Q2 2023 Raytheon Technologies Corp Earnings Call
Speaker 1: 2023 earnings conference call. My name is Lateef and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes.
Speaker 1: On the call today are Greg Hayes, Chairman and Chief Executive Officer, Chris Calio, President and Chief Operating Officer, Neil Mitchell, Chief Financial Officer, and Jennifer Reid, Vice President of Investor Relations.
Speaker 1: This call is being webcast live on the internet and there is a presentation available for download from RTX website at www.rtx.com
Speaker 1: Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding acquisition, accounting adjustments, and net non-recurring and or significant items, often referred to by management as other significant items.
Speaker 1: 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 risk and uncertainty.
Speaker 1: RTX SEC filings, including its forms 8K, 10Q, and 10K 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...
Speaker 1: that you limit yourself your first round to one question per caller to give everyone the opportunity to participate.
Speaker 1: To ask a question, you will need to press star 1 1 on your telephone.
Speaker 1: You may ask further questions by reinserting yourself into the queue as time permits.
Speaker 1: With that, I will turn the call over to Mr. Hayes.
Speaker 2: Thank you and good morning everyone. It was another strong quarter for RTX with continued strength across all of our end markets. On the commercial aerospace side, industry-wide, we saw 1200 new orders announced around the Paris Air Show. This is the largest number of orders in the history of the air show.
Speaker 2: as airlines look to secure production slots well into the next decade.
Speaker 2: Global commercial air traffic remains on track with our projections with a very robust summer travel season, driven by incredibly strong consumer demand.
Speaker 2: This dynamic is supporting strength in the aftermarket and growth across the globe, with revenue passenger kilometers now tracking at about 95% of 2019 levels.
Speaker 2: Long-haul International, which has lagged in the recovery, is showing strong growth with passenger flight hours up 18 points year-over-year, a good indicator of increasing demand for wide-body travel.
Speaker 2: Attorney to defense, we're pleased that the House Defense Appropriation Bill fully funds many of our programs, including importantly, the F135 engine core upgrade, which is the only engine funded for the F35 Joint Strike Fighter.
Speaker 2: Additionally, the bill also recommends the full budget request for other KRTX programs, such as L-TAMs, L-RSO, hypersonics, and standard missile three.
Speaker 2: sale of advanced air defense systems for Poland as it bolsters its security amid the ongoing conflict in Ukraine.
Speaker 2: This would expand our existing partnership with Poland and make Poland the first international customer for our LTAM system representing a key transition for this next generation, Ritian franchise.
Speaker 2: Before we get into details of the quarter, as you saw in our press release this morning, we are working through an issue resulting from a rare condition in powdered metal that will require Pratt & Whitney to remove some engines from service for inspection earlier than expected.
Speaker 2: I want to make just a couple of comments here at the outset.
Speaker 2: First of all, it's important to know that we understand the issue and we have begun to address it through an inspection protocol that we already have in place.
Speaker 2: That said, clearly this will have an impact on Pratt Whitney and our customers. Chris and Neil provide additional color later in the call on how we're going to address the issue as well as the operational and financial impacts.
Speaker 2: As you'd expect, we'll dedicate all the necessary resources to manage this.
Speaker 2: Now let's turn to slide two to go through some key highlights from the quarter.
Speaker 2: Q2 was another strong quarter, a strong demand of both the commercial and defense segments of our business with $25 billion of new orders. This brings our total backlog for a record $185 billion.
Speaker 2: On the commercial side, Collins continues to convert his industry leading portfolio into solid order strength.
Speaker 2: As I mentioned, industry-wide there were about 1,200 new aircraft orders announced in Paris.
Speaker 2: The aggregate amount of Collins and Pratt content on those aircraft will be about $20 million to the life of the programs.
Speaker 2: On the defense side across the RTX businesses, we captured 13 billion in new bookings in the quarter, driving a strong book to build 1.22. And this takes our defense backlog to $73 billion.
Speaker 2: Contributing to the backlog in the second quarter were a number of significant awards.
Speaker 2: including $2 billion of print and Whitney for the Lodge 17 of the F-135 engines and a billion and a half for 117 sustainments.
Speaker 2: The Raytheon segment was awarded its largest ever AMRAAM contract for $1.2 billion from the US Air Force and international partners, including Ukraine.
Speaker 2: The AMRAMs will work in concert with their existing NACEM batteries to help protect the Ukrainian people.
Speaker 2: Earlier this month, we executed the business realignment. We are now officially operating as three business units. Our team has done a tremendous job in a relatively short period of time, shifting roughly $3 billion of sales and thousands of employees across our portfolio to better meet the evolving needs of our customers. Of course, our transformation isn't done.
Speaker 2: We will continue to develop initiatives to better leverage our scale and breadth and to enable operational excellence and a best-in-class single-class cost structure.
Speaker 2: Finally, as many of you saw last week, we agreed to divest Collins actuation business to the next day to the end.
Speaker 2: We expect this deal to close in the second half of 2024 with proceeds from the transaction to be about $1.8 billion.
Speaker 2: With respect to our full year outlook, we're going to raise the top line to reflect the strength we're seeing in our end markets. The new range will be $73 to $74 billion. And we're also going to bring up the bottom end of our adjusted EPS range by a nickel to $495 to $505.
