Q2 2022 Raytheon Technologies Corp Earnings Call

July 26, 2022

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies second quarter 2022 earnings Conference call. My name is Lucy and I will be your operator for today.

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

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

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

Please note, except where otherwise noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring and or significant items, often referred to by management as other significant items.

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

Raytheon technologies SEC filings, including its forms 8-K, 10-Q, and 10-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements.

Once the call becomes open for questions. We ask that you limit your first round to one question per caller to give everyone the opportunity to participate.

To ask a question you will need to press star one one on your telephone.

You may ask further questions by re inserting yourself into the queue as time permits with that.

I will turn the call over to Mr. Hayes.

Thank you Latif and good morning, everyone I hope everyone had a chance to see our press release this morning.

The press release, I think one of the key takeaways as we had a really strong quarter for commercial aerospace and we continue to see very strong demand for our products and services as evidenced by our defense book to Bill in the quarter of 135 incredible number.

We delivered these results in the midst of a I would say a challenging period across our industry and most of industrial America.

Inflation supply chain and labor availability continue to be near term constraints.

We're working these things relentlessly by leveraging our scale and our portfolio to combat all of these different pressures.

Before we get into the results, let me just spend a few minutes on the macro environment.

On the defense side, the evolving threat environment, including the ongoing conflict in Ukraine continues to drive global defense budgets higher.

Most of our NATO allies have reaffirmed their commitment to spending at least 2% of GDP.

National Defense.

With many countries announcing even higher spending targets over the last several months.

For example, Poland has requested accelerated delivery of Patriot missile systems battery batteries in both Germany, and Finland have selected the F 35.

As you know the department of Defense released its fiscal year 'twenty three budget request earlier this year with modernization spending growing over 4%.

And with modernization accounts, specifically <unk> expected to grow by nearly 10%.

We're also encouraged by the markets that we've seen in Congress. The House Armed Services Committee has proposed a $37 billion increased to the administration's request, that's a 9% increase over fiscal 'twenty two excluding the supplemental.

On the Senate side, the Senate Armed Services Committee went even higher proposing a $45 billion mark.

Resulting in the Dod budget increase of 10% over fiscal 'twenty to bringing the fiscal year 'twenty three budget to over $815 billion.

So a lot different than what we expected two years ago.

We are encouraged by the support of our programs with the authorizing committees recommending significant increases in spend over the President's budget request.

The increases for stingers.

<unk> next generation Jammers Tomahawk cruise missiles, just to name a few.

And as I've said, our key programs and technologies and space Cyber missiles missile defense and non kinetic effects are also well aligned with the U S and our allies defense priorities.

We ended the quarter with the defense backlog of 65 billion that's.

That's up about $2 billion since the beginning of the year and we expect it to go even further in the remainder of the year.

The second quarter. We also saw a number of significant awards, including $4 billion to deliver F. 135 engines for lots 15, and 16, which will power all variance of the F 35 fighter.

The total contract value opportunities about $8 billion for F 135 engines across lots 15 through 17.

In addition, we received a $408 million contract for Sustainment of the F 35 Fleet F 135 fleet rather.

We have 135 engine continues to be the most advanced and I would say safest fighter engine ever produced.

Possesses unrivaled operational capability and mission effectiveness.

As the global threats evolve the F 3500, 35 could be upgraded to increase its thrust range and power thermal management to support the needs of the warfighter well into the next decade.

We also received a $648 million award to deliver SM three missiles to the missile Defense agency.

$662 million rewarded RMB to replenish <unk> hundred's stinger missiles, as well as awards to replenish javelin missiles.

<unk> also had a $1 2 billion bookings of classified programs.

During the quarter RMB was also down selected by the MDA to continue developing a first of its kind counter hypersonic missile the glide phase interceptor.

In a few weeks just a few weeks ago RMB along with their industry partner Northrop Grumman successfully completed the second flight test of the scramjet powered hypersonic air breathing weapon concept or Hawk for DARPA and the U S Air Force.

The flight test applied the data and lessons learned from the first flights play test last September to demonstrate how rapidly.

<unk> affordable Scramjet technology.

At the same time commercial air traffic demand continues to gain momentum with a strong start to the summer travel season.

Globally Q2 revenue passenger miles reached nearly 70% of the pre pandemic levels.

In the U S travelers through TSA checkpoints were up 30% year over year in the second quarter or nearly 90% of 2019 levels.

And with travel restrictions easing around the world, we expect growing demand for international travel in the second half of the year with international revenue passenger miles growing from over 60% of 2019 levels at the end of Q2 to about 75% to 80% of 2019 levels by the end of the year.

That being said, we all know that global supply chain isn't where it needs to be and we're aggressively managing these issues every day.

Microelectronics rocket motors structural castings, all continue to pace manufacturing lines.

Today, we have people embedded about 330 of our suppliers to help improve performance.

And we are also qualifying second in some cases third sources for critical parts as necessary.

Inflation also continues to be at elevated levels no surprise there.

However on the commercial side, we have long term agreements in place that cover about 80% of our spend and cover multiple years, which provides a inflation buffer at least in the near term.

On the defense side, we can price inflation into annual production contracts and flow through our rate structure.

<unk>, we're driving further automation standardization and process improvement projects throughout the company to mitigate inflation headwinds.

And lastly, and perhaps most.

Most importantly, the availability of skilled labor is a real challenge across multiple industries right now and we're seeing it in both at our suppliers and within our own shops.

It takes time to hire and train new employees. It doesn't just happen overnight, especially in certain areas such as much of our classified work.

Despite these near term challenges what differentiates us is our balanced A&D portfolio and our world class technologies that gives us the ability to deliver on our commitments.

Okay.

Let's just take a quick look at Q2.

I'm on slide two for those of you following along.

We delivered another solid quarter with sales growing 4% organically.

Adjusted EPS was a little bit ahead of our expectations at $1 16, and Thats up 13% versus the prior year and free cash flow was essentially in line with our expectations.

Growth in the quarter was led by strong commercial aftermarket sales that were up over 26% from the prior year.

This strength was partially offset by continued supply chain and labor constraints that principally impacted the defense businesses as well as some delays in expected contract awards.

Notwithstanding these challenges we continue to see full year sales in the range of $67 75 billion to $68 75 billion and adjusted EPS, We continue to see that in the $4 60 to $4 80 range.

However, there are some changes within the segments as strength in the commercial Aero will help to offset impacts in our defense businesses.

Neil and Jennifer will discuss in just a little bit later in the call.

As far as our cash flow outlook outlook, we continue to expect about $6 billion of free cash flow for the year.

That's of course, assuming that the R&D tax legislation is revealed.

Finally, we repurchased over $1 billion of RPX shares in the quarter, putting us at about $1 $8 billion year to date, and we remain on track to repurchase at least $2 5 billion for the year.

Through the end of the second quarter, we've already returned nearly $11 billion of capital to shareholders. Since the merger in April of 2020.

And we're more than halfway to our commitment to return at least $20 billion in the first four years following the merger.

With that let me turn it over to Neil.

I'll be back at the end for wrap up in Q&A.

Thank you Greg before I talk about the full year, let's look at the second quarter results on slide three.

As Greg noted sales of $16 3 billion grew 4% on an organic basis versus the prior year. Our performance in the quarter was driven by the continued recovery of air travel due to the pent up demand that was partially offset by continued supply chain constraints that as Greg said, principally impacted our defense businesses adjust.

Adjusted earnings per share of $1 16 was up 13% year over year and was ahead of our expectations, primarily driven by strength in commercial aftermarket at Collins, and Pratt and some favorable corporate items, including lower tax expense, which more than offset the impact of lower defense volume and productivity.

On a GAAP basis earnings per share from continuing operations was 88 per share and included 28 of acquisition accounting adjustments and that significant <unk> nonrecurring items.

And finally free cash flow of $807 million was generally in line with our expectations for the quarter.

So let me give you some perspective on how we're thinking about the environment as we look ahead to the second half of the year, let's turn to slide four.

I'll start with some positives so recovery in commercial air traffic remains a strong is very strong as airlines entered the summer travel season with leisure travel bookings well above 2019 levels and the active fleet is at its highest level since the beginning of the pandemic.

And as you saw our commercial aftermarket sales continued to grow generally in line with our expectations for the quarter Jia.

Geographically U S. Domestic demand has remained strong while China domestic travel has lagged our expectations. So far this year.

That said domestic air traffic in China began to rebound as lockdowns ease throughout the second quarter.

On the international front short haul international travel or intra region travel has been quite strong fueled by a stronger than expected European recovery. So far this year.

And long haul international travel or Trans regional travel has shown slow, but steady sequential growth and while this is encouraging we need to see this segment of the market accelerate in the second half of the year.

On the defense side as Greg mentioned, we are optimistic about the fiscal 'twenty three budget request and our continued alignment with the priorities of the United States and our allies and on the cost reduction front, we remain laser focused on driving operational excellence and our structural cost reduction projects to live.

To deliver further margin expansion in the second quarter, we achieved about $80 million of incremental cost synergies keeping us on track to achieve $335 million this year and well on our way to $1 5 billion of total gross gross cost synergies since the merger.

At the same time, we continue to monitor the broader geopolitical landscape as well as the U S and global tax environment.

And finally on the challenges side, we continue to see global supply chain and inflationary pressure as well as labor availability constraints.

During the second quarter, we saw slower than expected recovery of material receipts, and the resulting impacts to our shop productivity, along with increasing inflationary pressures on labor freight and other indirect cost areas and while we remain focused on aggressive mitigation actions. We don't expect these pressures to ease until next year.

So moving on to our outlook on slide five.

