Q1 2022 Raytheon Technologies Corp Earnings Call
Good day, ladies and gentlemen, welcome to the Raytheon Technologies' first quarter 2022 earnings conference call My.
My name is Liberty 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 the Raytheon technologies to web site at Www Dot <unk> Dot com.
Please note, except where I do life noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring endo 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 forward looking statements provided in this call are subject to risks and uncertainties Rtc's SEC filings, including its forms 8-K, 10-Q, and 10-K provide details on important factors that could cause.
Actual results may differ materially from those anticipated in the forward looking statements.
Once the call becomes open for questions. We ask that you need that 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 be inserting yourself into the queue as time permits with that I will now turn the call over to Mr. Hayes.
Thank you Louis and good morning, everybody.
Before I get into the results I just want to spend a minute to address the Russian invasion of Ukraine, and then what's first and center on everybody's mind.
It's obviously been devastating to see these tragic events unfold and our thoughts and prayers are with the Ukrainian people.
We of course have ceased all of our business activities with Russia in line with global sanctions and we remain committed to supporting our allies and ensuring the safety of our people around the world.
This event more than any other demonstrates our unique responsibility as a global company and trusted with supporting our customers as they navigate a difficult and complex geopolitical landscape and.
We remain focused on honoring that mission.
Alright, let me turn to the first quarter as you saw from the press release, we're off to a good start for the year.
On the commercial aerospace side, we remain optimistic on the market recovery. Despite the slower than expected start to the year due to the impact of omicron and increased geopolitical tensions.
That said air traffic is rebounding again in many markets around the world.
In the U S passenger traffic through TSA checkpoints remained steady versus Q4 at about 1.8 million passengers per day in the quarter, but importantly, it averaged over 2 million passengers per day in March a significant increase last year and nearly yeah. That's nearly 90% of what we saw in 2019 so.
He has insight.
On the defense side, we're very pleased with the enacted 22 D O D budget and we're encouraged by the President's most recent fiscal 'twenty three budget request of $773 billion.
The proposed budget includes broad based support across our key programs and technology investments in cyber space missiles missile defense systems, and others and we expect the enacted budget could be even higher to account for inflation and the many unfunded priorities identified by the services.
Looking internationally. Our allies are also increasingly prioritizing defense spending with a focus on defensive systems, which we are uniquely positioned to support them.
Resilient commercial air traffic, coupled with growing global defense budgets and our strong backlog continued to support our long term outlook for our businesses and gives us confidence in our ability to drive top line growth and margin expansion over the next several years.
Yeah.
Alright, turning to slide to some highlights for the quarter.
As I said it was a good start to the year. Despite the impact of Omicron and continued supply chain constraints.
Commercial aftermarket remains strong in the quarter growing 38% from Q1 of last year.
We delivered solid financial performance in the quarter, where we exceeded our expectations on both adjusted EPS and free cash flow.
That said as a result of ceasing business activities in Russia, we are going to reduce our full year sales outlook outlook by $750 million to a new range of $67 75 billion to $68 75 billion.
However, we are going to hold our adjusted EPS range of $4 60 to $4.80 and we continue to expect free cash flow of about $6 billion for the year.
Bill will give you a little more color on this just a minute.
Our defence backlog remained very strong at $62 billion exiting the quarter in total company backlog was $154 billion.
Notable defense awards during the quarter included about 1 billion to a classified bookings at our M D.
This significant competitive award as well as $650 million for the spy six full rate production contract and all.
Right, Yes booked about $1 1 billion of classified awards.
On the capital allocation front, we repurchased $743 million of RTL shares during the quarter and we remain on track to repurchase at least two $5 billion a share for the year.
Yesterday of course, you saw we increased our quarterly dividend by nearly 8% from 51 cents per share to 55, continuing our long history of growing and paying a dividend.
Since completing the merger we have returned nearly $9 billion to our T X shareowners.
And.
By the end of this year by the end of 'twenty, two that will be in excess of $13 billion and of course, we remain committed to returning at least $20 billion to shareholders in the first four years following the merger that shouldn't be an issue at all.
On the program execution front, we recently delivered the first <unk> unit into the U S. Army Test program. It's an important milestone for what will be a franchise program for our M D.
And finally, we launched our T X ventures to accelerate our pipeline of innovative technologies to grow to drive future growth and seed in the ecosystem of ground big.
I'm pretty clean technology companies with that let me turn it over to Neil I'll be back to you for the wrap up in Q&A.
Greg I'm on slide three.
Greg noted, we delivered adjusted earnings per share and free cash flow that exceeded our expectations for the quarter.
Sales of $15 7 billion were in line with our expectations and up 4% organically versus the prior year our performance in the quarter was primarily driven by the continued recovery of domestic and short haul international Air travel that was partially offset by continued supply chain constraints across our businesses.
