Last year, I would say about 75% of our aftermarket improvement and the improvement that we saw in ASM came from domestic narrow body and this year, we're expecting about 80% of the growth to be driven by international long haul and about 60% of that driven by long haul route. So it's going to be a really important fab.

Speaker 4: and the improvement that we saw in ASMs came from domestic narrowbody and this year we're expecting about 80% of the growth.

Speaker 4: to be driven by international long haul, you know, and about 60% of that driven by long haul routes. So it's going to be a really important factor as we look at the year. If you think about how that translates to the aftermarket sales...

As we look at the year, if you think about how that translates to the aftermarket say.

Sales assumptions.

Speaker 4: you know, the compares are getting a little bit more difficult sequentially given, you know, where we ended the fourth quarter. Um, I would expect Collins to be in the, you know, low to mid single digits sequentially on the aftermarket growth throughout the course of the year. Pratt will see down in the, um, you know, mid single mid to high angle.

The compares are getting a little bit more difficult sequentially, given where we ended the fourth quarter.

I would expect calls to be in the low to mid single digits sequentially on the aftermarket growth throughout the course of the year Pratt will see down in the.

Mid single mid to high single range here in the first quarter as we come off a traditionally high fourth quarter and that grows too.

Speaker 4: range here in the first quarter, as we come off a traditionally high fourth quarter, and that grows to, you know, you know, mid, I'll call it high single digits.

<unk>.

I'll call it high single digits.

Speaker 4: second quarter and mid-cycle digits, you know, through the rest of the year. So hopefully that helps give you a little color on.

Second quarter and mid single digits through the rest of the year. So hopefully that helps give you a little color on what we're saying Greg anything you want to add.

Speaker 1: what we're saying. Greg, anything you want to add? Yeah, you know, I think that the most important part just to reinforce what Neil said is really the our forecast for the aftermarket really is dependent upon a wide body recovery. And as you know, that is primarily a

No I think that the most important part just to reinforce with Neil said is really.

Our forecast for the aftermarket really is dependent upon a wide body recovery and as you know that is primarily a.

Speaker 1: the Pacific reopening. So you have to see China reopening. We have to see all of the countries in the Pacific Rim start to reopen, which will allow traffic to recover.

Pacific reopening so you have to see China reopening we have to see all of the countries in the Pacific rim start to reopen which will allow traffic to recover.

Speaker 1: Your guess is as good as mine with the China zero COVID policy that they have.

Your guess is as good as mine with the China's zero Covid policy that they have.

Speaker 1: Whether or not we'll see that here in the second quarter or the third quarter or the fourth quarter right now We're assuming that second quarter. We start to see it and we'll hopefully see that kind of progression throughout the year

Whether or not we will see that here in the second quarter or the third quarter or the fourth quarter right now, we're assuming that the second quarter, we start to see it and we will hopefully see that kind of progression throughout the year, which will get us back on track to get wide body.

Speaker 1: which will get us back, you know, on track to get wide body back to 2019 levels, hopefully by the end of 2023.

Back to 2019 levels hopefully by the end of 2023.

Yes.

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

Speaker 8: Yes. Good morning, Greg, Neil, Jennifer. Hey, Greg, maybe just switching over to defense, could you maybe just give us a little bit of some of the things you're expecting for maybe on the international side? Historically, Raytheon's had a lot of international awards. What your expectations might be for a book to bill and if you're seeing any kind of increased input from international companies?

Hi, Yes, good morning, Greg.

Hey, Greg maybe just switching over to defense could you, maybe just give us a little bit of.

Some of the things you are expecting for maybe on the international side historically lithium had a lot of International awards, what your expectations might be for a book to bill and if youre seeing any kind of increased.

Input from international countries, just given the rising tension thanks.

Speaker 1: Yeah, it's a good question. And I think the answer is, obviously, we are seeing, I would say, opportunities for international sales. We just have to look to last week where we saw the drone attack in the UAE, which attacked some of their other facilities. Of course, the tensions in Eastern Europe , the tensions in the South China Sea, all of those things.

Yes, it's a good question and I think the answer is obviously we are seeing.

I would say opportunities for international sales.

We just have to look to last week, where we saw the drone attack in the UAE.

Which took some of their facilities.

Retentions in eastern Europe , attentions to the South China Sea all of those things.

Speaker 1: are putting pressure on some of the defense.

Are putting pressure on.

Some of the defense.

Speaker 1: spending over there. So I fully expect we're going to see some some benefit from it. I would say though that

We're spending over there so I fully expect we're going to see some benefit from it I would say, though that.