We continue to expect our full year sales to be in the range of 60 775 billion to $68 75 billion.

However, due to continued supply chain and labor constraints, we now expect lower sales and operating profit at both <unk> and R&D for the full year.

Those sales impacts are expected to be largely offset by the stronger commercial aerospace recovery, we're seeing at Collins and Pratt.

From an earnings perspective, we're holding our adjusted EPS range of $4 60 to $4 80 per share, but expect to be more towards the midpoint of the range as we don't expect some of the headwinds to fully recover in the year.

I should also point out that we continue to work mitigation to offset the impact of ceasing business activities with Russia, and minimizing any impact to our customers.

I'll provide more color on the moving pieces between the businesses in a moment.

And on the cash front, we continue to expect free cash flow of about $6 billion for the year. It's important to mention 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 if.

If the legislation is deferred by September 15th we will have to make an incremental cash tax payment of about $1 5 billion here in the third quarter. However, this payment is a timing issue only as we will receive a refund in 2023 for the overpayment. If the legislation is ultimately deferred by year end as we continue to expect.

So with that let's move to slide six for some color on the segment outlooks.

At Collins, we continue to expect full year sales to be up low double digits versus prior year, where we now feel a little stronger commercial aftermarket recovery, partially offset by supply chain induced pressures on military sales.

As a result of better sales mix and spending containment measures, we're increasing Collins adjusted operating profit from up $650 million to $800 million to a new range of up $700 million to $825 million versus last year.

Turning to Pratt Whitney are increasing.

Whitney sales range from up high single to low double digits to a new range of up low teens versus prior year, and that's driven by stronger commercial aftermarket and better commercial OE mix.

With respect to operating profit or increasing perhaps adjusted operating profit from a range of up $500 million to $600 million to a new range of up $550 million to $650 million versus last year.

Turning to RIS.

Due to the pressures we've discussed along with delays in awards, we're reducing Ras's reported sales outlook from down slightly to a new range of down mid single digit to down low single digit versus prior year <unk>.

And organically, we're reducing our asset outlook from up low single digits and now Crs as organic sales roughly flat versus prior year.

And as a result of lower sales outlook and the impact of unfavorable development program adjustments, reducing our assets full year adjusted operating profit from the prior range of flat to up $50 million to a new range of down 50 to flat versus prior year.

And finally at RMB also due to ongoing material material availability delays and the associated productivity impact along with the anticipated cost reduction we are reducing RMB is full year sales outlook from a prior range of up low to mid single digit to a new outlook of up slightly versus prior year.

And as a result, we are reducing RMB as adjusted operating profit from our prior range of up $150 million to $200 million and now expect <unk> operating profit to be in the range of down $50 million to flat versus prior year.

And we also expect some improvement in some corporate spending and a lower full year tax rate. We've included an updated outlook for some of those below the line items in the webcast appendix so with that let me hand, it over to Jennifer to take you through the second quarter segment results.

Thanks, Neal starting with Collins aerospace on slide seven sales were $5 billion in the quarter up 10% on an adjusted basis and up 11% on an organic basis, driven primarily by the continued recovery in commercial aerospace end market.

By channel commercial aftermarket sales were up 25% driven by 33% increase in parts and repair.

8% increase in provisioning and an 8% increase in modification and upgrade.

Commercial aftermarket sales were up 3%.

Commercial OE sales were up 14% versus prior year with strength in narrow body offsetting expected headwinds from lower 787 delivery.

Military sales were down 6% driven primarily by lower material receipt.

Terry program and expected declines in F 35 volume.

Adjusted operating profit of $617 million was up $99 million from the prior year.

Drop through on higher commercial aftermarket more than offset higher SG&A expense the absence of favorable contract settlement and lower military sales volume looking ahead as Neil discussed we continue to see Cowen full year sales up low double digit and we now see adjusted operating profit up 700.

<unk> $825 million versus last year.

Shifting to Pratt <unk> Whitney on slide eight.

It was a $5 billion were up 16% on an adjusted basis and up 17% on organic basis with sales growing across all segments.

Commercial aftermarket sales were up 26% in the quarter with growth in both legacy large commercial engine and Pratt Canada shop visit.

Commercial OE sales were up 22% driven by higher DTF deliveries and favorable mix within Pratt large commercial engine business.

In the military business sales were up 5% driven primarily by the timing of F. 35 production contract award in Q2, and higher F 35 aftermarket volume adjusted.

Operating profit of $303 million was up $207 million from the prior year.

Drop through on higher commercial aftermarket favorable commercial OE mix, along with higher military volume were partially offset by higher SG&A and R&D looking.

Looking ahead, we now expect sales to be up low teens and for adjusted operating profit to be up $550 million to $650 million versus <unk>.

1021.

Turning now to slide nine sales of $3 6 billion were down 6% versus prior year on an adjusted basis, primarily driven by the divestiture of the global training and services business sales.

Sales were down 1% versus prior year on an organic basis due to lower expected sales in command control and communications as well as lower sales within sensing and effects.

That were partially offset by higher sales and classified cyber programs within cyber training and services.

The quarter was also impacted by the delay of certain contract awards.

Adjusted operating profit in the quarter of $315 million was down $100 million versus prior year, primarily driven by lower net program efficiencies, including unfavorable development program adjustment the impact of the divestiture and the absence of a land sale in the prior year.

RIS had $3 billion of bookings in the quarter, resulting in a book to Bill of <unk> 92, and our backlog of $16 billion. Its worth noting that we continue to expect Ras's full year book to bill to be greater than one.

Turning to RIS <unk> full year outlook as Neil discussed, we now expect <unk>.

Sales to be down mid single digit to down low single digits on a reported basis versus prior year and to be about flat on an organic basis.

And we expect RIS adjusted operating profit to be down $50 million to flat versus prior year.

Turning now to slide 10, RMB sales were $3 6 billion down 11% on an adjusted basis and down 10% on organic basis, primarily driven by continuing delays and material availability and expected declines in certain land warfare and an air Defense program.

Partially offset by higher volume on spy six production and next generation Interceptor development.

Adjusted operating profit of $348 million with $184 million lower than prior year, driven primarily by lower net program efficiencies, resulting from continued supply chain constraint and unfavorable program mix and lower volume primarily in land warfare and Air Defense program.

<unk> bookings in the quarter were approximately $4 5 billion, resulting in a book to bill of one three and a backlog of $30 billion.

In addition to the awards that Greg discussed RMB also booked $423 million on the spy six hardware production and Sustainment program.

And $217 million for Tomahawk production for the U S Navy.

For the full year, we now expect RMB full year book to bill to be closer to one two.

Looking ahead, we now expect R&D sales to be up slightly versus prior year and for adjusted operating profit to be down $50 million to flat versus prior year with that I'll turn it back to Greg to wrap things up.

Okay. Thank you Jennifer I'm on slide 11.

Second for Q&A.

So despite some of the macro uncertainties for the remainder of the year, we are well equipped to mitigate the challenges that we've talked about supply chain inflation and labor availability, we are going to do that through our focus on cost reduction operational excellence all in order to meet the commitments that we set out to investors earlier this year.

And while we continue to make progress let me just say that we're certainly not satisfied with the performance in our defense businesses this quarter.

There is much to do bookings were outstanding execution not so much.

At the same time, we continue to invest in technology and innovation for our customers as well as executing on our capital allocation strategy to drive significant long term growth, ensuring our value well into the future.

With our industry, leading franchises across A&D, we're prepared to capitalize on the commercial aerospace recovery and growing defense budgets balance continues to work.

And I think most importantly, we remain confident in our ability to hit the 2025 targets that we set in may of last year at our Investor meeting.

What to do there is always more to do with that let's open up the call for questions Latif.

In the interest of time and to allow for broader participation. You are asked to limit yourself to one question to ask a question you will need to press star one one on your telephone.

The first question comes from the line of Ron Epstein of Bank of America. Please go ahead, Ron Epstein.

Yes.

Good morning, Greg Good morning, Ralph Good morning.

So maybe if we could.

Peel back the onion more.

What's going on in the supply chain in defense.

For RMB right, you're down 7% in the first quarter or 11% this quarter, so you're going to be up during the year, which means youre going to have a pretty good inflection.

How is that going to happen.

It's almost a little hard to believe and then I guess.

Another way to ask this it seems like your commercial businesses right now are run better than your defense businesses are there any lessons that the defense businesses can learn from the commercial business because it's really surprising I mean, you guys are at Dx designated.

Company. So you should have.

Full on head of the line rates in terms of the supply chain. So so what's really going on there because it's surprising that it's hitting you guys. So harp.

That is the question of the day I would tell you first of all just to be clear most of our programs without Dx right and in fact, there are very few where we have DFAST ratings that give us priority.

And the supply chain again, those are very very few but.

But I will tell you there's a couple of significant differences between our commercial businesses and the defense side on the commercial side, you've heard US say this for about 80% of our supplies suppliers are on long term agreements that long term agreement allows us the ability to give forecast demand, but it also gives us a priority and our.

Lawyers as part of those <unk> are required to keep a buffer stock in place.

All of that gives us certainty of cost certainty of delivery now it doesn't always work, we talked about structural castings at Pratt Whitney back in Q1 that continues to be a challenge, but for the most part the commercial businesses have done a better job I would say because of the way we structure those long term agreements. If you look at the defense side of the.

Business only about 10% of those businesses of RMB in RF suppliers are on long term agreements and that's not surprising because of government contracting rules.

The problem that we've had as we've received all of these new awards, we've been going out and once the reward is set once the contract is signed we're going out and we're putting contractors suppliers on contract and we're seeing lead times double and sometimes triple.