Adjusted earnings per share of $1 15 was up 28% year over year and ahead of our expectations, primarily driven by commercial aftermarket at Collins four cents of commercial OE timing at Pratt and other corporate items, including lower tax expense, which more than offset the supply chain constraints.
On a GAAP basis EPS from continuing operations was <unk> 74 per share and included 41 cents of acquisition accounting adjustments and net significant <unk> nonrecurring items, which included 14th of charges associated with the impact of global sanctions on Russia.
And free cash flow of 37 million was better than our expectations of an outflow of $500 million driven primarily by working capital most notably the timing of collections during the quarter.
And finally, let me give you an update on our synergy progress during the quarter, we achieved incremental gross cost synergies of about $90 million, putting us on track to achieve $335 million of incremental cost synergies for the full year.
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 the rest of 2020 to Jennifer.
Thanks, Neal starting with Collins Aerospace on slide four sales were $4 8 billion in the quarter up 10% on an adjusted basis and up 11% on an as Ganic basis, driven primarily by the continued recovery in the commercial aerospace end market.
By channel commercial aftermarket sales were up 39% driven by a 73% increase in provisioning at 43% increase in parts and repair and 11% increase in modifications and upgrades sequentially commercial aftermarket sales were up 5%.
OE sales were up 12% with strength in narrow body offsetting expected headwinds from lower 787 deliveries.
And military sales were down 12%, driven primarily by supply chain constraints and expected declines in F 35 volume.
<unk> operating profit of $584 million was that $252 million from the prior year.
GAAP through on higher commercial aftermarket and OE volume more than offset lower military sales volume and higher SG&A expense.
Looking ahead as a result, we've seen activities with Russia, we now expect Collins full year sales to be about $375 million lower than our prior expectation, but still expect their sales to grow low double digits. However, as a result of better mix and spending containment we are men.
Painting, calling full year operating profit range.
$650 million to $800 million versus 2021.
Shifting to Pratt <unk> Whitney on slide five sales at 4.5 billion were up 12% on an adjusted basis and up 13% on an organic basis, driven primarily by the continued recovery of the commercial aerospace industry.
Aftermarket sales were up 37% in the quarter with legacy large commercial engine shop visit inductions up 9% and Pratt Canada shop visits up 22%.
Commercial OE sales were up 12% driven by favorable mix within Pratt large commercial engine business as well as higher general aviation platforms at Pratt Canada.
In the military business sales were down 11% driven by F 135 production contract award timing and lower expected production volume that would partially offset by higher F 35 aftermarket volume.
Adjusted operating profit of $308 million was up $268 million from the prior year.
Drop through on higher commercial aftermarket sales volume favorable large commercial OE mix and higher Pratt, Canada, OE volume were partially offset by higher SG&A and N D as well as lower military sales volume.
Looking ahead as a result of ceasing activities with Russia.
We also now expect Pratt's full year sales to be about $375 million lower than our prior expectations and now expect their sales to grow high single to low double digit. However, as a result of better mix and spending containment, we are maintaining perhaps full year operating profit range of that.
$500 million to $600 million versus 2021.
Turning now to slide six RIS sales of $3 6 billion were down 5% versus prior year on an adjusted basis, primarily driven by the divestiture of the global training and service business sales were in line with prior year on organic basis.
Adjusted operating profit in the quarter of 378 million was down $10 million versus prior year, primarily.
Primarily driven by the impact of the divestiture that was partially offset by net productivity across various Graham.
Alright, Yes had $2 6 billion of bookings in the quarter, resulting in a book to Bill of <unk> eight and a backlog of 17 billion. In addition to significant bookings that Greg mentioned are yes also booked 311 million for the next generation O P. I R. G L.
It's worth noting that we continue to expect our full year book to bill to be greater than one.
Turning to our full year outlook, we continue to expect our I S sales to be down slightly on a reported basis and to grow low single digit.
On an organic basis.
We also continue to expect our es operating profit to be flat to up $50 million versus 2021.
Turning now to slide seven RMB sales were $3 5 billion down 7% on both an adjusted organic basis, primarily driven by the continuing supply chain constraints and decline in certain land warfare and air Defense program.
Adjusted operating profit of $387 million with $109 million lower than prior year.
Driven primarily by lower net program efficiencies and unfavorable program mix.
<unk> bookings in the quarter were approximately $4 1 billion, resulting in a book to Bill of 1.18, and a backlog of 29 billion.
In addition to the award that Greg discussed our M. D. Also booked about 385 million for Excalibur rapid demo for the U S Army.
$220 million for aim NYNEX Sidewinder for the U S. Navy U S Air Force and international customers and about $220 million for Patriot Engineering support services for the U S Army and international customers.
It's worth noting that we now expect Rmb's full year book to Bill to be at least 1.1. Looking ahead. We continue to expect our M. D sales to grow low to mid single digit and operating profit growth of $150 million to $200 million versus 2021 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.