Speaker 1: So should there be hostilities, whether it's in the Middle East or whether it's in the Asia Pacific region, you're not going to see an immediate benefit here because what you'll see is a reallocation of inventory that we already have out there with the services. But I fully expect we should see a recovery in the future.

Should there be hostilities whether it's in.

The middle East or whether it's in the Asia Pacific region, Youre, not going to see an immediate benefits here because what you'll see is a reallocation of inventory that we already have out there with the services, but I fully expect we should see a recovery in the.

International Defense spending and a book to Bill.

Speaker 1: international defense spending and a book to build well north of one as we move into 2022 and beyond.

Well north of one as we move into 2022 and beyond one of the biggest drivers of course will be <unk> and I think again thats, probably a 2023 benefit will start to see bookings then for <unk>, which of course is the upgrade of the Patriot missile defense system.

Speaker 1: One of the biggest drivers, of course, will be L-TAMS. And I think, again, that's probably a 2023 benefit. We'll start to see bookings then for L-TAMS, which, of course, is the upgrade of the Patriot Missile Defense System. But that'll be, again, a couple.

But that will be again, a couple of years out.

Speaker 4: Greg, maybe if I could just pile on a little bit too, you know, we do see some international GEMT awards at RMD. And as we look at the $29 billion backlog of RMD and the sales outlook that we put out there, which is, you know, low single digit to mid single digit, think 3 to 4% or so year over year at RMD, we're confident that we have the backlog to, you know, continue to grow as we get through 2022.

Greg maybe if I could just pile on a little bit too we do see some international Jim T Awards at RMB and as we look at the $29 billion backlog of R&D and the sales outlook that we've put out there which is low single digit to mid single digit think 3% to 4% or so year over year in R&D.

We're confident that we have the backlog to continue to grow as we get through 2022.

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

Speaker 9: Good morning. I have a question for both of you. A key part of the story is operational improvement as we walk out over the next couple of years. That's going to be a big cash flow driver and a big part of that is the GT app.

Good morning.

I guess a question for both of you.

A key part of the story is operational improvement as we walked out over the next couple of years right, that's going to be a big cash flow driver and a big part of that is the GTS.

Speaker 9: So a question we've been fielding from investors and maybe you can give us some perspective on that.

A question we've been fielding from investors.

Maybe you can give us some perspective on this.

Speaker 9: How can we feel better about the long-term contracts you've put in place to do maintenance on the GTF family of engines?

How can we feel better about the long term contracts you've put in place to do maintenance.

The GTI family.

<unk>.

Speaker 9: where it seems like, you know, time on wing and the hot section maybe hasn't as performed like

Where it seems like time on wing in the Hot section, maybe Hasnt has performed like.

We were hoping it would at first.

Speaker 9: we were hoping it would at first, meaning how can we feel good that those contracts are priced right, be it that they're kind of long-term in nature.

How can we feel good that those contracts are priced right be it the third kind of long term in nature.

Speaker 1: Let me take a shot at it, Ron, then I'll turn it over to the former CFO at Pratt to answer the actual contract question. Maybe just to put it in perspective, to date on the GTF program, we have had more than 12 million flight hours.

So let me take a shot at it and then I'll turn it over to the former CFO of Pratt to answer the actual contract question, maybe just to put it in perspective.

To date under the GTS program, we've had more than 12 million flight hours on that in the last 12 months dispatch reliability has been 90, 996%. So I know that we had a lot of teething problems back in 2016, and 17, and we've talked AD nauseum about all of those teething problems and obviously.

Speaker 1: In the last 12 months, dispatch reliability has been 99.96%.

Speaker 1: So I know that we had a lot of teething problems back in 16 and 17, and we talked ad nauseam about all of those teething problems. And obviously it impacted some of our time on wing, impacted some of those maintenance support contracts. But given where we are from a reliability standpoint today, those programs will start to generate positive cash flow coming up as the show goes on.

It impacted some of our time on wing impacted some of those maintenance support contracts, but.

Given where we are from a reliability standpoint today.

Those programs will start to generate positive cash flow coming up is the first full shop visits happening in the next year or beyond and I actually feel pretty good about where we are on those contracts given the robustness of the current engine of course in 2023, we're going to be delivering the advantage engine, which because of getting better fuel burn.

Speaker 1: the first pull shop visits happen in the next year or and beyond, and I actually feel pretty good about where we are on those contracts, given the robustness of the current engine. Of course, in 2023, we're going to be delivering the Advantage engine, which gives it, again, better fuel burn and, we think, even more durability, which, again, will only benefit those aftermarket contracts.