And we have been I would say caught off guard a little bit by how much pressure. There is in the supply chain and I would tell you. It's it all goes back to labor availability.

Typically.

During the downturn that we saw in A&D two years ago.

There was a lot of layoffs. There is a lot of people that were let go typically we get about 75% to 80% of those folks come back off of layoff in.

In this case, what we're seeing in our supply chain is only about 25% of the people are coming back. They found other jobs similar jobs can because of the labor market is so tight in this country. We just don't have a large pool of resources the.

The other problem I would tell you.

Again, not just it's not just material. It's also labor availability that I'm thinking about our <unk> business, which has over 5000 programs that we're executing on.

That requires engineers and engineers with clearances.

If you look at the unemployment rate for engineering talent in the U S. It's less than 2%.

We started the year with a goal of almost hiring about 2000 engineers net of attrition, which means we'd have to hire probably more than 5000, we are struggling on that regard as well and again, if you don't think about it but engineers working on programs generate revenue and so as we think about the issues in Q2 in the first half of the year.

We have seen.

Supply chain, but also a labor availability impact our defense businesses.

As you talk about the back half of the year Youre absolutely right. There is a lot of work to do.

Right now just give you a couple of statistics in the second quarter.

In our factories, we typically look to.

Provide kits to the shop floor to assemble and we target somewhere between 90 and 95% kit availability in other words, all the parts of their 90% to 95% of the time.

In the second quarter because of all of these supply chain constraints, we saw kit Phil.

Fill rates around 50%.

50%. So you can imagine the amount of rework the lost productivity in our shops as we are starting things that are not complete going back doing rework all of that is what's causing some of these headaches on the defense side now as we look at the back half of the year.

We've had some very deep dive reviews, with Chris Kelly, <unk>, and Neil Mitchell with the guys going out and making sure that we have line of sight too.

And to the supplier recovery plans and we expect kit fill rates for instance to go from roughly 50% to about 80% by the end of the year.

That's a big that's a big yet, but we absolutely have to do that and again, we are deploying resources I said our comments, we've got about 330 suppliers, where we have people today working through all of this it is pick and shovel work.

Also about trying to make sure they've got the right labor trained labor to get all this done.

So it is a hill to climb in the back half of the year and it is a challenge that we're going to have to take out in order to.

First of all to meet our customer demands of our customer needs. I mean, this is really about making sure we can deliver to our customers on time and right now we are suffering.

I don't know Neil anything you want to add to that.

Maybe I'll just put a little color around the kind of held that we're looking at for the second half at RMB one of the <unk>.

Big challenges as the material receipts, we talked in the first quarter about sort of COVID-19 induced.

Labor issues in the supply chain, we expected that to get better in the second quarter and it did not and in fact, it got a little bit worse when I look at the second half of the year were RMB in particular need to see about a 25% volume step up in dollars in the second half versus the first half obviously, our new outlook for.

For R&D reflects that and it.

This material is also an important part of their products and it's about a 15% step up in the second half. So those are the metrics that we're monitoring on a daily and weekly basis.

As it relates to their performance the only other thing Greg I would add is.

Productivity. So one of the big reasons, I'd say about half of the drop in the margin at RMB in the second quarter was related to lost productivity the absence of productivity and our.

Our profit outlook.

For the remainder of the year for RMB reflects us not catching up on on that productivity given the kit fill rate issues that you talked about.

Sure.

Right.

If I can go ahead.

And that's been a real estate call given the most of the points that you brought up about hiring people with that.

As in past turnarounds right I mean thats.

It's not something that's going to change on a dime.

Look labor, let's speak, but let's be clear on this does not get solved this year I think again get into a kit fill rate of 80% is interesting, but literally we need to be at 95% to be running at I would say a normal pace. It has a lot of work we've done a lot of I would say deep dive reviews on supply chain going through supplier by supplier. So are we.

Got people out of all of these different suppliers, making sure they're meeting their commitments.

I think the only thing thats going to solve labor availability I hate to say this is a slowdown in the economy because right now theyre just simply aren't enough people in the workforce.

For all of our suppliers.

Look we pay a very very competitive wage at RPX.

But as you go down into the second third and fourth tier of the supply chain. They are struggling to attract workers, but again, we've got people out there I would tell you.

As we've done these reviews, we have a path to get there. It is not an easy path. It is going to be a challenge through the year and we'll see how we do we're tracking materially receipts day by day and it's.

It's a big Hill.

Alright, Thank you guys. Thanks.

Thanks, Brian Thank you.

Thank you.

Our next question comes from the line of Rob.

Robert Stallard of vertical research partners. Please go ahead Robert Stallard.

Thanks, so much good morning.

Hi, Rob.

Greg maybe to follow up on the wrong point down supply chain and labor.

And the impact of inflation, what do you see as your ability to pass. This on you is there a cap to how much you can parse this up the China it can be different and aerospace versus defense, but is there a point, where you have to stop biting more to bullet.

Cost increases.

As we look at it.

This year, we've got about $200 million of additional.

Inflation headwind that we didn't anticipate when we started the year so that $200 million.

Had to go out we've done a number of initiatives looking too.

Two ways within the supply chain to eliminate that that headwind and so far we've done a pretty good job of that.

Keep in mind, that's on top of about $300 million of headwind from the from the Russia exit that we had earlier in the year. So I would tell you. The team has done a good job in managing costs.

And finding ways to overcome some of the headwinds that we've seen.

On the commercial side again, the LTA coverage at 80% really provides you a lot of coverage.

With inflation now there's dead beds in there an excess inflation above some levels, usually six or 7% gets shared with the supplier, but for the most part we've been able to manage through that on the defense side. What we've seen again, we've seen labor inflation clearly we've been able to put most of that though into our overhead rates and then.

It gets that gets recovered in the normal contracting process.

<unk> also seen.

Then just inflation in the supply chain, but again, most well I would say at least 30% of the work that we have as cost type at RMB, and so youre able to pass that along.

And right now again I think one of the reasons we continue to.

Push this is on the.

R&D side is to make sure that we can overcome the inflationary impacts that we're seeing in the supply chain. There. So I think again, we need to learn the lessons of how we manage this from the from.

From the commercial side and going to more LTA is I think is absolutely essential if we're going to.

Be able to have some kind of consistency in terms of.

Supply chain.

Going forward.

That's great. Thanks, Craig.

Yep.

Thank you. Our next question comes from the line of David Strauss of Barclays. Your question. Please David Strauss.

Okay.

Thanks, Good morning.

Good morning, David.

Yes.

Greg maybe touch on.

The recovery on the GTS side of things.

I think you had mid <unk> 7 million in Q1, you were saying you would need yet to about 180 <unk>.

Up around 108 deliveries for the full year can you just talk about where you are there and then also talk on the Pratt Canada side Thats all deliveries were down in the quarter I think you had highlighted pre.

Previously that titanium was a was a pretty big issue on the Pratt Canada side.

Yes, Thanks, David Let me just on the Pratt <unk> Whitney and the GTS side I would tell you.

Right now we continue to deliver GTS.

Behind schedule, and we will not catch up as I think I said back in February until the end of the year and this is again goes back to a single issue around structural castings.

We're not holding up the line at Airbus Thats, the good news with the 11 hundreds or.

We're not holding up the line.

Five hundreds either on the C series or I guess, the <unk> hundred 20. So we're managing this with the customers. We are managing this with the supply chain and we really expect again youre going to see a big step up in the back half of the year GTS deliveries as you think about your <unk> had a great first half second half again EBIT was recovering commercial aftermarket.

It's going to be tough because you've got a lot more negative engine margin in the back half of the year. So again that all goes into the to the calculus of the full year guidance, but I would tell you right now there is no other surprises on GTS beyond those structural castings in there's always little things, David but nothing huge.

On the.

Pratt Canada side, you're exactly right.

On titanium and again this is primarily around the sanctions and our inability to continue to buy nor our desire to buy anything from Russia. So we have been working to.

Identify second sources qualify them I will tell you we will impact <unk>.

Production lines at a number of our customers.

Im sure Youre going to hear that from them as well on the Biz jet side, we're just not going to be able to make all the deliveries now we're not talking about dozens and dozens of aircraft, but youre talking five to 10 airplanes.

At these customers that are going to be without engines, because we don't have the titanium forgings that we had expected to get this year. So.

This will this will recover.

Sometime in the middle of next year.

But there is still a lot of work to do to get these suppliers requalify them I think every single.

Personal and commercial aerospace is facing the same problems with Russian titanium effect as it wasn't a huge piece of the supply chain, but it was 20% plus of global titanium.

We're all going after those same resources.

Similarly, we were in the Farnborough last week had a good conversation with a number of our suppliers on this people are stepping up people understand this is a long term business and I think the suppliers of titanium see this as a big opportunity to take share. So we'll work through it but it's not going to be without a little bit of pain to our customers.

Greg how far along are you in reallocating the titanium supply contracts.

So we're probably in terms of identifying and the sources of the contracts I would say we're almost complete.

The issue simply is getting the.

Parts qualified you have got to go through first article you got to go through the metallurgical analysis, you've got to make sure that the composition of materials exactly the same as what it was prior and then you've got to get the parts certified so that's the part that takes time, it's not actually identifying the suppliers. We've done that we've got everything lined up.

The same thing on heat exchangers.

<unk>, we made a number of different commercial heat exchangers.

At our joint venture in the OCA in Moscow.

All of that work was discontinued on the 27th of February and we're still working through the re qualification of heat exchangers in.

780 Sevens Thats Triple Sevens, that's Embraer 170, Theres a number of.

The issues are now we've got we got coverage for titanium for most of those are for heat exchangers through the end of the year and we're working through the recall there, but we're not we're not done yet there's a lot of work to do.