Let me give you some perspective on how we're thinking about the environment as we look ahead.
I'll start with some of the positives despite the impact of Covid variance early in the year. We continue to expect that the commercial aerospace recovery will remain resilient and will drive growth in commercial aftermarket and narrow body OE deliveries this year.
Notwithstanding the fact that global Rpms grew up roughly four points less than we expected in the first quarter commercial aftermarket grew in line with our expectations as operators began preparing their fleets for the summer travel season.
At the same time, we're closely monitoring China domestic and international traffic and as I've said before our outlook assumes a significant improvement in widebody traffic during the balance of the year.
That said, we continue to expect commercial traffic to returned to 2019 levels by the end of next year.
On the defense side as Greg mentioned, we are optimistic about the President's fiscal 'twenty three budget request, which included a 5% base budget increase in the modernization accounts, where our investments in technology and innovation are well aligned to the administration's priorities and our major programs are well supported.
And while it's too early to quantify today all of our businesses are positioned to support the expected growth in U S and international defense spending.
On the cost reduction front, we remain laser focused on driving operational excellence to deliver further margin expansion, including $1 5 billion of total gross cost synergies.
On the challenges side.
We continue to see global supply chain inflation, and labor availability labor availability pressures across our businesses.
And while we saw increasing risk in these areas during the first quarter, we remain focused on mitigating actions and expect supply chain constraints will ease later in the year.
And finally, we continue to monitor the broader geopolitical environment, including the impact of global sanctions as well as the U S and global tax environment.
Turning now to our outlook on slide nine.
Greg Greg discussed due to ceasing business activities with Russia, we're reducing our full year sales outlook by $750 million, which as we said is split evenly between Collins and Pratt we now see full year sales between 60 775 billion and $68 75 billion for the full year, However from an earnings perspective.
We continue to expect adjusted earnings per share to be between $4 60 and.
$4 82, due to improving sales mix and spending containment at both Collins and Pratt.
And on the cash front, we continue to expect free cash flow of about $6 billion. It's.
And to remind everyone that our cash flow outlook continues to assume that the legislation requiring R&D capitalization for tax purposes is deferred beyond 2022, which as I've said before the free cash flow impact of this legislation is approximately $2 billion for the year.
So with that let me hand, it back to Greg to wrap things up.
Okay. Thanks, Neil just a couple of thoughts here on chart 22 priorities, which remain essentially unchanged.
We remain focused on supporting our customers our employees suppliers and communities. So that we can actually execute on our mission of defending democracy and connecting the world.
You know today's environment reinforces the need for us to invest in innovative technologies to remain competitive to drive industry leadership and to deliver the right solutions for our customers.
We will do this while driving operational excellence and remaining disciplined with our capital including meeting our capital return commitments.
And of course, we're committed to doing all of this responsibly as evidenced by the publication of our first our T X ESG report yesterday, which builds upon our long history of best practices in this area.
And finally earlier this month, we celebrated the two year anniversary of our merger.
I'm very proud of what we've accomplished together, so far and I want to thank all of our employees for all their efforts during this very difficult and challenging period.
I'm confident in the investment thesis, we laid out the Investor Conference last May our franchises are strong we operate in resilient markets and we have great technology.
And importantly, we have experienced leadership that is focused on operational excellence and delivering on our long term commitments.
With that let me open up the call for questions Louie.
Thank you and ladies and gentlemen in order to ensure that everyone has a chance to participate we ask that you limit yourself to one question to ask a question. Please press Star then the number one on your telephone keypad. If you have any further questions. Please press star one again to enter the queue. The first question will come from the line up miles.
Walton from UBS Your line is open.
Thanks, Good morning.
Gregg or Neill could.
You comment on the gradient of the supply chain constraints, you're you saw in the first quarter as you look to the second quarter in particular, the two the.
Two items of Pratt commercial engines and rocket Motors I know you've talked about recovery by year end, but have you past the point of low and Youre seeing.
Sequentially.
Yes, Myles thanks for the question. So I think we laid this out last month, I guess, a month and a half ago. When we were speaking at the Barclays Investor Conference, but the fact is we had.
The problem with our structural casting supplier, where we were not able to get castings into our MRP schedule that resulted in about 70 engines moving out of the first quarter.
That problem is not behind us, but we are working with that supplier to recover.
Recover that in the World will get most of the way there by the end of the year, but it is not without its challenges like everybody else. Our suppliers are seeing a shortage of labor.
As well as inflation in their own businesses. So that's the that's the first piece I think again, we understand the issue.
We have we have a plan to to recover it on the rocket motor side. This impacts most of the RMT businesses and that remains problematic.
We have a recovery plan that we work with them on every day.
We have a number of our folks that are at their facilities every single day working through this making sure we're being prioritized, but the recovery is not going to happen. This year I think we are so far behind on rocket motors.
