Q3 2022 Raytheon Technologies Corp Earnings Call
[music].
Yeah.
Good day, ladies and gentlemen.
And welcome.
Florida.
Earnings Conference call.
Yeah.
Yeah.
As a reminder, this conference is being.
And recorded for replay purposes.
On the call today are Greg.
Chief Executive Officer.
Neil Mitchell, Chief Financial Officer and.
And Jennifer Reed, Vice President of Investor Relations.
This call is being carried live on.
On the Internet.
No.
From Raytheon technologies website at Ww, Dod Rdx Dot com.
Please note, except where otherwise noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring.
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.
John Technologists SEC filings.
Its form 8-K.
Q and 10-K provided details on important factors that could cause actual results to differ materially from those anticipated in forward looking statements.
Once the call becomes open for questions. We ask that you limit your first round to one question per caller.
Everyone the opportunity to participate.
Jimmy you will need to press star one on your telephone.
You may ask further questions by re inserting yourself into the queue as time permits.
I will turn the call over to Mr. Hayes.
Thank you Olivia and good morning, everybody.
As you can see in the press release. This morning, our T X had another solid quarter of growth led by commercial aerospace and extremely strong demand for our products with over $22 billion of awards in the quarter.
It's important to note our balanced aerospace and defense portfolio, along with operational resiliency remain the key differentiators, which enable us to deliver on our commitments. Despite some near term macro challenges and uncertainties.
Sure what that noises.
I think it's also important to know we've overcome some significant headwinds in 2022 from transitioning out of Russia to record inflation and a strained supply chain.
It's important those are short term issues and while we continue the day to day work to mitigate those challenges. We also continued to grow our $168 billion backlog.
Invest in the future through over $9 billion of R&D capital expenditures.
And customer funded research and development.
Those investments coupled with strong demand for our systems across each of our businesses positions us for significant growth runway as the near term headwinds recede.
Before I get to the results, let me spend a few minutes discussing the trends were seeing in some of our end markets.
On the defense side no surprises the Ela.
Weighted threat environment is significantly influenced how the U S and our allies are thinking about their defense capabilities and readiness and as a result, as this is driven global defense budgets substantially higher a trend we expect to continue for the foreseeable future.
As an example in Europe , Switzerland recently signed a $625 billion contract.
<unk> 36 F 35 jets modernizing their fleet and driving demand of course for our F 135 engine through the end of the decade.
We're also seeing significant global demand for advanced Air Defense systems, especially in eastern Europe , as the Russian and Ukraine conflict. Unfortunately continues.
This includes two of our <unk> system, which is the sharp.
Surface to air missile system that will help protect the people of Ukraine, and we expect more orders beyond those two to follow shortly.
The Aten threat environment continues to drive strong orders during the quarter, we saw strong domestic and international demand for our products with a number of significant defense Awards.
Which resulted in a book to Bill of one to two at a backlog that's up about $2 billion sequentially.
Of particular note our missiles and defense business was awarded a $1 billion to develop the hypersonic attack cruise missile or hack them for the U S. Air Force is the first of its kind missile that leverages air breathing scramjet propulsion technology, and they can travel a hypersonic speeds of Mach five or greater.
Additionally, RMB completed the systems requirement reviewed for the hypersonic glide Phase Interceptor program prototype. This is designed to protect the United States from increasing hypersonic missile threats.
Both of these accomplishments demonstrate that Raytheon technologies as a leader in the race to develop and deploy operational hypersonic and importantly counter hypersonic systems, a key strategic priority for the department of defense.
R&D also was awarded about $1 billion from the U S Air Force Navy and international customers for advanced <unk>, which is the advanced medium range Air to Air missile. These missiles have been upgraded with the most sophisticated technology needed to maintain the edge over at the series of the U S and our international Allies.
And our eyes.
We saw an additional $1 $6 billion in classified awards in the quarter. The team was also awarded $215 million from the FAA to upgrade their wide area augmentation system.
Hence safer air travel in support of the National Aerospace system.
At Pratt and Whitney the team recently delivered the 1000 F 135 engine and was awarded over $800 million for the quarter and the quarter to continue supporting the F 135.
As the safest most capable and best value military jet engine and operation.
And.
We're working on the F 135 engine core upgrade known as the enhanced engine package or <unk>. This will allow the F 135 to provide even more thrust range and electrification to the aircraft.
<unk> offers the most cost effective and lowest risk solution to enable the F 35 block for upgrade.
At Collins, we received a $583 million IV IQ award for the maps Gen. Two program, which maintains the integrity of positioning and timing at a GPS contested or denied environment and it's an important award to ensure mission success within a more connected battle space.
As you can see the defence pipeline remains robust.
And we expect to continued order strength in the future as we continue to win key awards successfully demonstrate our technology leadership and innovation capabilities.
Moving to the commercial side air traffic remains strong as third quarter global revenue passenger miles reached 75% of 2019 levels.