Thank you.

Okay.

Thank you our next question.

Yes.

Our next question comes from the line of Noah <unk> of Goldman Sachs. Your question. Please hi, good morning, everyone.

Good morning Noah.

Yes.

Obviously, what's happening with supply chain labor inflation is.

Unprecedented and hard to manage and hard to forecast but.

I'm confused by the pace of deterioration or the narrow window in which the defense forecast have changed because.

Unprecedented and hard to manage and hard to forecast but.

I'm confused by the pace of deterioration or the narrow window in which the defense forecast have changed because.

The variances are the negative variances are pretty large and if I go back to just the first quarter call in April .

Looking about supply chain labor inflation repeatedly the whole world was and so and.

And so you were giving guidance just three months ago, and a month into the quarter and so have supply chain labor inflation deteriorated that much and just two to three months time or is it.

It's just that difficult to forecast and if it's the latter if I go back to this discussion of the second half inflection.

Still really hard to stare at this R&D guidance and see how you can have that much of an acceleration maybe you could spend some time on the specific programs.

That drive that to get us more comfortable.

Yes, no that is a great point that I would tell you when we exited the first quarter and we knew that we had seen supply chain challenges specifically at RMB.

The thought was.

Which turned out to be of course incorrect was that most of the supply chain challenges were related to omicron and Thats why we had problems in December and January but we really expected as COVID-19 receded into the background that we would see a quick recovery.

In the supply chain and in fact that was that was wrong.

The labor challenges that we continue to see have not abated.

And again I think that is the challenge and Thats. The reason we continue to struggle in supply chain inflation is is a challenge, but we can measure. It we can we can work to overcome it.

Not having enough people in the supply chain that has proven to be much more difficult and so again, we have gone through this I would tell you.

Program by program line item by line item in terms of what's in our MRP schedule.

There is some go gets out there, but we have commitments from suppliers.

To hit these numbers and I think that's the that is the challenge is making sure that our suppliers continued to deliver on the recovery plans that they have laid out for us I don't know Neil anything you want to yes.

Two points, because there's been a compounding impact that we've seen in the second quarter and expect to persist and one is with the slowdown of receipts of material. We've got a different mix of output during the quarter more development program focused.

And our lower margin production contracts for the ones that received the materials, so getting back to that fill rate conversation.

You had to stuff that was coming and not being on the more profitable programs. The second piece of that the knock on effect of that is the absence of labor productivity in the shops, and so with the fill rates being down in that 50% range.

Just did not get the benefit of rolling through labor efficiencies, which is the primary driver of the EAC benefits, we typically see in a quarter in R&D has seen now in the second half we expect some not all of that to recover and so.

It is a tough hill in the second half I think we've got the right resources engage with suppliers within the business and on the shop floors, but.

We are we are looking at this everyday and we do need to see a market improvement in productivity in the shops to drive that P&L benefit in the second half of the year.

Okay. Thank you.

Thanks Noah.

Thank you our next question.

It comes from the line.

Sheila.

<unk> of Jefferies. Your question. Please.

Okay, and then I guess that with Morgan <unk> morning, guys.

Good morning, Sheila.

When we think about the U S Airlines, just switching gears a little bit there finally think pricing tailwind and capacity constraints. So can you talk a little bit about your aftermarket business.

Are you seeing definitely actions from the airlines house pricing trending relative to history, and then can you maybe remind us of your <unk>.

Aftermarket guidance expectations for the year with long haul international expectations for the second half.

Sure, let me start with some of the outlook pieces here first at Collins, we now.

Now expect aftermarket to be up between 20% and 25% year over year. So we're at the halfway mark of the year I think it's important I've been talking a lot about.

Around the recovery and we're pleased to see that.

Improving obviously in and holding I think Greg will probably want to add a couple of comments here as well, but clearly the demand for air travel is very strong we're seeing some encouragement in terms of the wide body.

Routes opening up as well and we expect that to continue in the second half and on the Pratt side, we now see the aftermarket up year over year, 2025%. So.

Really good performance there our customers are giving us good line of sight to shop visit inductions were a little over 40% towards our plan for the year in terms of the 2500 shop visits.

There is still some work to be done in the back half of the year as you know China was closed down for the better part of the second quarter and that is a piece of the back half growth, but feel pretty confident we've got good dialogue with our customers. Good line of sight to the third quarter in particular and I expect that to continue in the fourth quarter.

All I would say.

It's an interesting time for the commercial aerospace resist demand is on that.

Unprecedented is the wrong word I would say the trajectory of the recovery is certainly I think caught people by surprise in terms of the desire to travel again and he can tell every time, we go to an airport today. The long lines that we have in the problem of course is it's not just pilots shortages, but as baggage handlers, it's TSA agents as everybody that supports.

Commercial airlines, they're struggling with the same labor availability that we talked about in the supply chain. So.

Recovery is very strong pricing as you know for the airlines is very strong.

Fuel prices <unk> has doubled in price in the last year, but it has come off its highs of a couple of months ago. So I think again the airlines financially are doing very well and the biggest concern. They have is aircraft availability and so we're going to see very strong inductions into the shop, we've seen very strong orders in our aftermarket again.

Yeah, a little bit stronger than we had anticipated going into the second quarter, and we don't think theres anything that changes that trajectory in the back half of the year apps.

Absent a huge resurgence in COVID-19.

Again people want to travel China will reopen at some point, which we have seen a quick snapback in demand as soon as China reopened so I think it's all pointing in a positive direction on commercial aero for the back half of the year and into 2023.

So I think again, we're well along the recovery path and no change in trajectory.

Okay. Thank you.

Thank you.

Our next question comes from the line of Peter Amit of Baird. Please go ahead, Peter or Matt.

Hey, good morning, Greg Neil Jennifer Hi, Greg.

Hey, Greg.

Can you just.

Come back to kind of the differences between commercial aerospace or your aerospace business.

How well, it's performing but dealing with a lot of the same probably supply chain that overlaps with defense, maybe if you could just call out maybe some of the differences because I think a lot of it is struggling on the defense side, it's really seamless.

Very complex and trying to get back to kind of the trajectory versus where your commercial aerospace businesses, probably dealing with a lot of thing challenges, but at the same time is performing really well I mean, maybe just call out a couple of differences that would be helpful. Thanks.

Yes.

What are the operator of one of the benefits on the commercial side is we're not handicapped with government contracting regulations and to that end the MMS material management system, which dictates how much inventory, we can drive and how soon we can place things on order.

It really constrains our ability to be flexible.

On the defense side I would tell you. The reason that we have been able to be successful on the commercial side as we've driven a lot of inventory and you look at the inventories of about $1 billion since the beginning of the year, it's up about $400 million in the second quarter, primarily on the commercial side to meet the higher demand. So we have been driving material in faster, we're not constrained on the commercial side.

By the <unk> system, and I think again.

That is a lesson learned for us what we've told the team of defenses bring it in and we don't have to build it we had to bring in more inventory sooner rather than.

And within normal lead times Thats, Okay. So we're going to go out and be a little more aggressive with inventory.

We're not talking billions of dollars, but the fact is we need to drive inventory and faster.

Give some surety of supply or security of demand rather to our supply chain such as they continue to to drive the draw.

Drive material in and looking at some of the suppliers. We know are not going to get better. This year rocket motors, we've talked about that continuously for over a year, we know that as a recovery that stretches probably into 2024, but that's a that's only a piece of the problem.

It's again trying to make sure we've got the right.

Chips in microelectronics really hand to mouth there.

But again, we have the tools and again the folks here at the corporate office and supply chain are off working with the folks on the defense side too to help overcome some of these challenges, but it's it's not easy.

I appreciate the color thanks, Greg.

Thanks Peter.

Thank you. Our next question comes from the line of Robert Spingarn of Malleus Research. Your question. Please Robert Spingarn.

Well. Thank you Greg I wanted to go back to the discussion on inflation and labor constraints and ask what the longer term opportunity is to apply automation across the four businesses to mitigate these issues and as this require a brand new programs are brand new facilities to implement and more specifically with <unk>.

Bill.

It would seem that thats going to be a tough labor situation.

Inherently labor intensive business casting and you don't really have an available.

Labor pool there.

Trained and castings, how do you staff that plant, specifically or will it be more automated.

Well look I would tell you.

Factory automation is something that we have been doing for a number of years I think about the the hybrid facility. We have at Pratt, Canada that went online more than five years ago completely lights out manufacturing. So we have been making investments I'll call. It an industry four <unk> across all of our factories, we've got the new project down in Dallas, The New factory automated fact.

Hurry, that's going in down there.

Got Asheville, and Asheville, while it is a large facility, but the actual number of employees is only I think about 800 that we're going to be hiring and we have been actively hiring them today to train them for.

The opening which was happened sometimes I think at the end of next year.

So look it's it will be a challenge, but I would tell you.

If you work at Pratt Whitney worked at Collins or anywhere across the <unk> portfolio, we pay a very good wages.

Labor cost as a very or direct labor cost a very small piece of our cost of sales.

Bigger challenge I would tell you is on the engineering front.

And again Thats, just trying to find enough qualified engineers with clearances to drive.

The the revenue growth that we've been expecting that all of these programs that we've signed up for so.

Inflation is a problem, but we can deal with the inflation. The fact labor shortages, we can deal with it within our own four walls, because we've got really good really good competitive benefits.

People will come to Raytheon because of our mission and I think thats a differentiator that we have in the marketplace in the hope of course is as we see the economy slowed down here in the coming months and perhaps here that we'll have the opportunity.

To continue to drive more folks.

And to the both the shop floor as well as into our to our offices on these programs.