It could will stretch into the 2023 time frame, so again, not a new issue, but one that we have not been able to solve yet and we're off working with with other suppliers to try and requalify other rocket motors, but it is a long process to do that so we're gonna be hand to mouth on rocket motors for.
For a period of time yet.
Okay, Okay, and just a clarification did that drive in D. C. In the quarter in our M. D is that the reason for the lighter margins.
Myles it's Neil Good morning, Let me, let me comment a little bit on the margins. There's a couple of things driving the margins year over year I would I would characterize it in a couple of different buckets.
The first one is about 110 basis points I would attribute to lower <unk> in the quarter versus a year ago, and I would say that.
Some of that was in fact, driven by the fact that because of the supply chain delays that we encountered in the first quarter. They pushed key milestones out to the right that we're looking to that would be the indicators of when we could realize productivity. So we expect productivity to return to the R&D.
Business in the second quarter and beyond and certainly the first quarter I think marks a low point of the year for RMB in the margin, but that was the principal contributor to the second piece just to kind of finish the thought the other 100 basis points I would attribute to the contract mix and we've been talking about this for quite some time now about the mix too.
<unk> from lower lower international Patriot and <unk> production volume.
And some lower margin development contracts that are in process right now so.
Overall with RMT sales down 7% in the quarter about half of that was expected and the other half was I'd say driven by the supply chain. We also did have one fewer workday in the quarter that was probably about $50 million for the quarter, but we do expect that to recover as the year goes on R&D still expected to be up about 3%.
<unk> year over year on a sales basis.
Alright, thanks for the color.
Your next question comes from the line of Robert Spingarn from Melius Research. Your line is open.
Well hi, good morning.
Good morning.
A couple of things on defense, Jennifer talked about I think it was low to mid single digit sales growth profile at RMB going forward does this embed incremental demand.
Talked about expected out of Europe .
More specifically.
The.
The army worldly army and replace the current four 1400 stingers were sent to Ukraine and would that be through a sole source contract or perhaps a competitive follow on contract.
Yeah, Let me, let me start with that.
As far as.
Looking at the.
Sales forecast for R&D that does actually not contemplate any upside that we see from replenishment of stocks and again, we're working through all of that trying to understand the timing clearly we won't see any of that benefit this year, but as we think about the next couple of years as we see the budgets continue to increase and we see the replenishment.
The orders come in we would expect we will see a benefit to the RMT topline, which will take that.
That number up somewhat but again, we're not quite ready to give you a new number but I would just tell you it's going to be higher than what we've got there is.
As far as the stingers.
So we should keep in minds.
We have we are currently producing stingers for an international customer.
But we have a very limited stock of material for the Stinger production, we've been working with the Dod for the last couple of weeks.
We're actively trying to.
Resource some of the material but.
Unfortunately D O D Hasnt bought a stinger in about 18 years and some of them. Some of the components are no longer commercially available and so we're going to have to go out in redesign.
Some of the electronics in the in the missile or the secret head, that's going to take us a little bit of time so.
Again.
We will ramp up production and what we can this year, but I would expect again this is going to be a 'twenty three 'twenty four where we actually see orders come in for the larger replenishment as both on Stinger as well as on javelin, which has also been very successful in theater.
Thanks, Greg.
Your next question comes from the line of Peter Arment from Baird. Your line is open.
Hey, good morning, Greg Neil Jennifer Peter Hey, Greg can.
Can you give us maybe some color on just where you are on the narrow body build rates side I mean, it seems like that's a big part of the deposits for this year and just are you seeing running into any supply chain issues on that front.
Yes, Peter I think the biggest supply chain challenge that we're seeing as it relates to the narrow body recovery would go to the Pratt Whitney obviously as we think about.
GTS production and Thats, the structural castings issue that we talked about it that caused first quarter.
Rates to be lower than what we had expected so that will get better as we go throughout the year.
We actually.
See supply chain constraints, but crossed the commercial portfolio, though I mean, we see it in the electronics just like everybody else, we see it in aluminum we see it in titanium.
I think the one of the challenges as we think about Russia for instance.
That was a large source of some of our titanium supplies and because.
Because of the sanctions we are looking to resource a lot of material.
Probably not going to impact narrow body production delivery rates this year, but certainly could going into next year.
I would tell you that you know we're in lockstep with both Airbus and Boeing on their production rates.
Obviously.
Talk to the folks at Airbus they'd like to see your rate of 70 or 75 by 2025.
We will see if we can get there, but we're certainly doing everything we can to support our customers there, but supply chain continues to be it.
An issue I would say across the business, especially on the electronics side, where we've seen lead times go from three months out to 12 months plus and we were on allocation for many of those those components. So again nothing nothing dramatic that's going to change our forecast or change your ability. It's just a watch item that we're actively working.
Peter maybe I could add a couple of points here too.
Just just from a financial perspective.