Speaker 2: However, we are going to reduce our 2023 cash flow expectations by $500 million to $4.3 billion. This is primarily to reflect the developments at Pratt & Whitney that I discussed earlier.
Speaker 2: So with that, let me turn it over to Neil to walk you through our financial results in more detail. Neil.
Speaker 1: Thanks, Greg. Let's look at Q2 results on slide 3.
Speaker 3: As Greg noted, we had another solid quarter with sales of $18.3 billion, up a strong 13% organically versus the prior year, with growth across all four of our segments. Adjusted earnings per share of $1.29 was up 11% year over year, with strong adjusted segment operating profit growth of 26%.
Speaker 3: partially offset by lower pension income and a higher effective tax rate.
Speaker 3: On a GAAP basis, earnings per share from continuing operations was 90 cents per share and included 26 cents of acquisition accounting adjustments, an 8 cent charge related to an airline customer insolvency and 5 cents of restructuring and segment and portfolio transformation costs.
Speaker 3: Free cash flow of $193 million was generally in line with what we discussed when we were together in Paris last month.
Speaker 3: And finally, on the capital allocation front, we have repurchased $596 million in shares, putting us at about $1.2 billion year to date, on track for $3 billion in share repurchases for the full year.
Speaker 3: So let's turn the slide forward to get into the Q2 segment results.
Speaker 3: Beginning with RMD, sales were $4 billion in the quarter, up 12% on an adjusted basis, and 13% organically, primarily driven by higher volume from air power, advanced technology, and land warfare and air defense programs.
Speaker 3: Adjusted operating profit of $427 million was up 79 million versus the prior year, driven by favorable net program efficiencies and drop through on higher volume, partially offset by unfavorable mix resulting from early stage production programs.
Speaker 3: RMD had $3.6 billion of bookings in the quarter, resulting in a book to bill of 0.92, and a backlog of $35 billion. $3.6 billion.
Speaker 3: In addition to the AMRAAM award that Greg mentioned earlier, RMD also received a $265 million award for Javelin and a $251 million award for AIM-9X missiles.
Speaker 3: Your to D, RMD is a book to bill of 1.17.
Speaker 3: Shifting to RINs on slide 5.
Speaker 3: Sales of $3.7 billion were up 2% versus the prior year on an adjusted and organic basis. This was driven by higher revenue from sensing and effects as well as cyber and services programs which was partially offset by lower sales from command, control and communications programs.
Speaker 3: Adjusted operating profit in the quarter of $297 million was down $18 million versus prior year, primarily due to unfavorable mix in higher operating expenses, which more than offset improved productivity and drop through on higher volume.
Speaker 3: However, as I mentioned in June , we still saw unfavorable productivity in the quarter due to a handful of fixed price development programs.
Speaker 3: In the quarter, RINs had $3.1 billion of bookings, resulting in a book to bill of 0.96 and a backlog of $17 billion.
Speaker 3: Bookings in Q2 at RIS included about 1.1 billion in classified awards and 322 million for federal and civil cyber defense services.
Speaker 3: And on a year-to-date basis, RANS has a book to bill of 1.15.
Speaker 3: Turning to Collins on slide six.
Speaker 3: Sales were 5.9 billion in a quarter, up 17% under an adjusted and organic basis.
Speaker 3: driven primarily by strong demand across commercial aerospace and markets, which resulted in higher flight hours and higher OE production rates.
By channel commercial aftermarket sales were up 29% driven by a 68% increase in provisioning and a 28% increase in parts and repair. While modifications and upgrades were up 9% organically in the quarter.
sequentially, commercial aftermarket sales were up 7%. On the commercial OECide, commercial OECales were up 14% versus the prior year, which included growth in wide body, narrow body, and business jets.
And military sales were up 5% due to higher development volume. Adjusted operating profit of $837 million was up 220 million or 36% from the prior year. Let's drop through on higher sales volume and favorable mix, which more than offset higher production costs, as well as higher R&D and SGNA expenses.
Turning to Pratt Whitney on slide seven. Sales of $5.7 billion were up 15% on an adjusted and organic basis. Sales growth across the commercial segments partially offset by lower military volume.
Commercial aftermarket sales were up 26% in the quarter due to higher shop visit volume and content in both large commercial engine and Pratt Whitney Canada businesses.
Commercial OE sales were up 22% in the quarter on higher engine deliveries and favorable mix.
And then the military business sales were down 3% that a client in sales was driven by the timing of the F-135 production contract award in the prior year, which was partially offset by higher F-135 sustainment volume this year.
adjusted operating profit of $436 million was up 133 million from prior year with drop through on higher commercial aftermarket sales and favorable large commercial OE mix partially offset by higher production costs and higher R&D expenses.
Note that both this quarter and the prior year quarter had a similar sized contract benefit of roughly $60 million.
But that, before we get into the updated outlook for 2023, let me turn it over to Chris to give some additional color on the Pratt fleet.
Okay, thanks Neil.
Let me share with you what I can at this point about the Prat matter. As you heard from Greg, Prat previously determined that a rare condition in powdered metal used to manufacture certain engine parts may reduce the life of those parts. It's important to note up front that the current production of powdered metal parts is not impacted, and Prat will continue to deliver both new engines and new spare parts across all product lines. I'll come back to that in a minute.
