Q4 2022 Raytheon Technologies Corp Earnings Call

January 24, 2023

Yes.

Yeah.

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies fourth quarter 2022 earnings Conference call My.

My name is Martin and I will be your operator for today.

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

Sure.

On the call today are Greg Hayes.

Chairman and Chief Executive Officer.

Chris Kyle.

Operator.

Neil Mitchell, Chief Financial Officer, and Jennifer Reed, Vice President of Investor Relations.

This call is being carried live on the engine.

And there is a presentation available for download from Raytheon technologies website at Www Dot Archaize Dot com.

Please note.

Where otherwise noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring and or.

Often referred to by management as other.

Hi.

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 technologies SEC filings, including its form 8-K, 10-Q, and 10-K provide details on important factors that could cause actual results to differ materially from those anticipated 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 Reinsert yourself into the queue as time permits.

What's that.

I will turn the call over to Mr. Hayes.

Thank you Latif and good morning, everyone Hope you all had a chance to review our press release this morning.

Before we get into the highlights I'd first like to welcome Chris Kelly you to the call as you know Chris.

Chris has been our chief operating officer for the last year has been responsible for our business units as well as our operations engineering and digital functions effective March one Chris has been elected to the position of President and Chief operating officer of RPX Chris.

Chris has been instrumental over this past year and driving our focus on operational excellence and delivering for our customers in a very challenging environment. So welcome Chris.

Okay, Let's go to the webcast slide four slide to talk about some of the highlights for 2022.

I don't have to tell anybody that 'twenty two is an incredibly dynamic year, but I am pleased to say that we were able to achieve.

Despite facing a number of significant challenges, including transitioning them out of Russia.

Managing a record levels of inflation as well as supply chain and labor constraints.

With all that as a backdrop, we still delivered $67 $1 billion in sales for the full year, which was up 6% organically.

Adjusted EPS of $4, 78, which was up 12% year over year.

We also returned almost $6 billion of capital to shareholders, which included $2 $8 billion of share repurchases.

And more importantly, even with the one 6 billion headwind from the R&D tax legislation, we generated $4 9 billion and free cash flow, which exceeded our expectations.

At the same time, we've continued to position the business for sustained profitable growth.

In 2022, we captured $86 billion of new bookings.

<unk> and backlog growth of 12% book to Bill of 128 and.

Near record backlog at the end of the year of $175 billion.

Additionally, we were granted over 2600 patents last year. This places us in the top 10 companies in the United States for the second consecutive year.

While we invested.

<unk> $9 billion in R&D and Capex. This allowed us to bring new technologies to market and drive further automation and digitization through each phase of our product lifecycle from design through development through manufacturing and product Sustainment.

Our investment in recent awards supports our mission to create a safer and more connected world, which was especially true in 2022.

Our products and technologies have been instrumental in helping the people of Ukraine defend itself from the Stinger javelin and Excalibur to <unk> and now Patriot Air and missile Defense system, we remain in lockstep with the U S government to ensure we can continue to support our allies.

On the commercial side of the business. We saw continued advancements on our path towards leaving the future of sustainable aviation with the start of development flight testing of the GTS advantage engine.

Which as you know further enhances the GTS position as the leader in fuel efficiency and Cotwo emissions.

Importantly, we also completed the first engine test run for a regional hybrid electric flight demonstrator.

This system integrates a one megawatt electric motor which was developed by Collins with a highly efficient Pratt and Whitney fuel Bernie mentioned, specifically adapted for hybrid electric operations.

New engine will reduce fuel burn and <unk> by 30% compared to today's most advanced regional turboprop aircraft.

These types of investments along with strong demand across both the commercial and defense end markets will position us for continued growth as we head into 2023.

We're particularly proud that our TX outperformed among all companies in the Russell 1000 for local U S job creation in 2022.

Our TX leads the industry in employee, giving and volunteering, which is a testament to the impact our workforce has in the communities, where we work and where we live.

Before I turn it over to Chris I, just want to spend a minute to talk about the status of our integration and the next steps as we evolve as a pure play aerospace and defense company.

As you know in 2020, we brought together two great companies UTC aerospace business and Raytheon with.

With combined strength scale and capabilities that makes us uniquely equipped to innovate and deliver game changing technologies and solutions for our customers.

As we approach the third anniversary of this merger, we've accomplished many of our objectives, including exceeding our original synergy commitment and.

And we see even more opportunities ahead.

So today, we are starting the next step in our integration that evolution.

Our plan is to streamline our structure to a customer centric organization with three focused segments.

<unk> aerospace Raytheon and Pratt and Whitney.

This will better align us with our customers' needs and allow us to better collaborate on next generation technology.

There's still a lot of work to be done to make this happen.

Let me turn it over to Chris to give you some of the additional details of this transformation and some additional business updates Chris.

Alright. Thank you Greg it's great to join today's call and I'm looking forward to engaging more with everybody.

Starting here on slide three.

Over the past year I've been focus of our team on driving operational performance and program execution as well as identifying ways to improve our cost position and to ensure alignment between our investments and our strategic priorities.

As Greg noted our merger integration is nearly complete having realized gross cost synergies of $1 4 billion.

So we are now in the process of realigning RPX in the three business units.

Let me give you some additional color around our thinking on this.

At its core this move is about enabling us to better coordinate with our customers aligning with their needs and collaborating more effectively across our businesses.

All of which is feedback we've received from our customers.

All of this will ultimately enhance performance make us even more competitive and allow us to capture additional revenue synergies in areas such as connected Battle space. For example, just this past year, we were awarded a phase of the <unk> effort known as tightened.

<unk> and colleagues are working together to deliver this cutting edge solution to ensure our joint forces have one common operating picture of the battle space.

Additionally, this realignment will allow us to better leverage our scale. So we can optimize our footprint improve resource allocation and reduce costs in both RPX and our customers.

Now we don't have a number for you today in terms of cost savings as we are in the early stages of that analysis, but we do believe there are additional material opportunities to be realized.

Connecting with this reorganization.

<unk> president of our <unk> business.

<unk> invested his plan to retire.

Alright, well, however, stay on as an advisor over the next several months to help us with this important transformation.

Sean Your al currently the CFO of Rns has been named acting President of our effective February one.

While organizational changes like this are never easy we have demonstrated our ability to successfully execute on these types of initiatives in the past and many members of the team involved in this process have experience from our recent portfolio and merger transformations.

The exact timing of this change is in final yet the current plan is to make it effective during the second half of the year until then we'll manage the business under our current structure will provide updates on our progress over the coming months.

Before I turn it over to Neil to discuss our results for the quarter and the outlook for the year I want to turn to slide four to share some of our critical assumptions for 2023 and the areas, where we're focused to ensure we execute on our commitments.

Greg mentioned earlier customer demand for our products and services continues to grow.

Commercial aerospace, we expect global air traffic to fully recover to 2019 levels as we exit 2023 with continued strength in the U S and Europe .

Pretty consistent from what we're all hearing from the airlines.

And like everyone else, we're keeping a close eye on China, which historically has represented about 14% of global air traffic.

Working assumption today is that China's lifting of Covid restrictions continues to be manageable and its traffic levels will remain robust.

We also assume traffic in other parts of the world remain resilient. We are therefore expecting commercial aftermarket revenue growth across our aerospace businesses to approach 20% in 2023.

Commercial production rates are also quickly accelerating we expect commercial aircraft volumes will be up around 20% year over year.

On the defense side, our backlog is expected to continue to grow given the heightened an increasingly complex threat environment in the U S. We continue to see strong bipartisan support as evidenced by the adoption of the defense authorization Bill and the omnibus appropriations Bill with a budget of 858 billion.

Which is up about 10% from 2022.

And overseas the EU is targeting a $70 billion increase in defense spending over the next three years in Japan will increase their defense budget by 26% this year.

Given our current backlog and its continued strength in demand we remain extremely focused on execution and I see four key actions that will position us to be successful on this front.

One we continue to grow production capacity to deliver on this backlog as we move through 2023 and 'twenty. Four for example, we've made investments in key strategic locations like Asheville, North Carolina for turbine Airfoils, Mckinney, Texas for RF and <unk>.

Products in Bangalore, India to expand the Collins, India manufacturing strategy.

Second we of course need of skilled workforce to execute our development production programs.

Labor availability remains a constraint we've made some progress across our <unk> in Q4 to reduce attrition and other strategic retention and recruiting initiatives.

Third we need to continue restoring health within our supply chain. We've actively maintained a physical presence at close to 400 supplier sites. We've continued to qualify additional suppliers on key programs.

We secured sources of supply for critical commodities.

While we are broadly beginning to see our supply chain improve is not yet at the levels. We need we are assuming a recovery as we move into the back half of the year.

And lastly, we are taking a number of actions to deal with the elevated levels of inflation that everyone's experiencing for perspective, we are expecting roughly $2 billion of labor and material inflation in 2023 and.

And we are targeting to more than offset this headwind through higher pricing and aggressive cost reduction actions across of all RPX.

Some of these actions are in the category of blocking and tackling such as continual process improvement and some are more strategic in nature, such as driving productivity through increasing the amount of connected equipment and automated factory hours.

There's no doubt we've got a lot of work in front of us, but I think we all believe we've got the right actions identified and more importantly, the right team in place to do it.

So with that let me turn it over to Neil to look at our financial results and outlook for 2003.

Well, Thank you, Chris let's turn to slide five.

I am pleased to see how we finished the year, where we continue to see solid growth in organic sales and adjusted earnings per share and robust free cash flow in the quarter.

Fourth quarter sales of $18 1 billion grew 7% organically versus the prior year.

