Q1 2023 Raytheon Technologies Corp Earnings Call

April 25, 2023

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

Good day, ladies and gentlemen.

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

And welcome to the Raytheon Technologies' first quarter 2023 earnings Conference call. My name is Lucy and I will be your operator for today.

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

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

On the call today are Greg Hayes, Chairman and Chief Executive Officer.

Chris Collier.

And Chief operating Officer, Neil Mitchell Chief.

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

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.

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

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

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

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.

Ask a question you will need to press star one to 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. Hayes.

Alright, Thank you Latif and good morning, everyone.

Trust everyone's had a chance to see the press release. It was clearly a good start to the year for RPX and demand remains strong for both our commercial aerospace and defense businesses and I think importantly, we're seeing some stabilization in the supply chain.

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.

Before we get to the highlights for the quarter, Let me just spend a couple of minutes on the macro environment.

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

Starting on the commercial side.

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

Domestic revenue passenger miles are now back to pre pandemic levels 2019 levels as we exit March. This was led by a very strong rebound in China. Following the reserve Covid policy reversal.

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

Alright, Thank you Latif and good morning, everyone.

On the international front, we have seen continued improvement in rpms, reaching nearly 80% of.

2019 levels.

With strong consumer demand and record advanced booking we expect total global air traffic to fully recover to 2019 levels as we exit the year.

Before we get to the highlights for the quarter, Let me just spend a couple of minutes on the macro environment.

Starting on the commercial side.

On the defense side, we're very encouraged by the President's most recent fiscal year 'twenty for budget request of 886 billion, that's up about 3% and Thats on top of last year's nearly 10% top line budget increase.

Domestic revenue passenger miles are now back to pre pandemic levels 2019 levels as we exit March. This was led by a very strong rebound in China following their Azure Covid policy reversal.

The proposed budget includes broad based support for many of our key programs technologies and capabilities.

On the international front, we have seen continued improvement in rpms, reaching nearly 80% of.

Moving a request to fund multiyear munitions purchases for amarin.

2019 levels with.

With strong consumer demand and record advanced booking we expect total global air traffic to fully recover to 2019 levels as we exit the year.

It also prioritizes heck, that's the hypersonic attack cruise missile as the future long range hypersonic missile.

And perhaps most importantly for us the budget reflects the Dod's decision to move forward with the engine core upgrade for the F 135 engine, which we believe is a win for both the warfighter and the taxpayer.

On the defense side, we're very encouraged by the presidents most recent fiscal year 'twenty budget request of 886 billion, that's up about 3% and Thats on top of last year's nearly 10% top line budget increase.

This program will solidify Pratt and Whitney his position on the F 35, and will provide additional thrust range and efficiency necessary to support the needs of the warfighter well into the next decade.

The proposed budget includes broad based support for many of our key programs technologies and capabilities.

<unk> a request to fund multiyear munitions purchases for amarin.

Looking internationally, we're also seeing strong demand for defense capabilities as our allies prioritize additional defense spending pull.

It also prioritizes heck, that's the hypersonic attack cruise missile as the future long range hypersonic missile.

<unk> recently announced plans to spend 4% of their GDP on defence. This year thats, the highest level across all of the NATO countries.

And we continue to support Ukraine's ongoing needs, including the Pentagon has accelerated deployment of Patriot missile defense system, and another <unk> capability to the Ukraine mission.

Clearly the demand environment remains strong across our end markets and with that as a backdrop, let's turn to slide two for the Q1 highlights.

Looking internationally, we're also seeing strong demand for defense capabilities as our allies prioritize additional defense spending pulled.

Importantly, we exited the quarter with a record backlog of $180 billion.

Poland, and recently announced plans to spend 4% of their GDP on defence. This year thats, the highest level across all of the NATO countries.

This included over $20 billion of New awards from some of our key franchises in the quarter.

As an example, RMB received a $1 $2 billion award for Patriot for Switzerland.

And we continue to support Ukraine's ongoing needs, including the Pentagon has accelerated deployment of Patriot missile defense system.

The 18th Patriot partner Nation.

<unk> was awarded $1 9 billion and classified awards.

Another RPX capability to the Ukraine mission.

Clearly the demand environment remains strong across our end markets and with that as a backdrop, let's turn to slide two for the Q1 highlights.

We also delivered solid financial performance was strong year over year organic sales growth of 10% and adjusted EPS of $1 22.

We exited the quarter with a record backlog of $180 billion.

Regarding free cash flow, we started the year slowly due to some timing of higher working capital, which Neil will talk to you about in a bit.

This included over $20 billion of New awards from some of our key franchises in the quarter.

Importantly, though we remain confident in our full year outlook of about $4 $8 billion of free cash flow.

As an example, RMB received a $1 $2 billion award for Patriot for Switzerland that marks the 18th Patriot partner nation.

As expected sales growth was led by commercial aerospace with aftermarket up close to 20% in.

<unk> was awarded $1 9 billion and classified awards.

In OEM shipments up close to 17% year over year.

We also delivered solid financial performance was strong year over year organic sales growth of 10% and adjusted EPS of $1 22.

Additionally, in the quarter, we achieved an incremental $50 million of gross merger cost synergies and we are quickly approaching the $1 $5 billion target with more opportunities still ahead.

Regarding free cash flow, we started the year slowly due to some timing of higher working capital, which Neil will talk to you about in a bit.

On the capital allocation front, we repurchased more than $560 million of our shares in the quarter and we remain on track for $3 billion of share repurchases for 2023.

Importantly, though we remain confident in our full year outlook of about $4 $8 billion of free cash flow.

As expected sales growth was led by commercial aerospace with aftermarket up close to 20%.

And as you saw yesterday, we increased our dividend over 7% from 55 to 59 a share in line with our commitment to return at least 20 billion to shareowners in the four years following the merger.

And OEM shipments up close to 17% year over year.

Additionally, in the quarter, we achieved an incremental $50 million of gross merger cost synergies and we are quickly approaching the $1 $5 billion target with more opportunities still ahead.

We've done all this while continuing to invest in R&D additional capacity automation and the digitization of our production facilities in order to support our growing backlog.

On the capital allocation front, we repurchased more than $560 million of our shares in the quarter and we remain on track for $3 billion of share repurchases for 2023.

As you can see we're extremely well positioned for growth this year and well into the future.

Every day, we are furthering our integration to unlock the scale and breadth of our T X all while driving additional technology synergies and our focus on operational performance.

And as you saw yesterday, we increased our dividend over 7% from 55 to <unk> 59, a share in line with our commitment to return at least 20 billion to shareowners in the four years following the merger.

With that let me turn it over to Mr. Kelly to talk about the progress we're making in regard to our business realignment and I'll be back at the end for wrap up in Q&A Chris.

We've done all this while continuing to invest in R&D additional capacity automation and digitization of our production facilities in order to support our growing backlog.

Well, thank you, Greg and good morning, everybody I'm on slide three.

As you know we announced back in January our plan to realign our portfolio into three business units Collins Aerospace Raytheon and Pratt Whitney and as we said this a realignment has three primary objectives.

As you can see we're extremely well positioned for growth this year and well into the future.

Every day, we are furthering our integration to unlock the scale and breadth of our TX all while driving additional technology synergies and our focus on operational performance.