In the U S travelers through TSA checkpoints reached 91% of 2019 levels with labor day domestic traffic exceeding 2019.
And we continue to see steady improvement in long haul international traffic with wide body hours flown up nearly 40% year over year.
The strong demand.
On commercial aerospace recovery of its driving demand for our commercial products and services and we continue to innovate to deliver value for our customers for.
For example, just a few weeks ago prep.
Began development flight testing of the <unk> advantage engine of the <unk> hundred 20, neo aircraft and to lose France. The.
The GTS advantaged reduces fuel consumption and cotwo emissions by a total of 17% compared to the prior generation engines.
Extending the engines lead as the most efficient power plant for the <unk> hundred 20 family.
Also during the quarter <unk> completed the first flight test of the GTS powered <unk> hundred 21, XL or extra long range two significant milestones for the GTI family of engines.
So even with some near term challenges we continue to invest in innovation for continued growth in air travel and to meet the strong defense demand.
Okay with that as background, let's turn to slide two some highlights in the quarter.
In the quarter, we delivered another strong organic sales growth of 6%. Adjusted EPS was ahead of our expectations at $1 21, and free cash flow was also ahead of our expectations. Despite a $1 5 billion additional tax payment, we made related to the R&D amortization.
Sales growth was again led by strong commercial aftermarket sales that were up 24% over the prior year.
However, we continue to see challenges related to supply chain and labor availability and each of our businesses.
On the capital allocation front, we repurchased over $600 million of shares in the quarter, putting us at $2 $4 billion year to date, and we remain on track to repurchase at least $2 5 billion for the year.
Through the end of the third quarter, we've returned over $12 billion of capital to shareholders since the merger and we're well on our way to our commitment to return at least $20 billion in the first four years following the merger.
Before I hand, it over to Neil notwithstanding the strength in demand that we're seeing across our businesses the industry wide challenges, we're facing and remain the same.
<unk> heard me talk about them before supply chain labor at inflation.
But we continue to focus on what we can control by proactively managing the businesses through these dynamic times, let me give you. Some examples of what we're doing.
On the Microelectronics front, we're working closely with our distributors and the Oems to bring more capacity online.
We're also having direct engagement, which has led to higher deliveries of acceleration of expected recoveries for certain wafers and chips.
At R&D, we're working hand in hand, with our rocket motor supplier holding daily senior manager of Indians to track work in progress and solve technical problems real time.
We're also leveraging our TX as contract labor agreements to help source labor in our supply base.
To mitigate the impacts of inflation, we take multiple we've been taking multiple actions. For example, we're leveraging our raw material contracts from the business from RPX to get best prices for our suppliers as well.
And while supply chain disruptions are frustrating, we are seeing some stabilization and rickard encouraged by the demand signals across the business that said these headwinds continue to pressure the business.
So as we finish out the year just a couple of thoughts we're going to have to adjust our full year sales outlook slightly to a new range of <unk> 67 to 67 3 billion.
We're going to bring up the bottom of our adjusted EPS range by a dime $4 70 to $4 80, and we're continuing to see free cash flow of about $4 billion for the year.
With that let me turn it over to Neil and Jennifer to take you through the details.
Thank you Greg before I get into the full year, let's look at our Q3 results on slide three.
Sales of $17 billion grew 6% organically versus the prior year with organic growth at Collins, and Pratt and <unk> more than offsetting a decline in R&D.
Ongoing recovery of commercial air travel and a strong summer travel season drove our aerospace performance, while we continue to see challenges in the supply chain as Greg mentioned adjust.
Adjusted earnings per share of $1 21 was down 4% year over year, but ahead of our expectations on better commercial Aero segment operating profit growth of 12% was more than offset by the absence of a prior year tax benefit.
And lower pension income.
GAAP earnings per share from continuing operations was <unk> 94 per share and included 27.
Of acquisition accounting adjustments and restructuring.
And free cash flow of $263 million was also ahead of our expectations and included the impact of the $1 $5 billion cash payment that Greg just mentioned.
On the cost reduction front, we achieved an incremental $105 million of gross merger cost synergies in the quarter, bringing our merger to date total to $1 3 billion of our $1 $5 billion commitment in the four years following the merger.
Before I hand, it over to Jennifer a few comments on our full year outlook.
The commercial air recovery remains robust and we continue to expect the global Rpms will recover to about 90% of 2019 levels as we exit this year domestic and short haul international travel also remains strong and we continue to see a steady recovery in long haul international travel.
As Greg discussed, while we're seeing some stabilization in certain areas of the supply chain and labor market. These constraints continue to put pressure on our businesses. As a result, we're reducing our full year <unk> sales outlook to a new range of 67% to $67 3 billion, which translates to between five and 6% organic sales growth. This is down from our prior <unk>.
Range of 67, 75% to $68 75 billion. However, despite the lower sales outlook, we are raising the bottom end of our adjusted EPS range by <unk> 10 to $4 70 to.