You think about the sales impacted the Russia on the narrow body in particular at Collins, we expect the commercial OE now to be up mid to high teens year over year still very strong growth and similarly at Pratt. We now expect commercial OE to be up low teens, I had talked about Greg and I talked about.
OE shipments being up about 200 to think about that now has about a 180 at the Pratt business year over year. So just a couple of extra data points for you.
Thanks Neil.
Your next question comes from the line of Robert Stallard from vertical research. Your line is open.
Thanks, so much good morning.
Laura.
Neil maybe just a follow up on your Russia comment there I'm wondering if you could give us a bit more detail on this hit to revenues or you're anticipating in 2022, because yeah I wouldn't expect to have us about he said not remarket planes. For example is this all coming on the after market and on Biz jet.
Yes, Rob I think if you think about that so Russia accounts for about 4% of global Rpms right. So it's not a huge huge number of Atlanta accounts for about one 5% of our total sales so call that $900 million a year, we're going to be able to mitigate.
Some of that through higher sales elsewhere.
You really do lose some sales associated with aftermarket activity into into Russia. Also importantly at Pratt, we're not shipping engines to quit.
We're not shipping engines to Airbus that would otherwise go into it's a Russia now Airbus will of course will remarket. Some of those so we won't lose those completely but we will lose the spare sales associated with those engines going into.
Going into Russia. So again, we've taken a pretty detailed look of this.
Those are the sales impact.
Also importantly, I think Oh, Theres still is a relatively significant.
Hit in terms of earnings of around $200 million.
Finally, we're going to be able to offset that through cost reduction and this is.
Just cost containment, but it's a it is not a not a small number for us as we think about the guidance for the year.
And Rob I would also tell you that.
Just to kind of think about the profile of that.
Think about $225 million a quarter in each of the next three quarters, we actually had about $80 million of sales that did not materialize in the first quarter because of <unk>.
This impact and as you think about one other thing to add is.
Pratt Canada also was selling engines to helicopter engines into Russia, so that that will impact the OE. So from a split perspective at Collins at about 60% aftermarket 40% are we and then at Pratt about 10% aftermarket, but really heavy on the OE side, 90%.
That's great very helpful. Thank you.
Your next question comes from the line of Ron Epstein from Bank of America. Your line is open.
Yeah, Hey, good morning, guys.
Thanks, Ron.
Maybe just following on that supply chain team.
How are you guys handling that titanium situation.
Alright.
Russia was a.
Somewhat important supplier for you guys. I mean are you just looking to move that all domestic and how are you thinking about it.
Rather it is a great question and as I think the biggest challenge that we have as we think about these global sanctions on Russia.
We did have a relatively significant portion of our titanium forgings and castings coming from Russia and many of those are now out of the sanctions list.
The good news is as we as.
As we started looking at across the business and we actually we started advanced purchasing back in the fourth quarter and we were able to get ahead of some of the sanctions. So we have inventory for.
Big chunk of that throughout through the end of this year.
I will tell you, though that there are some components, especially at Pratt Canada.
Where it's going to take us some time to resource some of the some of the castings and that's going to impact some of our customer deliveries this year full.
Full stop and as we think about the.
The sales guidance that Neil was just talking about obviously.
The Pratt Canada pieces is directly impacting that in terms of not being able to deliver all the engines that we had hoped to.
We'll recover those next year and we're working on the sourcing.
I would tell you you know trying to find a titanium sourcing today is very difficult, Russia accounted for about 15% of global sponge production.
So that's really been taken out of the market.
But it's not just the sponge production is also the the casting and forging facilities that are in Russia, but are no longer available to us. So we're working through all of that I think we've done a pretty good job of identifying what those challenges are and finding second sources.
But it's going to it's going to cause us to be late on some deliveries, especially out of Pratt Canada. This year and that's going to it's going to take us some time to recover.
Got it and if I may as a follow on are you thinking about just permanently moving it out of Russia.
We're done we're done in Russia full stop.
We actually we had a joint venture there, where we built a commercial heat exchangers for Boeing and Embraer. We closed that facility. We sold our share we arent going back I think this is as I say crossing the Rubicon here as far as we're concerned for Russia, we're not going to support the airlines were not going to support the development programs, we're not going to support any Russia.
Customers going forward what was going on.
Got it alright, thanks Kurt.
Your next question comes from the line of Sheila <unk> from Jefferies. Your line is open.
Thank you.
Good morning.
Tony.
Profitability.
Got it thank you percent incrementals in the quarter Adam.
Is it flattish for the rest of the year with vertical.
All right.
Okay.
Now that the two year Mark.
Has expired with the merger.
How are you.
Yes.
Okay. So let me start with the financial piece and I'll, let Greg talk about our portfolio thinking.
Good morning, Sheila So, yes, very very strong margins for Collins in the quarter.
Getting a little bit of feedback there.