The first is to better align our market, leading franchises with our customers' priorities, ensuring more effective coordination and collaboration across our businesses.

The second is to enhance our performance and capture additional synergies from both a product and technology standpoint, and third to better leverage our resources to optimize our investments and cost structure.

With that let me turn it over to Mr. Kelly to talk about the progress we're making in regard to our business realignment and I'll be back at the end for a wrap up in Q&A Chris.

Well, thank you, Greg and good morning, everybody I'm on slide three.

So let me update you on where we are in the process.

After continued internal analysis and customer engagement, we've determined a major content shifts within our portfolio necessary to achieve these objectives.

First the multi domain command and control solutions of RIS in R&D will transition to the mission systems strategic business unit within Collins So true.

The first is to better align our market, leading franchises with our customers' priorities, ensuring more effective coordination and collaboration across our businesses.

A more focused business to support connected battlespace opportunities.

Additionally, Ras's air traffic management business will be integrated into Collins's connected aviation solutions strategic business unit further consolidating what we call the connected ecosystem of flight data and management into one business.

So let me update you on where we are in the process.

After continued internal analysis and customer engagement, we've determined a major content shifts within our portfolio necessary to achieve these objectives.

These two moves will put Collins at the center of our company wide collaboration efforts. They will now be responsible for more than half of our revenue synergy projects.

First the multi domain command and control solutions of RIS in R&D will transition to the mission systems strategic business unit within Collins.

In parallel we will move Collins's intelligence surveillance and reconnaissance business to the new Raytheon business unit, combining complementary sensing and imaging technologies to improve our offerings for multiple customer applications.

Create a more focused business to support connected battlespace opportunities.

Additionally, RIS as air traffic management business will be integrated into Collins's connected aviation solutions strategic business unit further consolidating what we call the connected ecosystem of flight data and management into one business.

And lastly, the new Raytheon business will merge the remaining.

In R&D businesses into strategic business units aligned around specific customers such as the Air Force Army Navy space and missile defense.

These two moves will put Collins at the center of our company wide collaboration efforts. They will now be responsible for more than half of our revenue synergy projects.

When this is complete the top customer of each of these strategic business units will account for 70% or more of that business unit sales.

In addition, we will establish a strategic business unit that will operate like a merchant supplier within the Raytheon business unit will centralize components and sub systems that are sold internally as well as to a broad array of government commercial and other prime customers, enabling us to sell more effectively into these channels.

And lastly, the new Raytheon business will merge the remaining RIS in RMB businesses into strategic business units aligned around specific customers such as the Air Force Army Navy space and missile defense.

As part of this realignment we are pleased to announce that the new Raytheon business unit will be led by Wes Kremer currently the president of R&D versus over 20 years of experience across multiple businesses and product lines within Raytheon is uniquely qualified to lead this business.

This is complete the top customer of each of these strategic business units will account for 70% or more of that business unit sales.

We are now in the middle of the implementation phase, including our analysis and validation of targeted gross cost savings, we provide more details on the new design and implementation status, including those savings at our Investor meeting at the Paris Air show. So overall good progress thus far as we remain focused on our goal to operate under the new structure beginning in July .

In addition, we will establish a strategic business unit that will operate like a merchant supplier within the Raytheon business unit.

Will centralize components and sub systems that are sold internally as well as to a broad array of government commercial and other prime customers, enabling us to sell more effectively into these channels.

As part of this realignment, we're pleased to announce that the new Raytheon business unit will be led by Wes Kremer currently the president of R&D versus over 20 years of experience across multiple businesses and product lines within Raytheon is uniquely qualified.

With that let's move to slide four and I'll provide an update on the current environment.

In general not a lot has changed since we spoke back in January and demand remains strong across our end markets on the event side as Greg mentioned upfront. Some of the awards, we received in the quarter and a record backlog on the commercial side, we saw strong aftermarket growth in the quarter as airlines are preparing to support the busy summer travel season with airtran.

Qualified to lead this business.

Increasing in retirement is remaining very low we continue to see strength in parts repair provisioning and maintenance across our end markets.

Given this demand our focus remains on ensuring we have the capacity supply chain performance and operational excellence necessary to meet our commitments to customers.

With that let's move to slide four and I'll provide an update on the current environment.

In general not a lot has changed since we spoke back in January and demand remains strong across our end markets on the <unk> side as Greg mentioned upfront some.

So let me start and provide some color on capacity.

In R&D, we continue to invest in new test equipment tooling and automation at our Tucson Andover in Huntsville facilities to support the ramp up on key programs, such as Amiram storm breaker SM, three SM six and Patriot GMT.

The awards, we received in the quarter and a record backlog on the commercial side, we saw strong aftermarket growth in the quarter as airlines are preparing to support the busy summer travel season with air traffic, increasing and retirements remaining very low we continue to see strength in parts repair provisioning and maintenance across our end markets.

At press Asheville, North Carolina turbine airfoil site, we now have 63% of machining production assets onsite and are progressing towards first article inspection by the end of May.

Given this demand our focus remains on ensuring we have the capacity supply chain performance and operational excellence necessary to meet our commitments to customers.

On our way to improving productivity and cost in support of the high volume GTS and F 35 programs.

So let me start and provide some color on capacity.

In Tucson, we recently completed a classified space conversion, bringing our total number of classified seats added over the past two years to almost 1000 with the expectation of an additional 900 more by the end of 'twenty three.

In R&D, we continue to invest in new test equipment tooling and automation at our Tucson Andover in Huntsville facilities.

The ramp up on key programs, such as Amiram storm breaker SM, three SM six and Patriot GMT.

This will create the classified lab capacity for R&D to execute on recent development wins, such as <unk> Halo and <unk>.

At press Asheville, North Carolina turbine airfoil site, we now have 63% of machining production assets onsite and are progressing towards first article inspection by the end of May.

Furthermore, we are expanding our MRO network. This past quarter, two new facilities joined the GTS aftermarket network second MRO shop in Japan, and 165000 square foot shop at Delta Airlines Tech Ops and Atlanta.

On our way to improving productivity and cost in support of the high volume GTS and F 35 programs.

We of course also remained very focused on the health of the supply chain, which continues to be a challenge from a performance and cost perspective.

Starting with performance, while we've experienced stabilization in certain areas such as electronics continued to experience challenges in castings forgings raw materials and machining.

This will create the classified lab capacity for R&D to execute on recent development wins, such as <unk> Halo and <unk>.

And you've heard us talk before about our in person support embedded our supplier sites and that continues to increase.

Furthermore, we are expanding our MRO network. This past quarter, two new facilities joined the GTS aftermarket network second MRO shop in Japan, and 155000 square foot shop at Delta Airlines Tech Ops and Atlanta.

Today, we are present in more than 400 suppliers with a focus on high impact locations and.

Specific to defense, we have significantly increased onsite support in the last quarter, allowing us to help clear bottlenecks better execute engineering and quality initiatives.

We of course also remained very focused on the health of the supply chain, which continues to be a challenge from a performance and cost perspective.

<unk> improved overall visibility.

Starting with performance, while we've experienced stabilization in certain areas such as electronics continued to experience challenges in castings forgings raw materials and machining.

And in R&D. This helped yield a 5% improvement in material receipts year over year, enabling increased flow through our factories.