And we think even more durability.

Which again will only benefit those aftermarket contracts.

Speaker 4: Yeah, thanks, Greg. I'll just add that, you know, the average age of those airplanes is still under three. There's plenty of time. These are long term contracts. We've made significant improvements. You mentioned the durability improvements, and we are factoring that in. Obviously, as we look at those contracts.

Yes, Thanks, Greg.

Greg I'll just add that.

The average age of those airplanes are still under three there's plenty of time. These are long term contracts. We've made significant improvements you mentioned the durability improvements and we are factoring that in obviously as we look at those contracts and I would tell you that.

Speaker 4: And I would tell you that, you know, as we perform warranty type work under these contracts today, we've been reasonably conservative in our outlook and our bookings on that. So we are confident that we're able to, you know, see the improvement fall through the bottom line as those major overhauls begin. And we're also confident that we're able to demonstrate the significant.

As we perform warrantee type work under these contracts today.

We've been reasonably conservative in our outlook and our bookings on that so we are confident that we are able to see the improvement fall through the bottom line is those major overhauls begin and we're also confident that we're able to demonstrate significant.

Speaker 4: efficiencies and fuel savings that come from that engine, and we're seeing that in the campaign activity that we're engaged in currently with the engine. So, feel well-positioned with the product and the GTF advantage, I think, only gets us in a better place as we go forward.

<unk> and fuel savings that come from that engine and we're seeing that in the campaign activity that we're engaged in currently with the engine. So we feel well positioned with the product and the <unk> advantage I think only gets us in a better place as we go forward.

Great. Thank you.

Speaker 2: Your next question comes from the line of Miles Walton with DBS.

You bet. Your next question comes from the line of Myles Walton with UBS.

Thanks, Good morning, Greg I was wondering I'm wondering if you could comment on the F 35.

Speaker 7: Thanks, morning and Greg was wondering if you could comment on the 35 engine program progress through the course of 21. and if you get to a better point, you know, towards the end in terms of resolving some of the issues that have been raised the last 18 months importantly, as sort of the NDA starts building momentum. Potentially towards opening the door to to ATP and maybe being 2nd source in the later part of the decade.

Engine program progress through the course of 'twenty, one and if you get to a better point.

Towards the end in terms of resolving some of the issues have been raised over the last 18 months importantly.

The NDAA starts building momentum potentially towards opening the door to to ATP and GE, maybe being second source in the later part of the decade.

Speaker 1: Okay, Miles, it's a good question, and I would just say a couple of things, a couple of points I would make. First of all, we did make good progress on OEM deliveries last year. We were on contract as we exited the year for F-135 deliveries.

Okay.

It's a good question.

I'll just say a couple of things that a couple of points I would make first of all.

We did make good progress on OEM deliveries last year.

We are on contract as we exited the year for F 35 deliveries.

Speaker 1: And we also made good progress, I would tell you, in the in the shops in terms of supporting the overhauls. I think we had about 80 overhauls of the power modules last year, which is double what we saw in 2020. That number is going to probably double again this year.

And we also made good progress I would tell you.

The shops in terms of supporting the overhauls I think we had about 80 overhauls of the power modules last year, which is double what we saw in 2020 that number is going to probably double again. This year. So again, we feel pretty good about the engine where it is today.

Speaker 1: So again, we feel pretty good about the engine where it is today. Obviously, I think everybody that follows the program understands that you're going to need more power on that engine. You're going to need better fuel efficiency on that engine. And there are two different, there are two choices, I think, in front of the services today. One is to do a upgrade of the current engine. We call that the EEP program, which is an enhanced version of the F-135.

Obviously, I think everybody that follows the program understands that youre going to need more power of that engine, you're going to need better fuel efficiency out of that engine and there are two different there are two choices I think in front of the services today. One is to do a upgrade of the current engine we call that the ERP program, which is.

An enhanced version of the F 135, or you could see a whole new engine.

Speaker 1: Or you could see a whole new engine, which would be the adaptive engine that both GE and Pratt are currently testing.

You'll be the adaptive engine that both GE and Pratt are.

Currently testing.

Speaker 1: Um, of course, you know, those engines are years away. We're talking, you know, late in this decade before you would ever see those on the

Of course those engines are years away, we're talking late in this decade before you would ever see those on the.

Speaker 1: uh... on the aircraft frankly what we think is from a risk standpoint single-engine fighter uh... upgrade of the current uh... engine was probably the most cost-effective lowest risk solution

On the aircraft frankly, what we think is from a risk standpoint, and a single engine fighter.