So good margins the aftermarket in particular at Collins performed quite well with provisioning up 73% year over year and that was really what drove the favorability in the first quarter for us.
So I think we don't expect that to sustain itself at quite that level as the year progresses and also similar to last year surely remember that we had phased our expenditures R. R E N D. Our SG&A.
We had furloughs that were still in effect in the first quarter of last year. So those types of items become a headwind as you get a little further into the year. So very strong incrementals in the first quarter, we still expect mid thirties for the next several quarters.
For Collins as you see <unk> ramp up a little bit see the effective arm.
Merit increases to take hold in April 1st across the company.
If the aftermarket is stronger you will surely see that in the margins and while we're very very pleased to see double digit margins again at Collins.
Greg I'll turn it over to you.
Yes, Sheila just a comment on portfolio rationalization, we obviously haven't been sitting still for the last two years, we've been looking at it across the portfolio, but to your point, we were really kind of hamstrung because of this.
With the spin transactions of the merger to not really do anything significant with any of our portfolio during that two year period. So.
We are actively looking across the portfolio today.
For both acquisitions as well as divestitures I would tell you the acquisitions will probably be technology related.
And smaller dollar similar to what we did last year with CCAR engineering or Blue Canyon in the space side.
And then we are going to look at the <unk> portfolio for potential divestitures. There are certain businesses that do not have the growth profile the margin profile or the.
Technical <unk>.
Footprint that we're looking forward and some of these product lines. So I would expect over the next six to nine months, we will complete those analysis. Obviously, you don't want to be selling any of these businesses at a down arrow market, but with a recovery that we're expecting this year and next I would think they will probably be.
Doing something later this year or early next year.
Thank you.
Thank you Sheila.
Your next question comes from the line of David Strauss from Barclays. Your line is open.
Thanks, Good morning.
David.
Greg on the Collins side.
Any visibility out of Boeing to go above 31, a month on Max and where are you today on an eight seven and the outlook for production to start moving back up again there.
Yeah. That's a great question for the Boeing Company Tomorrow, when they released earnings I would tell you we're in lockstep with Boeing in terms of the production schedule on Max for this year.
No. They have talked about 31, a month and where we are.
We're clearly able to support that level and an even higher as we go into next year.
Eight seven production I think again, it's we have been working with Boeing.
As they're working through their own issues relative.
Relative to FAA certification to get the aircraft delivered.
Obviously, there's a we havent been shipping a lot down to Charleston on the seven to eight seven over the last quarter because of some of those issues, but we would expect as the as the year progresses, we'll start to see that pick up and I would tell you that Boeing has been very transparent with us in terms of sharing what their delivery and production forecasts are.
And it's all reflected in the guidance that we've given for Collins, So no change to any of that today.
Alright, great. Thanks.
Your next question comes from the line of question from Morgan Stanley . Your line is open.
Hey, good morning, guys.
Good morning, Steve and large.
On the large commercial engine casting issue at Pratt is this related to aluminum casting our titanium casting and also with raw material and labor inflation.
Hold limits on how much you're able to pass through to your customers.
So those are primarily titanium castings for me.
Our supplier that that's impacting these are structural castings.
Which means you can't really build start even start building most of the engine until you get the the castings in it that's what's what the holdup is there.
I'm sorry was there another part to that question Christine.
Yes, Greg on raw material and labor inflation.
Are there a threshold limits on how much youre able to pass through to customers.
There are I think the good news is as you think about.
Inflation in the supply chain is about 80% of the our commercial aerospace.
Supply is on long term agreements.
Obviously, there's.
Some of that comes up for renegotiation every year and we're seeing some some cost pressure tips.
Typically every year, we see maybe $150 million or so of inflation I would tell you, there's probably an extra $200 million. This year of inflation that we're gonna have to offset through cost reduction or negotiations with some of the supply chain.
In terms of passing it on to the customers.
Typically we have dead band.
Pricing within the contracts, which require us to absorb the first tranche.
Tranche of inflation beyond that we can pass on a portion of it. Unfortunately, we're not going to be able to do that this year that will be a benefit next year as we can increase pricing. We did of course increased pricing on the aftermarket through.
Through our catalog that was issue I think last October that was roughly a 6% increase year over year, So we're able to offset.
Chunk of the of that inflation through pricing and the rest is going to have to be offset through either cost reduction and redesign of renegotiation.
And while we're on the topic of supply chain in the castings that four cent benefit that we realized in the first quarter is likely going to end up being a four cent headwind as we go through the second quarter and we get the production back on track.
Great. Thank you guys very helpful.
And your next question comes from the line of Doug Harned from Bernstein. Your line is open.
Good morning, good morning, Doug.
If we go back to last summer.
You all talked about a five year CAGR for defense and the sort of 3% to 5% range top line.
And now we've seen now that we're seeing the issues with the Russian invasion.
We're looking at stronger defense budgets you talk.
To put this a little bit earlier.