This growth was primarily driven by our commercial aerospace businesses is the continued recovery in commercial air traffic more than offset the supply chain and labor challenges we saw during the year.

Adjusted earnings per share of $1 27 was in line with our expectations and up 18% led by the commercial aftermarket at Pratt and Collins, which more than offset the impact of lower productivity in our defense businesses.

On a GAAP basis earnings per share from continuing operations was <unk> 96 per share and included 31 cents of acquisition accounting adjustments restructuring and nonrecurring items.

Worth, noting that both GAAP and adjusted earnings per share had a tax benefit of about <unk> <unk> associated with legal entity and operational reorganizations, which were completed during the quarter.

And finally, we had free cash flow of $3 8 billion in the quarter, bringing our total cash generation for the year to $4 9 billion, which exceeded our commitment as a result of stronger collections, particularly in international areas across the portfolio.

Let's turn to slide six and I'll get into the segment results.

Starting with Collins.

At Collins sales were $5 7 billion in the quarter up 15% on an adjusted basis and up 16% organically driven primarily by the continued recovery in commercial aerospace end markets.

By channel commercial aftermarket sales were up 21% driven by a 32% increase in provisioning and a 25% increase in parts and repair while modifications and upgrades were up 5% organically in the quarter.

Sequentially commercial aftermarket sales were up 6%.

Commercial OE sales were up 20% versus prior year, driven principally by the continued strength in the narrow body.

Military sales were up 5% driven primarily by improved material receipts higher volume and New program Awards.

Adjusted operating profit of $743 million was up $274 million from the prior year as drop through on higher commercial aftermarket volume and lower R&D expense was more than offset by higher SG&A expense.

So shifting to Pratt Whitney on slide seven.

Sales of $5 7 billion were up 10% on an adjusted basis and up 11% on an organic basis with commercial OE sales growth in large commercial engines, and Pratt, Canada as well as higher commercial aftermarket volume.

Commercial OE sales were up 37% driven by favorable volume and mix within perhaps large commercial engine and Pratt Canada businesses.

Commercial aftermarket sales were up 11% in the quarter with growth in both legacy large commercial and Pratt Canada shop visits.

In the military business sales were down 2% driven by lower military legacy program aftermarket sales.

Adjusted operating profit of $321 million was up $159 million from the prior year, driven primarily by drop through on higher commercial aftermarket, which included a favorable contract adjustment was partially offset by higher SG&A and R&D.

Turning now to <unk> on slide eight.

Sales of $3 5 billion were down 8% versus prior year on an adjusted basis driven by the divestiture of the global training and services business in the fourth quarter of 2021 on.

On an organic basis sales were down 5% versus prior year, driven by command control and communications cyber training and services and sensing and effects.

Adjusted operating profit in the quarter, a 278 million was down $122 million versus prior year.

Excluding the impact of divestitures operating profit was down $96 million, driven primarily by unfavorable mix lower net program efficiencies and lower volume.

RIS had a.

$2 $9 billion of bookings in the quarter, resulting in a book to Bill of <unk> 92, and our backlog of $16 billion and on a full year basis Ras's book to Bill was <unk> 96.

Turning now to slide nine.

R&D sales were $4 1 billion up 6% on an adjusted basis and up 7% organically, primarily driven by higher volume enabled power programs, including spy six production higher volume and strategic missile defense, including next generation Interceptor development and higher volume in advanced technology programs.

Adjusted operating profit of $418 million was $68 million lower than the prior year, driven by unfavorable program mix and lower net program efficiencies, partially offset by drop through on higher volume.

Rmg's bookings in the quarter were $6 billion for a book to Bill of 148.

And for the full year Rmt's book to Bill was 137, resulting in a record backlog of $34 billion.

So with that let's turn to slide.

10 to discuss the financial outlook for the year.

At the <unk> level, we expect full year 2023 sales of between 72 and $73 billion.

Which represents organic growth of 7% to 9% year over year.

On an earnings perspective, we expect adjusted earnings per share of $4 90 to $5 <unk> up three 3% to 6% year over year.

And we expect to generate free cash flow of about $4 8 billion I should note. We are not assuming the legislation requiring R&D capitalization for tax purposes will be repealed and our outlook and as a result in 2023, we will have a cash payment of about one 4 billion related to the current law.

While there are more details on the cash flow walk in the appendix, let me share a few of the moving pieces.

We're expecting segment operating profit growth offsetting that will be increases in working capital capital expenditures as well as a lower pension cost recovery.

Additionally, we are expecting to buyback approximately $3 billion of <unk> shares in 2023 of course subject to market conditions.

Now getting into the details around the earnings per share walk.

Starting at the segment level, we expect strong operating profit growth of about 20%, which results in about 77 of earnings per share growth at the midpoint of our outlook range.

And as Chris noted earlier, this overcomes about $2 billion of material and labor inflation.

And with respect to pension although markets have improved since we spoke in October pension will still be a substantial year over year headwind based on actual 2012, 2022 asset returns and where discount rates ended the year that headwind would be about 22.

Our tax rate in 2023 is expected to be approximately 18% versus the 14, 4%. We saw in 2022, which will result in a <unk> 22 headwind. This change is primarily driven by benefits recorded in 2022 that likely won't repeat in 2023.

And to wrap things up we see about <unk> 14 of net headwind year over year, primarily driven by higher interest in corporate expenses and all of this brings us to our outlook range of $4 90, and $5 to $5 <unk> per share.

So with that let's go to slide 11 for a little more detail on the segment outlooks.

At Collins, we expect full year sales to be up low double digits, primarily driven by continuation of the commercial Aero recovery.

Military sales accounts are expected to be up mid single digits for the year as well.

We expect Collins adjusted operating profit to grow between $750 $825 million versus last year and this was primarily driven by drop through on commercial aftermarket higher OE production ramp and increased defense volumes.

At Pratt <unk> Whitney, we expect full year sales to be up low to mid teens versus prior year.

Principally driven by higher OE deliveries and bolt, perhaps large commercial engine and Pratt Canada businesses as well as continued growth in legacy large commercial engines, GTS aftermarket and Pratt Canada shop visits.

Military sales at <unk> are expected to be flat driven by higher F 35, Sustainment volume, which will offset lower F 35 material inputs.

We expect <unk> adjusted operating profit to grow between 200 $275 million versus last year, primarily on higher aftermarket volume, which was partially offset by a higher large commercial OE delivery impact.

Turning to <unk>, we expect full year sales to be flat versus the prior year and adjusted operating profit to be up between 75 and $125 million driven by improved net program efficiencies and.

And at R&D, we expect sales to grow low to mid single digits versus 2022 as the effects of the supply chain constraints ease in the back half of the year and for adjusted operating profit to be up between 175 and $225 million versus prior year, driven by improved net program efficiencies, which were partially offset by continued mix headwinds.

<unk>.

And finally higher intercompany activity will increase sales eliminations by about 10% year over year.

And it's also worth noting we have included an outlook for some of the below the line items and pension in the webcast appendix so with that let me hand, it back to Greg to wrap things up.

Okay. Neil Thanks, very much so we're going to close out on slide 12, and take a quick look at our priorities, obviously theres no surprises here as.

As we head into 2023 I would tell you the future remains bright for RPX, especially with $175 billion backlog and strong demand in all of our end markets.

We also though the challenges that we saw in 2022 will continue and we will keep working to mitigate the big three that we've continued to focus on supply chain labor and inflation.

And although we are monitoring the macro environment, we remain optimistic in the economic outlook as the demand drivers for our businesses remain incredibly strong.

As Chris mentioned, we are actively preparing for the demand ahead by expanding capacity investing in digital solutions and leveraging automation to unlock efficiencies across our value streams.

We have the right team in place and we're making the right investments. We're also taking proactive actions to mitigate the risks we see today and to ensure its success not just in 2023, but beyond.

The streamlining lining of our businesses is just the next step in our journey on leveraging the unique scale and capabilities of <unk> to deliver value for our customers and our shareowners.

Right now, it's all about program execution and managing costs.

We have the backlog we have the demand and we have the technology and our balanced between defense and commercial Aero will help us navigate into the future.

We will of course continue to stay disciplined in capital allocation and we're going to generate strong free cash flow this year and beyond all of which enables us to return significant value to our shareowners.

Most importantly, we remain confident in our ability to achieve our 2025 targets.

We're going to provide an update at our upcoming Investor day, which will be on June 19th at the Paris Air show.

Before I close I really want to see effect a special thank you to ROI as Vito for his many contributions to Raytheon over these past 34 years.

ROI has been a key member of our senior leadership team at <unk> for the past three years, and we wish him nothing but health and success as he moves into the next phase of his career.

So with that let's close out this portion and open it up 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 Robert Stallard of vertical research. Please go ahead Robert.

Thanks, so much good morning.

Good morning.

Greg just to follow up on your final comment there on your confidence in 2025.

This confidence has been shaken any way by this change in the R&D tax legislation, but also the supply chain challenges because you basically have to double the cash flow between now and then to get to your target.

Rob that is a great question, one that we have been working through over these last couple of months, we obviously thought going into the end of 2022 that the tax legislation the arity amortization would get.

<unk> eliminated unfortunately that didn't happen that cost us a $1 six last year as Neil said it'll be another $1 four.

And as we go into the 2025 timeframe that drag will still be about $1 billion about $800 million of that is actual net R&D deferral of Theres a couple of hundred million dollars.

Of additional interest expense and financing our little loan to the government.

So as all that being equal we still see a we've always talked about a $10 billion free cash flow in 2025 realistically I think that number is going to be $9 billion now.