Grade of the current engine was probably the most cost effective lowest risk solution.

Speaker 1: And again, I think that's something that, you know, we're working with the customer on. We think that is a much lower cost.

And again I think that's something that we're working with the customer on we think that is a much lower cost.

Speaker 1: than the adaptive engines that we're developing. And the adaptive engines are really targeted for sixth-gen fighter, which again, will probably not be fielded until the end of this decade. So again, we've got options. We're working with the customer. The first and most important thing, of course, is to keep the engines that we've got out there flying. And so we're supporting the folks out in the shops around the world, making sure that that happens, and also continuing to drive the...

And then the adaptive engines that we're developing.

The depth of engines are really targeted for sixth Gen fighter, which again will probably not be feel that until the end of this decade. So.

Again, we've got options, we're working with a customer the first and most important thing of course those to keep the engines that we've got out there flying and so we are supporting the folks.

The shops around the world and making sure that that happens and also continuing to drive.

Speaker 1: OEM productions as we mature in the program.

OEM productions.

We.

Mature in the program.

Thanks, Greg.

Your next question comes from the line of Michael Mcgarry with Wolfe Research.

Speaker 4: Hey, good morning. Thank you. Neil, on your cash flow guide, can you break your bridge between 2021 and 2022 down a bit further? Specifically, I'm curious to understand the one point four billion dollar figure for operational growth in CapEx. If you can add some more color if you're not working capital as well. Thank you.

Hey, good morning, Thank you.

Neil on your cash flow guide can you break your bridge between 2021, and 2022 down a bit further.

Specifically.

Curious to understand the $1 $4 billion figure for operational growth in Capex.

Can add some more color maybe around working capital as well. Thank you.

Speaker 4: Yep, sure. So couple couple comments there. The first thing is, if you look at our segment profit guide at the midpoint, that's about a billion four. So think about that being the major driver of that piece of our cash flow walk.

Yeah sure. So couple of couple of comments there. The first thing is if you look at our segment profit guide at the midpoint, that's about $1 billion floor, so think about that being the.

The major driver of that piece of our cash flow walk.

Speaker 4: And you'll see from our guidance about $400 million or so of capital expenditure headwind year over year. So the net of that. That would imply a few hundred million dollars of working capital improvement.

And what Youll see from our guidance about $400 million or so of capital expenditure.

Expenditure headwind year over year, so the net net of that that would imply.

A few hundred million dollars of working capital improvement I think that remains to be determined as we see the year play out so that will either.

Speaker 4: I think that remains to be determined as we see the year play out. So that'll either turn into higher segment.

Turn into higher segment profit.

Speaker 4: Um, as we get later into the year, if we were able to achieve the higher end of our range.

As we get later into the year, if we are able to achieve the higher end of our range.

Speaker 4: And in particular, given the supply chain issues, we could see a little bit of working capital pressure as we bring inventory in a little bit sooner. And again, the timing of that profit recognition and the timing of collections will all play out in the fourth quarter. But I would characterize those as the three, you know, key elements of that piece of our system.

In particular, given the supply chain issues, we could see a little bit of working capital pressure as we bring inventory in a little bit sooner, but again, the timing of that profit recognition and the timing of collections will all play out in the fourth quarter, but I would.

I would characterize those as the three key elements of that.

That piece of our our cash walk.

Thank you.

Welcome.

Speaker 2: Your next question comes from the line of Christine Leewalk with Morgan Stanley .

Your next question comes from the line of Chris Danley Walk with Morgan Stanley .

Hey, good morning, everyone.

Understood.

Speaker 10: Greg, Neil, Jennifer, if we continue to see raw material and labor inflation at elevated levels for longer, how should we think about potential impacts and margins? How much will you be able to pass through with your contracts and how much would the businesses have to absorb?

Greg Neil Jennifer.

Raw material and labor inflation that elevated level for longer.

Should we think about potential impact on margins, how much will you be able to pass through with your contract and how much were the businesses have to absorb.

So.

Speaker 1: So let me start here. First of all, we have seen inflation. Obviously, I think like everybody else, it has been higher than what we expected, I would say, towards the end of last year. As we think about 2022, we've probably got about $150 million of, I would say, price pressure from unexpected inflation in the supply chain.

Let me start here.

First of all we have seen inflation, obviously I think like everybody else has been higher than what we expected I would say.

Towards the end of last year as we think about 2022, we've probably got about $150 million of I would say price pressure.