How do you see that trajectory now is is there upside from there we haven't we haven't seen our backlog increase yet but but.
But does this change the way you look at that five year outlook.
Yeah, Doug as we think about this.
Given the President's budget request for 23 of the 773 billion did not anticipate the Russian invasion of Ukraine. So we we were seeing an increase in defense spending before.
Any of this this.
This nonsense in Ukraine with the Russians. So I think again the trajectory is better than what we had expected.
I would go back two years when the merger first occurred we thought defense spending was going to be flat to up slightly in the eye.
I think everybody recognizes the need for modernization.
And the need to prepare for the.
To detour. These are these folks are more in a more robust fashion. So.
Clearly, there's going to be upward pressure on our sales guidance, but again, you probably won't see any of that until 'twenty three or 'twenty four.
But as.
As we understand what the implications are of the new defense budget, what we see in terms of the plus ups as they go through the process on the twenty-three.
N D. A I think again, we will have an opportunity to update everybody. Later this year on the on our thinking around kind of that three to five year outlook for for defense.
But your sense is that there there could potentially be some some upside there as we look in the outer years.
Yeah, absolutely if you look at just the Rd in the research and development in the budget that's up 11%.
Versus what was in the in the 'twenty.
22 budget so clearly.
There is going to be more spending than what we had anticipated and importantly, it's in those programs like space.
And some of the other advanced missions that we have a half.
I have an outsize share of.
Great. Thank you.
Understood.
Your next question comes from the line of Noah <unk> with Goldman Sachs. Your line is open.
Hi, good morning, everyone.
No no no.
Neil could you spend a minute on the progression of the margin through the year at the other segments. The way you did at Collins.
Because it looks like <unk> is fairly steady through the year, but then RMT.
Mathematically needs, a pretty big step up to get into the 150 to 200.
It looks like a lot sequentially. So I'm, assuming that's back end loaded, but the more backend loaded the higher it has to be.
And then at Pratt I assume.
Clearly you'll have different mix OE versus aftermarket as you move through the year.
But the guidance implies that margin steps down and I assume that mix change was also back end loaded. So just be helpful to hear from you on how.
How we should expect those to change as you move through the year.
Thanks, Noah let me start with R&D as I said earlier, the 11% in the first quarter, we see as the low point of the year and in order to get to our full year guide you're right will you have to be in the 13% to 14% margin range in that business has been there before.
That will come on the back of improved mix. It will also come with productivity realization as we get later in the year and these milestones get realized so.
I would expect to see.
Sequential increases in the margin at R&D as we go throughout the year with Q1 being the low point.
I talked about Collins, but just to reiterate.
Q1 benefited from the provisioning I do expect SG&A and indeed to kick in a little bit higher plus we have substantial military growth.
Profiled in the latter part of the year.
And so that obviously comes with slightly lower margins and you'll see that kind of come across throughout the quarters. As we go ahead at Pratt. The story really is about the mix of OE versus aftermarket and as the OE volume continues to grow particularly in the large commercial engine business you should see.
With 250 basis point or so degradation in the margins is that negative engine margin picks up.
In the next two quarters in particular and typically we see a larger aftermarket mix in the fourth quarter.
And then lastly, I expect to see 2030 basis point incremental margin improvements in RIS as we go through the year again on better volume better mix productivity. We saw good productivity in the first quarter, there and I expect that to continue through the rest of the year.
Very helpful. Thank you.
Your next question comes from the line of Mike <unk> from Wolfe Research. Your line is open.
Hey, Thank you good morning.
Everyone, Mike Neill falling up on a couple of the prior questions on the slower GTS deliveries at Pratt.
With the supply chain issues is it just pratt or I think Greg might have mentioned something broader is it affecting all of <unk> hundred 20, and does that change your thinking at all on.
Peak negative engine margin and separately breakeven cash flow on GTS.
Good morning, Mike No I don't see any change to our thinking around peak negative engine margin or our breakeven on the GTS I would say that the supply chain issues that we've been talking about we're seeing aside from the casting issue are more acute in the defense side of our businesses at this time.
In particular January and February of this this quarter this past quarter, where particularly light I think that was driven by our suppliers.
Having a lot of absenteeism.
Inability to put the over time to recover.
But we haven't seen that start to slowly recover in March and again in April .
That has really affected Collins as well as RIS in RMB, we have seen that across the board there.
At Pratt and Whitney and the first quarter.
In addition to the casting issue on the military side, we did see a delay in getting under contract for the next lots of F. 135 engines, we do have a handshake and expect that to be done in the second quarter. So just timing within the year.
Okay.
Thank you and your next question comes from the line of Ken Herbert from RBC. Your line is open.
Hi, good morning, Thank you.
Ken.
Hey, Greg I wanted to ask about China, the traffic data and events in China. So far in April have not been encouraging.
Can you can you help us think about the full year assumptions for international travel.