To $4 80 per share from our prior range of $4 60 to $4 80.
Continued aftermarket strength favorable OE mix and cost containment actions across RPX or partially offsetting lower sales and lower productivity in our defense businesses.
You'll also recall that we previously assumed the legislation requiring capitalization of R&D expenses for tax purposes would be repealed a deferred this year since that hasn't happened we've realized an EPS benefit of about <unk> 11 year to date and estimate that the full year impact is about <unk> 15 per share.
And on the cash front, we continue to expect free cash flow of about $4 billion for the full year in the fourth quarter, we're expecting lower tax payments several large international receipts and finally, we've provided an updated outlook for the segments and some below the line items in the webcast appendix so with that let me hand, it over to Jennifer to take you through the third quarter segment.
And updated outlooks, Jennifer Thanks, Neal starting with Collins Aerospace on slide four sales were $5 1 billion in the quarter up 11% on an adjusted basis and up 13% organically driven primarily by the continued recovery in commercial aerospace end market by panel commercial aftermarket sales were up.
25% driven by a 44% increase in provisioning and a 31% increase in parts and repair and modification and upgrades were up 3% organically in the quarter sequentially.
Sequentially commercial aftermarket sales were up 4%.
<unk> sales were up 16% versus prior year, driven principally by the strength in narrow body.
Military sales were down 6%, driven primarily by lower material receipt and decreased volume adjusted operating profit of $630 million was up $150 million from the prior year.
Drop through on higher commercial aftermarket and OE more than offset lower volume on military programs as well as higher SG&A and R&D expense.
<unk> ahead, we continue to see Cowen full year sales up low double digits and as a result of stronger commercial aftermarket, we're bringing up the low end of Collins adjusted operating profit to a new range of $750 million to $825 million from the prior range of $700 million to $825 million versus <unk>.
Last year.
Shifting to Pratt <unk> Whitney on slide five.
Sales of $5 4 billion were up 14% on an adjusted basis and up 15% organically with sales growth in large commercial engines, and Pratt Canada more than offsetting lower military sales.
Commercial OE sales were up 26% driven by favorable mix within Pratt large commercial engine and Pratt, Canada businesses, along with higher DPF and Pratt Canada volume.
<unk> aftermarket sales were up 23% in the quarter with growth in both legacy large commercial engine and Pratt Canada shop visits.
Sequentially commercial aftermarket sales were up 14%.
In the military business sales were down 2% driven primarily by lower expected F. 35 production volume that was partially offset by higher F 35 Sustainment volume.
The adjusted operating profit of $318 million was up $129 million from the prior year.
The drop through on higher commercial aftermarket and favorable military and commercial OE sales mix more than offset higher SG&A and R&D expense.
Looking ahead, we continue to expect <unk> sales to be up low teens, and we're increasing price adjusted operating profit to a new range of $650 million to $700 million.
From a prior range of $550 million to $650 million versus 2021, reflecting the strength of the aerospace recovery.
Turning now to slide six.
<unk> sales of $3 6 billion were down 3% versus prior year on an adjusted basis, driven by the divestiture of the global training and services fitness.
On organic basis sales were up 2% versus prior year due to higher classified sales and Cynthia and effects that were partially offset by lower expected sales in command control and communications, including lower sales in tactical Communications program.
Adjusted operating profit in the quarter of $371 million was down $20 million versus prior year.
Excluding the impact of the Divesture operating profit was up $8 million driven primarily by favorable net program efficiencies.
Alright, yes at $3 9 billion of bookings in the quarter, resulting in a book to Bill of 118, and our backlog of $17 billion for.
For the full year, we continue to expect Ras's book to bill to be greater than one.
Turning to RIS full year outlook.
Out of ongoing material availability delays and the associated productivity impacts as well as anticipated cost reduction actions and award delays, we are reducing <unk> sales to the low end of our prior outlook and now expect <unk> sales to be down mid single digits from our prior outlook of down mid single digit to down low.
<unk> digit on a reported basis versus prior year.
On an organic basis, we now expect our asset sales to be down slightly versus our prior outlook of about flat.
And as a result of lower sales outlook and program efficiencies, we are reducing ras's adjusted operating profit to a new range of down $125 million down $75 million from our prior range of down 50 to flat versus prior year.
Turning now to slide seven RMB.
<unk> sales were $3 7 billion down 6% on an adjusted basis and down 5% organically, primarily driven by continuing delays and material availability and lower volume in land warfare and air Defense and Naval Power program. This was partially offset by higher volume on strategic missile Defense program.
Including next generation Interceptor development.
Adjusted operating profit of $116 million with $74 million lower than prior year, driven by unfavorable program mix and lower volume primarily in land warfare and air defense programs as well as lower net program efficiencies, resulting from continued supply chain and labor constraints.
R&D bookings in the quarter were approximately $5 4 billion, resulting in a book to Bill of one five in backlog of 32 billion.