From unexpected inflation in the supply chain.

Speaker 1: Now typically we enter the year and we'll see about $200 million or so of pricing pressure that we go out and we work to alleviate. The whole goal here is to keep input costs flat year over year, so we go out, we work cost reduction.

Typically we entered the year and we will see about $200 million or so of <unk>.

<unk> pressure that we go out and we work to to alleviate the whole goal here is to keep.

Input costs flat year over year. So we go out we work cost reduction this year, we got a little more work to do that $150 million of inflation impact is baked into the guidance that Neil.

Speaker 1: This year we've got a little more work to do. That $150 million of inflation impact is baked into the guidance that Neil took you all through before, but it's something we're keeping an eye on. Labor inflation, obviously, is also a little troubling. We're seeing it in our own shop.

You all through before.

But it's something we're keeping an eye on.

The labor inflation, obviously is also a little trouble we were seeing it in our own shops. The good news is most of that.

Speaker 1: The good news is most of that we can price in on the government side and and pass that along to our customers. But again, there will be pressure. And what we have to do, of course, is figure out ways to continue to reduce costs. That's why we've got the core operating system to let us go out and find efficiencies in the factories.

We can price and on the government side and pass that along to our customers.

But again, there will be pressure and what we have to do of course is figure out ways to continue to reduce costs. While we've got the core operating system to let us go out and find efficiencies in the factories.

Speaker 6: such that we can get productivity to offset the continued pressure on wages. But again, our hope here is that we're going to see inflation start to slow down here by the back half of this year. And we'll have to keep an eye on it, and again, I think it's everybody's concern across the country right now when you see 7 percent inflation, that's a big headline, and we've got to keep after it. Thank you for the caller, Greg.

So we can get productivity to offset the continued pressure on wages.

But again, our hope here is that we're going to see inflation start to slow down here by the back half of this year.

And we'll have to keep an eye on it.

I think it's everybody's concerned across the country right now and you see 7% inflation, that's a big headline.

We've got it we've got to keep after it.

Thank you for the color Greg.

Interesting.

Your next question comes from the line of Robert Spingarn with Melius research.

Speaker 8: Greg, last week, Secretary of the Air Force Frank Kendall was talking about hypersonic strategy and suggesting that maybe because our targets are different than China's, we need to rethink the strategy, boost glide versus air breathing. And I wanted to ask you your thoughts on this and how this might change the dynamic between Lockheed on the boost glide side and Raytheon on the cruise missile side.

Greg last week Secretary of the Air Force, Frank Kendall was talking about hypersonic strategy and suggesting that maybe because our targets are different in China is we need to rethink the strategy boost glide versus air breathing and I wanted to ask you your thoughts on this and how this.

Might change the dynamic between Lockheed on the boost glide side and Raytheon on the cruise missile side.

Speaker 1: Yeah, I think that's a that is a great question. One. I think that we're all wrestling with right now. And I would tell you, you know, there is

Yes.

That is a great question and what I think that we're all wrestling with right now and I would tell you.

There is.

Speaker 1: I would say several different markets here. Obviously, the boost glide is an interesting market that we saw the Chinese demonstrate that capability. We've also, of course, we've demonstrated our capability to launch a air breathing, which is a

I would say several different markets here, obviously the boost glide.

As an interesting market that we saw the Chinese demonstrate that capability.

We've also of course, we've demonstrated our capability to launch the air breathing which is.

Speaker 1: the hypersonic missile that we did the test on late last year. I think both of those technologies are going to be funded going forward. I think most importantly, however, is what are going to be the defensive systems against hypersonic.

The hypersonic missile that we did the test on late last year I think both of those technologies are going to be funded going forward. I think most importantly, however is what are going to be the defensive systems against hypersonic.

Speaker 1: And again, I think those are the things that will provide us the biggest opportunity, whether that's going to be directed energy, some anti-hypersonic glide vehicles, things that we're working on. There's a lot of money being devoted to this. Unfortunately, most of it, as you can imagine, is classified. We really can't go into what those individual technologies are, but I would tell you that any defense would be a layered defense, where you'd be...

And again I think those are the things that will provide us the biggest opportunity whether thats going to be directed energy.

Anti hypersonic.

Glide vehicles things that we're working on.

There's a lot of money being devoted to this unfortunately most of those you can imagine is classified we really can't go into to what those individual technologies are but I would tell you that any defense would be a layered defense, where you would be.

Speaker 1: uh... using uh... ground-based defectors uh... you'd be using uh... ship-based defectors as as well as potentially directed energy

Using the ground based effectors youll be using ship based effectors as well as potentially directed energy.