Additionally, we held an RTL supplier conference just a few weeks ago, where we engage with about 70 key suppliers to be detailed action plans to ensure future capacity and to reduce current overdue positions.

And you've heard us talk before about our in person support embedded our supplier sites and that continues to increase.

Today, we are present in more than 400 suppliers with a focus on high impact locations and.

On the cost side, the overall inflation picture remains persistently high and we are attacking those inflationary pressures from several angles.

And specific to defense, we have significantly increased onsite support in the last quarter, allowing us to help clear bottlenecks better execute engineering and quality initiatives.

We have almost 2000 cost reduction projects ongoing related to our supply chain product and non product, including negotiating better contractual terms transitioning work to lower cost sources and part redesigns to reduce cost.

<unk> improved overall visibility.

And in R&D, that's helped yield a 5% improvement in material receipts year over year, enabling increased flow through our factories.

We're also going deeper to our supply chain to better understand their usage of constrained raw materials, such as aluminum titanium and nickel. So we can get a complete picture of our embedded spend into leveraged total raw material purchases drive improved cost positions.

On the cost side, the overall inflation picture remains persistently high and we are attacking those inflationary pressures from several angles.

A cure supply throughout our value stream.

And lastly, we continue to leverage our core operating system to execute on our cost reduction initiatives as well as footprint modernization.

Almost 2000 cost reduction projects ongoing related to our supply chain product and non product.

As we've previously talked about we have thousands of ongoing projects many of which are at the manufacturing line or sell level to take cost out of our operations.

Negotiating better contractual terms transitioning work to lower cost sources and part redesigns to reduce cost.

These range from things like redesigning material and machining flow to reduce labor hours and cycle time.

We're also going deeper into our supply chain to better understand their usage of constrained raw materials, such as aluminum titanium and nickel. So we can get a complete picture of our embedded spend into leveraged total raw material purchases drive improved cost positions.

Implementing closed door machining to enable the completion of a part and one continuous process without any operator intervention.

So these are relatively small initiatives with short paybacks. They are part of a continuous commitment to improvement in efficiency.

Our supply throughout our value stream.

And lastly, we continue to leverage our core operating system to execute on our cost reduction initiatives as well as footprint modernization.

So before I turn it over to Neil to recap the financials I do want to provide a brief update on the GTS program.

As we've previously talked about we have thousands of ongoing projects many of which are at the manufacturing line or sell level to take cost out of our operations.

As you know since the GCI program went into service in 2015, we have continued to introduce upgrades and improvements to increase reliability and durability.

These range from things like redesigning material and machining flow to reduce labor hours and cycle time <unk>.

Spectra reliability, we have met the target level for dispatch reliability. This is now at mature engine levels.

Implementing closed door machining to enable the completion of a part and one continuous process without any operator intervention.

It looks like the durability, we have improve time on wing since program inception.

Again time on wing, meaning how how long engines can be operated before needing to be removed for maintenance, but we're not yet at the level, we and our customers expect this has put stress on the operations of the fleet.

But these are relatively small initiatives with short paybacks. They are part of a continuous commitment to improvement and efficiency.

So before I turn it over to Neil to recap the financials I do want to provide a brief update on the GTS program.

We continue to develop upgrades to the current GTS configuration to improve durability. We're also expanding our MRO capacity and working to reduce shop visit turnaround times to improve service availability.

As you know since the GTI program went into service in 2015, we have continued to introduce upgrades and improvements to increase reliability and durability.

It will take some time to realize these benefits, but we are continuing to invest in time on wing improvements as we were able to do over the course of the V 2500 program.

Spectra reliability, we have met the target level for dispatch reliability. This is now at mature engine levels.

It looks like the durability, we have improve time on wing since program inception.

And of course in parallel we continue to execute on our GTS advantaged development program. Our next generation GTS configuration. It will incorporate all of our experiences and technical learnings since entry into service.

Again time on wing, meaning how how long engines can be operated before needing to be removed for maintenance.

We're not yet at the level, we and our customers expect this has put stress on the operations of the fleet.

Okay with that let me turn it over to Neil to walk through our financial results.

Thank you Chris I'm on slide five as Greg noted sales of $17 2 billion were up a strong 10% organically versus the prior year.

It will take some time to realize these benefits, but we are continuing to invest in time on wing improvements as we were able to do over the course of the V 2500 program.

This growth was driven by both commercial aerospace and defense. Despite some of the environmental challenges we continue to face.

Adjusted earnings per share of $1 22 was up 6% year over year with strong segment operating profit growth of 15%, partially offset by the expected lower pension income and a higher effective tax rate.

On a GAAP basis earnings per share from continuing operations was <unk> 97 per share and included 25 of acquisition accounting adjustments restructuring and nonrecurring items in.

Okay with that let me turn it over to Neil to walk through our financial results.

Thank you Chris I'm on slide five as Greg noted sales of $17 2 billion were up a strong 10% organically versus the prior year.

And finally free cash flow was an outflow of $1 4 billion in the first quarter, which is historically, our lightest quarter of the year due to the timing of incentive compensation payments and seasonality in our defense businesses in.

This growth was driven by both commercial aerospace and defense. Despite some of the environmental challenges we continue to face.

In addition to these typical dynamics the timing of sales and cash collections as well as supply chain and capacity constraints drove higher working capital in the first quarter of this year.

We expect to generate positive free cash flow beginning in the second quarter as commercial deliveries accelerate in performance as well as other funding milestones are achieved.

On a GAAP basis earnings per share from continuing operations was <unk> 97 per share and included 25 of acquisition accounting adjustments restructuring and nonrecurring items.

And importantly, as Greg said, we remain confident in delivering about $4 8 billion and free cash flow for the full year.

So with that let's turn to slide six and get into the segment results.

Beginning with Collins sales were $5 6 billion in the quarter up 16% on an adjusted basis and up 17% on an organic basis, driven primarily by the continued recovery in commercial aerospace end markets, resulting in higher flight hours and higher OE production rates.

In addition to these typical dynamics the timing of sales and cash collections as well as supply chain and capacity constraints drove higher working capital in the first quarter of this year.

We expect to generate positive free cash flow beginning in the second quarter as commercial deliveries accelerate in performance as well as other funding milestones are achieved.

By channel commercial aftermarket sales were up 24% on an adjusted basis, and 20, 26% organically driven by a 43% increase in provisioning and a 29% increase in parts and repair while modifications and upgrades were up 1% organically in the quarter.

And importantly, as Greg said, we remain confident in delivering about $4 8 billion and free cash flow for the full year.

So with that let's turn to slide six and get into the segment results.

Sequentially commercial aftermarket sales were up 8%.

Commercial OE sales were up 12% versus the prior year driven by production ramps in narrow body business jets and wide body and.

Military sales were up 9% due to both higher material receipts and manufacturing throughput.

Adjusted operating profit of $800 million was up $216 million from the prior year with drop through on higher volume and favorable mix, partially offset or offset by higher production costs and higher SG&A expense.

Sequentially commercial aftermarket sales were up 8%.

Looking ahead on a full year basis, we continue to expect collins's sales to grow low double digits and operating profit of between $750 and $825 million increase versus 2022.

Commercial OE sales were up 12% versus the prior year driven by production ramps in narrow body business jets and wide body and.