Most of that growth from let's call. It $5 billion. This year to $9 billion is going to come from.

Segment operating profit, which should grow between 2020.

Two in 2025 by about $5 billion.

And Thats just assumes an execution on the current demand that we have in backlog right. There is nothing else magic about that accept the continued return of people flying.

The defense budgets remaining very robust so we.

We see a path to the $9 billion I don't see a path to the $10 billion today because of the R&D, but.

Longtime may view, we hope that people would Washington will understand that theyre, making any.

Very very bad tactical decision here, and not allowing us to deduct R&D, but it is the reality that we face today.

That's great. Thanks, Craig.

Yes.

Thanks, Rob.

Our next question comes from the line of Sheila <unk> of Jefferies. Your question. Please Sheila.

Hi, Good morning, guys and thank you, maybe a little bit more focused on 2023.

You mentioned 400 suppliers in our supply chain, how are you expecting the supply chain to unravel across both the commercial aerospace.

Defense segment, you mentioned $2 billion.

<unk> headwinds can you talk about the impact.

Pricing on a net.

Across the four global are you seeing an impact.

Ngls.

Start with this one and then invite Neil and Greg to chime in so let's talk about supply chain for a minute maybe start with the positive which was saw some stabilization as we exited the year last year. If you look at R&D material receipts were up 30% Q3 to Q4 supplier delinquencies were down at Pratt we saw some ups.

Tick in casting delivery. So those were those are some of the green shoots that we saw at the end of the year, but I will tell you, it's not where we know where we need to be especially for the back half of 'twenty three.

The kinds of things that we're focused on candidly the things that we can control. We've got the people on site as you mentioned and they are responding to engineering and quality issues, giving us better visibility to what's going on relieving.

Bottlenecks and also finding issues earlier than perhaps we were previously giving us more time to react with qualified some additional suppliers and negotiated additional LTA is I think we did about 400 agreements last year with about a $1 billion eight in annual spend so again, giving us, giving our suppliers better visibility into.

<unk>, our demand and what we're doing and then candidly were taken some actions in our own house to better enable supply chain performance small things like reducing the time it takes to place a po to perhaps more complex things like engineering changes to improve the yields on some of our complex parts and ensuring we've got sort of a stable configuration as pros.

Grams moved from development into production. So those are all the things that we're that we're focused on continuing to drive health and supply chain, but you are right, we're going to need it to perform.

We hit these numbers, we've got here in 'twenty three and beyond.

So Sheila the other question you had there was on inflation and I think again.

The $2 billion of inflation is a real number we saw it last year, we were able to overcome it through cost reduction as well as some additional pricing and again, we will see pricing benefits again in 2023.

Especially on the commercial aftermarket side keep in mind also on the defense side about a third of our business is cost type cost reimbursable and so some of that inflation gets passed automatically along to our customer.

At the department of Defense.

As I think about that $2 billion right about a $1 billion to I think Chris said is product related and about $800 million of that is people cost and that is a real number we've got roughly $20 billion in compensation costs across our TX.

It's about a 4% increase year over year for $800 million Big number, but again, we've got plans in place for cost reduction both in the supply chain in the factories as.

As well as in the back office and some of this transformation activity that Chris mentioned.

With the realignment of the businesses will also present us an opportunity to get after some of that cost so.

It's real but we've got plans and I think we have more than more than provided for that in the guidance Youll covered.

Thank you Bob.

Thanks Sheila.

Thank you. Our next question comes from the line of Rob.

Ronald Epstein of Bank of America. Your question. Please Ronald.

Okay.

Hey, good morning, everyone.

Question for you about this this restructuring.

Reorganization I guess.

In the defense business and Raytheon I think we all understand that you will get cost synergies out of it but if you look at excuse me alright <expletive> in the quarter with a sales down 5% how does the reorganization.

Boost sales synergies.

First question and then.

No.

The second question.

Is I mean, it's really how.

How do you Bruce that and then the second question is.

Is there some restructuring that actually has to go on in that portfolio because they are there some businesses in there that are just structurally lagging.

Hey, Ron its Chris maybe I'll take a crack at that.

The sale synergy so again as you kind of said upfront.

This this is about taking the organization to the next level right you've got a tremendous defense backlog. Unlike 70 billion R&D and this is really about enhancing customer alignment and coordination we've had customer feedback.

Throughout the last couple of years about.

The need for us to.

Figure out how to better integrate some of our solutions, providing mission solutions to the customers.

Coming in with a with a unified narrative and an investment story all of these things I think will enable us to work better and frankly collaborate better across.

Businesses and large organizations like ours won't be surprised to hear that sometimes there is some friction there and we think this will help remove some of that friction and again provide better solutions to the customers. So thus far the customer feedback that we've spoken to sort of see that potential and it's up to us to execute on it as of the portfolio.

I think again RIS has a very strong portfolio book to Bill was <unk>.

<unk> not necessarily where we want it we had some campaigns push out of the year, but feel really strong again about the portfolio.

To continue to invest in it.

Yes, Ron let me just jump in and add to that as we look at this reorganization. This is not just about putting RIS in RMB together to recreate the old legacy Raytheon company, we're going to look to take the entire portfolio of RIS Collins, RMB and move the pieces where they most.

Lately aligned from a technology and a customer standpoint, so you may well see pieces, especially related to <unk> moving into the Collins business, we'll see how all of this evolves over the next several months I would say by the time, we get to the end of the first quarter. We should have a really good understanding of what the what the new organization is going to look like we'll share that with every.

At that point.

We're going to take us longer than that to actually do the rewiring. This way, we're talking about kind of mid year.

But I agree with Chris I think the portfolio that we have across the legacy Raytheon and college business is really quite strong and the book to Bill.

We'll be we'll get better at some of those legacy RA.

This business is especially in the space segment.

I would also tell you that the performance in Q4 was not great, but it was really program legacy programs for many years ago that we still have not completed so theres. Some work to do there, but I would tell you the portfolio is not broken through the business is not broken.

Got it alright, thank you.

Yes.

Thank you.

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

Hey, good morning, everybody.

Hey, good.

Good morning.

Okay.

Recognizing that theres some theres multiple top line inputs that are that are out of your control at the moment.

Which of the 2025 segment margin targets hold and which do not at this point because.

And the two aerospace segments the <unk>.

24% to 5% Incrementals required to get there are a lot better than 23.

And then obviously on the defense side it requires a pretty big step up.

So.

Me with that math and I guess, just what's the latest medium term outlook for each of the segment margins.

Now, let me take a stab at that one for me because as you look out to 2025 clearly we've had.

In 2022, some supply chain and labor impacts that have caused us to come in a little lower than our initial expectations. However, when you think about that backlog that we've been talking about at the $175 billion at the company level.

6900 $70 billion within the defense, we have a lot to deliver ahead of us and so I think theres going to be some puts and takes as we look at the segments.

On an individual basis as you get out to 2025, but as I step back and look at the totality of our TX and where we projected to be in where we're aiming to go in with that backlog. We feel confident that we can get there we can get the sales growth the earnings growth and Greg already hit on the on the cash flow pieces there. So.

Some things have changed since since we've talked in 2021, we're certainly dealing with a lot more inflation.

But we've also got the situation in Ukraine that is given R&D. Some tailwind. So when we get to June we'll be able to lay out that in more detail and also be.

Aligned with the format of our new new operating segments at that time, but.

But I think theres going to be some puts and takes but we're all focused on driving margin improvements and making the right investments to drive that.

Automation in the factory and Digitization I should I should add to Greg's comments earlier about the free cash flow walk, we'll probably see about a half of $1 billion of capital headwind between 2022, and 2023, so making the right investments.

I'm really focused on earnings growth and conversion of cash and so we'll see where the margins land, but I do think we're going to get that earnings growth.

Is it your anticipation that youll have a few hundred basis points of defense segment margin expansion over the next.

A few years.

Is that all cost or is that mix or is it not dealing with supply chain.

Do you do that.

I would tell you it is.

A combination of all of those things its supply chain getting better which allows us to see productivity in our factories is also.

As we move as we move from these <unk> contracts initial rates of production on <unk> by six and others to full rate production to see it.

The improvement in margin on the production side as well as the mix of.

Vod versus international sales today, we're actually at a low point of about 30% at RMB of international versus Dod sales that actually transitions back towards more historical levels of 40, 45%.

As we do more exports, especially around <unk> and some of these other new new systems.

Okay. Thank you.

Thank you.

Our next question comes from the line of Peter or Matt.

Baird. Your question please Peter.

Hey, good morning, Greg.

Peter.

Greg I want to say in R&D.

Up low to mid single digits on an organic basis.

Just in the backdrop it seems like it should be.

Potentially better than that obviously I'm wondering if you could just kind of parse out how much is being impacted by the supply chain and it's.

Just when we think about all the Dod potential replenishment activity plus you've got strong demand from NATO allies, just a lot of opportunities for this space. It feels like you should be having.

More potentially sustained top line growth, maybe just your thoughts on that over the.

The coming next couple of years.

Peter I think.

Youre spot on I think as we look at 23 24, there is more growth potential with R&D that they are probably as any business outside of Collins, just because again the backlog is so strong I would tell you given the challenges that we saw in supply chain last year and driving material in I.

I think we've taken a more conservative view of 2023 performance. There I think total material inputs at RMG last year around $6 billion. This year, we're looking at about $6 5 billion, but quite frankly, the demand is out there for more.

So that $6 5 billion should also drive some productivity $100 million to $150 million again, I think that's actually light by historical standards, but were they.