Speaker 1: And we're going to continue to work on that with the Air Force this year. And we'll hopefully have some interesting opportunities as the year unfolds.

And we're going to continue to work on that with the with the Air Force. This year and we'll have hopefully have some interesting opportunities as the year unfolds.

Speaker 8: OK, just a quick one for Neil, if I'm still here. Neil, I was wondering if you could clarify, maybe I didn't catch it. If there's a full year CR, what would the sensitivity be in the guidance?

Okay, and just a quick one for Neil.

Still here.

Neil I was wondering if you could clarify maybe I didn't catch it if there is a full year CR what would the sensitivity be in the guidance.

Speaker 4: That's a good question. I didn't put that out there, but you know, a couple pieces here. First, that will expire or set to expire February 18th of this quarter. I don't see a lot of impact to the first quarter if that were to extend through March 31st, maybe 50 to 100, 150 million dollars of sales. If it were to persist through the

It's a good question I didn't put put that out there but.

A couple of pieces here first.

That will expire are set to expire February 18th of this quarter, we'll see a lot of impact to the first quarter. If that were to extend through March 31, maybe 50 to 100 $150 million of sales that were to persist through the full year I would see probably between five and $600 million of sales headwind. So I think that underscores the.

Speaker 4: I would see probably between five and $600 million of sales headwind. So I think that underscores the importance of us.

<unk> of us getting the continuing resolution behind the country.

Speaker 4: getting the continuing resolution behind the country, but yeah that's how I would size it up looking at it today. And I would say...

But yeah, that's how I would size it up looking at it today and I would say that would be relatively evenly spread across our businesses frankly, each one of them will.

Speaker 8: That would be relatively evenly spread across our businesses, frankly. Each one of them will, you know, have some headwind as it relates to a continuing resolution that persists through the year. Okay. Thanks so much. Thanks.

Have some some headwind as it relates to a continuing resolution that persist through the year.

Okay. Thanks, so much.

Okay.

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

Speaker 11: Yes, thanks so much. So there's a fair amount of debate on the profile of recovery in deliveries and production of the 737 and the 787. Could you tell us approximately where your rates are today and the type of profile you're looking for in 2022 and what you've baked into your 2022 guide?

Yes. Thanks, so much so there's a fair amount of debate.

The profile of recovery.

In deliveries and production of the 703, seven and the <unk>.

787 could you tell us approximately where your rates are today and the type of profile, you're looking for in 2022, and what you've baked into your 2022 guide.

Speaker 4: Thanks, guy. Good morning. Let me give you a couple of thoughts there. I don't want to get ahead of Airbus and Boeing, obviously, but let me start with the 737. Obviously, we ended the year.

Thanks, Ken and good morning.

Let me give you a couple of thoughts there I don't want to get ahead of Airbus and Boeing obviously, but.

Let me start with the 737, obviously.

We ended the year.

Speaker 4: You know, sort of in the high teens, you know, per month range, we are aligned with Boeing in terms of, you know, that, you know, growing to that rate 31 in the second half of the year. So I'll leave it at that for now, but we do see obviously growth there, you know, in the back half of the year, and it kind of gradually grows through the first half.

Sort of in the high teens.

Month range, we are aligned with Boeing in terms of.

That growing to that <unk> 31 in the second half of the year. So I'll leave it at that for now, but we do see obviously growth there.

In the back half of the year and it kind of gradually growth through the first half.

Speaker 4: On the 787, you know, as we talked about last call, we had, we were shipping very, very little, if any. On the 787, we ended the year in the, you know, I'll call it low single digit per month ship set rate. We are anticipating that same type of rate through 2022. Because of inventory that is in the channel, I think a good estimate would be about two per month as you think about the full year for 2022. Thank you.

787 as we.

We talked about last call. We had we were shipping very very little if any on the 787, we ended the year in the call.

All at low single digit per month.

Chip ship set right.

We're anticipating that same type of rate through 2022.

Does have inventory that is in the channel I think a good estimate would be about two per month as you think about the.

Our full year for 2022.

Thank you very much.

You're welcome.

Speaker 2: Your next question comes from the line of Seth Seifman with J.P. Morgan.

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

Speaker 12: Okay, thanks very much and good morning. Appreciate it.

Okay, Thanks, very much and good morning.

So yes I.

Speaker 12: I guess, you know, Neil, when you spoke, I think, back in November and kind of talked about, you know, the outlook for the segments for the year, did that change very much? I'm thinking specifically about the progression of the aftermarket recovery. You know, did that change very much as a result of the emergence of Omicron? And I guess, is there...