Military sales were up 9% due to both higher material receipts and manufacturing throughput.

Turning to Pratt <unk> Whitney on slide seven.

Sales of $5 2 billion were up 15% on an adjusted basis and 16% on an organic basis with sales growing across all segments.

Commercial OE sales were up 27% in the quarter on higher engine deliveries within both perhaps large commercial engine and Canada businesses.

Looking ahead on a full year basis, we continue to expect collins's sales to grow low double digits and operating profit of between $750 and $825 million increase versus 2022.

Commercial aftermarket sales were up 14% in the quarter, primarily driven by increased volume and favorable mix.

And then the military business sales were up 13% driven by the F 35 production contract award in the second quarter of last year and higher F 35, Sustainment volume.

Turning to Pratt <unk> Whitney on slide seven.

Sales of $5 2 billion were up 15% on an adjusted basis and 16% on an organic basis with sales growing across all segments.

Adjusted operating profit of $434 million was up $126 million from the prior year, driven primarily by drop through on higher commercial aftermarket are favorable contract matter and higher military sales, which was partially partially offset by conversion on higher commercial OE volume.

Commercial OE sales were up 27% in the quarter on higher engine deliveries within both perhaps large commercial engine and Canada businesses.

Commercial aftermarket sales were up 14% in the quarter, primarily driven by increased volume and favorable mix.

Turning to <unk> full year outlook, we continue to expect sales to grow low to mid teens and operating profit growth of $200 million to $275 million versus 2022.

And then the military business sales were up 13% driven by the F 35 production contract award in the second quarter of last year and higher F 35, Sustainment volume.

Shifting to <unk> on slide eight.

Sales of $3 6 billion were in line with our expectations and flat versus prior year, both on an adjusted and organic basis.

This was driven by lower command control and communications programs, which was mostly offset by higher revenue from cyber and services programs.

Adjusted operating profit in the quarter of $330 million was down $48 million versus prior year, driven primarily by lower net program efficiencies spread across several programs.

Turning to <unk> full year outlook, we continue to expect sales to grow low to mid teens and operating profit growth of $200 million to $275 million versus 2022.

Our eyes began the year with strong orders in the quarter of $4 3 billion, resulting in a book to Bill of 134, and a backlog of over $17 billion. This brings our asses rolling four quarter book to Bill to 1.09.

Shifting to <unk> on slide eight.

Sales of $3 6 billion were in line with our expectations and flat versus prior year, both on an adjusted and organic basis.

This was driven by lower command control and communications programs, which was mostly offset by higher revenue from cyber and services programs.

In addition to the significant bookings Greg mentioned earlier RIS also received $650 million award for the next generation Jammer and a $275 million space Development Agency Award for missile tracking satellite constellation.

Adjusted operating profit in the quarter of $330 million was down $48 million versus prior year, driven primarily by lower net program efficiencies spread across several programs.

Looking ahead, we continue to expect <unk> full year sales to be flat with operating profit growth of $75 million to $125 million versus 2022.

Turning now to slide nine RM.

<unk> sales were $3 7 billion up 4% on an adjusted basis and up 5% organically, primarily driven by higher sales in advanced technology and airpower programs adjusted.

Adjusted operating profit of 335 million was down $52 million versus the prior year driven by the lower by lower net program efficiencies and higher development program mix, partially offset by higher volume.

Looking ahead, we continue to expect Rns's full year sales to be flat with operating profit growth of $75 million to $125 million versus 2022.

Lower net program efficiencies included the unfavorable impact of a significant option exercised in the quarter, which had about a 100 basis point impact on the margin.

Turning now to slide nine RM.

Like our rns RMB as bookings were also very strong to start the year with $5 2 billion of bookings in the quarter, including an over $600 million by six award.

<unk> sales were $3 7 billion up 4% on an adjusted basis and up 5% organically, primarily driven by higher sales in advanced technology and airpower programs adjusted.

This resulted in a record backlog of $35 billion and our book to Bill of 143 in both the quarter as well as on a rolling four quarter basis.

And for the full year, we continue to expect R&D sales to grow low to mid single digits with operating profit growth of between 175 and $225 million versus 2022.

Lower net program efficiencies included the unfavorable impact of a significant option exercised in the quarter, which had about a 100 basis point impact on the margin.

With that I'll turn it back to Greg to wrap things up.

Like our rns RMB as bookings were also very strong to start the year with $5 2 billion of bookings in the quarter, including an over $600 million Spy Six award.

Okay excuse me. Thank you Neil amongst slide 10 here just a couple of thoughts before we open it up for Q&A.

I think first and foremost given the strength of our backlog and the continued end market demand.

This resulted in a record backlog of $35 billion and our book to Bill of 143 in both the quarter as well as on a rolling four quarter basis.

As a team remain extremely confident we can deliver our 'twenty three guidance and our 2025 commitments.

And for the full year, we continue to expect R&D sales to grow low to mid single digits with operating profit growth of between $175 and $225 million versus 2022.

Our success of course begins with ensuring that we're meeting our customers' most critical needs.

We're keeping a watchful eye on external factors, but I would tell you that Chris and the entire senior leadership team remain laser focused on mitigating supply chain constraints and driving productivity and efficiency improvements across all of the businesses.

With that I'll turn it back to Greg to wrap things up.

Okay excuse me. Thank you Neil I'm on Slide 10 here just a couple of thoughts before we open it up for Q&A.

More importantly, we are continuing to invest in innovative solutions and differentiated technology that will continue to drive long term growth.

I think first and foremost given the strength of our backlog and the continued end market demand.

Last slot as earlier this month marked the third anniversary of the merger.

As a team remain extremely confident we can deliver our 'twenty three guidance and our 2025 commitments.

We've been able to accomplish a lot so far even with this challenging environment.

Our success of course begins with ensuring that we're meeting our customers' most critical needs.

And we know there's a lot more progress we can make with the ongoing business realignment, which will set up Archie extra success for decades to come.

We're keeping a watchful eye on external factors, but I would tell you that Chris and the entire senior leadership team remains laser focused on mitigating supply chain constraints and driving productivity and efficiency improvements across all of the businesses.

We look forward to sharing more of this information on our transformational efforts and our long range outlook during our Investor day at the Paris Air show in June 19.

With that let me open up the <unk>.

More importantly, we are continuing to invest in innovative solutions and differentiated technology that will continue to drive long term growth.

Call for Q&A.

In the interest of time and to allow for broader participation.

Lastly, as earlier this month marked the third anniversary of the merger.

You are asked to limit yourself to one question to ask a question you will need to press star one one on your telephone.

We've been able to accomplish a lot so far even with this challenging environment.

And we know there's a lot more progress we can make with the ongoing business realignment, which will set up Archie extra success for decades to come.

The first question.

From the line of Myles Walton of Wolfe Research your question Myles.

We look forward to sharing more of this information on our transformational efforts and our long range outlook during our Investor day at the Paris Air show in June 19th with that let me open up the call for Q&A.

Thanks, Good morning, Hey.

Greg or maybe Chris I don't know, which but on R&D.

This has been one where you're sort of trying to get to the bottom of the issues.

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.