For the full year, we now expect RMB is book to bill to be at or better than one point too.
As a result of ongoing material availability delays and the associated productivity impacts and cost reduction actions. We now expect R&D sales to be down low single digits versus our prior outlook of up slightly versus 2021, and as a result of the lower sales outlook and lower program efficiencies, we are reducing RMB.
Adjusted operating profit to a new range of down 300 million to down $250 million from the prior range of down 50 to flat versus 2021 that I will turn it back to Neil.
Thank you Jennifer a lot to cover there I'm on slide eight.
We arent, providing our 'twenty three outlook today, let me tell you how I'm thinking about next year.
Overall, we expect another year of organic sales and segment operating profit growth was solid free cash flow generation at <unk> on the positive side, we expect the commercial air traffic will continue to recover and the global demand for our defense products and technologies will remain strong we expect to exit next year at or above 2019 levels for global Air.
Traffic and the significant defense orders, we have one should begin to convert to sales.
We will continue to drive operational excellence and we are focused on improving our cost competitiveness or using the core operating system to align goals and drive targeted improvements with technology. The collaboration across our TX has already yielded 180 approved projects with a growing pipeline of over 350 future projects, which are focused on smart fab.
<unk> automation and machine upgrades that will apply best practices to further reduce our structural costs.
We will leverage our scale these additional cost reduction opportunities and pricing to help address the inflation pressures that we expect to remain elevated well into next year.
While we are working many actions across our businesses every day to mitigate the impacts of supply chain constraints and labor availability as I said, we do expect these pressures will continue to persist into next year as well. Additionally.
Additionally, as we sit here today, we see pressure from increasing interest rates and market volatility and the anticipated pension headwind next year that could be about 40 on a year over year basis due to current market conditions that said, it's important to note that our U S plans remain well funded and have even seen an improvement in their funded status year to date.
Of course, everyone is watching the geopolitical landscape energy supply in Europe , the continuing resolution and the global tax environment. So with that let me hand, it back to Greg for some closing remarks.
Okay. Thanks, Neil So theres a lot going on a lot of moving pieces and I think the key takeaways that I hope people get from this as most importantly, our backlog is up $12 billion since the beginning of the year and we're investing $9 billion. This year to support the growth that's going to come over these next couple of years.
The future remains absolutely break for RPX. The 2025 commitments that we laid out a year ago may remain insight and we're not going to back off from any of those be a topline bottomline or cash flow.
So Neil laid out three challenges that are out there right supply chain alright, It's a challenge there's no doubt about it we've got 13000 suppliers and those 13000 about 400 of them.
<unk> for us, but we've deployed teams to almost all of those suppliers to work with them on a daily basis getting them raw material, giving them contract labor give you the technical support all of the things that you would expect us to be doing.
On labor availability, it's a challenge everybody sees it especially in the supply chain.
What's interesting for at <unk> as we have hired 27000 people in 2022, that's about 3000 a month since the beginning of the year. Our total head count today is over 180000. The challenge, though is we need about 10000 more people. So a lot of work yet to do on labor. It's out there, it's a great place to work and.
People come to <unk> because of the mission and so we have a I think a very good pipeline, we will continue to hire at this rate.
Again, the challenge will be in the supply chain.
And inflation.
We came into the year expecting about 1 billion and a half dollars of cost growth between compensation and what we saw in the supply chain and energy prices 1 billion and a half has turned out to be closer to $2 billion. So about $500 million of additional headwind that we didn't expect as we came into the year you couple that with about $200 million of headwind from the <unk>.
<unk> of activities in Russia back in February and there is about $700 million of headwinds that we came into the year that we had to overcome.
The good news is we have found ways to save we have cut costs across the business. We've got about 500 cost reduction projects that we're currently working and so despite that $700 million, we've been able to maintain guidance for the year, just where we saw it back in January of this year.
So it's been a tough year, it's going to be a tough year going forward, we know that we recognize it but the fact is we have the tools and the people to make it all happen.
So I'll stop there and turn it back to the operator, and we'll take whatever questions you might have.
Thank you, ladies and gentlemen in terms of time and to allow for broad participation. You are asked to limit yourself to one question to ask a question.
Star one one on your telephone.
One more question.
No first question coming from the line of.
Peter Arment with Baird. Your line is open.
Hi, Yes, good morning, Greg Neil Jennifer.
Good morning, Peter.
Hey, Greg maybe if you could just at a high level, how you're thinking about I know, you're not giving formal 2023 guidance by just the street obviously expecting.
Across the board growth is would you kind of feel that commercial estimates continue to recover and obviously defense maybe you finally start to convert some of these wins in the actually showing some topline growth just maybe just high level, how you're thinking about 'twenty three.
I think Peter Youre exactly right, we expect strong growth on the commercial aerospace side to continue.
I'll start with that one no I'm not going to comment on next year's margins right. Now we're focused on making sure we get through the rest of this year, but a couple of thoughts on the margin profile.