As a result of this rare condition in powdered metal, Pratt instituted enhanced inspections to be performed at scheduled shop visits.
However, based on very recent learnings from these inspections, Pratt has now determined that the timing of these shot visits needs to be accelerated.
Well, part of metal parts have been widely used throughout Pratt's product lines for decades. Pratt has bounded the potentially impacted material. It has concluded that this condition was present in rare instances in powder, metal produced from approximately Q4 2015 into Q3 2021. The PW-1100 engine fleet, which powers the A320 NEO,
engines. Proud also anticipates that approximately 1,000 additional PW 1100 engines will need to be removed from the operating fleet for this inspection within the next 9-12 months. For the exact number of engines and the timing of those removals, it's not yet finalized.
Now it's important to note that some of the engines that must be removed for inspection in 2023 and 2024 are already forecasted for a regular shop visit during this time period. And so the incremental impact of the fleet is still under evaluation.
capability to perform the accelerated inspections, which are focused on the high pressure turbine desks is already in place. And Pratt is developing plans to optimize shop visit capacity within its network to complete these inspections as quickly and efficiently as possible.
As I said earlier, current production of powdered metal parts is not impacted, and Pratt will continue to deliver both new engines and new spare parts across all product lines.
This is a result of the combination of extensive improvements that were made to our powder processing to remove possible contamination sources and the deployment of enhanced inspections for improved detection.
PRAD is also analyzing any potential impact to other parts of its fleet, but the current expectation is that they will be less impacted based upon existing inspections, utilization profiles, and maintenance intervals.
Let me take a moment to explain the timing of these developments. We proactively monitor the performance of our engines throughout their life cycle. It's foundational to how we maintain and manage the safe operation of our fleet. And we do this in a number of ways.
Analyzing large amounts of data generated during operation, inspecting parts in MRO, destructively testing certain parts to analyze their material properties, and characterizing what we observe. We use learnings from this proactive monitoring to inform our predictive models so we can address any issues before they appear on our fleet.
In this case, as proud to analyze some recent inspection findings, it determined the need for an accelerated inspection plan, even though the fallout rate from these inspections is expected to be very low.
The next step is for Pratt to publish a service bulletin describing the inspections, and the FAA will likely follow up with an airworthiness directive.
Financial impact associated with these removals is still being analyzed. It will depend on a number of factors, including the result of the inspections, the amount of work needed to be done in our network shops.
Financial impact associated with these removals is still being analyzed and will depend on a number of factors, including the result of the inspections, the amount of work needed to be done in our network shops, and of course the impact on our customers.
This is obviously a difficult situation for our customers, especially given the strong demand for travel. We are truly sorry for the impact of this disruption and we will do all we can to support our customers.
Safety always has been and always will be our number one priority. And we will never compromise in ensuring the safe operation of our fleet.
We will of course continue to keep you apprised as our analysis progresses on both the operational and financial impacts of these accelerated shop visits.
With that, let me turn it over to Neil to talk about how this impacts our 2023 outlook.
Thanks, Chris. Let's start with the segment outlook. As Chris mentioned, there continue to be a number of evolving assumptions around the financials of Pratt.
Let me try to put some additional color around that, starting with the top line. Commercial aftermarket demand remains strong, and we are continuing to ramp production. Because of this, we are competent in our prior sales range of up-low to mid-teens.
On the profit side, given the strong first half results and continued top line growth, we still expect between 200 and 275 million of operating profit growth for the year.
Within that outlook for Pratt, here's what we are assuming as it relates to the increased engine removals and inspections. Given Pratt's results to date and aftermarket strength, the impact for the first 200 engines is contemplated within the range we just provided. Keep in mind, given the percentage of completion accounting for the aftermarket contracts, the overall performance of the first 200 engines is estimated to be about 1.5% in the year 2020.
in the relatively early life of the programs, the P&L impact will be less significant today.
However, for the reasons Chris described, the impact of any further engine removals from service for inspection is not currently assumed in our outlook.
So moving to Collins, given the strong results in the first half and the continued strength we are seeing in commercial aftermarket, we are increasing the full year sales range from up low double digits to a new range of up low double digits to low teens.
And as a result of this increased demand and continued execution, we now expect Collins adjusted operating profit to be up between $825 and $875 million, compared to the prior range of $750 to $825 million.
Turning to the new Raytheon segment.
Given the strength of the backlog and the accelerating top line, we expect sales for the combined segment to grow low to mid-single digits versus 2022.
While we have begun to see increased material flow and improved efficiencies, we had lower productivity than we expected in the first half of the year, including costs associated with fixed price development programs.
And similar to Q1, we anticipate another contract option exercise that will lead to a headwind in the third quarter. With all that said, we're expecting continued volume growth and second half productivity improvements, and altogether with the adjusted operating profit up between $125 and $175 million versus prior year.
So now let me summarize all this at the RTX level.
As Greg mentioned, we're increasing our full year RTX sales outlook to $73 to $74 billion, which translates to organic growth of between 9 and 10%.
This is up from our prior outlook of $72 to $73 billion.