It sounded like there was a contract option exercise was a 100 basis points, but even with that you. Obviously have an implied 12, 5% margin for the rest of the year in the guidance. So I'm just curious what's driving that how profitable is the backlog growth is now built up I think that's one of the questions that everybody has and I know after.

The first question comes from the line of Myles Walton of Wolfe Research Your question Myles.

Realignment RMT won't exist, but it will still be part of the business obviously.

Thanks, Good morning, Hey.

Hey, Myles this is Chris thanks for the question.

Greg or maybe Chris I don't know, which but on R&D.

Look.

Agree we'd like to be seeing the margins improving a bit of a faster rate, but there are some real positives in this business when you step back most notably the backlog. If you think about the book to Bill over the last 12 months. It's a 143, which is really phenomenal with some key wins and some potential franchise areas.

This has been one where you're sort of trying to get to the bottom of the issues and it sounded like there was a contract option exercise was a 100 basis points, but even with that you. Obviously have an implied 12, 5% margin for the rest of the year.

In the guidance. So I'm just curious what's driving that how profitable is the backlog growth is now built up I think that's one of the questions that everybody has and I know after realignment RMT won't exist, but it will still be part of the business obviously.

As Neil noted in his remarks, we did have a contract option exercise in the first quarter. It's it's good business with Mako mistake about that but because of the accounting resulted in a bit of a negative impact about 100 basis points.

Hey, Myles this is Chris thanks for the question.

You exclude that it would put R&D at a bit over 10% sort of in line with where we were in Q4.

<unk>.

Agree we'd like to be seeing the margins improving at a a bit of a faster rate, but there are some real positives in this business. When you step back most of that will be the backlog. If you think about the book to bill over the last 12 months. It's a 143, which is really phenomenal with some key wins and some potential franchise areas.

Sort of look ahead to the RMB margin profile of the two principle drivers of that margin improvement are going to be.

Material flow and flow in our factory.

And of course just absorption.

Brought on by higher material receipts and of course, the labor that goes with it. So if you think about the factory flow.

As Neil noted in our remarks, we did have a contract option exercise in the first quarter. It's it's good business with make no mistake about that but because of the accounting resulted in a bit of a negative impact of about 100 basis points.

We had a.

The 15% increase in Q4 in terms of materials seats and other 5% here in Q1, and we're starting to see the results in the factory.

If you exclude that it would put RMB at a bit over 10% sort of in line with where we were in Q4.

Meg talk prior about kit fill rates being in the fifties.

You sort of look ahead to the RMB margin profile of the two principle drivers of that margin improvement are going to be material flow and flow in our factory.

The material flow that we've seen lately has brought the capsule right up into the low seventies, our historical rate has been more than the mid <unk>, but as we continue to drive more material youll see more material flow in the factories getting those kit fill rates up and thats going to reduce the period of performance and then you had a second one again is just math with increasing material.

And of course just absorption.

Brought on by higher material receipts and of course, the labor that goes with it. So if you think about the factory flow.

We had done.

15% increase in Q4 in terms of materials seats and other 5% here in Q1, and we're starting to see the results in the factory you heard Gregg talk prior about kit fill rates being in the fifties.

<unk> volume in labor, we're going to see better absorption of our fixed indirect support costs. So more productivity there. So thats the margin sort of profile and story at R&D.

Okay and is it particularly back end loaded to the year I would imagine the second half.

The material flow that we've seen lately has brought the kit fill rate up into the low seventies, our historical rate has been more than the mid <unk>, but as we continue to drive more material youll see more material flow in the factories getting those kit fill rates up and thats going to reduce the period of performance and then you had a second one again is just math with increasing material.

Myles This Neal, yes, I expect that to accelerate as the year goes on but I would point to the second half as Chris said with the kit fill rates in the seventies.

That grows into the <unk> and then higher as the year progresses, youll see the productivity the confidence around our ability to shorten that period of performance improve and that will show up in the EAC. The other thing I'll say is that option we had.

<unk> volume in labor, we're going to see better absorption of our fixed indirect support costs. So more productivity there. So thats the margin sort of profile and story at R&D.

Again, as Chris said, good good business.

There may be another one but again this is really good business coming on the heels of increased customer demand. So we'll be sure to continue to talk about that but I think the fundamentals of the backlog are strong as we look at the margin embedded in that backlog, it's above 10% and.

Okay and is it particularly back end loaded to the year I would imagine in the second half.

Myles This is Neil yes, I expect that to accelerate as the year goes on but I would point to the second half as Chris said with the kit fill rates in the seventies.

That gives us the confidence that that margin expansion will come over time.

It grows into the <unk> and then higher as the year progresses, youll see the productivity the confidence around our ability to shorten that period of performance improve and that will show up in the EAC. The other thing I'll say is that option we had.

Thank you.

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

Again, as Chris said, good good business.

Question Noah.

Hey, good morning, everybody.

Good morning Noah.

Okay.

Can we just spend a little bit more time on the margin.

I guess, what's happening with pricing in the aftermarket maybe specifically in the engine.

That gives us the confidence that that margin expansion will come over time.

Just sounds like out there in the industry given limited parts supply limited MRO availability of that pricing is.

Thank you.

Much better than normal so.

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

Curious what youre seeing on that front.

Especially things that are not on some version of a long term agreement.

Question Noah.

And.

What does that mean for the margin going forward.

Hey, good morning, everybody Hey, good morning Noah.

So let me let me start Greg first of all on the pricing side with all of the inflation that we've seen over the last 18 months.

Right.

Can we just spend a little bit more time on the margin.

I guess, what's happening with pricing in the aftermarket and maybe specifically in the engine.

I would say Pratt and Collins were both relatively aggressive last year and catalog price increases and so I think we are seeing some of the benefits of that.

Just sounds like out there in the industry given limited parts supply limited MRO availability of that pricing is.

That aftermarket part increase but keep in mind on GTS for instance, more than 75% of all of those customers are on long term support agreements. So you really are seeing the benefit.

Maybe much better than normal so.

Curious what youre seeing on that front.

Especially things that are not on some version of a long term agreement.

And.

What does that mean for the margin going forward.

Pricing there similarly.

So let me let me start Greg first of all on the pricing side with all of the inflation that we've seen over the last 18 months.

The OEM contracts again, we have some benefit of pricing, but it is very limited.

Based upon the indices, obviously, there is a dead band there. So we're not getting I would say a lot of pricing power today. So I have to say that we won't improve as time on wing as Chris was talking about improves margins will improve but pricing is not the not the driver of this this is really demand driven is what's.

I would say Pratt and Collins were both relatively aggressive last year and catalog price increases and so I think we are.

We're seeing some of the benefits of that.

That aftermarket part increase but.

Keep in mind on GTS for instance, more than 75% of all of those customers are on long term support agreements. So you really are seeing the benefit of pricing there. Similarly.

Diving top line here.

Maybe I'll just add about the.

Margin profile of <unk>, obviously, as we look at the rest of the year now we expect the engine deliveries to increase.

The OEM contracts again, we have some benefit of pricing, but it is very limited.

Think about between 35% to 40% year over year, you saw 42% in the first quarter that will obviously come with some negative engine margin headwind I would put a number around $250 million in terms of rest of year.

M headwind that would then coupled with the strong aftermarket that we're expecting to continue at Pratt.

Diving top line here.