I hate to say the word conservative again and again, but we're really we set these targets. So we think we can absolutely deliver we're not going to have to go back in.

We look at these in the middle of the year, but there is certainly the demand out there for higher.

Top line and that would result in higher bottom line, but most of that growth I think will come in 2024, where we really see supply chain back to where we had seen at pre pandemic that is the key for RMB they've got the orders.

We've got the capacity that we just have to bring drove the material into that $6 5 billion that we see next year is going to have to continue to grow significantly to meet the demand out there that we see.

Appreciate the color thanks, Greg.

This is Peter.

Thank you.

Our next question comes from the line of Myles Walton of Wolfe Research. Your question. Please miles.

Thanks, Hey, good.

And Greg just to follow up first I think you just said RMB might have the fastest growth outside of Karnes and just wanted to clarify is perhaps still the faster growing <unk> faster growth.

From a bottom line perspective, it's going to be college, alright, I think again top line youre going to see what is the number Neil Ford for 'twenty through here for prep.

For 2020, there'll be up low to mid teens, so very substantial growth for 'twenty, three and sort of as you look out.

Over the next several years.

All four businesses are in the same ZIP code of high single digit type of sales growth on a CAGR basis.

Got it and maybe more of a detailed question on Pat If you can just give a little color on.

We're GTS is in the aftermarket composition.

Where legacy higher margin aftermarket isn't that composition and how those two.

To play out over the next several years and also how the GTS aftermarket is trending versus your sort of assumptions of profitability on those long term contracts.

Sorry, Myles this is Chris maybe just to step back for a minute on GTS demand remains really really strong as you know we continue to do the block upgrades to drive improved time on wing, obviously improve time on wing helps with their contract profitability. We continue to incorporate upgrades to sort of improve the.

<unk> experience on the aftermarket side in 2020 to turn slightly positive and so from this point, it's about accelerating those margins youre going to see that through some some better contract mix as we talked about back in Investor day and in 'twenty, one you're going to see that through increased time on weighing through some of these upgrades.

And so the GTS aftermarket profitability is something that is of high focus <unk> given the growing installed base gets about 2500 engines out there in a very large backlog. So DTF after marks a huge driver.

And maybe I'll just put a couple of financial numbers around that to help out a little bit but at Pratt for 2023, we think the aftermarket there will be up between 20% and 25% from a sales perspective, so think about the legacy shop visits being about 15% to 20% up year over year over year.

On the OE side that would that would imply about a mid teens sort of our sales growth. There. So we see strong growth obviously in the commercial business and I guess, while I'm on Pratt I'll just throw out a couple of the Collins numbers, just so everyone has them in there.

Thereafter market business think about that as being up sort of low double digits to low teens.

<unk> kind of growing in the low single digit percentage kind of range and on the OE side up low to mid teens year over year, So again with all of that.

OE growth that we see.

<unk>, the narrow and wide body platforms, you'll see that both at Pratt and Collins.

Thank you.

Sure.

Thank you.

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

Okay.

Good morning, everyone.

Good morning, David.

Greg I guess following up on that could you just comment where you are on.

Cross mainly colons, but also touch on <unk>, where you are relative to to the manufacturer stated rates I guess in particular on the Max and the lowest <unk> Z $3 20 in the mid mid to high Forty's and 787% round tool market.

Hey, David.

It's something we focus a lot of it obviously, we are I would tell you Collins and Pratt in lock step with.

And in Airbus in terms of their production rates.

Obviously some of the challenges that we've talked about it prior to the supply chain with the structural castings is limited.

Say some of our.

Our ability to meet some of the demand out there that's starting to ease and again, we are working very closely with Airbus on the <unk> hundred 20.

The production rate as far as 737 years, that's really a Collins story.

Again.

The outlook with Neil talked about that assumes those rates that you talked about rub 31 aircraft or so a month on average I think they were a little light on that in the fourth quarter, but we think we'll get back to that they still have roughly 200 aircraft to be delivered that are in inventory too from the the line, where shutdowns, which again also as part of.

Collins is upside for the year as far as 787 hundred 87, we see that as you said I think it's one a month going to two months of perhaps up to three.

Again, I think thats that will all depend upon boeing's ability to continue to get to the aircraft out the door, but we are working with them.

On a daily weekly basis to make sure that we can support them, but we don't see anything in our supply chain today that would prevent us from delivering either.

Boeing or Airbus to the rates that they need.

Great and Greg could you just comment on the interiors business, how thats doing instead, if youre starting to see a pickup there from from the widebody side. Thanks.

Yes.

David I wanted to say that is probably the slowest recovery of all of the Collins businesses to your point because it is primarily wide body and as the airlines were conserving cash for these last couple of years, we saw sales down significantly.

We don't expect a recovery in the interiors business literally for them over the next three years. So it gets better but it's still not back to what it was pre pandemic.

It will remain a challenge.

Thank you.

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

Your question please.

So much so.

Cash flow in the fourth quarter, you had a $900 million uptick in payables, a huge uptick in contract liabilities and yet inventory, where you would normally get a benefit in the fourth quarter were actually up a bit maybe comment on some of those trends and how that translates.

Two are flat.

Year end.

23.

Thanks, Scott and good morning.

Let me, let me start on 2022, and where we ended the year Youre right. The inventory was up.

Would say most of that was at Pratt and Collins as you think about the.

The backlog the growth rates, we just talked about on the commercial aerospace side.

And the supply chain issues that we're all working to overcome we were pretty strategic in our thinking around making sure we're bringing the materials and so that we can deliver and meet the customer commitments.

You pointed out the accounts payable growth there so not all but a large portion of that inventory growth was sort of offset by by the payables to kind of go along with that on the advances side or the contract side really that was driven by.

Some a couple of large international advances that we received in December .

That contributed to our overdrive on free cash flow, which was about $500 million relative to our expectations that will be a drag on working capital as you get into 2023 and as I look at the 23 free cash flow.

We see a little bit of headwind on the working capital in part because of some of the advances that we got at the end of 2022 and I would say in part because we're going to continue to be pretty strategic about making sure that we bring in.

Parts and materials were where we need them and where theres constraints and bottlenecks in the supply chain value stream right now so on balance.

We're always targeting to take that inventory balance down, but we want to be smart and make sure. We have the products that we can deliver it we will be seeing improved velocity through our factories as we go through 'twenty three so I would expect it turns to improve here, but.

All eyes on the inventory management for sure and then managing through the collections as we get into 2023.

Our international customer sites.

Thank you very much Youre welcome.

Thank you.

Our next question comes from the line of Christine Let me walk.

Morgan Stanley Your question please Christine.

Hey, good morning, everyone.

Thank you Margaret.

Hey, al following up on the supply chain.

Or is it the same versus 2022.

What issues are different and then considering the strengthening strengthening visibility.

<unk> ability on demand.

Would have assumed that we'd seen a lot more improvement by now.

The problem and.

Can you provide more details on the actions you're taking to get this resolved by the second half of the year.

Interesting thanks, Craig.

Hey, Christine its Chris so.

I would say the the constraints are those that we've talked about previously I said, we saw some some improvement on castings, but it's not where it needs to be so castings is still there rocket motors continues to be a <unk>.

<unk> item at R&D and microelectronics, while the lead times have stabilized they havent come down and back to 2019 historical levels and so those are sort of the three main areas that I talked about we've talked about in the past that continue to be a headwind moving into 'twenty three in terms of the spin.

Civic actions talked about a few of them earlier, but again some of this is what I would call blocking and tackling in the factories, whether it be ours or our supply chain and I mentioned that before in some cases, we'll try to make an engineering change to improve produce ability and ultimately yield and other places we just need.

To be in with our customer.

Answering quality questions and making sure we can help them relieve bottlenecks microelectronics a lot of that was about really the supply base understanding our demand and then working some some interesting agreements negotiated agreements on making sure that we had our priority place in line and we made sure that we had our rate allocation.

With what Youre seeing on the consumer side in terms of microelectronics coming down we expect to see our allocation get better in that area, but again still not where it needs to be here in 'twenty. Three we are assuming a back half recovery. So certainly not all is lost but it will be the man to man defense here to get to that point.

<unk>.

Thanks, Chris.

Greg maybe a follow up you mentioned on your commentary on commercial large structural casting it sounded more constructive today than your commentary in previous quarters. I was wondering what changed in the supply chain that youre seeing to make you more confident how much of that is the Oems walking away from Airbus Welcome lately.

95 per month.

Thursday.

Youre seeing that ease.

The investments, they're making are maybe.

Labour evening.

Well I think you are seeing if you think about the structural casting issue, we're not out of the woods as Chris said, but it has certainly gotten a lot better from where we were a year ago today.

We continue to work with the suppliers there.

Primarily around the requirement side, making sure that we are the specifications that were slowing down or actually producible and the supply chain. So that's giving us this confidence.

As Chris said, it's going to be the end of 2023 before we see structural castings back too.

2019 levels.

Again, we've got competencies they've have been bringing people on and they have been training people, we have folks out there helping them.

But all of that would support.

The OE rates that we need to support for 2023.

Anything you want to add there Chris.

I would just support you said Greg.

<unk>.

Our supply chain is bringing in labor they are starting to see more success on that front, but in some cases like take casting is a pretty complex process and theres a learning curve for folks that you bring in and it takes some time to come down that learning curve to get to a level of productivity that we need to see for the improvements here, but again.

<unk> focused on that in the back half of 'twenty three.

Great. Thank you.

Thank you our next question.

It comes from the line of Doug Harned Bernstein. Please go ahead Doug.

Thank you and good morning.

And then on.

On on Pratt you talk.