Far as automation, we're going to continue to drive automation, it's what we do to drive cost reduction that were encouraging suppliers through the same thing, but that's all contemplated I think in the kind of $2 $5 billion a year that we spend on capex, which is not an insignificant amount.

Greg just one more thing on Nashville, you mentioned structural castings earlier, we know thats been a long pole in the 10 tier.

If I remember correctly Asheville supposed to be for airfoils, but might you do structural large structures. There just to again address this single supplier problem.

Yes.

We'll take airfoils first and I think again, whether we decide later on to do is to go after.

The supply chain there that's a decision that is another relatively large investment. The fact is structural castings require huge capital and I would tell you.

Workforce it is highly skilled.

We're going to start with airfoils, it'll take us several years to get up to full run rate production there.

And then we'll see where we go from there, but really no plans to go beyond structural I'm sorry to go beyond the airfoils at this point.

Thank you.

Thanks.

Thank you our final question comes from the line of.

Seth Sigman of Jpmorgan. Please go ahead.

Yeah. Thanks, Thanks, very much good morning, Thanks for all the color on the defense situation, maybe just a quick final question, that's a little more thematic.

Greg how do you think about the role of the company in China over time.

And the pace at which maybe the U S and China, our decoupling on aerospace we see the 737, Max it seems to be stocking some political limbo right now in China Collins as a supplier on the C 909.

How fast do you see these two kinds of aviation levels.

Splitting up or is that not the right way to think about it.

How do you think about that these days.

So China remains.

Incredibly large market for commercial aerospace is an incredibly important market for commercial aerospace growth over the coming decades, obviously, the Chinese have a desire to have digital aircraft. That's the C 909, maybe the C to 92, 9% at some point.

But the fact is we think we're going to have we will continue to work with our partners there will.

We will continue to utilize supply chain out of China that we have thousands and thousands of parts that come out of China for our commercial aerospace specifically at Collins, but also some for Pratt, Canada and some for Pratt Whitney. So look we're going to continue to work with the Chinese at the same time I think we understand a geopolitical realities.

We're also making sure that we have assured assured supply chain. So we're looking to make sure. We have second sources outside of China in the case that the geopolitical tensions rise to the point, where we're not able to access that supply chain there.

A process thats been ongoing for well over a year and a half and it will continue for the next couple of years again thousands of part numbers to do that but again, we don't see a decoupling of China from the world. The way, we have seen a decoupling of Russia from the world After the invasion of Ukraine again.

The economy of Russia are relatively small the China's second largest economy in the world the decoupling between China and the U S. I think is impractical and almost impossible to imagine the consequences on the U S consumer the U S economy, if we really tried to decouple. So again the whole peer is we find a path forward, where we can.

We have worked together at.

At the same time understanding that we have competing interests.

But at the same time, we are retaining a very large presence in China for the commercial aerospace obviously, none of the defense side, but we understand what we need to do to protect our customers long term.

Okay. Thank you.

Okay.

Thank you very much I appreciate everybody listening in today, Jennifer and team of course will be available all day to take your calls and questions and look forward to seeing you guys sometime early in the fall.

This now concludes today's conference you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Yes.

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies second quarter 2022 earnings Conference call. My name is Latif and I will be your operator for today.

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

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

This call is being carried live on the Internet and there is a presentation available for download from Raytheon technologies website at Www Dot <unk> Dot com.

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

Great beyond technologies, SEC filings, including its forms 8-K, 10-Q, and 10-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements.

Once the call becomes open for questions. We ask that you limit your first round to one question per caller to give everyone the opportunity to participate.

To ask a question you will need to press star one one on your telephone.

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

Thank you Latif and good morning, everyone I hope everyone had a chance to see our press release this morning.

From that press release, I think one of the key takeaways as we had a really strong quarter for commercial aerospace and we continue to see very strong demand for our products and services as evidenced by our defense book to Bill in the quarter of 135 credible number.

We delivered these results in the midst of a I would say a challenging period across our industry and most of industrial America.

Inflation supply chain and labor availability continue to be near term constraints.

We're working these things relentlessly by leveraging our scale and our portfolio to combat all of these different pressures.

Before we get into the results, let me just spend a few minutes on the macro environment.

On the defense side, the evolving threat environment, including the ongoing conflict in Ukraine continues to drive global defense budgets higher.

Most of our NATO allies have reaffirmed their commitment to spending at least 2% of GDP.

National Defense.

Many countries announcing even higher spending targets over the last several months.

For example, Poland has requested accelerated delivery of Patriot missile systems battery batteries in both Germany, and Finland have selected the F 35.

As you know the department of Defense released its fiscal year 'twenty three budget request earlier this year with modernization spending growing over 4%.

And with modernization accounts, specifically <unk> expected to grow by nearly 10%.

We're also encouraged by the markets that we've seen in Congress.

Armed Services Committee has proposed a $37 billion increased to the administration's request, that's a 9% increase over fiscal 'twenty two excluding the supplemental.

On the Senate side, the Senate Armed Services Committee went even higher proposing a $45 billion mark.

Resulting in the Dod budget increase of 10% over fiscal 'twenty to bringing into fiscal year 'twenty three budget to over $815 billion.

It's a lot different than what we expected two years ago.

We're encouraged by the support of our programs with the authorizing committees recommending significant increases in spend over the President's budget request.

<unk> increases for stingers.

<unk> next generation Jammers Tomahawk cruise missiles, just to name a few.

And as I've said, our key programs and technologies and space Cyber missiles missile defense and non kinetic effects are also well aligned with the U S and our allies defense priorities.

We ended the quarter with the defense backlog of 65 billion.

That's up about $2 billion since the beginning of the year and we expect it to go even further in the remainder of the year.

The second quarter. We also saw a number of significant awards, including $4 billion to deliver F. 135 engines for <unk>, 15, and 16, which will power all variance of the F 35 fighter the.

The total contract value opportunities about $8 billion for F 135 engines across lots 15 through 17 in.

In addition, we received a $408 million contract for Sustainment of the F 35 Fleet F 135 fleet rather.

We have 135 engine continues to be the most advanced and I would say safest fighter engine ever produced and persistent.

Possesses unrivaled operational capability and mission effectiveness.

As the global threats evolve the F 3500, 35 could be upgraded to increase its thrust range and power thermal management to support the needs of the warfighter well into the next decade.

We also received a $648 million award to deliver SM three missiles to the missile Defense agency.

$662 million rewarded RMB to replenish 1300, stinger missiles as well as awards to replenish javelin missiles. RIS also had a $1 2 billion bookings of classified programs.

During the quarter RMB was also down selected by the MDA to continue developing a first of its kind counter hypersonic missile the glide phase interceptor.

In a few weeks just a few weeks ago RMG, along with our industry partner Northrop Grumman successfully completed the second flight test of the scramjet powered hypersonic air breathing weapon concept or Hawk for DARPA and the U S Air Force.

The flight test applied the data and lessons learned from the first flight test last September to demonstrate how rapidly.

In matured affordable Scramjet technology.

At the same time commercial air traffic demand continues to gain momentum with the strong start to the summer travel season.

Globally Q2 revenue passenger miles reached nearly 70% of the pre pandemic levels.

In the U S travelers through TSA checkpoints were up 30% year over year in the second quarter or nearly 90% of 2019 levels.

That being said, we all know that global supply chain isn't where it needs to be and we're aggressively managing these issues every day.

Microelectronics rocket motors structural castings, all continued to pace manufacturing lines.

Today, we have people embedded about 330 of our suppliers to help improve performance.

And we are also qualifying second in some cases third sources for critical parts as necessary.

Inflation also continues to be at elevated levels no surprise there.

However on the commercial side, we have long term agreements in place that cover about 80% of our spend and cover multiple years, which provides a inflation buffer at least in the near term.

On the defense side, we can price inflation into annual production contracts and flow through our rate structure.

Additionally, we're driving further automation standardization and process improvement projects throughout the company to mitigate inflation headwinds.

And lastly, and perhaps most.

Most importantly, the availability of skilled labor is a real challenge across multiple industries right now and we're seeing it in both at our suppliers and within our own shops.

It takes time to hire and train new employees. It doesn't just happen overnight, especially in certain areas such as much of our classified work.

Despite these near term challenges what differentiates us is our balanced A&D portfolio and our world class technologies that gives us the ability to deliver on our commitments.

Okay.

Let's just take a quick look at Q2.

I'm on slide two for those of you following along.

We delivered another solid quarter with sales growing 4% organically.

Adjusted EPS was a little bit ahead of our expectations at $1 16, and Thats up 13% versus the prior year and free cash flow was essentially in line with our expectations.

Growth in the quarter was led by strong commercial aftermarket sales that were up over 26% from the prior year.

This strength was partially offset by continued supply chain and labor constraints that principally impacted the defense businesses as well as some delays in expected contract awards.

Notwithstanding these challenges we continue to see full year sales in the range of $67 75 billion to $68 75 billion and.

And adjusted EPS, we continue to see that in the $4 60 to $4 80 range.

However, there were some changes within the segments the strength in the commercial Aero will help to offset impacts in our defense businesses.

Neil and Jennifer will discuss in just a little bit later in the call.

As far as our cash flow outlook, we outlook.

Outlook, we continue to expect about $6 billion of free cash flow for the year.

That's of course, assuming that the R&D tax legislation is repealed.

Finally, we repurchased over $1 billion of <unk> shares in the quarter, putting us at about $1 $8 billion year to date, and we remain on track to repurchase at least $2 5 billion for the year.

Through the end of the second quarter, we've already returned nearly $11 billion of capital to shareholders. Since the merger in April of 2020.