I guess, Neil when you spoke I think back in November and kind of talked about.

The outlook for the segments for the year did that change very much and I'm thinking specifically about the progression of the aftermarket cover a recovery.

That change very much as a result of the emergence of <unk> and I guess is there.

Speaker 12: Is there any kind of information or new information kind of underlying the level of confidence that you have about the international travel recovery this year?

What is there any kind of information or new information kind of underlying the level of confidence that you have about the international.

International travel recovery this year.

Speaker 4: Yeah, let me start with the first point. So a couple of things have definitely changed since that early November timeframe. And I'd say the first was the variant Omicron clearly came on quick. We hope that it will go away quickly as well. But I think we factored some of that thinking into the first quarter. As I look at today's outlook relative to where we were thinking a few months ago, we see a little bit slower recovery in the first quarter than we were thinking, but we do see that getting back.

Yes, let me start with the first point. So a couple of things have definitely changed since that early November timeframe and I'd say the first was the very on variant.

Clearly came on quick we hope that it will go away quickly as well, but I think we factored some of that thinking into the first quarter.

As I look at.

Today's outlook relative to where we were thinking a few months ago, we see a little bit slower recovery in the first quarter than we were thinking, but we do see that getting back to.

Speaker 4: you know, sort of the line we were projecting from Q2 and beyond. So we'll see how that plays out. Again, I said last year, a lot of this depends on airlines getting ready for the summer travel season. So we are expecting to see an uptick in their behavior for provisioning of parts.

Sort.

The line we are projecting.

From Q2 and beyond so we will see how that plays out again said last year a lot of this depends on airlines getting ready for the summer travel season.

We are expecting to see an uptick.

And their behavior for provisioning in parts.

Speaker 4: here in March and April . What sort of gets to your second question there in terms of the.

In March and April what sort of gets to your second question. There in terms of the support underlying the reopening of international borders we have seen reopening of some international borders in the fourth quarter and Thats encouraging.

Speaker 4: support underlying the reopening of international borders. We have seen reopenings of some international borders in the fourth quarter, and that's encouraging.

Speaker 4: in particular Europe . And as Greg mentioned earlier, you know, the key, I think, to us realizing what we've laid out here today is, you know, Asia Pacific opening up and the long haul routes coming

In particular, Europe , and as Greg mentioned earlier.

The key I think to us realizing what we've laid out here today is Asia Pacific opening up.

And the long haul routes coming back.

Speaker 12: in earnest as we get towards the end of the year here. So we'll have to wait and see, but certainly sometime in the March and April timeframe is when we would expect to see an uptick that would drive the ranges that we're predicting here for Collins in particular. Okay, great. Thanks very much. You're welcome.

In earnest as we get towards the end of the year here. So we'll have to wait and see.

But certainly sometime in the March and April timeframe is when we would expect to see an uptick that would drive the ranges that we're predicting here for Collins in particular.

Okay, great. Thanks very much.

Youre welcome.

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

Speaker 13: Hey, good morning guys. I was wondering if you could just comment on the new Asheville facility and I guess specifically how far are we sort of through the investment there and how do you think of sort of the ramp up of production at that point?

Hey, Good morning, guys. I was wondering if you could just comment on the new Asheville facility and I guess, specifically how far are we through the investment there and how do you think the ramp up of production at that facility.

Speaker 4: Making great progress there in Asheville. The building is up and I was looking at it the other day actually I have visibility to that via webcam and it's in great shape so we're on track. Some of the capex favorability that we saw here in 2021 is the deferral of some of that spend into 2022, but I'd say we're on track there to stand up that facility and get the production going as we had planned to do so. It's really in good shape.

Great progress there in Asheville, the building is up and.

I was looking at it the other day actually I have visibility to that via webcam.

It's in great shape. So we're on track some of the <unk>.

Capex favorability that we saw here in 2021 is the deferral of some of that spend into 2022, but I'd say, we're on track there.

To stand up that facility and get the production going as we had planned to do so it's really in good shape.

Okay, great. Thanks.

Okay.

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

Speaker 14: Good morning. Thank you.

Good morning, Thank you.

Speaker 8: I'd like to go back to the GEAR Turbofan and the aftermarket outlook. You've been delivering GEAR Turbofans now for about six years. And if we go back to the earlier days of the design, one of the big advantages was going to be, because of the GEAR, you have fewer stages and, in principle, lower maintenance costs. So that . . .