Looking about 15% to 20%.

Growth in the aftermarket on the legacy programs this year.

And one of the things that that we've been concerned about its been capacity constraints.

It's taking longer to say going to be 2500 into a shop for an overhaul and longer to get it through when you. When you look at that upside year, you're forecasting how are you thinking about the capacity issue labor availability and is there potentially further upside from that if you can actually.

Yet.

Have more success there.

Doug let me start with that.

Maybe Chris will add so as we think about the outlook you're right to say that we see the large commercial engine legacy commercial engine shop visits up 15% to 20%.

About the <unk> being up around 20% and if you think about the math there we were a little over 700 or so.

As we exited 2022, so that puts us in the mid eight hundreds kind of a range expectation for 2023, which is a level we've been at before so as it relates to capacity, we have that level of capacity for the legacy shop visits.

It really then comes back to the conversation we've been having here for the last hour about ensuring that the supply chain is there and ready to support that level of shop visit inductions, which again.

We've been planning these expectations are in line with.

The numbers that Chris put out there back in May of 2021, So again the supply chain I think expect this level of an uptick in our.

Our shops too as well.

In terms of is there upside.

As you think about retirements of this this aircrafts for example, it was 21 aircraft in the last year got retired that were between 500 powered so I'm not going to get ahead of ourselves, but I think that when you look at the dynamics around OE deliveries today of new aircrafts. We think the V 2500 still has a lot of life left in it.

About a third of that fleet is yet to see its first shop visit so.

I am cautiously optimistic that we will see that fly for a longer period of time at these elevated levels, Chris I don't know if theres anything else you want to add to that Doug I would add that Youre right turn times have been elevated.

On the other platforms and so we don't see as many supply chain constraints there, perhaps as we do in other in other areas I would say the labor is stabilizing again, you're bringing people off the street to do MRO. There is a learning curve associated with that that individual becoming.

Productive.

Technician and maintenance personnel, but we believe we've got the plan in place there in terms of upside I mean again, if you listen to.

<unk> and others out there today, Neil kind of referenced this given the supply chain challenges, we're having on perhaps new production Youre seeing airlines hold onto older assets longer signing up for longer leases. So again kind of goes to the for the life of the V 2500 meters being some upside there.

And just really quick what was the favorable contract adjustment in the size of that Pat for the quarter.

From an operating profit and think about a few pennies.

Okay, Alright, great. Okay. Thank you.

Welcome.

Okay.

Thank you.

Our final question will come from the line of.

Seth segment of <unk>.

J P. Morgan your question please.

Oh, great. Thanks, Thanks for the final question.

Guys I wonder if we can dig in a little bit more on GTS.

Can you talk a little bit about the time on wing.

What we've been reading lately from comments from some of the leasing companies and comments in the press at the time on wing on.

New generation engine has been falling short of expectations and so a kind of.

To what degree do you share that perception and kind of whereas I need to get.

What specifically in the engine DNA to kind of improve to get it there.

And then the last part is I think you mentioned that GTS profit.

Aftermarket profits were positive for the first time and just with a relatively young pool of engines and maybe some time on wing challenges.

Had a profits get to positive.

So I would say that I generally agree with the sentiment that you are hearing time on wing and we've been pretty open about this and very open dialogue with our customers. All the time on wing on newer platforms, not necessarily being where we wanted them to be when we launched the program. We have done a number of block upgrades as I.

<unk> said, we've got a block upgrade going in now through MRO that that increases time on wing on average about 20% just based on the geography.

That you're in and we've got some other I'd say durability and reliability hardware and software fixes that we put in as well. So we want it we obviously want to get to the contractual levels that we have promised and we've got a plan to go do that with these upgrade Seth I will tell you keep in mind, you've got the GTS advantage, that's going to start cutting in and.

2024, as you know Thats. The next generation of the GTS more thrust better fuel burn started flight testing in Q4 with Airbus and we remain on track there in for 2024 Eas that takes all of the lessons learned we've had on the what I call base GTS program and some enhanced testing.

And we think.

That's the next generation that we'll get to the levels of performance and time on wing that our customers are anticipating but even on the what I'll call. The existing fleet today, we've got upgrade plans to continue to push that time on wing higher and higher our customers are demanding it.

Our contracts are dependent on it so we are aligned there.

Okay. Thanks very much.

Okay. Thanks, Seth and thank you everyone for listening today as always Jennifer her team are going to be available.

Day Tomorrow rest of the week to answer any follow up questions that you have thank you for listening and take care everyone.

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

[music].

Good day, ladies and gentlemen.

Welcome to the Raytheon Technologies' fourth quarter 2022 earnings conference call.

My name is Martin 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.

Chris <unk> Chief operating officer.

Mitchell, Chief Financial Officer, and Jennifer Reed, Vice President of Investor Relations.

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

Please note.

Where otherwise noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring and or significant.

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.

Jack to risks and uncertainties.

Raytheon technologies, SEC filings, including its form eight.

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 Reinsert yourself into the queue as time permits.

With that.

I will turn the call over to Mr. Hague.

Thank you Latif and good morning, everyone Hope you all had a chance to review our press release this morning.

Before we get into the highlights I'd first like to welcome Chris Kelly go to the call as you know.

Chris has been instrumental over this past year and driving our focus on operational excellence and delivering for our customers in a very challenging environment. So welcome Chris.

Okay, Let's go to the webcast slide four slide to talk about some of the highlights for 2022.

I don't have to tell anybody that 'twenty two is an incredibly dynamic year, but I am pleased to say that we were able to achieve.

Despite facing a number of significant challenges, including transitioning out of Russia.

Managing a record levels of inflation as well as supply chain and labor constraints.

With all that as a backdrop, we still delivered $67 $1 billion in sales for the full year, which was up 6% organically and <unk>.

Adjusted EPS of $4, 78, which was up 12% year over year.

We also returned almost $6 billion of capital to shareholders, which included $2 $8 billion of share repurchases.

And more importantly, even with the one 6 billion headwind from the R&D tax legislation, we generated $4 9 billion and free cash flow, which exceeded our expectations.

At the same time, we've continued to position the business for sustained profitable growth.

In 2022, we captured $86 billion of new bookings.

<unk> and backlog growth of 12% book to Bill of 128.

Near record backlog at the end of the year of $175 billion.

Additionally, we were granted over 2600 patents last year. This places us in the top 10 of companies in the United States for the second consecutive year.

While we invested.

Our investment in recent awards supports our mission to create a safer and more connected world, which was especially true in 2022.

Our products and technologies have been instrumental in helping the people of Ukraine defend itself from the Stinger javelin and Excalibur to Nee Sam's and now Patriot Air and missile Defense system, we remain in lockstep with the U S government to ensure we can continue to support our allies.

Which as you know further enhances the GTS positioned as the leader in fuel efficiency and Cotwo emissions.

Importantly, we also completed the first engine test run for a regional hybrid electric flight demonstrator.

This system integrates a one megawatt electric motor which was developed by Collins with a highly efficient Pratt and Whitney fuel burning engine, specifically adapted for hybrid electric operations.

This new engine will reduce fuel burn and cotwo by 30% compared to today's most advanced regional turboprop aircraft.

These types of investments along with strong demand across both the commercial and defense end markets will position us for continued growth as we head into 2023.

We're particularly proud that our TX outperformed among all companies in the Russell 1000 for local U S job creation in 2022.

Our TX leads the industry in employee, giving and volunteering, which is a testament to the impact our workforce has in the communities, where we work and where we live.

Before I turn it over to Chris I, just want to spend a minute to talk about the status of our integration and the next steps as we evolve as a pure play aerospace and defense company.

As you know in 2020, we brought together two great companies UTC aerospace business and Raytheon with.

With combined strength scale and capabilities that makes us uniquely equipped to innovate and deliver game changing technologies and solutions for our customers.

As we approach the third anniversary of this merger, we've accomplished many of our objectives, including exceeding our original synergy commitment and we see even more opportunities ahead.

So today, we are starting to the next step in our integration and evolution.

Our plan is to streamline our structure to a customer centric organization with three focused segments.

<unk> aerospace Raytheon and Pratt and Whitney.

This will better align us with our customers' needs and allow us to better collaborate and next generation technology.

There's still a lot of work to be done to make this happen.

Let me turn it over to Chris to give you some of the additional details of this transformation and some additional business updates Chris.

Alright. Thank you Greg it's great to join today's call and I'm looking forward to engaging more with everybody.

Starting here on slide three.

As Greg noted our merger integration is nearly complete having realized gross cost synergies of $1 4 billion.

So we are now in the process of realigning RPX in the three business units.

Let me give you some additional color around our thinking on this.

At its core this move is about enabling us to better coordinate with our customers aligning with their needs and collaborating more effectively across our businesses.

All of which is feedback we've received from our customers.

<unk> and colleagues are working together to deliver this cutting edge solution to ensure our joint forces have one common operating picture of the battle space.

Additionally, this realignment will allow us to better leverage our scale. So we can optimize our footprint improve resource allocation and reduce costs for both RPX and our customers.

Now we don't have a number for you today in terms of cost savings as we are in the early stages of that analysis, but we do believe there are additional material opportunities to be realized.

Connecting with this reorganization.

<unk> president of our <unk> business.

Foreign vessels planned to retire.

Alright, well, however, stay on as an advisor over the next several months to help us with this important transformation.

Sean Your al currently the CFO of Rns has been named acting President of our Ias effective February one.

The exact timing of this change is in final yet the current plan is to make it effective during the second half of the year until then we'll manage the business under our current structure, we will provide updates on our progress over the coming months.