With respect to earnings, we are tightening our adjusted earnings per share range by 5 cents on the bottom end and now expect adjusted EPS of between $4.95 and $5.05, given the first half results and some improvement in below-the-line items.
And we provided an update on those below the line items in the appendices.
Turning to free cash flow, the impact of the Pratt matter will be more meaningful on cash flow as we begin to ramp up inspections and MRL activity this year.
As a result, we now see free cash flow of approximately $4.3 billion for the year, about $500 million below our prior outlook.
And finally, we'll transition to the new segment reporting here in the third quarter, and we've provided the recasted 2022 and 2023 quarterly financials in the appendices.
So with that, let me turn it over to Greg for some closing remarks. Okay, thanks, Neil. So just some closing thoughts before we get to the Q&A.
We obviously have a very strong second quarter with $25 billion in new orders. The springs are backlogged to a record $185 billion.
Sales were also very strong with 13% organic revenue growth.
This strength and sales and orders reflects the strength in both our commercial and defense markets.
Our PMs are on track to return to pre-COVID levels as we exit 2023, and military spending globally continues to increase in response to Russia's aggression in Ukraine, and the emerging threats in the Indo-Paycom theater.
Based on the continued strength in our markets, we are well positioned to deliver on our commitments for 2023 and beyond. With that, let's open up the call for questions. 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 11 on your telephone.
to ask a question you will need to press star 11 on your telephone. Our first question.
comes from the line of Robert Stuller, of vertical research. Thanks so much, good morning. We're ready. Hang on up. Let's start with the GTS show. Fun I can, this is the third issue you're dealing with at the moment. You have that quality escape, note to the Paris.
the ongoing time on wing issues in these challenging environments and now the metal problem. Is there a root problem or cause that's linking these issues? And are you concerned about the potential impact on Pratt's reputation for reliability? Thank you. Thanks, Ra. This is Chris. I'll start. Obviously, this is a disappointment.
I will tell you that again we continue to monitor the situation with the fleet. We continue to.
Better clarity on the engines that are being delivered so yeah. So it was it was mid to late 2021, where we changed all the processes in terms of the screening of the powdered metal to identify the contaminated to eliminate the contaminant, let's let's be clear I mean this is a.
These contaminants or microscopic.
And unfortunately, the original process as we scaled up production for GTS.
Got it got away from us a little bit.
We fixed it but I would tell you everything that we have shipped almost every single you shipped I should say in the last three years. We believe is going to be just fine. That's why we're confident we can continue to support Airbus continues to support customers with new deliveries as well as with spares this year and next.
I appreciate it thanks, Greg.
Thanks Peter.
Thank you.
Our next question.
Comes from the line of Sheila <unk> of Jefferies.
Good morning, Thank you very much.
Greg Johnson. Thank you free cash flow can we walk through the <unk>, one 2 billion of free cash flow usage in the first half for propylene.
For the year.
How do you think about that.
On a segment level.
From a working capital what are your expectations for factoring for the year.
Heartland and do we think about $500 million of pod on path for 200 and Jim.
We showed that in going forward in future years.
Thanks, Sheila this is Neil and good morning, I will take that one first first of all on the half a billion dollar I wouldn't extrapolate that we need some more time as I said earlier in the call.
So, let's just kind of focus on 23.
As I look at the walk from the first half to the second half I'll also say that we ended the quarter with positive cash flow pretty much as expected. So the back half of the year is as we expected it to be obviously there is some work to do there to generate the cash but.
Consistent with the profile, we had last year. The major pieces really are I'd put it in four major buckets. Obviously, we have the rest of the year segment operating profit, it's a little less than $4 billion or so.
Feel pretty good about that consistent with the guidance that we just provided an updated we've got capital second half capital, which is going to be a headwind of about $1 billion for.
And then we've got a working capital.
Items that we have to kind of burn down it's about $3 5 billion.
About $2 billion of that is inventory I would say split pretty evenly between Pratt and Collins and then a $1 billion of the net contract asset liabilities, which is principally in the Raytheon segment and Thats that lines up to milestone payments, we expect to receive in the back half of the year as well as some international advances similar to what we had last year.
That would occur late in the fourth quarter.
The rest of the puts and takes are really the things we've talked about pension taxes interest and other the net of that is about a <unk> 5 billion.
Of an outflow in the second half. So again same profile we were staring at.
35 to 45 days ago.
We've layered in the Pratt impact I think that mostly will impact working capital. It may have some capex as well.
Thank you.
You're welcome.
Thank you.
Our next question.
Comes from the line of Christine Lee of.
Morgan Stanley .
Hey, good morning, guys.
Good morning, Kristine good morning.
For the broad issue it seems like the free cash flow impact in 2020 for 2025.
So a little bit unclear.
How should we think about how this affects your 2025 free cash flow outlook of $9 billion.
And is that still the number you're reiterating or should we think about potential downside risks.
Hey, good morning, Kristina I'll take that to start I mean, clearly all things equal the issue. We just talked about is going to put some pressure on margins that would put pressure on cash I think it's too early to put a number on that.
We're going to need some time to go through and understand what's the work scope, how does that intersect with already planned work scope and the profile of those shop visits.
And of course, we're always focused on trying to drive more out of our businesses and we would do the same here. So I think I'll leave it at that we will come back to you over the next couple of months.
With more detailed Greg yes.