Good morning.

I'd like to go back to the geared turbofan and the aftermarket outlook.

<unk> been <unk> been delivering geared turbofans now for about six years.

If we go back to the earlier days of the design one of the big advantages was going to be.

Does of the year, you have fewer stages and in principle lower maintenance costs so that.

Speaker 15: The thinking was, as I understood it back then, that could lead to higher margins in the aftermarket as you go forward.

The thinking was as I understood. It back then that can lead to higher margins in the aftermarket as you go forward.

Speaker 15: Do you still see it that way? And if so, when should we see margins in the aftermarket for the GTF get to the levels we've seen on the V2500?

<unk>.

Do you still see it that way and if so when should we see.

Margins in the aftermarket for the GTS get to the levels, we've seen on the V 2500.

Speaker 1: Doug, that's an interesting question. Obviously, when the original design of the GTF, there were a couple of different priorities. One, obviously, was fuel burn. That was a 15 percent benefit over the V2500. We clearly achieved that.

Yes, Doug.

Interesting question, obviously, when we originally the original design of the GTS.

There were a couple of different priorities. One obviously was fuel burn and that was a 15% benefit over the <unk> 2500, we clearly achieved that.

Speaker 1: uh... what we did not achieve uh... i would say the first few years of delivery with a was a robust

What we did not achieve I would say the first few years of delivery was a robust engine. We had we had teething problems as we've talked about primarily around the combustor and primarily in some of the more difficult environment.

Speaker 1: engine. We had all we had teething problems, as we've talked about primarily around the combustor and primarily in some of the more difficult environmental environments like India. And so of course, that impacted

Environments like India.

So of course that impacted the.

Speaker 1: aftermarket as we brought those engines back sometimes within a year or two of shipping them to to update the combustor. Um, right now, I would tell you the combustors there are lasting at least 10,000 hours now, which is good news. We're starting to see that already in these in the aftermarket contracts.

The aftermarket as we brought those engines back sometimes.

Within a year or two of shipping them to update the combustor.

Right now I would tell you the combustor is they're lasting at least 10000 hours now which is good news.

We're starting to see that already in these in the aftermarket contracts.

Speaker 1: As you said, though, as Neil said before, the average age is only about three years on these GTFs. So we're not seeing the overhaul activity in a significant number yet, but we will in the coming two or three years. And I think you'll start to see margins improve in the aftermarket once we start going through and doing the heavier overhauls.

As you said, though as Neil said before you have the average age is only about three years.

The GTS, so we're not seeing the overhaul activity.

And this is a significant number yet, but we will in the coming two or three years and I think youll start to see margins improve in the aftermarket once we start going through and doing the heavier overhauls.

Speaker 1: Um, will they ever get to the same level of, uh...

Will they ever get to the same level of.

Speaker 1: profitability as the V2500? Absolutely. Keep in mind the V2500 has been out there for 30 years.

Profitability is about 2500, absolutely, it's just going to keep in mind. The V 25, hundred's without there for 30 years.

Speaker 1: It's not a brand-new engine. It's a very, very durable engine.

It's not a brand new engine Thats very very durable engine.

Speaker 1: And it just it will take us time to get the number of engines out there to drive the kind of efficiencies in the aftermarket. But we fully expect it's a great design. It gives the fuel burn. And it does to your earlier point have fewer moving parts right about 1500 fewer.

And it just it will take us time to get the number of engines out there to drive the kind of efficiencies in the aftermarket, but we fully expect.

Great design gives the fuel burn than it does to your earlier point have fewer moving parts right about 1500 fewer.

[noise] blades than the competing engines and that should and will reduce costs over the long term.

Very good thank you.

This does good question and answer session I would now like to turn the call back over to Mr. Greg Hayes for closing remarks.

Speaker 1: Okay, thank you, Lisa. And thanks to everybody for listening in today. Again, a lot of moving pieces, but we have high confidence in the outlook that Neil and Jennifer took you guys through. I look forward to hearing from many of you in the coming days and weeks. Jennifer and the team will be, of course, available all day today and tomorrow to take whatever follow up questions you might have. Have a wonderful day and stay healthy. Thank you.

Thank you Lisa and thanks, everybody for listening in today again, a lot of moving pieces, but we have high confidence in the outlook that Neil and Jennifer took you guys through.

I look forward to hearing from many of you in the coming days and weeks, Jennifer and the team will be of course available all day today and tomorrow to take whatever follow up questions you might have.

Wonderful day in <unk>.

Thank you.

This concludes today's conference you may now disconnect.

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