We have been adversely affected to your point on absorption as a result of that slowdown in the throughput that's coming through in the rates, which is causing that productivity to be muted from what we're used to seeing I do expect as the volume starts to fill up the factories when we deliver that $67 billion of defense backlog, we will start to see.
Improvements in productivity as well, Greg I don't know if theres anything else you wanted to add to that so I think you pretty well covered I mean, the other obvious issue is.
International sales, which tend to be more profitable on the defense side are down compared comparatively and again some of the newer contracts have much lower margins than what.
What we had on some of the existing as we transitioned from Patriot to <unk> production Youre going to see a big.
Mix shift there or margin degradation for a couple of years until we get through the through the low rate initial production contracts.
Okay I'll leave it there thank you.
Thanks, Tom.
And for our next question now.
Next question coming from the line of Sheila <unk> from Jefferies. Your line is now open.
Good morning, guys. Thank you for your time.
When Sheila.
Neal I wanted to ask about profitability.
Guidance implies that margins in Q1 is that in Q4.
This is about a 12% rate year to date on margins. How do you think about the bridge into some of the drivers there as we exit the year and maybe if you could comment on price mix actions as well.
I'm sorry, the last part Sheila.
Price and mix as we head into 2023.
Sure Yes.
So we've already seen substantial Collins margin expansion as we've gone through the first nine months of the year and I expect as the wide body.
International traffic recovers, we will continue to see.
A broadening of the margins at Collins I'm pretty pleased with the trajectory that they're on they'd be doing a great job controlling costs as well and they will do more of that during the fourth quarter. As you look out into next year, we've talked about some of the pricing actions that we've already taken in our Pratt <unk> Whitney business Collins, and Pratt Canada business will.
Also introduce revised pricing as we usually do at the beginning of the year. So we do expect that to be considerably higher than what we've seen in the past, reflecting the inflation that we're dealing with.
Across the business. So we are attacking.
Both price and cost as we look at the business going forward. So a number of projects in the pipeline that.
All of the businesses and Collins in particular are looking at and as I think I've said a few.
A couple of months ago, many of the projects that we have looked at around footprint consolidation and automation and digitization of our factories are much more attractive.
Inflationary pressures that we're seeing today. So those 350 projects that I alluded to we're ready to move forward on those and make sure that we.
Structurally change the cost profile of our business going forward.
Thank you so should we assume it's at $35, 40% incremental margin business going forward.
I think getting out of this year youll start to see muted incrementals because the compares get a little more challenging but clearly we're on our way back to the 20% margins that we committed to at the 2020.
Our Investor day back in 2021.
Thank you.
Thanks. Thank you one moment for our next question next question coming from the line of Robert Stallard with vertical Research partners. Your line is now open.
Thanks, so much good morning.
Turning to open it up.
Greg on the defense side of things, particularly R&D units sort of interesting situations, where defense demand is clearly very strong but supply continues to be constrained. How do you see this panning out from here when will these two coming to equilibrium now and are you seeing any help from your customers and getting this fixed.
Yeah look I think we're all in this together and as we.
See here in Washington, and we're going to be talking to the folks at Dod Tomorrow.
There is concerned about the supply chain challenges as we are and they are putting DFAST ratings on many things to try and.
Move up in the queue with the supply chain, but.
The challenge I think again, it's it's not just defense I mean I go to the.
Perhaps structural casting as we've been talking about it all year still remain a challenge.
It's not necessarily a capacity issue, it's a labor availability I mean, how do you get trained welders working efficiently.
Efficiently and Thats.
That remains a challenge.
Think about this though we saw about a 5% incremental improvement.
And our build kit efficiencies this quarter.
We had hoped to be about 10 points higher than that.
By the end of the year, we hope to be at 80%, we're not going to get there.
If we're lucky we'll get to about a 70% kit fill rate by the end of the year, which is the reason why we had to take R&D sales guidance down.
I do think as we're looking through this it by the end of next year, we should start to see some of this abate again because.
The economy slowing down more people available.
And the supply chain to work.
But some things like.
Rocket Motors, we literally do not see a recovery path there too on contract until sometime in the first half of 2024. So this is not a short term fix and I think we're fully prepared that next year is going to be kind of hand to mouth on the supply chain.
As I said in the opening comments that we have worked with us.
Chip manufacturers, the Oems to get some assured supply and that seems to be working.
The offset of that of course has a lot of inventory sitting here. We've added about $1 billion one of inventory for the year to make sure that we do have the things that we need to build these.
These products so.
Long winded answer it's not over yet and I think it's going to be most of 2023 before we really get out of the woods of supply chain.
That's very helpful. Thank you.
Thank you one moment, our next question and our next question coming from the line of Brian .
Ron Epstein with Bank of America, Ron Epstein. Your line is now open.
Hey, good morning, everyone.
Maybe switching gears a little bit.
And everybody's going to focus on.