Maybe the way to think about this is so we're going to hold 200 engines back this year.
Bunch of those were going to come back Anyways and then next year is another thousand that a bunch of those were already planned.
Having said that though we know right now we've got 13 MRO facilities, we're going to have to go.
Plan was to go to 19.
We'd have to accelerate some of the tooling thats contemplated in this cash we're going to have to dedicate some spares to erodible pool of engineers to support to customers those things again, it will be behind us.
I would say probably by the middle of next year in terms of the cash outflows associated with that the big question in everybody's mind will be what are we going to have to do in terms of compensation to the airlines. We have contracts special support agreements that are that are out there. So we'll work through that but it's going to take time.
I guess the main point, though is by the end of next year. This inspection program will be almost all complete and the 2025 outlook really shouldnt be impacted other than as Neil said potential margin impact as some of these costs roll through the the GTS support contracts, but again, it's we've got to <unk>.
Years to work through that and we will figure that out but in terms of the cash really probably not a big difference as you get out to 2025.
Great. Thank you.
Thank you.
Our next question comes from the line of Seth Sigman of J P. Morgan.
Hey, thanks, very much and good morning.
So.
I wanted to ask a question about the Raytheon business.
It looks like and I want to make sure I've got the right read.
Recast numbers here, but it looks like first half to second half kind of on a kind of a modest.
Sales increased expected, but fairly healthy profit increase to get to the 150.
Profit growth midpoint, and so I guess, if you could talk a little bit about what is the comp.
Confidence in that especially in light of that option exercise you mentioned and then also I thought there was pretty good top line momentum at R&D in the quarter end.
The degree to which you do or don't.
Expect that to continue in the second half.
Hey, Seth this is Chris.
When you see when you look at when you look at R&D, we will break it down into the pieces of the new Raytheon segment. When you look at R&D, we start to see some positive momentum in particular around material growth rate above 14% year over year materials growth that kit fill rates that we've talked about for some time that we're hovering in those.
Mid to low 50, <unk>, we're up into the mid <unk>. So we're starting to see material flow, which is a big part of the continued productivity story at R&D at RIS I would say again less material intensive, but very good material flow and kits celebrates the issue that we are continuing to.
Grapple with there are the fixed price development contracts that we've got we've mentioned before we've got a handful of fixed price development contracts.
That are that are technologically very complex and we continue to work our way through we believe we'll make significant progress on those here in 2023 and into early 2024 foot, but overall again seeing seen.
Positive momentum on the productivity front at Raytheon.
Thanks, Chris Let me add a couple of comments here too regarding productivity.
I think the first half of the year was encouraging in some regards we turned the corner a bit.
I think on a year over year basis for the first half of the new combined business were essentially flat year over year, we are expecting about $100 million of productivity step up in the second half of the year.
Think about that is I'm, sorry on a full year basis, so about $75 million or so.
In the second half of the year and the material receipts is what makes us have the confidence around that path to the second half of the year.
Other encouraging point I would say is particularly at the missile business. We saw sales pick up on that material receipt in the mix of that material had good drop through on it. So we're starting to see the transition of.
The mix of production from development, we talked about 2023 being the low point.
So that's how we've calibrated this into this revised outlook.
We've also taken into account our first half performance as we've readjusted this realignment.
In the second half of the year.
Thanks Frank.
Youre welcome.
Thank you.
Our next question.
It comes from the line of Ken Herbert of RBC capital markets.
Yes, hi, good morning.
Good morning, Ken.
And maybe.
Maybe Christian if you could dig a little bit further into what you bucket. It is the other disruptions as we think about.
Maybe an incremental diversion of engines into the spare pool and how we think about stresses on the capacity of the network as you deal with not only the 200 this year, but the 1000 next year and within that other bucket, where do you see sort of the primary risks or maybe the greatest unknowns as you think about the potential eventual.
Packed on cash.
Yes.
Hey, Ken. Thanks, This is Chris I'll.
I'll start it as we kind of noted upfront there are a number of variables that are going into the fleet impact both this year and.
And next work scope, making sure we define that the work scope of these inspections the turnaround time.
I'm trying to get the turnaround time and do this work as quickly and efficiently as possible, making it into a project visit to the extent that we can and then optimizing the network capacity just heard Greg say, we've got 13 shops across our network today were adding more shops, but how do we go and optimize that network because obviously we've got.
Today as you know is we're trying to increase output on the GTS MRO and we've got to make sure that that we're inducting the right engines at the right time, and making sure that we can do.
Do this we'll call it new work new inspection work separate in a part to the extent that we can from the ongoing MRO work. So all of that I'll call. It optimization formula is.
<unk> is still.
It's still being developed and we're going to need a little bit more time on that in terms of the debt.
The other disruptions Greg mentioned some of them.
But again, we're going to be looking at our network, where all of our work is done to try to minimize any disruption on other program.
Our more mature programs, perhaps that are going through the MRO cycle again, how do we make sure that those continue to flow uninterrupted. While we do this work those are the types of things, we're continuing to work through.
Great. Thank you.
Yeah.
Thank you.
Our next question comes from Jason Gursky of Citi.
Hey, good morning, everybody.
Morning, Jason.
You talked a little bit about the capacity and MRO could you talk a little bit about the capacity for.