We're more than halfway to our commitment to return at least $20 billion in the first four years following the merger.

With that let me turn it over to Neil.

I'll be back at the end for wrap up in Q&A Neil.

Thank you Greg before I talk about the full year, let's look at the second quarter results on slide three.

Greg noted sales of $16 3 billion grew 4% on an organic basis versus the prior year.

Our performance in the quarter was driven by the continued recovery of air travel due to the pent up demand that was partially offset by continued supply chain constraints that as Greg said, principally impacted our defense businesses.

On a GAAP basis earnings per share from continuing operations was 88 per share and included 28 of acquisition accounting adjustments and net significant <unk> nonrecurring items.

And finally free cash flow of $807 million was generally in line with our expectations for the quarter.

So let me give you some perspective on how we're thinking about the environment as we look ahead to the second half of the year, let's turn to slide four.

I'll start with some positives to recovery in commercial air traffic remains a strong is very strong as airlines entered the summer travel season with leisure travel bookings well above 2019 levels and the active fleet is at its highest level since the beginning of the pandemic.

And as you saw our commercial aftermarket sales continued to grow generally in line with our expectations for the quarter.

Geographically U S. Domestic demand has remained strong while China domestic travel has lagged our expectations. So far this year.

That said domestic air traffic in China began to rebound as lockdowns ease throughout the second quarter.

On the international front short haul international travel or intra region travel has been quite strong fueled by a stronger than expected European recovery. So far this year.

On the defense side as Greg mentioned, we are optimistic about the fiscal 'twenty three budget request and our continued alignment with the priorities of the United States and our allies.

On the cost reduction front, we remain laser focused on driving operational excellence in our structural cost reduction projects to live to deliver further margin expansion in the second quarter, we achieved about $80 million of incremental cost synergies keeping us on track to achieve $335 million this year and well on our way to $1 5 billion.

A total gross gross cost synergies since the merger.

At the same time, we continue to monitor the broader geopolitical landscape as well as the U S and global tax environment.

And finally on the challenges side, we continue to see global supply chain and inflationary pressure as well as labor availability constraints.

During the second quarter, we saw a slower than expected recovery of material receipts and the resulting impacts to our shop productivity, along with increasing inflationary pressures in labor freight and other indirect cost areas and while we remain focused on aggressive mitigation actions. We don't expect these pressures to ease until next year.

So moving on to our outlook on slide five.

We continue to expect our full year sales to be in the range of $67 75 billion to $68 75 billion.

However, due to continued supply chain and labor constraints, we now expect lower sales and operating profit at both <unk> and R&D for the full year.

Those sales impacts are expected to be largely offset by the stronger commercial aerospace recovery, we're seeing at Collins and Pratt.

From an earnings perspective, we are holding our adjusted EPS range of $4 60 to $4 80 per share, but expect to be more towards the midpoint of the range as we don't expect some of the headwinds to fully recover in the year.

I should also point out that we continue to work mitigation to offset the impact of <unk> business activities with Russia, and minimizing any impact to our customers I'll provide more color on the moving pieces between the businesses in a moment.

$2 billion for the year.

If the legislation isn't just deferred by September 15th we will have to make an incremental cash tax payment of about $1 5 billion here in the third quarter. However, this payment is a timing issue only as we will receive a refund in 2023 for the overpayment. If the legislation is ultimately deferred by year end as we continue to expect.

So with that let's move to slide six for some color on the segment outlooks.

At Collins, we continue to expect full year sales to be up low double digits versus prior year.

We now see a little stronger commercial aftermarket recovery, partially offset by supply chain induced pressures on military sales.

Turning to Pratt Whitney were increasing.

Whitney sales range from up high single to low double digits to a new range of up low teens versus prior year, and that's driven by stronger commercial aftermarket and better commercial OE mix.

With respect to operating profit we are increasing adjusted operating profit from a range of up $500 million to $600 million to a new range of up $550 million to $650 million versus last year.

Turning to RIS due to the pressures we've discussed along with delays in awards, we're reducing Ras's reported sales outlook from down slightly to a new range of down mid single digit to down low single digit versus prior year <unk>.

And organically, we are reducing our outlook from up low single digit and now see ras's organic sales roughly flat versus prior year.

And finally at RMB also due to ongoing material material availability delays and the associated productivity impact along with the anticipated cost reduction we are reducing RMB is full year sales outlook from the prior range of up low to mid single digit to a new outlook of up slightly versus prior year.

By channel commercial aftermarket sales were up 25% driven by 33% increase in parts and repair it.

8% increase in provisioning and an 8% increase in modification and upgrade sequentially.

Sequentially commercial aftermarket sales were up 3%.

OE sales were up 14% versus prior year with strength in narrow body offsetting expected headwinds from lower 787 delivery.

Military sales were down 6% driven primarily by lower material receipt.

Our military program and expected declines in F 35 volume adjusted.

Operating profit of $617 million was up $99 million from the prior year.

<unk> $825 million versus last year.

Shifting to Pratt <unk> Whitney on slide eight.

Sales of $5 billion were up 16% on an adjusted basis and up 17% on organic basis with sales growing across all segments.

Commercial aftermarket sales were up 26% in the quarter with growth in both legacy large commercial engine and Pratt Canada shop visit.

Commercial OE sales were up 22% driven by higher DTF deliveries and favorable mix within Pratt large commercial engine business.

In the military business sales were up 5% driven primarily by the timing of F. 35 production contract award in Q2, and higher F 35 aftermarket volume.

Adjusted operating profit of $303 million was up $207 million from the prior year.

Chapter on higher commercial aftermarket favorable commercial OE mix, along with higher military volume were partially offset by higher SG&A and R&D looking.

Looking ahead, we now expect Pratt sales to be up low teens and for adjusted operating profit to be up $550 million to $650 million versus 2021.

Turning now to slide nine sales of $3 6 billion were down 6% versus prior year on an adjusted basis, primarily driven by the divestiture of the global training and services business sales.

Sales were down 1% versus prior year on an organic basis due to lower expected sales in command control and communication as well as lower sales within sensing and effects.

That were partially offset by higher sales and classified cyber programs within cyber training and services.

The quarter was also impacted by the delay of certain contract awards.

RIS had $3 billion of bookings in the quarter, resulting in a book to Bill of <unk> 92, and our backlog of $16 billion. Its worth noting that we continue to expect our assets full year book to bill to be greater than one.

Turning to RIS <unk> full year outlook as Neil discussed, we now expect <unk>.

Sales to be down mid single digit to down low single digits on a reported basis versus prior year and to be about flat on organic basis.

And we expect RIS adjusted operating profit to be down $50 million to flat versus prior year.

Partially offset by higher volume on spy fixed production and next generation Interceptor development.

<unk> bookings in the quarter were approximately $4 5 billion, resulting in a book to bill of one three and a backlog of $30 billion.

In addition to the awards that Greg discussed R&D also booked $423 million on basic hardware production and Sustainment program.

And $217 million for Tomahawk production for the U S Navy.

For the full year, we now expect RMB is full year book to bill to be closer to 1.2.

Okay. Thank you Jennifer I'm on slide 11.

Second for Q&A.

And while we continue to make progress let me just say that we're certainly not satisfied with the performance in our defense businesses this quarter.

There is much to do bookings were outstanding execution not so much.

With our industry, leading franchises across A&D, we're prepared to capitalize on the commercial aerospace recovery.

And growing defense budgets balance continues to work.

And I think most importantly, we remain confident in our ability to hit the 2025 targets that we set in may of last year at our Investor meeting.

A lot to do there is always more to do with that let's open up the call for questions Latif.

In the interest of time and to allow for broader participation. You are asked to limit yourself to one question to ask a question you will need to press star one one on your telephone.

The first question comes from the line of Ron Epstein of Bank of America. Please go ahead, Ron Epstein.

Yes.

Good morning, Greg Good morning, Ralph Good morning.

So maybe if we can.

<unk> and more.

What's going on in the supply chain in defense.

For RMB right, you're down 7% in the first quarter or 11% this quarter, so you're going to be up during the year, which means youre going to have a pretty good inflection.

How is that going to happen.

It's almost a little hard to believe and then I guess.

Another way to ask this it seems like your commercial business right now our run better than your defense businesses are there any lessons that the defense businesses can learn from the commercial business because it's really surprising I mean, you guys are at.

Designated.

Company.

We usually have.

Full on head of the line rates in terms of the supply chain. So so what's really going on there because it's surprising that it's hitting you guys. So hard.

Ron that is the question of the day I would tell you first of all just to be clear most of our programs without Dx right and in fact, there are very few where we have DFAST ratings that give us priority on.

The supply chain again, those are very very few.

I'll tell you there's a couple of significant differences between our commercial businesses and the defense side on.

On the commercial side, you've heard US say this for about 80% of our supplies suppliers around long term agreements alright that long term agreement allows us the ability to give forecast demand, but it also gives us a priority and our suppliers as part of those <unk> are required to keep a buffer stock in place.

This only about 10% of those businesses of RMB in RF suppliers are on long term agreements and thats not surprising because of government contracting rules the.

The problem that we've had as we've received all these new awards, we've been going out and once the award is set once the contract is signed we're going out and we're putting contractors suppliers on contract and we're seeing lead times double and sometimes triple.

And we have been I would say caught off guard a little bit by how much pressure. There is in the supply chain and I would tell you. It's it all goes back to labor availability.

Typically.

During the downturn that we saw in A&D two years ago.

There was a lot of layoffs. There is a lot of people that were let go typically we get about 75% to 80% of those folks come back off of layoff.