Youll see that margin sort of level out as the year goes on and those engine deliveries increase.

Maybe I'll just add about the margin.

Margin profile of <unk>, obviously, as we look at the rest of the year now we expect the engine deliveries to increase.

Okay. Thanks, very much I appreciate it.

Thank you.

Our next question comes from the line of Rob Stallard of vertical research your question Rob.

Thanks, So much good morning, Rob morning, Rob.

Maybe just a follow up actually on Noah's question with regard to Pratt.

Any headwind that would then coupled with the strong aftermarket that we're expecting to continue at Pratt.

14% aftermarket growth year on year in the quarter and given the aggressive price increase that Greg referred to it feels a bit low and then secondly on those GTS volumes, how do those compare versus airbus's <unk> hundred 20 ramp plan. Thank you very much.

Youll see that margin sort of level out as the year goes on and those engine deliveries increase.

Okay. Thanks, very much I appreciate it.

Sure.

Okay. So let me start on the aftermarket, 14% Pratt and Whitney consolidated level aftermarket growth on top of 37% a year ago. So.

Thank you.

Our next question comes from the line of Rob Stallard of vertical research your question Rob.

Thanks, So much good morning, good morning, Rob.

When I think about that it's still very strong growth.

Maybe just a follow up actually on Noah's question with regard to Pratt.

We have seen shop visits increased low double digits here in the first quarter and we expect that to continue as the rest of the year.

14% aftermarket growth year on year in the quarter and given the aggressive price increase that Greg referred to it feels a bit low and then secondly on those GTS volumes, how did those compare versus <unk> and <unk> hundred 20 ramp plan. Thank you very much.

Continues Rob.

I would tell you that the legacy engines remain very strong even the PW two thousands and four thousands on the V 2500 shop visits continue they are paced by some of the structural casting issues that we've talked about so I think as we've seen improvement Darrin and I'll, let Chris talk about that.

Okay. So let me start on the aftermarket.

14% Pratt Whitney consolidated level aftermarket growth on top of 37% a year ago. So when I think about.

Minute.

We do expect to see accelerated.

Growth in terms of the Pratt Whitney aftermarket on a full year basis, we still think pratt's aftermarket will be up 20% to 25% year over year. So nothing concerning in the first quarter results.

That it's still very strong growth.

Have seen shop visits increased low double digits here in the first quarter and we expect that to continue as the rest of the year.

Continues Rob.

Incredible demand.

As we look at the rest of the year for for the flying fleets of the Pratt engines.

Hey, Rob This is Chris maybe to comment on the on the OE deliveries.

Greg mentioned.

Stabilization in the.

Supply chain I would say on structural castings, we continue to see some improvement and Thats, obviously critical for <unk>. If you think about the key constraint castings at Pratt they are above 30% sequentially. This quarter now that's not to the level of flow that we need we continue to see some manpower sort of labor challenges in that supply.

In a minute.

We do expect to see accelerated.

Growth in terms of the Pratt Whitney aftermarket on a full year basis, we still think pratt's aftermarket will be up 20% to 25% year over year. So nothing concerning in the first quarter results.

As you know incredible demand as.

As we look at the rest of the year for for the flying fleets of the Pratt engines.

Chain and we're taking some actions to try to address that whether it be off load, whether it would be helping to improve yields.

Manufacturing process.

Greg mentioned.

But we're lockstep with Airbus on their demand for the year.

Stabilization in the.

And we are hand to mouth right now given some of the given some of the constraints.

But again lockstep with the demand and that will continue to increase as we move into the back half of the year.

Chris maybe just to add on to that a little bit.

The key constrained structural castings that 30% of the sequential improvement.

Chain and we're taking some actions to try to address that whether it be off load whether it would be helping to.

And the number of castings that we've been able to get in the first quarter. So.

Continue to have the challenges, but good sign as we gain momentum starting the year right.

That's great. Thanks, so much.

Sure.

Thank you.

Our next question.

Comes from the line of Matt Akers of Wells Fargo. Please go ahead, Matt.

Yeah, Hey, good morning, Thanks for the question.

You touched a little bit more on <unk>.

The key constrained structural castings that 30% of the sequential improvement in the number of castings that we've been able to get in the first quarter. So.

Working capital a little bit.

The bigger impact that we've seen in Q1 prior year is kind of spread across contract assets receivables inventories that anything thats kind of it.

Continue to have the challenges, but good sign as we gain momentum starting the year right.

Kind of drove that this quarter.

Sure. Thanks, Matt.

Certainly working capital was a drag on the quarter.

Sure.

Would say about we typically see breakeven ish type cash flow, we're expecting probably a slight outflow. It's obviously a little bit worse than that about $500 million of that I would characterize as as an inventory build.

Our next question.

Silver lining here is that with the easing of the supply chain constraints, we've seen an incredible amount of inventory come in.

We're also looking to balance that and make adjustments in our MRP as we look at the rest of the year, but about I'd call it $500 million of.

Sure. Thanks, Matt.

Certainly working capital was a drag on the quarter.

The excess there associated with the inventory build.

We increased our inventory $700 million, so we plan to grow our inventory and sort of a good news.

Situation. It grew a little bit further I fully expect that to turn the other way as we go through the rest of the year on the contract asset side that really was in our defense businesses again, the seasonality of those businesses is that we invest in the products we ship them.

And then we make milestone collections as we meet performance milestones I expect those performance milestones to be met as.

As we go through the rest of the year, so again slightly higher than we had planned.

We did get those billings out in early April and they've already been collected so I'm not concerned about that and the last piece. We saw in terms of the first quarter was a slight increase in our receivables probably about a couple of hundred million dollars.

And frankly, that's due to the timing of sales they came a little bit later in March we'll collect that here in the second quarter. So as we look at the rest of the year and I think about.

Getting from the outflow of $1 4 billion up to our our objective of $4 eight or so.

Here's how I would characterize that work the majority of that is going to come from profit that we've yet to realize so nearly $556 billion. There we expect working capital to be flat year over year. So we'll have an improvement of about $2 7 billion about half of which will come from inventory.

We've got some puts and takes a few hundred million dollars net of taxes and pension and then of course, a little under $2 billion of capital Capex left to go in the year and if you do all that math, you'll get to about the $4 8 billion. If you look at the fourth quarter of last year I think we generated about $2 2 billion of cash so I do expect it to be.

Back ended.

But turning turning cash positive in the second quarter pretty consistent with what we saw last year, which was in the $750 million range and that's after absorbing about $650 million of incremental cash taxes that will pay here in the second quarter because of the R&D impact. So we feel confident in the full year obviously.

A lot to do but.

It's nice to have the inventory given the strength of the demand that we're all seeing here in the business.

Okay. That's helpful. Thank you.

Thank you.

Our next question.

It comes from the line of Sheila <unk>.

Of Jefferies.

Question. Please Sheila.

Thank you and good morning, Great question Neal.

Susan.

Yeah. Thanks, Josh.

Good with the numbers and then you keep giving us detail I wanted to ask another one on performance.

What drove the strength in the quarter at eight 3% margin specialties by 6% and five by 'twenty, three and sort of what's driving the lower margins for the year and how do we think about the aftermarket drop given some of that prior commentary on GTS and markets and how do we think about the pwc im not showing excellent.