Greg mentioned earlier customer demand for our products and services continues to grow.

Commercial aerospace, we expect global air traffic to fully recover to 2019 levels as we exit 2023 with continued strength in the U S and Europe .

Pretty consistent from what we're all hearing from the airlines.

And like everyone else, we're keeping a close eye on China, which historically has represented about 14% of global air traffic or.

Working assumption today is that China's lifting of Covid restrictions continues to be manageable and its traffic levels will remain robust.

We also assume traffic in other parts of the world remain resilient. We are therefore expecting commercial aftermarket revenue growth across our aerospace businesses to approach 20% in 2023.

Commercial production rates are also quickly accelerating we expect commercial aircraft volumes will be up around 20% year over year.

Which is up about 10% from 2022.

And overseas the EU is targeting a $70 billion increase in defense spending over the next three years in Japan will increase their defense budget by 26% this year.

Given our current backlog and this continued strength in demand we remain extremely focused on execution and I see four key actions that will position us to be successful on this front.

Our products in Bangalore, India to expand the Collins, India manufacturing strategy.

Second we of course need of skilled workforce to execute our development production programs.

Labor availability remains a constraint we've made some progress across our <unk> in Q4 to reduce attrition and other strategic retention and recruiting initiatives.

We secured sources of supply for critical commodities.

While we are broadly beginning to see our supply chain improve is not yet at the levels. We need we are assuming a recovery as we move into the back half of the year.

And we are targeting to more than offset this headwind through higher pricing and aggressive cost reduction actions across of all RPX.

There's no doubt we've got a lot of work in front of us, but I think we all believe we've got the right actions identified and more importantly, the right team in place to do it.

So with that let me turn it over to Neil to look at our financial results and outlook for 2003.

Thank you, Chris let's turn to slide five.

I am pleased to see how we finished the year, where we continue to see solid growth in organic sales and adjusted earnings per share and robust free cash flow in the quarter.

Fourth quarter sales of $18 1 billion grew 7% organically versus the prior year.

On a GAAP basis earnings per share from continuing operations was <unk> 96 per share and included 31 cents of acquisition accounting adjustments restructuring and nonrecurring items.

With that let's turn to slide six and I'll get into the segment results.

Starting with Collins at.

At Collins sales were $5 7 billion in the quarter up 15% on an adjusted basis and up 16% organically driven primarily by the continued recovery in commercial aerospace end markets.

Sequentially commercial aftermarket sales were up 6%.

Commercial OE sales were up 20% versus prior year, driven principally by the continued strength in the narrow body.

Military sales were up 5% driven primarily by improved material receipts higher volume and New program Awards.

So shifting to Pratt Whitney on slide seven.

Commercial OE sales were up 37% driven by favorable volume and mix within Pratt large commercial engine and Pratt Canada businesses.

Commercial aftermarket sales were up 11% in the quarter with growth in both legacy large commercial and Pratt Canada shop visits.

In the military business sales were down 2% driven by lower military legacy program aftermarket sales.

Turning now to <unk> on slide eight.

Sales of $3 5 billion were down 8% versus prior year on an adjusted basis driven by the divestiture of the global training and services business in the fourth quarter of 2021.

On an organic basis sales were down 5% versus prior year, driven by command control and communications cyber training and services and sensing and effects.

Adjusted operating profit in the quarter of 278 million was down $122 million versus prior year excluding.

The impact of divestitures operating profit was down $96 million, driven primarily by unfavorable mix lower net program efficiencies and lower volume.

RIS had a two.

$2 9 billion of bookings in the quarter, resulting in a book to Bill of <unk> 92, and our backlog of $16 billion and on a full year basis Ras's book to Bill was <unk> 96.

Turning now to slide nine.

R&D sales were $4 1 billion up 6% on an adjusted basis and up 7% organically, primarily driven by higher volume and naval power programs, including spy six production higher volume and strategic missile defense, including next generation Interceptor development and higher volume in advanced technology programs.

Rmt's bookings in the quarter were $6 billion for a book to Bill of 148.

And for the full year Rmt's book to Bill was 137, resulting in a record backlog of 34 billion.

So with that let's turn to slide.

10 to discuss the financial outlook for the year.

At the RPX level, we expect full year 2023 sales of between 72 and $73 billion.

Which represents organic growth of 7% to 9% year over year.

On an earnings perspective, we expect adjusted earnings per share of $4 90 to $5 <unk> up three 3% to 6% year over year.

While there are more details on the cash flow walk in the appendix, let me share a few of the moving pieces.

First we're expecting segment operating profit growth offsetting that will be increases in working capital capital expenditures as well as a lower pension cost recovery.

Additionally, we are expecting to buyback approximately $3 billion of <unk> shares in 2023 of course subject to market conditions.

Now getting into the details around the earnings per share walk.

Starting at the segment level, we expect strong operating profit growth of about 20%, which results in about 77 of earnings per share growth at the midpoint of our outlook range and.

And as Chris noted earlier, this overcomes about $2 billion of material and labor inflation.

So with that let's go to slide 11 for a little more detail on the segment outlooks.

At Collins, we expect full year sales to be up low double digits, primarily driven by continuation of the commercial Aero recovery military.

Military sales of Collins are expected to be up mid single digits for the year as well.

We expect Collins adjusted operating profit to grow between $750 $825 million versus last year and this is primarily driven by drop through on commercial aftermarket higher OE production ramp and increased defense volumes.

At Pratt Whitney, we expect full year sales to be up low to mid teens versus prior year principally.

Principally driven by higher OE deliveries and bolt, perhaps a large commercial engine Pratt Canada businesses as well as continued growth in legacy large commercial engines, GTS aftermarket and Pratt Canada shop visits.

Military sales at Pratt are expected to be flat driven by higher F 35, Sustainment volume, which will offset lower F 35 material inputs.

We expect <unk> adjusted operating profit to grow between 202 hundred $75 million versus last year, primarily on higher aftermarket volume, which was partially offset by a higher large commercial OE delivery impact.

Turning to <unk>, we expect full year sales to be flat versus the prior year and adjusted operating profit to be up between 75 and $125 million driven by improved net program efficiencies.

And at RMB, we expect sales to grow low to mid single digits versus 2022 as the effects of the supply chain constraints ease in the back half of the year and for adjusted operating profit to be up between 175 and $225 million versus prior year, driven by improved net program efficiencies, which were partially offset by continued mix headwinds.

And finally higher intercompany activity will increase sales eliminations by about 10% year over year.

And it's also worth noting we've included an outlook for some of the below the line items and pension in the webcast appendix so with that let me hand, it back to Greg to wrap things up.

Okay. Neil Thanks, very much so we're going to close out on slide 12, and take a quick look at our priorities, obviously theres no surprises here.

We head into 2023, I would tell you the future remains bright for RPX, especially with $175 billion backlog and strong demand in all of our end markets.

We also though the challenges that we saw in 2022 will continue and we will keep working to mitigate the big three that we've continued to focus on supply chain labor and inflation.

And although we are monitoring the macro environment, we remain optimistic in the economic outlook as the demand drivers for our businesses remain incredibly strong.

As Chris mentioned, we are actively preparing for the demand ahead by expanding capacity investing in digital solutions and leveraging automation to unlock efficiencies across our value streams.

We have the right team in place and we're making the right investments. We're also taking proactive actions to mitigate the risks we see today and to ensure its success not just in 2023, but beyond.

The streamlined lining of our businesses is just the next step in our journey on leveraging the unique scale and capabilities of RPX to deliver value for our customers and our shareowners.

Right now, it's all about program execution and managing costs.

We have the backlog we have the demand and we have the technology and our balanced between defense and commercial Aero will help us navigate into the future.

Most importantly, we remain confident in our ability to achieve our 2025 targets.

We're going to provide an update at our upcoming Investor day, which will be on June 19th at the Paris Air show.

Before I close I really want to say a special thank you to ROI as Vito for his many contributions to Raytheon over these past 34 years.

ROI has been a key member of our senior leadership team at <unk> over the past three years, and we wish him nothing but health and success as he moves into the next phase of his career.

So with that let's close out.

This portion and open it up 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 Robert Stallard of vertical research. Please go ahead Robert.

Thanks, so much good morning.

Morning.

Greg just to follow up on your final comment there on your confidence in 2025.

Rob that is a great question, one that we have been working through over these last couple of months, we obviously thought going into the end of 2022 that the tax legislation they already amortization would get.

Eliminated unfortunately that didn't happen that cost us a $1 billion six last year as Neil said it will be another $1 billion for.

And as we go into the 2025 timeframe that drag will still be about a $1 billion about $800 million of that is actual net R&D deferral of Theres a couple of hundred million dollars of additional interest expense and financing our little loan to the government.

So as all that being equal we still see a we've always talked about a $10 billion free cash flow in 2025 realistically I think that number is going to be $9 billion.

Now most of that growth from let's call. It $5 billion. This year to $9 billion is going to come.

Segment operating profit, which should grow between 2020.

2% in 2025 by about $5 billion.

And that just assumes an execution on the current demand that we have in backlog right. There is nothing else magic about that accept the continued return of people flying.

The defense budgets remaining very robust so.

We see a path to the $9 billion I don't see a path to the $10 billion today because of the R&D, but.

It's a long time may view, we hope that people would Washington will understand that theyre, making a very very bad tactical decision here and not allowing us to deduct R&D, but it is the reality that we face today.

That's great. Thanks, Greg.

Thanks, Rob.

Our next question comes from the line of Sheila <unk> of Jefferies. Your question. Please Sheila.