In this case, what we're seeing in our supply chain is only about 25% of the people are coming back. They found other jobs similar jobs because of the labor market is so tight in this country. We just don't have a large pool of resources. The other problem I would tell you.

Again, not just it's not just material. It's also labor availability that I'm thinking about our ice business, which has over 5000 programs that we're executing on right that requires engineers and engineers with clearances.

If you look at the unemployment rate for engineering talent in the U S. It's less than 2%.

We started the year with the goal of almost hiring about 2000 engineers net of attrition, which means we have to hire probably more than 5000, we are struggling on that regard as well and again, if you don't think about it but engineers working on programs generate revenue and so as we think about the <unk>.

Issues in Q2, and that's really the first half of the year, we have seen this.

Supply chain, but also a labor availability impact our defense businesses.

As you talk about the back half of the year Youre absolutely right. There is a lot of work to do.

Right now just give you a couple of statistics in the second quarter.

In our factories, we typically look to.

Provide kits to the shop floor to assemble and we target somewhere between 90 and 95% kit availability in other words, all the parts of their 90% to 95% of the time.

In the second quarter because of all of these supply chain constraints, we saw kit Phil.

Fill rates around 50%.

We've had some very deep dive reviews, with Chris <unk>, and Neil Mitchell with the guys going out and making sure that we have line of sight too.

To the supplier recovery plans and we expect kit fill rates for instance to go from roughly 50% to about 80% by the end of the year.

Also about trying to make sure they've got the right labor trained labor to get all this done.

So it is a hill to climb in the back half of the year and it is a challenge that we're going to have to take out in order to.

First of all to meet our customer demands of our customer needs. I mean, this is really about making sure we can deliver to our customers on time and right now we are suffering.

I don't know Neil anything you want to add to that.

Maybe I'll just put a little color around the kind of held that we're looking at for the second half at RMB one of the big challenges as the material receipts, we talked in the first quarter about sort of COVID-19 induced <unk>.

Volume step up in dollars in the second half versus the first half obviously, our new outlook for for RMB reflect that and it.

Material is also an important part of their products and it's about a 15% step up in the second half. So those are the metrics that we're monitoring on a daily and weekly basis.

As it relates to their performance the only other thing Greg I would add is.

Productivity. So one of the big reasons, I'd say about half of the drop in the margin at RMB in the second quarter was it related to lost productivity in the absence of productivity and our.

Our profit outlook.

For the remainder of the year for RMB reflects us not catching up on on that productivity given the kit fill rate issues that you talked about.

Sure.

Right.

If I can go and.

Percent.

Recall, given the most of the points that you brought up about hiring people with.

Fast turnarounds.

Right I mean thats.

It's not something that's going to change on a dime.

Look let's be let's be clear on this does not get solved this year I think again get into a kid fill rate of 80% is interesting, but literally we would need to be at 95% to be running at I would say a normal pace. It has a lot of work we've done a lot of I would say deep dive reviews on supply chain going through supplier by supplier. So why we got <unk>.

A lot of all of these different suppliers, making sure they're meeting their commitments.

I think the only thing thats going to solve labor availability I hate to say this is a slowdown in the economy because right now theyre just simply aren't enough people in the workforce.

For all of our suppliers.

We pay a very very competitive wage at RPX, but as you go down into the second third and fourth tier of the supply chain. They are struggling to attract workers, but again, we've got people out there I would tell you.

Because we've done these reviews, we have a path to get there. It is not an easy path. It is going to be a challenge through the year and we will see how we do we're tracking materially receipts day by day, and it's a big Hill.

Alright, great. Thank you guys.

Thanks, Brian Thank you.

Thank you.

Our next question comes from the line of Robert Stallard of vertical Research partners. Please go ahead Robert Stallard.

Thanks, so much good morning.

Bob.

Greg maybe to follow up on that <unk> point, there on the supply chain and labor and the impacts of inflation, what do you see as your ability to pass. This on you is there a cap to how much you can parse this up the China it can be different and aerospace versus defense, but is there a point, where you have to stop biting the bullet all of these cost increases.

Yes.

As we look at it this year, we've got about $200 million of additional inflation headwind that we didn't anticipate when we started the year so that $200 million.

We've had to go out we've done a number of initiatives looking too.

Ways within the supply chain to eliminate that that headwind and so far we've done a pretty good job of that.

Keep in mind, that's on top of about $300 million of headwind from the from the Russia exit that we had earlier in the year. So I would tell you. The team has done a good job in managing costs.

And finding ways to overcome some of the headwinds that we've seen on the on the commercial side again, the LTA coverage at 80% really provides you a lot of coverage with inflation now there's dead bands in there.

Inflation above some levels, usually six or 7% get shared with the supplier.

But for the most part we've been able to manage through that.

On the defense side, what we've seen again, we've seen labor inflation clearly we've been able to put most of that though into our overhead rates and that gets that gets recovered in the normal contracting process.

We've also seen again just inflation in the supply chain, but again, most I would say at least 30% of the work that we have as cost type at RMB, and so youre able to pass that along and.

Right now again I think one of the reasons we continue to.

Push this.

On the R&D side is to make sure that we can overcome the inflationary impacts that we're seeing in the supply chain. There. So I think again, we need to learn the lessons of how we manage this from the from.

From the commercial side and going to more LTA is I think is absolutely essential if we're going to.

Be able to have some kind of consistency in terms of.

Supply chain.

Going forward.

That's great. Thanks, Greg.

Rob.

Thank you. Our next question comes from the line of David Strauss of Barclays. Your question. Please David Strauss.

Okay.

Thanks, Good morning good.

Good morning, David.

Yes.

Greg maybe touch on the recovery.

The recovery on the GTS side of things.

Thank you had mid <unk> 7 million in Q1, you were saying you would need to get to about 180.

Up around 108 deliveries for the full year can you just talk about where you are there and then also talk on the Pratt Canada side I saw deliveries were down in the quarter I think you had highlighted.

Previously that titanium was a was a pretty big issue on the Pratt Canada side. Thanks.

Yes, Thanks, David Let me just on the Pratt <unk> Whitney and the GTS side I would tell you.

Right now we continue to deliver GTS.

Behind schedule, and we will not catch up as I think I said back in February until the end of the year and this is again goes back to a single issue around structural castings.

We're not holding up the line at Airbus Thats, the good news with the 11 hundreds or.

We're not holding up the line.

500, either on the C series or I guess the 820. So we're managing this with the customers. We are managing this with the supply chain and we really expect again youre going to see a big step up in the back half of the year GTS deliveries as you think about your <unk> had a great first half second half again EBIT was recovering commercial aftermarket.

The.

Pratt Canada side, you're exactly right on titanium and again this is primarily around the sanctions and our inability to continue to buy nor our desire to buy anything from Russia. So we have been.

Working too.

Identify second sources qualify them I will tell you we will impact production lines at a number of our customers.

Sure Youre going to hear that from them as well on the Biz jet side, we're just not going to be able to make all the deliveries now we're not talking about dozens and dozens of aircraft, but youre talking five to 10 airplanes.

<unk>.

As these customers that are going to be without engines, because we don't have the titanium forgings that we had expected to get this year. So again this will recover.

Sometime in the middle of next year.

There's still a lot of work to do to get these suppliers requalify them I think every single.

The person in commercial aerospace is facing the same problems with Russian titanium effect as it wasn't a huge piece of the supply chain, but it was 20% plus of global titanium.

We're all going after those same resources interestingly, we were in the Farnborough last week had a good conversation with a number of our suppliers on this people are stepping up people understand this is a long term business and I think the suppliers of titanium see this as a big opportunity to take share. So we'll work through it but it's not going to be without a little bit of pain to.

Customers.

Greg how far along are you on reallocating these titanium supply contracts.

Well, we're probably in terms of identifying and the sources of the contracts I would say we're almost complete.

The issue simply is getting the.

Parts qualified you have got to go through first article you got to go through the metallurgical analysis, you've got to make sure that the composition of the material is exactly the same as what it was prior and then you've got to get the parts certified so that's the part that takes time, it's not actually identifying the suppliers. We've done that we've got everything lined up.

The same thing on heat exchangers recall, we made a number of different commercial heat exchangers.

At our joint venture in the OCA in Moscow.

All of that work was discontinued on the 27th of February and we are still working through the re qualification of heat exchangers.

780 Sevens Thats Triple Sevens, Thats, Embraer 170, Theres a number of.

Thank you.

Okay.

Thank you our next question.

Our next question comes from the line of Noah <unk> of Goldman Sachs. Your question. Please hi, good morning, everyone.

Good morning Noah.

Okay.

Obviously, what's happening with supply chain labor inflation is.

It's unprecedented and hard to manage and hard to forecast but.

Im confused by the pace of deterioration or the narrow window in which the defense forecast have changed because.

Unprecedented and hard to manage and hard to forecast but.

I'm confused by the pace of deterioration or the narrow window in which the defense forecast have changed because.

The variances are the negative variances are pretty large and.

I go back to just the first quarter call in April and you are talking about supply chain labor inflation repeatedly the whole world Wars, and and so you were giving guidance just three months ago and a month into the quarter and so have supply chain labor inflation deteriorated that much and just two to three months.

<unk>.

Or is it.

It's just that difficult to forecast and if it's the latter if I go back to this discussion of the second half inflection.

Still really hard to stare at this RMT guidance and see how you can have that much of an acceleration maybe you could spend some time on the specific programs.

That drive that to get us more comfortable.

Yes, no that is a great point that I would tell you when we exited the first quarter and we knew that we had seen supply chain challenges specifically at RMB.

The thought was it which turned out to be of course incorrect was that most of the supply chain challenges were related to omicron and Thats why we had problems in December and January but we really expected as COVID-19 receded into the background that we would see a quick recovery.