R&D.
Great.
Discuss a little bit.
Thank you Bob aircrafts.
Propulsion technology, you guys have the geared platform your primary competitors working on in Amdocs. It today.
How many how much.
What legs that the gear, where can we go to go to from here.
How much of a threat is an undoubted fan.
And then.
If we go one step beyond that.
It's a hybrid propulsion or that sort of thing would you see all that happening.
A long time from now.
But let's let's be clear, we're just introducing the advantage engine. The <unk> hundred 20, or 1100 GTS advantage engine that will go into service in 2024.
We will have a very long life cycle like 30 years on it.
Over the next 20 years, I think what youre going to see Rod as immuno this theres going to be an evolution probably towards hybrid electric propulsion at least in.
Regional jet.
Turboprop markets.
Have yet to find a way to make the case for long range propulsion with anything other than <unk>.
And that's the challenge I mean, we're talking we're working with hydrogen we're working with ammonia, we're working with a number of different things to improve efficiency.
CF is a is an interesting option, it's not carbon free really dependent upon the feedstocks. So again that will help in terms of the.
Emissions mandate, but it's not the solution. So I think we're investing a lot of money today in these advanced technologies, they've got a project as you know between Collins and Pratt to do a hybrid electric demonstrator.
Regional turboprop.
But again I think those those technologies are 15 or 20 years out.
We're going to focus now on kind of incremental improvements.
In the gear and the gears not done right.
We've always said this it can scale up with can scale down and we've got a great family of engines today and I think.
As we think about next generation single aisle whenever that is probably 2030, we're going to we're going to have I would say the next evolution of the year.
But it's still going to be.
The jet engine as you see it today with <unk>, maybe it's all Saf, but it's still it's still the same turbo machinery that we're talking about today.
Got it thank you.
Thank you our next question and our next question coming from the line of David Strauss with Barclays. David Ross Your line is open.
Great. Thanks, good morning, everyone.
Good morning, David.
Wanted to see if you could give some initial thoughts on free cash flow in 2023, it looks like 2022 free cash flow will grow about $1 billion, that's the R&D yet.
So I guess, Neil obviously, youre talking about probably close to $1 billion of EBIT growth.
I can give a bit of a pension pension kaz headwind.
Not sure what Youre expecting for working capital So maybe some help with the with the moving pieces on 23 free cash flow.
Okay.
Thanks, David I'll keep this at a high level, but certainly back coming in January I'll give you a little more details, but with the operating profit growth, we would expect that to convert to free cash flow I expect a little bit of headwind on capital is that inches up just a tad as we finish off some of these large investments, particularly an upgrade of our.
Facilities in Texas at the RF business as well as the completion of the Asheville facility for Pratt.
However.
A couple of other moving pieces working capital I expect we'll see inventory to continue to grow we'll try to manage that through.
Payables and other parts of our working capital, but certainly we need the inventory with all the constraints that we faced in the supply chain. This year, we want to make sure we're prepared to deliver on the growing aftermarket and growing OE business and we will see.
Long story short I do expect free cash flow to grow organically, we will also.
We're anticipating a refund of the tax payments that we're making this year.
Then assuming that the.
Ultimately a repeal of the R&D capitalization proficient so let me leave it at that for now, but certainly in January we will provide a better work.
Thanks, and a quick quick follow up excuse me on pension.
Pension. The 40 is that 40 incremental versus this year I think I think you are already anticipating kind of a 10 cent incremental hit is that 40 incremental to that or just <unk> <unk>.
<unk> 30.
<unk> 30, 30 incremental to the <unk>, we had already forecasted and Thats really driven by asset returns being below our we are away as well as rising interest rates, causing higher interest expense.
More to come we obviously through all those assumptions up at the end of the year, but that's where we see it as of today I do not expect that to be a major cash issue for us and if there are any future faz funding requirements those will be offset by higher Cas recoveries in the future so not a cash issue but.
But a P&L issue right now thanks.
Thanks very much.
You bet.
Thank you. Our next question next question coming from the line of Seth Sigman with Jpmorgan. Your line is now open.
Okay. Thanks very much.
Morning.
Wonder if you could talk good morning.
A little bit about Pratt for a second and.
Strong.
In the quarter and running about $300 million of profit per quarter year to date I think the guidance.
Is basically for a step down to $2 50, or a little bit below that in the fourth quarter now tariff when I asked about that youre going to talk about higher engine deliveries, but.
I think there was a price increase as well for spares and so how do we think about that evolution.
Why it comes down so much in the fourth quarter as well.
Yes.
Where it goes from here and how much progress can make in 'twenty three toward the.
The out year margin target that you have.
Yes.
So you hit the nail on the head. It's as you look sequentially from Q3 into Q4 most of the degradation. If you will the step down in that profit is higher commercial engine shipments.
As we've been talking about have been kind of pushed to the back end of the year. So that's really the major driver of what you see in terms of the the walk from Q3 to Q4 on op profit.