The part itself.
The internal.
Manufacturing capability that you have there.
Whether this is another potential constraint for you all on the GTO.
Yeah. Thanks, Jason This is Chris.
Greg mentioned upfront that we've had this enhanced inspection technique technique in place for some time <unk> been doing these inspections on the V 2500 in particular, we've had I think.
Meg you said almost 3000 of those inspections I will tell you that the fallout rate from that on this part has been.
Very very low.
So at this particular time, Jason we don't believe that.
But the HPT will be the limiting factor if you will in terms of the turnaround time.
Our ability to work through this as quickly and efficiently as possible.
Mhm and adhere.
If you were to go into do one of these inspections to date do you have a sense of are we talking about weeks or days or four months to do.
This inspection.
So we're talking to HPT disks.
Isn't it so.
That particular module you can't necessarily do that.
On when you have got to take the engine off wing <unk> got it.
Disassemble the engine to get to that particular area. Unfortunately based on the geometry and location of the part you do have to remove the part to do this enhanced inspection capability Reassemble and then and then get it back out to the fleet. So I think I've mentioned before we're trying to turn this into as best we can what we would call a project visit not a not a.
Full interval shop visit but that work is.
Still underway, obviously, making sure the wing to wing turnaround time is as short as possible and doing what we need to do is an important element of understanding the fleet impact.
And what we need to do from a network perspective.
And is there any silver lining to this at all.
In the sense that you mentioned optimization on how youre going to deal with these visits on these inspections.
Is there an opportunity here.
To get through some of this.
Durability swap outs that you need to do anyway.
So that you can kind of.
Kill two birds with one stone so to speak issue as you do these inspections.
So when you think about that 2020 for shop visit population.
We're going to again take a look at the utilization on those the cycle time on those engines and in working with our customers, making a decision a mutual decision on is this the right candidate for a project visit or should that work scope increase to take on <unk>.
<unk> work, which will benefit the time on wing in the interval of that engine moving forward. Several years that that is a that is a decision that is a conversation that we will have once we better understand again, how many of these visits are truly incremental in 2024, and then the related fleet.
<unk>.
As you know Jason that is a part of the equation.
And then lastly, do you think youre going to learn enough by the time, we have the October earnings call to provide us a little bit more clarity on things or do you think this is going to be a discovery process that takes us out.
There are months and at the end of the year.
Jason we're discovering something new everyday here. So I think all I would tell you is that over the next I would say six weeks.
We finalized the.
The inspection protocols as we finalize the turn times and work with our customers keep in mind, we're trying to get the first 200 engines backed by the middle of September . So I think by the Middle of September we will have a much better feel for what is involved here.
We will have an opportunity.
To update everybody around that time I think by the time, we get to October obviously, we will know even more as we go through some of the initial inspection. So this is a learning process, we understand what it takes to inspect we understand what it takes in terms of the inductions in the processes.
And unless there was some surprise I think we can we can have this pretty well bounded in terms of what the cost impact is in terms of what the cash flow impact is.
And so over the time, we get to third quarter call. Obviously, we will have a hell of a lot more knowledge that we do sitting here today.
Great.
Thank you.
Our next question.
Comes from the line of Cai von rumor of Cowen.
Yes. Thank you so much for taking my call. So.
My calculations, you delivered something like 16, 1700, GTS by the middle of 'twenty one so.
How do we get to 1200 engines I mean are we sure that's the number.
Could it be a larger number and is this just from needed to the PW 1000 or does it also impact of these.
Yes so.
Let me start maybe with the second part burst sky.
Our current assessment is that we don't expect the same type of impact on the 2500.
It has had an enhanced inspection fleet plan and management plan in place for some time and as I noted and as Greg noted we've completed a significant number of those inspections no. Thus far and feel comfortable that this can be managed at this point within the existing shop visit forecast, we're going to the Greg noted, we're still going through that analysis.
Will take us.
Into August to finalize that but thats our current expectation.
Same on the other neo applications. There are there are different characteristics and attributes on those engines, whether it be stress on the par whether it be thrust that we believe differentiates it from the 1100 and such our current assessment is those can be managed within the existing <unk>.
Visit forecast that we have for 2024.
In terms of the population you heard Gregg talk about when we have when we bounded the material potentially contaminated material we put in place the enhanced.
Processes for powder metal at that time also.
Put in the enhanced inspection techniques that we've talked about.
Many of the of the engines that have come all the engines that have come off since that time have gone through this inspection and have been a part of what we would call this better powder processing.
Jim and so ultimately we will inspect parts when they come in for their normal shop visit.
On down the line Kai as you know these engines will come back in for shop visits and we will expect this among other things during that time, while we're talking about right now are those that we need to accelerate the shop visit for and again, that's based on all the variables that we talked about so we feel confident that the.
Part of the safety management Board that Pratt has that we've got the right population and the right plan in place.
Thanks, just one quick follow on.
Hit on all the negatives, but you just got this announcement of this $2 9 billion potential Amiram order from Germany can you give us some color on your munitions outlook I mean in the out years is that substantially better.
Yes.
So nice to talk about something other than GTS, but yes look this amiram order is an order that will be for both Germany really for all of the NATO countries.