Hi, Good morning, guys and thank you, maybe a little bit more focus on 2023.

You mentioned 400 suppliers in our supply chain, how are you expecting that supply chain to unravel across both the commercial aerospace.

Defense segment, you mentioned 2 billion headwind.

Can you talk about the impact of.

Pricing on a net wholesale costs for global are useful and helpful.

<unk>.

I'll start with this one and then invite Neil and Greg to chime in so let's talk about supply chain for a minute maybe start with a positive which was saw some stabilization as we exited the year last year. If you look at R&D material receipts were up 30% Q3 to Q4 supplier delinquencies were down at Pratt we saw some ups.

The kinds of things that we're focused on candidly the things that we can control. We've got the people on site as you mentioned and they're responding to engineering and quality issues, giving us better visibility to what's going on we're leaving bottlenecks and also finding issues earlier than perhaps we were previously giving us more time to react we've quantified some.

Suppliers are negotiated additional LTA is I think we did about 400 agreements last year with about $1 billion eight and annual spend so again, giving us, giving our suppliers better visibility into our demand and what we're doing and then candidly were taken some actions in our own house to better enable supply chain performance small.

Things like reducing the time it takes to place a po to perhaps more complex things like engineering changes to improve the yields on some of our complex parts and ensuring that we've got sort of a stable configuration as programs move from development into production. So those are all the things that we're that we're focused on continuing to drive health and supply chain.

You're right, we're going to need it to perform.

To hit these numbers, we've got here in 'twenty three and beyond.

So Sheila the other question you had there was on inflation and I think again.

At the department of Defense.

As I think about that $2 billion right about $1 billion to I think Chris said is product related and about $800 million of that is people cost and that is a real number we've got roughly $20 billion in compensation cost across RPX.

It's about a 4% increase year over year for $800 million Big number, but again, we've got plans in place for cost reduction both in the supply chain in the factories.

Well as in the back office and some of this transformation activity that Chris mentioned.

With the realignment of the businesses will also present us an opportunity to get after some of that cost so.

It's real but we've got plans and I think we have more than more than provided for that in the guidance as Neil covered.

Thank you Bob.

Thanks Sheila.

Thank you. Our next question comes from the line of Ronald Epstein of Bank of America. Your question. Please Ronald.

Hey, good morning, everyone.

Good question for you about this restructuring.

Reorganization I guess.

In the defense business and Raytheon I think we all understand that youll get cost synergies out of it but if you look at excuse me alright <expletive> in the quarter with sales down 5% how does the reorganization.

Boost sales synergies I guess, that's the first question.

And then the.

The second question.

Is I mean, it's really how.

How do you Bruce that and then the second question is.

There are some restructuring that actually has to go on in that portfolio. Because there are there some businesses in there that are just structurally lagging.

Hey, Ron its Chris maybe I'll take a crack at that.

The sale synergy so again as we kind of said upfront.

This this is about taking the organization to the next level right you've got a tremendous defense backlogs like 70 billion R&D and this is really about enhancing customer alignment and coordination we've had customer feedback throughout.

Throughout the last couple of years about.

The need for us to.

Figure out how to better integrate some of our solutions, providing mission solutions to the customers.

Coming in with a with a unified narrative and an investment story all of these things I think will enable us to work better and frankly collaborate better across.

Businesses and large organizations like ours, you won't be surprised to hear that sometimes there is some friction there and we think this will help remove some of that friction and again provide better solutions to the customers. So thus far the customer feedback that we've spoken to sort of see that potential and it's up to us to execute on it as of the portfolio.

I think again RIS has a very strong portfolio book to Bill was <unk> 90, <unk> not necessarily where we want it we had some campaigns push out of the year, but feel really strong again about the portfolio.

And we're going to continue to invest in it.

Yes, Ron let me just jump in and add to that as we look at this reorganization. This is not just about putting an RMT together to recreate the old legacy Raytheon company, we're going to look to take the entire portfolio of RIS Collins, RMB and move the pieces, where they most most.

<unk> aligned from a technology and a customer standpoint, so you may well see pieces, especially related to <unk> moving into the college business, we'll see how all of this evolves over the next several months I would say by the time, we get to the end of the first quarter. We should have a really good understanding of what the what the new organization is going to look like we'll share that with us.

Everybody at that point, it's going to take us longer than that to actually do the rewiring. This way, we're talking about kind of a midyear, but I agree with Chris I think the portfolio that we have across the legacy Raytheon and Collins business is really quite strong and the book to Bill.

We'll be we'll get better at some of those legacy.

<unk> businesses, especially in the space segment.

Got it alright, thank you.

Okay.

Thank you.

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

Hey, good morning, everybody.

Good morning.

Ed.

Recognizing that theres some theres multiple topline inputs that are that are out of your control at the moment.

Which of the 2025 segment margin targets hold and which do not at this point because.

And the two aerospace segments the.

The 24% to 5% Incrementals required to get there are a lot better than 'twenty three and then obviously on the defense side it requires a pretty big step up.

So.

Help me with that math and I guess, just what's the latest medium term outlook for each of the segment margins.

Now, let me take a stab at that one for you because as you look out to 2025 clearly we've had.

<unk> $970 billion within the defense, we have a lot to deliver ahead of us and so I think theres going to be some puts and takes as we look at the segments.

On an individual basis as you get out to 2025, but as I step back and look at the totality of our TX and where we projected to be in where we're aiming to go in with that backlog. We feel confident that we can get there we can get the sales growth, but the earnings growth and Greg already hit on the on the cash flow pieces there. So.

Some things have changed since since we've talked in 2021, we're certainly dealing with a lot more inflation.

But we've also got the situation in Ukraine that is given R&D. Some tailwind. So when we get to June we'll be able to lay out that in more detail and also be.

Aligned with the format of our new operating segments at that time, but.

But I think theres going to be some puts and takes but we're all focused on driving margin improvements and making the right investments to drive that.

I'm really focused on earnings growth and conversion to cash and so we'll see where the margins land, but I do think we're going to get that that earnings growth.

Is it your anticipation that youll have a few hundred basis points of defense segment margin expansion over the next.

A few years.

Is that all cost or is that mix or is it not dealing with supply chain.

Do you do that.

I would tell you it is.

A combination of all of those things its supply chain getting better which allows us to see productivity in our factories is also.

As we move as we move from these <unk> contracts initial rates of production on <unk> by six and others to full rate production to see it.

The improvement in margin on the production side as well as the mix of.

Vod versus international sales today, we're actually at a low point of about 30% at RMB of international versus Dod sales that actually transitions back towards a more historical level 40, 45%.

As we do more exports, especially around <unk> and some of these other new new systems.

Okay. Thank you.

Thank you.

Our next question comes from the line of Peter Amit.

Baird. Your question please Peter.

Hey, good morning, Greg.

Morning, Peter.

Greg I want to say in R&D.

Up low to mid single digits on an organic basis, just given the backdrop it seems like it should be.

Potentially better than that obviously I'm wondering if you could just kind of parse out how much is being impacted by the supply chain and it's just.

When we think about all the potential replenishment activity plus you've got strong demand from NATO allies, just a lot of opportunities for this space. It feels like you should be have a more potentially sustained top line growth maybe just your thoughts on that over the.

The coming next couple of years. Thanks.

Yes, Peter I think you are.

You're spot on I think as we look at 23, then 24, there is more growth potential with R&D that they are probably as any business outside of Collins, just because again the backlog is so strong I would tell you given the challenges that we saw in supply chain last year and driving material in.

So that $6 5 billion should also drive some productivity $100 million to $150 million again, I think that's actually life by historical standards, but were.

I hate to say the word conservative again and again, but we're really we set these targets. So we think we can absolutely deliver we're not going to have to go back in.

We look at these at the middle of the year, but there is certainly the demand out there for higher.

I appreciate the color thanks, Greg.

This is Peter.

Thank you.

Our next question comes from the line of Myles Walton of Wolfe Research. Your question. Please miles.

Thanks, Hey, good.

And Greg just to follow up first I think you just said RMB might have the fastest growth outside of Karnes and just wanted to clarify is perhaps still the faster growing <unk> faster growth.

From a bottom line perspective, it's going to be Collins alright.

Alright, I think again top line Youre going to see what is the number of Aneel Ford for 'twenty through here for prep.

For 2020, there'll be up low to mid teens, so very substantial growth for 'twenty, three and sort of as you look out.

Over the next several years.

All four businesses are in the same ZIP code of high single digit type of sales growth on a CAGR basis.

Got it and maybe more of a detailed question on <unk>. If you can just give a little color on.

We're GTS is in the aftermarket composition.

Where legacy higher margin aftermarket isn't that composition and how those.

To play out over the next several years and also how the GCM aftermarket is trending versus your sort of assumptions of profitability on those long term contracts.

Yes.

On the aftermarket side in 2020 to turn slightly positive and so from this point, it's about accelerating those margins youre going to see that through some some better contract mix as we talked about back in Investor day and in 'twenty, one you're going to see that through increased time on weighing through some of these upgrades.

And so the GTS aftermarket profitability is something that is of high focus at Frac given the growing installed base gets about 2500 engines out there in a very large backlog. So GTS after marks a huge driver.

On the OE side that would that would imply about a mid teens sort of the sales growth. There. So we see strong growth obviously in the commercial business and I guess, while I'm on Pratt I'll just throw out a couple of the Collins numbers. Just so everyone has them and their aftermarket business think about that as being up sort of low double digits to low teens.

Sequentially kind of growing in the low single digit percentage kind of range and on the OE side up low to mid teens year over year, So again with all of that.