As we look out a little further I'm not going to get into specific numbers, but we certainly expect OE deliveries and the large engine business to step up next year aligned with our customer requirements.
And I do expect we'll see some some movement towards the margin goals that <unk> put out there a year and a half ago. There's a long ways to go here, but a lot of that will be fueled by our growing aftermarket recovery on the <unk> 2005, hundreds. We've also seen considerable strength and the PW two thousands and four thousands were.
Call that about 40% of that fleet.
Power's cargo aircrafts. So continues to be really strong there and of course, the GTS will turn to profit and we will see on the on the aftermarket side, we will see the shop visits begin as we get.
Through next year and into into the middle of the decade. So.
Prior to his position to expand the margins are still a lot of work to do Greg talked about some of the incremental cost reduction actions that they're taking they're going through an exhaustive review of every element of the business in terms of driving out both SG&A as well as <unk>.
Structural operational cost and the manufacturing facility, so I find it encouraging.
But not going to commit to some numbers today, but we will get that out there again in January and Youll see that in full transparency then.
Great. So just if I could follow up real quickly the military part of Pratt has been down this year can that stabilize or grow again in 'twenty three.
I think again, it's been down as we plan for lower F 35 deliveries, that's been partially offset by growing sustainment revenues and we've talked about that aftermarket for the F. 35 engine will continue to grow in the future as well so should see that stabilize similarly at Collins.
Military is down mid single digits for the year I do expect same same phenomena to begin as we turn to turn the page into 2023.
Great. Thank you.
Thank you.
Our next question and our next question coming from the line of Myles Walton from Wolfe Research MS. Wilson. Your line is now open.
Thanks, Good morning.
Neil I think you mentioned fourth quarter cash would be driven by lower tax payments in several large international receipts and I just wonder on the international received portion.
Awaiting government approvals.
Timing risk here.
And is that are those international receipts tied to the fourth quarter mid 13% targeted margin Youre looking forward R&D.
So great question.
International cash receipts are not tied to the margin in the fourth quarter. However.
Every international advance is subject to some risks and Theres a couple of very large ones here.
I believe that we have line of sight to get them within the year, but if it is not within the year certainly just just timing, but certainly a watch item for us not subject to government approval.
But.
Certainly.
A watch item for us and hence the reason I called it out there in the script.
As we look at the rest of the year, but I.
I do feel good about the rest of our actions to drive free cash flow, we had very very strong cash flow notwithstanding the $1 billion $5 payment.
<unk> payments will be less obviously in the fourth quarter as we make.
The rest of the payment we're required to make to meet the.
The new law for R&D.
Okay, and Greg just a high level the U S review with the U S. Saudi relationship.
Any expectation there in terms of impact on your business.
So right now.
We follow the lead of the Dod state of sales to Saudi Arabia.
We still continue to work with Saudi Arabia, especially on the defensive side.
I think it's important to know we've had a very long term relationship with the Saudis.
And again the key for us is providing the saudis with defensive capabilities and primarily that means gem T missiles for the.
Patriot.
Anti missile.
Aircraft batteries so.
We have not seen any impact.
From some of the talk in Washington about suspending arm sales just to again put it in perspective, it's about one 7% of our total sales go to Saudi Arabia, it's not a big number but.
But I think it's an important ally.
I believe that we will get through this.
A difficult time that we're seeing right now in terms of diplomatic relations because ultimately.
They are a staunch ally in the middle East.
A key player in middle Eastern stability.
Thanks Ray.
Thank you. Our next question next question coming from the line of Kristine <unk> with Morgan Stanley Christian <unk>. Your line is now open.
Hey, good morning.
Neil and Greg.
You highlighted in inflation as a continuing challenge as we look out to 2023, I mean that said right Youre also expecting margins to expand next year can you provide more color on the moving pieces of how much inflation are you able to pass through to customers. How much you can offset with lower costs and how we should think about that remaining exposure.
So Christine good morning.
There's a lot of moving pieces here and obviously, our crystal ball is not terribly clear as to where inflation is going but I do think it's going to persist at elevated levels as we go into 'twenty three and that's what we're planning for and so we.
Fortunately have a good portion of our supply base is committed under long term agreements, but as you know those continue to rollover and we're looking at long term pricing solutions and working with our suppliers to.
Beat back some of those price increase request on the topline I talked about the pricing actions that we've begun to take that we take every year, but they are significantly larger than our historical pricing increases in the commercial aftermarket business and on the defense side, we're able to pass a lot of that through to our government customer as we.
<unk>.
Set up new contracts with them and update our forward pricing rates. So we're working through all of that not going to put a number on it but Greg talked about the level of inflation. We've seen this year and I expect it to be even larger next year. So it's going to require even more projects. We've got all of those in process right now.
The teams are working very aggressively to.
To accelerate the savings from those projects and many of them were started.