Also benefit Ukraine, and I would tell you that is on top of what we expect to see is a relatively large order for gem T missiles associated with the Patriot Air Defense system.
We have orders there from Saudi Arabia, we have orders coming from NATO.
I think in the back half of the year Youre going to see significant and we're planning a significant order intake on both <unk> and <unk>.
As well as of course Excalibur, we got this Nielsen mentioned, we got the javelin order we had the stinger order already.
Those are those orders will continue to grow I would tell you right now we still have only seen $2 billion of orders associated specifically with Ukraine replenishment, we think theres, probably another $2 $5 billion coming in the next 12 months associated with just the Ukraine replenishment on top of the gym to use in the gem Ts again, it'll go to Germany.
Poland will go through all 18 of those countries that are currently operating Patriots. So I think thats, a very positive sign and whats why we're so bullish on the on the defense outlook for the next couple of years.
Thank you.
Thank you.
Our next question.
Comments from the line of David Strauss of Barclays.
Thanks, Good morning.
David.
Sorry back to the to the GTS.
Sorry.
Just wanted to ask you about how how closely.
Closely coordinated.
Coordinated you are at this point with the regulatory bodies with regard to this and.
Have they kind of signed off on your plan or is there any risk here of.
Potentially the population or the timeline of these inspections getting getting accelerated.
Yes. Thanks, David This is Chris I would say all of this has been very closely coordinated with the FAA I think you heard me upfront talk about.
This will this will come in the form of a service bulletin that Pratt will publish and then likely in <unk>.
That the FAA will distribute but our safety management process.
Either it be through events that happened in the field things that we find through our continuous surveillance process or recommendations and assessment like this are always very closely coordinated with the FAA and then of course with the other.
International regulatory bodies as well FAA of course.
Is where is where we start but we of course continue to coordinate with the FAA and those other international bodies, but bottom line very closely coordinated with them.
Okay, and a quick follow up you keep mentioning fallout rate low fallout rate I assume that.
Is where you actually have to replace the high pressure turbine des.
What exactly have you assumed in terms of a fallout rate and.
Given it sounds like the inspection here is pretty involved how much more involved would it be and costly to be to actually replace the high pressure turbine blades versus just the inspection or desk sorry.
Yes.
So youre absolutely right, that's what follower it means those that we inspect and decided need to be removed and replaced again. Our experience has been that has been very very low.
If of course, we had to replace the turbine does then we factor that into the turnaround time.
And that will of course potentially add some some time to the process, but as of now again, David our assumption and we're continuing to work through that and through the month of August here, but our assumption based on everything that we've seen thus far.
Is that the fallout rate, we will be very low and that's what's embedded in our assumptions today, yes.
Yeah, David keep in mind order to do the inspection as Chris said, we literally have to pull the high pressure turbine disc off of the engine and put it through this inspection protocol.
Now, whether we put that disk back on or a brand new one it's not a significant impact on us again with a very very low expected fallout ratio I wouldn't have all the things that we worry about that would be low on the list. We have plenty of capacity for turbine disc out of Columbus.
Especially given the what we expect to be a very small number of replacement so.
That's.
I would say the most manageable portion of this.
Got it thanks a lot.
Thank you.
Our final question will come from the line of Noah <unk> of Goldman Sachs.
Hey, good morning, everyone.
Good morning Noah.
On the powder metal.
Are you able to bound at this point and whether you expect the free cash impact next year to be larger or smaller than this year.
And then also following up on the Raytheon defense margins can you just spend another minute on.
The fixed price development programs, you're citing which ones are they when do they move out of the development phase and how do they play into the multiyear margin expansion you're expecting.
Sure Yeah first of all on the on the free cash flow again, Noah I hate to keep saying this but we really need a little bit more time to put a finer point on our estimates and we will we will come back to you on that part as it relates to 'twenty four and beyond but I think we've talked at length about what the considerations are there.
And how we'll be thinking about that and that there is a possibility that some of these shop visits are already planned and there'll be effects that counterbalance. Some of this in the out year. So more to come on that front on the defense margins Youll recall back in Paris, I talked about.
About $40 million to $50 million of headwinds, we expected from the <unk> business and that happened just as we expected as we closed out the quarter, it's literally a few contracts.
I'd say most of them are classified so hard to get into the names but.
<unk> I would say the most.
The period of time that we're looking at probably 18 to 24 months before those programs are fully behind US. We're in the test phase, we're obviously learning through that phase.
But I think we have a little bit longer to go here I think we've got it calibrated in the second half of our year outlook.
But all the right resources are on it and like I said absent that.
We are seeing productivity turn and the rest of the business. So it really is a focused set of programs that we're dealing with.
Okay. Thank you.
Welcome.
Okay. Thanks to everybody for listening and I would just just to put all this in perspective, I think you need to keep in mind, we have very strong franchises between.
Collins, Raytheon and print Whitney and the $185 billion of backlog I know this GTS issue this quality issue.
A bit of a surprise we have been working it.
The West I would say 10 days or so we will know a lot more in the next six weeks.
As information becomes available we will of course be shared with investors.
But again keep in mind. This is a small piece of what is a great franchise across <unk>.
You said that Jennifer and her team are obviously going to be available. The next couple of days to answer any follow up questions that you have thank you all for listening and take care Bye bye.