No.

Four questions allow me, let me see if I can remember them all here we go.

So in the first quarter as I think about the eight 3% margin for Pratt there were really two things that I would point to clearly we had the drop through from the aftermarket growth. So you have that we also had a favorable contract matter settlement that was about 50 or $60 million, so that won't repeat but it was good news and.

We also had.

We had year over year headwind in negative engine margin of about $50 million.

But obviously I expect as we go through the rest of the year as I said earlier about another $250 million of headwind as those engine volumes step up so I think thats the Pratt story.

We clearly will see the aftermarket continue to grow in the remainder of the year, we will get good drop through on that and that should help to par.

Partially offset the negative engine margin headwind that will come with the higher engine deliveries.

The other piece of that in terms of thinking about the GTS and time on wing.

Basically what I can say is.

Our estimates today contemplate everything that we know about the engine, we feel very comfortable with.

Where we are with our contract accounting and any challenges in terms of cost or additional resources, we need to put into that area are already contemplated in the outlook that we have for Pratt and for RPX as a whole so I don't see that as being a headwind.

Our expectations for the year.

Thank you feel like I missed one of those.

So may I ask too many thank you.

Thanks Sheila.

Thank you.

Our next question.

Comes from the line of Peter I'm at Baird.

Question Peter.

Yes, thanks, good morning, everyone.

Question is for Greg or Chris, maybe just focusing on R&D and just $35 billion backlog and you've had some big wins, obviously, Switzerland was a was a big one but maybe if you could just talk a little bit about obviously customer engagement is very high probably at its highest levels ever.

Maybe you could just talk about the <unk> profitability continued to grow backlog or some of the bigger booking opportunities that are still out there. Thanks.

Yeah, Peter let me start and I'll turn it over to Chris look we had some very very strong bookings quarter.

R&D, obviously, the Patriot $1 2 billion for Switzerland.

We've been working on for a number of years of most of the 18th country to be a patriot operator, but we see continuing demand.

<unk> is still not in the backlog we know for.

For instance, so far we've only seen about $2 billion of awards related to.

Ukraine munitions replenishment, we expect that we will see more of that coming up later this year and into next year.

We also know that is.

<unk>, which is the Patriot upgrade system.

Certified later this year that will start to see orders internationally for <unk> also start to pick up as well as U S.

The U S.

We're also I think you're going to see very strong bookings on spy six months by six as the new <unk> radar.

The radar system for the Navy.

<unk>.

The initial low rate production contract on that but again much more to come on spy six.

Just this year, but into the future on top of that of course <unk> continues to be very very solid there's tomahawk, which will eventually be replaced by the <unk>. So the fact is the backlog at RMB is only going to grow we think over the next couple of years.

I think again what are the issues at that RMB has if you will is youre going to see lower margins on some of these new development contracts, which is depressing. The margin. This year and next that will start to turnaround as we get into 2025, but it's going to it's going to take some time, but.

That is going to grow and the other piece of the puzzle we won't really talk a lot about is the other international customers right. Now are international sales of RMB are only about 30% that's below historical levels.

It should also improve as we get into <unk> next generation Av Amiram delivery, so lots of good news out there.

For us it's just a question of getting it out the door at this point as Chris mentioned here, we still are constrained from a supply chain standpoint, although its going to have a hell of a lot better.

We still have work to do.

We've talked about structural castings at Pratt for RMB, its all about rocket motors.

<unk> toe.

That impacts javelins that impacts fingers that impacts us on <unk> three so again as we work through those those supply chain issues that rocket motors.

That should also drive extraordinary growth in the top line over the next couple of years.

Okay.

Appreciate it thanks.

No.

Thank you.

Our next question comes from the line of Ron Epstein of Bank of America. Your line is open rod.

Hey, good morning.

Right.

A question.

Come up a lot.

Among investors.

Where do you think about the GTS and its variance.

And on the long term contracts that have been pulled with the correct me if I'm wrong. It was about 80% of those engines have been told with long term contracts.

Correct.

And you're having this time on when issues like you mentioned the Sheila it's not an issue this year, but as we go out over time, how can we get confidence that those contracts were actually priced right.

Particularly the ones that were put in place.

Earlier.

The program.

Let me also.

Turn it over to Chris obviously, Chris is intimately familiar with this that we'd run the commercial engine business.

I would say that the one bright spot is most of those contracts for eight to 10 years in length. If you think about it. They were entered decision was introduced back in 2015. So as you think about the long term outlet.

Outlook I am very confident margins are going to improve because we will have a chance.

To re look at some of those contracts but.

Obviously, there is a challenged today with margins because time on wing is not what we expected it to be.

Reliability.

Durability or the two issues and reliability is great 90, 998% dispatch reliability time on wing is the challenge, but again I think as Chris explained we've got some solutions to that which will see over the next couple of years, yes, and just to build on that Ron This is Chris.

This is why that we are running as fast as we can to continue to insert upgrades into the fleet during shop visits we've talked before about the sort of the block D upgrades, which are really aimed at combustor Hot section and improving time on wing in those areas. That's the only about only about 50% of the way through the <unk>.

Fleet in terms of those upgrades and so again, we've had some part constraints and shortages of labor in our MRO network, which has which has impacted our ability to output MRO to levels that we and our customers want which is why we're adding more capacity to that MRO network. You've heard me talk about the new Japanese <unk>.

<unk> Delta, obviously, a top tier provider joining the network helpful is there as well so adding capacity of the networks that we continue to accelerate these upgrades and improve the time on wing at the end of the day.

That's what it's all about in addition to the contract mix that Greg talked about it's also about accelerating our repair development, making sure that we've got.

Full suite of repairs in our MRO network. So that we're not always having to replace parts. We can repair parts at a better cost and improved turn times.

And in fact, if I may as a follow on to this question.

My understanding is the gears just fine it's the other stuff that's running out quicker.

How did that happen because there was everybody was worried about the gear not not the other stuff.

I think to your point right. The gear has proved to be extremely reliable we have not seen a gear failure out there.

Many of the 3000 engines or so that we've delivered.

But again.

Operating in some very harsh environments and I would tell you that we probably didn't spend enough time testing for those harsh environment, specifically places like India, and that's where we've seen lower life on the combustor, we've seen some lower life on the turbine blades, just because of the harsh conditions there. So.

As we move forward to Chris's point, there we have the advantage coming on line is getting a lot more testing has got all the learnings from the existing fleet this should be.

Difficultly more.

Durable out there in terms of time on wing is going to take US a couple of years before we can get all of those upgrades introduced I mean to your point, Greg and Ron Youre, 100% rate gear, the gear and the fuel burn performance have been spot on and meeting expectations keep in mind. This was a new architecture and we've had some learnings.

Along the way the one thing I'll remind you that kind of mentioned this in my remarks, we had a similar journey on those 2500 and it took us a while to get to the levels today that people are enjoying on the V 2500 Big difference of course has been the ramp up on the GTS has been.

Massive ramp versus when the V went into service. So there's a little bit more I would say time and buffer to help manage that fleet as it was entering into service, but the playbook is there on the <unk>. We've got a followed on the GTS.

Got it thank you.

Thank you.

Our next question.

Comes from the line of David Strauss of Barclays. Your question David.

Thanks, Good morning, everyone.