Years ago, and we are starting to bear fruit in terms of the Digitization that we're undertaking across the company upgrades of our systems and improvement of information flow around the around the company. So a lot of actions a lot of singles and doubles.
But it's going to take a lot of work here for us to mitigate the sustained level of 67, 8% types of inflation rates.
Yes, Christian just to add to that I think the biggest inflationary.
Aerie impact really comes in compensation. So we spent roughly $20 billion a year in compensation every year for the last 10 years, we've targeted somewhere around three or three 5% increases. We're obviously seeing more pressure on the compensation given what's going on in the marketplace today, but the fact is this.
Is not new and we are always looking for productivity improvements.
Activity improvements in the factories productivity in the back office functions and everything that we do so it's a concerted effort.
Im not again terribly concerned about the impact on margins just because I know that we know how to take cost out of the business.
Some of them, we get to pass on as Neil said through our overhead rates to our government customers.
We're also I think being aggressive on pricing.
The commercial side of the business.
So we've got a lot of levers infill.
Inflation hopefully it's.
I won't even use the word transitory because I think thats, a thats been proven a miss but it will be here for a while so we're going to continue to look for ways to drive cost out and to pass cost on and I think thats just what we do every day.
Great. Thank you Greg Thank you Neil.
Thank you and one for our next question and our next question coming from the line up.
Bon <unk> from Cowen Your line is now open.
Yes. Thanks, so much so you indicated that youre going to do at least $2 5 billion in share repurchase for.
For the year, even though.
The cash flows impacted by section 174.
174 is pushed out you clearly get a windfall to cash flow next year, how should we think about share repurchase given that your longer term outlook really looks pretty good and if you do get 174 pushed out youre going to have a lot of firepower.
Yes, obviously the section 174 nonsense is is a little disconcerting, because we're hoping again, we're going to get a tax law change here at the end of the year with tax extenders, which as you know we will give us a refund of the 1 billion and a half that we've already paid sometime in the first quarter of next year.
I guess April actually.
But the fact is as we think about share buyback, we were firmly committed to the $20 billion of capital return.
This year as we said $2 5 billion plus I suspect next year that that number will look like a $3 billion plus number.
And again, the timing of that will really depend upon when we see the cash if we if we do from this section 174 reveal but again I think you can you can count on us to continue to.
Be aggressive in share buyback along with the continued to increase the dividend each year.
But how much of that $3 billion plus would you do if section 174 is not repealed.
We'd still do $3 billion.
We have program this in.
For the next couple of years to hit that $20 billion target keep in mind. This is the section 174 is a timing issue.
And eventually we do get the deductions in the bank next year, we'll get to deduct 20% of what we deferred this year, but it is a timing and by 2025 the.
Most of the impact of this is abated because of the ability to amortize most of this so again, while it's important it's not going to really change capital allocation in terms of what we have committed to.
Thank you very much.
That's correct.
Thank you.
And our last question coming from the line of.
Ken Herbert with RBC capital, Ken Herbert Your line is now open.
Yes, hi, good morning, Neil and.
Greg Thanks for squeezing me in here.
Hey, I just wanted to see if you could provide a little bit more color on Pratt Whitney the up 14% sequentially in the aftermarket can you just talk about where.
That was from how much was maybe volume versus price and how should we think about where you are specifically in the b 2500 sort of shop visit recovery I know, that's obviously a big part of the story this year and next year and how much growth did you see in the shop visits this year and how do we think about that into next year.
Thanks, Ken.
Couple of thoughts so most of what Youre seeing in Pratt through the third quarter is really just volume and we've talked about the shop visits going up about 20%.
On a full year basis, we saw about a 10% growth here in the third quarter I think we've got pretty good line of sight too.
To the fourth quarter at this point, so I think the 20% up year over year still sticks. The other element of the aftermarket at Pratt is seeing is higher content per shop visit which again was expected for us to see that as these aircraft are now applying it much.
Greater than sustained levels than they were over the last couple of years. So good story on the aftermarket, but I don't think any of the pricing actions have yet to kind of flow through in the results reported to date.
Great and so pricing actions pricing extra just real quick I think as those flow through for 2023 if.
If I understand properly youre looking at a little more step up in pricing that you realized in 'twenty two correct.
That is true.
Keep in mind, a number of our customers have contracts in place as well. So some of that increase is muted, but there is a number of them that do not and you will see that drop through and that will help to offset some of the headwinds that we're dealing with there as well.
Great. Thank you.
You bet.
Thank you I will now turn the call back over to Mr. Greg case for closing remarks.
Okay. Thank you.
Thank you all for listening in just a reminder, Jennifer and team will be available today to take your questions also just.
Note. This is Aaron summers last earnings call with US she is moving onto the CFO of our international business for R&D. So congratulations there. If you guys were talking to earlier today. Thank you all for listening and we'll see you soon take care.
Thank you ladies and gentlemen. This now concludes today's conference you may now disconnect everyone have a great day.
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