And sort of what we've seen in China. So far this year has that changed the outlook specifically on the full year for the aftermarket or how would you talk about the recovery in international travel and the risk in the back half of the year relative to what we were seeing so far in China in particular.
Yes.
That's kind of an understatement about China, obviously, I think China accounts for about 16% of global Rpms, a big chunk of that is their domestic market, which is down more than 80%.
Of the Lockdowns that we've seen because of Covid.
Obviously, there is that there is an impact to the aftermarket, but we do expect that that will recover and we have seen that.
Several times in the past, where as the Chinese walked down the their cities.
It passed away within.
30, or 60 days of the traffic comes right back. So we don't expect any long term impacts from this I would tell you you know the the aftermarket recovery.
Our wide body.
International travels, we're still expecting that to recover to roughly 75% of pre pandemic levels by the end of this year.
China accounts for a piece of that but a relatively small piece of the international long haul.
Really what you you're going to need to see is traffic picking up to Japan, and Australia and Trans Atlantic.
Throughout the course of the year, which we fully expect I mean were the bookings look very very solid.
And I think while it looks aggressive in terms of that kind of 75% kind of recovery are all.
<unk> are that that's exactly what's going to happen.
Well one thing we also will see as we go into the second quarter kind of to that point is we have an engine center in Shanghai and so at Pratt in particular, you'll see relatively flat sequential aftermarket.
That shop is currently shut down, but we expect to recover that this year.
On the on the Collins side sequentially think low single digit type sequential growth so still growth in aftermarket.
But clearly the China market as a watch item, it's an important one for our narrow body customers in particular.
Great. Thank you.
Youre welcome.
Your next question comes from the line of Seth <unk> from Jpmorgan. Your line is open.
Okay, Thanks, very much and good morning.
Greg you've mentioned in the past that.
<unk> expressed some skepticism about.
Airbus, calling up to 70 or 75 and indicating that.
You didn't think that filing would really allow them to get to that market share level. When you spoke a little bit earlier today. It sounded like you saw it as more of a supply constraint issue in terms of Airbus getting up to that 70 to $75 per month level has your thinking on that topic and on what the market share split could be has that thinking changed recently.
Yes, Yes, I would tell you. It's is evolving you know as we look at the backlog that Airbus has if you want a slot.
Taking the <unk> hundred 20 delivery, you're talking about 2028 at current production rates. So there is pressure to move up to that 70 to 75, we're currently facilities for rate 63.
Which is something we had agreed to with Airbus a well before the pandemic.
So I think again you know there is pressure to take the the rate up to 70 or 75, and I think Boeing will see its share.
We will continue to also increase production on the 737, but there is robust demand out there for narrow body aircraft and I think.
Again, the constraint will be supply chain at the end of the day cannot not just Pratt and Collins with the entire supply chain support a rate of 75 a month.
And to loosen Homburg and.
Then 40 or 50 a month.
For narrow body at Boeing 737, So we will see all I would tell you as you know we remain in lockstep in terms of what's going on over the next 18 months to 24 months with both Boeing and Airbus on the narrow body and we're certainly able to meet those demands today and we'll work with them if the demand is there.
We will find a way to meet it.
Great. Thanks very much.
And your next question comes from the line of Hive box rumor from Cowen Your line is open.
Yes, thanks, so much for taking the call.
So Greg.
You mentioned, 6%.
After market price hike.
Normally do that in October for January so it hits all at once but back in October inflation wasn't quite the threat that it was now are you seeing where are you seeing pushback on that price hike and secondly was that across the board or which areas, where maybe a little higher than others. Thanks.
Yeah.
Got it thanks for the question. So obviously, we saw inflation building and that price increase was a little bit stronger than what we would typically push for the catalog I thought usually four and a half or 5%. So.
We took a took the opportunity to raise prices we do it obviously with.
Keeping in mind in terms of where the demand signals are coming from the customer and a big chunk of the aftermarket at both Pratt and Collins is on long term agreements, where you don't see that type of 6% increase but on the time and material overhaul and repair work that we do that.
We will see the benefit.
Obviously inflation.
Inflation is much worse than what we expected it to be for the year, we were thinking 3% to 4% eight and a half like we saw last month, but our hope here is that the inflation will moderate as we get to the end of the year and come October we'll take another look at the catalog and if inflation is still there we will have to address it through the through the catalog again.
Thank you.
Thanks Scott.
Alright, I think.
Go ahead Larry.
Yes. Thank you and we have reached the end of our Q&A session I would like to hand, the call back to Mr. Greg Hayes for any closing remarks. Thank you.
Alright, Thanks, Louise Thanks, all for listening today as always Jennifer and the IR team are available all day.
The answer any and all questions you might have thank you stay healthy and we'll see you all soon take care bye.
Ladies and.
Gentlemen, This concludes today's conference call. Thank you for participating you may now disconnect.
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