Renewed.

Gregg specifically on the Max I think you previously commented that the expectation around Collins on the OE growth rate there was for the Max to be in the low thirties for you all for the for the full year is that is that still what you're thinking even with.

The new issues that have developed here.

And then second part of the question just on rocket Motors.

Your view of the potential.

Aerojet acquisition Biolay checks on how how that potentially could could improve things in terms of rocket motor availability. Thanks.

Yes in terms of 737, Max I think current production rates about 31 a month.

We had talked about moving that up to 37 months by the end of the year I would tell you colleges.

Right now I think we're all set at the 31, a month and it might get a little bit better during the course of the year, but I think could give that wouldn't be an issue in terms of.

Our ability to ramp production to meet that but.

Right now again, I think you've always got some challenges, we'll hear with what they.

Cedar in another day or so.

We're I would say.

Constant contact with both Boeing and Airbus on OEM rates, both at Pratt and Collins, So no surprises there.

To think of her to talk about as far as rocket motors.

Obviously the.

The potential acquisition by L. III Harris of a rocket data is something that we have been.

Discussing.

There is always a concern I think when you do have.

What are your key suppliers going through a merger or an acquisition is that they lose focus on delivery and quality.

We are again laser focus we've got folks out at <unk>.

Rocket every single day.

We'll see what happens I know Theres, a second request right now with the.

<unk> as it relates to their potential acquisition.

And we have been obviously in contact with.

Everyone as it relates to that so we'll have to see what happens, but I would tell you again the current anti trust environment. No deal is certain until it is actually done. So we will have to see how this plays out.

And make sure that again.

Aerojet Rocketdyne continues to focus on delivery and not get distracted by this this deal.

Alright, thanks very much.

Steve.

Thank you.

Our next question.

It comes from the line of Rob Spingarn Melius Research your question. Please Rob.

Good morning, Rob.

Hey, Rob good morning.

Neil just.

Going back to Collins, and I think in 2019 about 40% 45% of the aftermarket there was from wide bodies I wanted to see if you could update us on where that is now and how it's trending relative to narrow bodies, maybe this year and next.

Thanks for the question, Rob I think what I would say about the growth at Collins right. Now is the majority of it is still coming from the narrow body. We have started to see wide body.

To improve I don't have the exact number in front of me on that mix today, but.

As we think about the wide body environment.

Those volumes are coming up.

I'd say.

Particularly seeing that in.

In the interiors business on the OE side as they continue to take those production levels up.

And as you said.

Today, I think Collins is more in the.

On the OE side, probably about 30% of their OE sales relate to wide body with about 40% from narrow body and on the aftermarket side I'm sorry.

But let me just stop there I think that's that's enough for those numbers right now.

Okay. If I could just ask for a follow up and just a follow up to Ron's question on the GTS losses on the on engine delivery and I think you mentioned to recently somewhere that's about $1 million per engine.

Okay.

Yes.

Should that is learning curve versus.

Need for new productivity versus volume in other words.

Which of those three things will improve.

The most.

Volume.

Clearly volume as we continue to ramp back up to levels that we saw pre pandemic are going to be the.

The tailwind if you will on a per engine a reduction in negative engine margin.

As Youll recall, we were already producing the highest <unk> rates as we've kind of entered into 2020.

And when you think about the headwind we saw here in the first quarter on 40% higher volume where were getting good absorption as we continue to take up those engine volumes I expect that to continue.

We're always work and productivity.

We're working productivity to offset the growing cost that we're seeing particularly on the casting side.

So we're doing all of those things, but I would say.

What's going to drop to the bottom line is going to be driven by that higher volume and the absorption that comes from that.

Great. Thanks, Neil.

Okay.

Thank you.

Our next question.

It comes from the line of Ken Herbert.

RBC.

Question. Please Ken.

Yes, hi, good morning.

I wanted to stay on on Collins aerospace for a minute.

First quarter aftermarket numbers were.

Continuing to be pretty strong youre seeing better pricing is it is it fair to assume that there is upside to sort of a full year aftermarket expectations within Collins or how do we see the sort of the remainder of the year progressing with tough comps but.

So very strong fundamentals of demand.

Thanks for that question, Ken clearly the first quarter was a good strong start Collins has a lot of operating profit growth and our year over year planned between $750 25, and certainly seeing a little over $200 million of that happened in the first quarter was encouraging.

And I think when you look at the provisioning numbers that we saw from Collins.

Very strong obviously.

I think a lot of that was driven by these airlines getting ready to put their fleets up in the air and be prepared to continue to fly through the summer travel season.

It's certainly a watch item today I would say.

Our aftermarket outlook for colleges in the low teens plus range. So certainly.

A positive indicator, but it's one quarter into the year, it's a little early to kind of.

Take those numbers up but certainly if they continue at this level there will be goodness, and we will see that goodness dropped to the bottom line, but certainly a great start driven by all the right things.

China reopening.

Certainly gave a boost in the first quarter for Collins and as we see OE deliveries continued to lease.

<unk> stabilize and grow as the year goes on.

Think that too will add some tailwind there, but a little early to kind of give a bigger number at this point.

Great. Thank you.

Thank you.

Our next question comes from the line of Brian rumor of comment.

Your question please.

Thanks, so much so two issues at Pratt first you mentioned any EM was $50 million in the first quarter deliveries were up 48, so that's a little more than $1 million a unit and yet if we look at the back part of the year. It should be another 50 to 70, something like that and so why does any.

Go up to $2 50 that seems an acceleration in the level of per unit and secondly, your aftermarket in the first quarter up 14%, if I take out price youre, probably flat to up 1% and I recognize it's a tough year over year compare why was it so low and is part of that.

The casting shortage and having to allocate parts to always thank you.

So let me take the first one I think we can take it offline and Jennifer can help you a little bit, but I think as we look at that volume uptick as we go through the rest of the year Youll find that when you combine that with the mix of new and spare engines that are negative engine margin.

Is stable, if not reducing a little bit so feel good about that there's a number of different engine families that make that up so.

We don't see any issues there in terms of cost headwinds or degradation on a per engine basis as the rest of the year goes.

As you think about the aftermarket.

A couple of thoughts here I had mentioned that we were addressing and dealing with material flow and availability certainly the castings are playing a part in that in terms of allocations amongst MRO and OE deliveries.

But we did.

See price improvements in the Pratt Whitney portfolio as we do every year.

And the volume is also dropping through the content on the shop is also stepping up.

Across almost all segments of Pratt Whitney large and the small engine business as well so we're seeing the right momentum there and I'd.

Do expect that as we continue to see.

<unk> improvements.

Alleviate as the year goes on you'll see that also drop through in the top and bottom line.

The key for for Pratt in terms of the aftermarket really goes back to the 2500.

Very strong input I think shop visits were up more than 10% here in the quarter. So the pricing is a part of it to neil's point, but really it is the volume coming back into the shops as these engines are flying more.

Thank you.

Okay.

Thank you at this time I would like to turn the call over to Greg Hayes for any closing remarks, Sir.

Well. Thank you everyone for listening in today as always Jennifer and her team will be around to answer all of your questions over the next couple of days. Thanks again for listening in to take care see you.

Right.

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

Q1 2023 Raytheon Technologies Corp Earnings Call

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