OE growth that we see across the narrow and wide body platforms youll see that both at Pratt and Collins.

Thank you.

Welcome.

Thank you.

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

Okay.

Good morning, everyone.

Good morning, David.

Greg I guess following up on that could you just comment where you are on.

Across mainly colons, but also touch on Pratt where you are relative to to the manufacturer stated rates I guess in particular on the Max and the lowest <unk> Z $3 20 in the mid mid to high Forty's and 787% around two am Amit. Thanks.

Hey, David.

It's something we focus a lot on obviously, we are I would tell you Collins and Pratt in lock step with.

And in Airbus in terms of their production rates.

Obviously some of the challenges that we've talked about it prior to the supply chain with the structural castings is limited.

Say some of our.

Our ability to meet some of the demand out there that is starting to ease and again, we are working very closely with Airbus on the <unk> hundred 20.

Production rate as far as 737 years, Thats really a Collins story.

Yes.

The outlook with Neil talked about that assumes those rates that you talked about about 31 aircraft or so a month on average I think they were a little light on that in the fourth quarter, but we think we'll get back to that they still have a roughly 200 aircraft to be delivered that are in inventory to further whether the the line where shutdowns, which again also as part of.

Collins is upside for the year as far as 787 hundred 87, we see that as you said I think at one a month going to two months of perhaps up to three.

Again, I think thats that will all depend upon boeing's ability to continue to get to the aircraft out the door, but we are working with them.

On a daily weekly basis to make sure that we can support them, but we don't see anything in our supply chain today that would prevent us from delivering either.

At Boeing or Airbus to the rates that they need.

Great and Greg could you just comment on the interiors business, how thats doing instead, if youre starting to see a pickup there from from the widebody side. Thanks.

Yes.

Yeah, David what I will say that it is probably the slowest recovery of all of the Collins businesses to your point because it is primarily wide body and as the airlines were conserving cash for these last couple of years, we saw sales down significantly.

We don't expect a recovery in the interiors business literally for themselves over the next three years. So it gets better but it's still not back to what it was pre pandemic.

It will remain a challenge.

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

Your question please.

So much so.

Two are flat.

Year end.

92003.

Thanks, Good morning.

Let me, let me start on 2022, and where we ended the year Youre right. The inventory was up.

I'd say most of that was at Pratt and Collins as you think about the.

The backlog the growth rates, we just talked about on the commercial aerospace side.

Some a couple of large international advances that we received in December .

That contributed to our overdrive, a free cash flow, which was about $500 million relative to our expectations that will be a drag on working capital as you get into 2023 and as I look at the 23 free cash flow.

Parts and materials were where we need them and where theres constraints and bottlenecks in the supply chain value stream right now so on balance.

All eyes on the inventory management for sure and then managing through the collections as we get into 2023%.

Our international customer sites.

Thank you very much Youre welcome.

Thank you.

Our next question comes from the line of Christine Let me walk.

Morgan Stanley Your question please Christine.

Hey, good morning, everyone.

Thank you Margaret.

Following up on the supply chain.

The the same versus 2022.

Issues are different I mean, considering the strengthening.

Strengthening visibility on demand.

I would have assumed that we've seen a lot more improvement by now.

The weight of the problem and can you provide more details on the actions you're taking to get this resolved by the second half of the year.

Interesting thanks, Chris.

Hey, Christine its Chris so.

I would say the the constraints are those that we've talked about previously I said, we saw some some improvement on castings, but is not where it needs to be so castings is still there rocket motors continues to be a.

Pacing item at R&D and microelectronics, while the lead times have stabilized they havent come down and back to 2019 historical levels and so those are sort of the three main areas that I talked about we've talked about in the past that continue to be.

<unk> is moving into 'twenty three in terms of the specific actions <unk> talked about a few of them earlier, but again. Some of this is what I would call blocking and tackling in the factories, whether it be ours or our or our supply chain and I mentioned that before in some cases, we will try to make an engineering change to <unk>.

Prove produce ability and ultimately yield and other places, we just need to be in with our customer.

With what Youre seeing on the consumer side in terms of microelectronics coming down we expect to see our allocation get better in that area, but again still not where it needs to be here in 'twenty. Three we are assuming a back half recovery. So certainly not all is lost but it'll be the man to man defense here to get to that point.

<unk>.

Thanks, Chris.

Maybe a follow up you mentioned on your commentary on commercial large structural casting.

More constructive today than your commentary in previous quarter I was wondering what changed in the supply chain that youre seeing to make you more confident how much of that is the Oems walking away from Airbus.

95 per month.

Versus.

Youre seeing that ease through investments, they're making are maybe labor evening.

Well I think you are seeing if you think about the structural casting issue, we're not out of the woods as Chris said, but it has certainly gotten a lot better from where we were a year ago today and will continue to work with the suppliers there.

Primarily around the requirement side, making sure that we're.

The specifications that were flowing down actually producible and the supply chain. So that's giving us this confidence.

As Chris said, it's going to be the end of 2023 before we see structural castings back too.

2019 levels.

Again, we've got competencies they've had been bringing people on and they have been training people, we have folks out there helping them.

But all of that would support.

The OE rates.

We need to support for 2023.

Anything you want to add there Chris I would just I would.

To support you said Greg.

Our supply chain is bringing in labor they are starting to see more success on that front, but in some cases like take casting is a pretty complex process and theres a learning curve for folks that you that you bring in and it takes some time to come down that learning curve to get to a level of productivity that we need to see for the improvements here, but again.

Focused on that in the back half of 'twenty three.

Great. Thank you.

Yes.

Thank you our next question.

Comes from the line of Doug Harned Bernstein. Please go ahead Doug.

Thank you and good morning.

Yes.

On Pratt you are talking about 15% to 20%.

Growth in the aftermarket on the legacy programs this year.

And one of the things that that we've been concerned about its been capacity constraints.

It's taking longer to say going to be 2500 into a shop for an overhaul and longer to get it through.

When you look at that upside here, you're forecasting how are you thinking about the capacity issue labor availability.

And is there potentially further upside from that if you can actually get.

Have more success there.

Doug Let me start with that and maybe Chris will add so as we think about the outlook you're right to say that we see the large commercial engine legacy commercial engine shop visits up 15% to 20% think about the <unk> being up around 20% and if you think about the math there we were a little over 700.

Or so.

We've been planning these expectations are in line with the.

The numbers that Chris put out there back in May of 2021, So again the supply chain I think expect this level of an uptick.

Our shops too as well.

In terms of is there upside.

As you think about retirements of this this aircrafts for example, it was 21 aircraft in the last year got retired that would be 2500 powered so I'm not going to get ahead of ourselves, but I think that when you look at the dynamics around OE deliveries today of new aircrafts. We think the V 2500 still has a lot of life left in it.

About a third of that fleet is yet to see its first shop visit so.

I am cautiously optimistic that we will see that fly for.

Period of time at these elevated levels, Chris I don't know if theres anything else you want to add to that Doug I would add that Youre right turn times have been elevated on V and other platforms and so we don't see as many supply chain constraints there, perhaps as we do in other in other areas I would say the labor.

Is stabilizing again, you're bringing people off the street to do MRO. There is a learning curve associated with that that individual becoming.

Ah.

The technician and maintenance personnel, but we believe we've got the plan in place there in terms of upside I mean again, if you listen to.

<unk> and others out there today, Neil kind of referenced this given the supply chain challenges, we're having on perhaps new production Youre seeing airlines hold onto older assets longer signing up for longer leases. So again kind of goes to the to the life of the V 2500 meters being some upside there.

And just really quick what was the favorable contract adjustment in the size of that perhaps for the quarter.

From an operating profit and think about a few pennies.

Okay, Alright, great. Okay. Thank you.

Welcome.

Okay.

Thank you.

Our final question will come from the line of.

Seth assessment.

J P. Morgan your question please.

Oh, great. Thanks, Thanks for the final question.

Guys I wonder if we can dig in a little bit more on the GTS and.

Talk a little bit about the time on wing.

What we've been reading lately from comments from some of the leasing company is that comments in the press at the time on wing.

New generation engines has been falling short of expectations and so a kind of.

To what degree do you share that perception and kind of where does it need to get.

What specifically in the engine Danny into kind of improve to get it there.

And then the last part is I think you mentioned that GTS.

Aftermarket profits were positive for the first time and just with a relatively young pool of engineers and maybe some time on wing challenges had a profits get to positive.

So I would say that I generally agree with the sentiment that you are hearing time on wing and we've been pretty open about this.

And very open dialogue with our customers all the time on wing on newer platforms, not necessarily being where we wanted them to be when we launched the program. We have done a number of block upgrades as I said, we've got a block upgrade going in now through MRO that that increases time on wing on average about 20% just based on the geography.

That you're in and we've got some other I'd say durability and reliability hardware and software fixes that we put in as well. So we want it we obviously want to get to the contractual levels that we have promised and we've got a plan to go do that with these upgrades that I would tell you keep in mind, you've got the GTS advantage, that's going to start cutting in.

In 2024, as you know Thats a next generation of the GTS more thrust better fuel burn started flight testing in Q4 with Airbus and we remain on track there in for 2024 Eas that takes all of the lessons learned we've had on the what I call base GTS program and some enhanced.

Testing and we think.

And higher our customers are demanding it.

Our contracts are dependent on it so were aligned there.

Okay. Thanks very much.

Okay. Thanks, Seth and thank you everyone for listening today as always Jennifer her team are going to be available.

Day Tomorrow rest of the week to answer any follow up questions that you have thank you for listening and take care everyone.

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

Q4 2022 Raytheon Technologies Corp Earnings Call

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