In the supply chain and in fact that was that was wrong.

The labor challenges that we continue to see have not abated.

And again I think that is the challenge and Thats. The reason we continue to struggle in supply chain. It inflation is is a challenge, but we can measure it we can we can work to overcome it.

Not having enough people in the supply chain that has proven to be much more difficult and so again, we have gone through this I would tell you.

Program by program line item by line item in terms of what our thoughts and our MRP schedule.

There is some go gets out there, but we have commitments from suppliers.

To hit these numbers and I think that's the that is the challenge is making sure that our suppliers continued to deliver on the recovery plans that they have laid out for us.

I don't know Neil anything you want to yes.

In our lower margin production contracts were the ones that received the materials, so getting back to that fill rate conversation.

You had to stuff that was coming in not being on the more profitable programs. The second piece of that the knock on effect of that is the absence of labor productivity in the shops, and so with the fill rates being down in that 50% range.

It is a tough hill in the second half I think we've got the right resources engaged with suppliers within the business and on the shop floors, but.

We are we are looking at this every day and we do need to see a market improvement in productivity in the shops to drive that P&L benefit in the second half of the year.

Okay. Thank you.

No.

Thank you our next question.

Comes from the line.

Sheila.

<unk> of Jefferies. Your question. Please.

Okay, and kind of guess that with Morgan <unk> morning, guys.

Good morning, Sheila.

And when we think about the U S Airlines, just switching gears a little bit there finally, thank python tailwind and capacity can you talk a little bit about your aftermarket business.

Are you seeing definitely actions from the airlines house pricing trending relative to history, and then can you maybe remind us of your.

Aftermarket guidance expectations for the year with long haul international expectations for the second half.

Sure, let me start with some of the outlook pieces here first at Collins.

Now expect aftermarket to be up between 20% and 25% year over year. So we're at the halfway mark of the year I think it's important I've been talking a lot about.

Certainty around the recovery and we're pleased to see that.

Routes opening up as well and expect that to continue in the second half and on the <unk> side, we now see the aftermarket up year over year, 2025%. So.

Really good performance there our customers are giving us good line of sight to shop visit inductions were a little over 40% towards our plan for the year in terms of the 2500 shop visits.

There's still some work to be done in the back half of the year as you know China was closed down for the better part of the second quarter and that is a piece of the back half growth, but feel pretty confident we got good dialogue with our customers. Good line of sight to the third quarter in particular and I expect that to continue in the fourth quarter.

Yes, Sheila I would say.

It's an interesting time for the commercial aerospace business demand is on.

<unk> airlines, they're struggling with the same labor availability that we talked about in the supply chain. So.

The recovery is very strong pricing as you know for the airlines is very strong fuel prices jet a has doubled in price in the last year, but it has come off its highs a couple of months ago. So I think again the airlines financially are doing very well and the biggest concern. They have is aircraft availability and so we're going to see very.

Strong inductions into the shop, we've seen very strong orders in our aftermarket or getting a little bit stronger even than we had anticipated going into the second quarter and we don't think theres anything that changes that trajectory in the back half of the year.

Absent a huge resurgence in COVID-19.

Okay. Thank you.

Thank you.

Our next question comes from the line of Peter Amit of Baird. Please go ahead, Peter or Matt.

Hey, good morning, Greg Neil Jennifer.

Good morning.

Hey, Greg just if I can.

Just.

Come back to the kind of the differences between commercial aerospace or your aerospace business.

How well, it's performing but dealing with a lot of the same probably supply chain.

And that overlaps with defense, maybe if you could just call out maybe some of the differences because I think a lot of it is struggling on the defense side, it's really seamless.

Very complex and tried to get back to kind of the trajectory versus where your commercial aerospace businesses, probably dealing a lot of things challenges at the same time, it's performing really well.

Maybe just call out a couple of differences that would be helpful. Thanks.

Yes.

What are the the opera or one of the benefits on the commercial side is we're not handicapped with government contracting and REIT regulations and to that end the MMS material management system, which dictates how much inventory, we can drive and how soon we can place things on order.

Really constrains our ability to be flexible.

On the defense side I would tell you. The reason that we have been able to be successful on the commercial side as we've driven a lot of inventory and you look at the inventory is up about $1 billion since the beginning of the year, it's up about $400 million in the second quarter, primarily on the commercial side to meet the higher demand. So we have been driving material in faster, we're not constrained on the commercial side.

By the <unk> system, and I think again.

That is a lesson learned for us what we've told the team on defense is bringing.

Bring it in and we don't have to build it.

To bring in more inventory sooner rather than.

And with a normal lead times, that's okay. So we're going to go out and be a little more aggressive with inventory.

We're not talking billions of dollars, but the fact is we need to drive inventory faster and.

Give some surety of supply or security of demand rather to our supply chain such as they continue to to drive.

Drive material in and look at some.

Some of the suppliers, we know are not going to get better. This year rocket motors, we've talked about the continuously for over a year, we know that as a recovery that stretches probably into 2024, but thats.

That's only a piece of the problem I mean, it's again trying to make sure we've got the right.

Chips in microelectronics really hand to mouth there.

I appreciate the color thanks, Greg.

Thanks Peter.

Thank you. Our next question comes from the line of Robert Spingarn of <unk> Research. Your question. Please Robert Spingarn.

Well. Thank you Greg I wanted to go back to the discussion on inflation and labor constraints and ask what the longer term opportunity is to apply automation.

Across the four businesses to mitigate these issues and as this require a brand new programs are brand new facilities to implement and more specifically with Asheville.

It would seem that that is going to be a tough labor situation.

Inherently labor intensive business casting and you don't really have an available.

Labor pool there.

Trained and castings, how do you staff that plant, specifically or will it be more automated.

Well look I would tell you.

Factory automation is something that we have been doing for a number of years I think about the hybrid facility. We have at Pratt, Canada that went online more than five years ago completely lights out manufacturing. So we have been making investments I'll call an industry for across all of our factories. We've got the new project down in Dallas, The new factory automated factor.

That's going into down there.

The opening which was happened sometimes I think at the end of next year.

So look it's it will be a challenge, but I would tell you.

If you work at Pratt Whitney you work at Collins or anywhere across the <unk> portfolio, we pay a very good wages.

Labor cost as a very or direct labor cost a very small piece of our cost of sales the bigger challenge I would tell you is on the engineering front.

Again, Thats just trying to find enough qualified engineers with clearances to drive.

The the revenue growth that we've been expecting that all of these programs that we've signed up for so.

Inflation is a problem, but we can deal with the inflation. The fact labor shortages, we can deal with it within our own four walls, because we've got really good pay really good competitive benefits.

People come to Raytheon because of our mission and I think that's a differentiator that we have in the marketplace in the hope of course is as we see the economy slowed down here in the coming months and perhaps here that we'll have.

The opportunity to continue to drive more folks.

And to the both the shop floor as well as into our to our offices on these programs as far as automation, we're going to continue to drive automation. It's what we do to drive cost reduction that were encouraging suppliers through the same thing, but that's all contemplated I think in the kind of $2 $5 billion a year that we spend on capex, which is not an insignificant amount.

Greg just one more thing on Nashville, you mentioned structural castings earlier, we know thats been a long pole in the tent here, if I remember correctly Asheville supposed to be for airfoils, but might you do structural large structures. There just to again address this single supplier problem.

Yes.

We'll take airfoils first and I think again, whether we decide later on to <unk> to go up.

Of the supply chain there to decision at another relatively large investment. The fact is structural castings require huge capital and I would tell you.

Workforce it is highly skilled.

We're going to start with airfoils, it'll take us several years to get up to full run rate production there.

And then we'll see where we go from there, but really no plans to go beyond structural I'm sorry to go beyond the airfoils at this point.

Thank you.

Thanks.

Thank you.

Our final question comes from the line of Seth Sigman of Jpmorgan. Please go ahead.

Yeah. Thanks, Thanks very much.

Morning.

Thanks for all the color on the defense.

<unk>, maybe just a quick final question.

A little more thematic.

Greg how do you think about the role of the company and China over time.

And the pace at which maybe the U S and China, our decoupling on aerospace we see the 737, Max it seems to be stocking some political limbo right now in China Collins as a supplier on the C 909.

How fast do you see these two kinds of aviation where all of this.

Splitting up or is that not the right way to think about it.

How do you think about that these days.

So look China remains an incredibly large market for commercial aerospace and an incredibly important market for our commercial aerospace growth over the coming decades, obviously, the Chinese have a desire to have digital aircraft, let's see.

<unk> 9009, maybe the C to 92, 9% at some point.

But the fact is we.

We think we're going to have we will continue to work with our partners there will.

The process has been ongoing for well over a year and a half that will continue for the next couple of years again thousands of part numbers to do that but again, we don't see a decoupling of China from the world. The way, we've seen a decoupling of Russia from the world After the invasion of Ukraine again.

The economy of Russia are relatively small the China's second largest economy in the world the <unk>.

Coupling between China, and the U S. I think is impractical and almost impossible to imagine the consequences on the U S consumer the U S economy, if we really tried to decouple. So again the whole peer is we find a path forward, where we can work together.

The same time understanding that we have competing interests, but at the same time, we are retaining a very large presence in China for the commercial aerospace obviously, another defense side, but we understand what we need to do to protect our customers long term.

Okay. Thank you.

Okay.

Thank.

Thank you very much I appreciate everybody listening in today, Jennifer and team of course will be available all day to take your calls and questions and we look forward to seeing you guys sometime early in the fall.

This now concludes today's conference you may now disconnect.

Q2 2022 Raytheon Technologies Corp Earnings Call

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