This now concludes today's conference you may now disconnect.
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Good day, ladies and gentlemen, and welcome to the R. T X second quarter.
2023 earnings Conference call. My name is let's see if 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>, President and Chief Operating Officer, Neil Mitchell, Chief Financial Officer, and Jennifer Reed, Vice President of Investor Relations.
This call is being webcast live on the Internet and there is a presentation available for download from Archie ex website at Www Dot Archie X Dot com.
Please note, except where otherwise noted the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring and or significant items, often referred to by management as other significant items.
The company also reminds listeners that the earnings and cash flow expectations and any other forward looking statements provided in this call are subject to risks and uncertainties.
<unk> 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 yourself. Your first round to one question per caller to give everyone the opportunity to participate.
To ask a question you will need to press star one one on your telephone you may ask further questions by re inserting yourself into the queue as time permits.
With that I will turn the call over to Mr. Hayes.
Thank you and good morning, everyone. It was another strong quarter for <unk> with continued strength across all of our end markets on the commercial aerospace side industry wide. We saw 1200, new orders announced around the Paris Air show.
This is the largest number of orders in the history of the Air show as Airlines look to secure production slots well into the next decade.
Global commercial air traffic remains on track with our projections with a very robust summer travel season, driven by incredibly strong consumer demand.
This dynamic is supporting strength in the aftermarket and growth across the globe with revenue passenger kilometers now tracking at about 95% of 2019 levels.
And long haul international which has lagged in the recovery is showing strong growth with passenger flight hours up 18 points year over year.
The good indicator of increasing demand for wide body travel.
Turning to defense, we're pleased at the House defense appropriation Bill fully funds many of our programs, including importantly, the F 135 engine core upgrade which is the only engine funded for the F 35 joint strike fighter.
Additionally, the Bill also recommends the full budget request for other key RPX programs, such as <unk> El Abra, So hypersonic X and standard missile three.
Internationally, we saw the state department approve a large sale of advanced Air Defense systems for Poland is it bolsters that security amid the ongoing conflict in Ukraine.
This will expand our existing partnership with Poland and make pulling the first international customer for our <unk> system.
Representing a key transition for this next generation Raytheon franchise.
Before we get into details of the quarter as you saw in our press release. This morning, we are working through an issue, resulting from a rare condition and powdered metal that will require pratt and Whitney to remove some engines from service for inspection earlier than expected.
I want to make just a couple of comments here at the outset.
First of all it's important to know that we understand the issue and we have begun to address it through an inspection protocol that we already have in place.
That said clearly this will have an impact on Pratt Whitney and our customers' Chris.
Christen Neal and provide additional color later in the call and how we're going to address the issue as well as the operational and financial impacts.
As you would expect we will dedicate all the necessary resources to manage this.
Now, let's turn to slide two to go through some key highlights from the quarter.
Q2 was another strong quarter of strong demand in both the commercial and defense segments of our business with $25 billion of new orders. This brings our total backlog to a record $185 billion.
On the commercial side Collins continues to convert its industry, leading portfolio and the solid order strengths.
As I mentioned industry wide there were about 1200, new aircraft orders announced in Paris.
The aggregate amount of Collins and Pratt content on those aircraft will be about $40 billion for the <unk>.
Life of the programs.
On the defense side across the <unk> businesses, we captured $13 billion in new bookings in the quarter driving the strong book to Bill of one to two and this takes our defence backlog to $73 billion.
Contributing to the backlog in the second quarter were a number of significant awards.
Including $2 billion at Pratt and Whitney for the <unk> 17 of the F 135 engines, and one 1 billion and a half for $1 17 Sustainment.
The Raytheon segment was awarded its largest ever amram contract for $1 2 billion from the U S Air Force and international partners, including Ukraine.
The <unk> will work in concert with their existing Nissan batteries to help protect the Ukrainian people.
Earlier this month, we executed the business realignment. We are now officially operating has three business units.
Our team has done a tremendous job in a relatively short period of time shifting roughly $3 billion of sales and thousands of employees across our portfolio to better meet the evolving needs of our customers.
Of course, our transformation isn't done we will continue to develop initiatives initiatives to better leverage our scale and breadth and to enable operational excellence and to best in class cost structure.
Finally, as many of you saw last week, we agreed to divest Collins actuation business to suffer own.
We expect this deal to close in the second half of 2024 with proceeds from the transaction will be about $1 8 billion.
With respect to our full year outlook, we're going to raise the top line to reflect the strength, we're seeing in our end markets. The new range will be $73 billion to $74 billion and we're also going to bring up the bottom end of our adjusted EPS range by a nickel to $4 95 to five five.
However, we are going to reduce our 2023 cash flow expectations by 500 million to $4 3 billion. This is primarily to reflect the developments at Pratt and Whitney that I discussed earlier.
So with that let me turn it over to Neil to walk you through our financial results in more detail Neil.
Thanks, Greg, Let's look at Q2 results on slide three.
As Greg noted, we had another solid quarter with sales of $18 $3 billion up a strong 13% organically versus the prior year with growth across all four of our segments adjusted.
Adjusted earnings per share of $1 29 was up 11% year over year with strong adjusted segment operating profit growth of 26%, partially offset by lower pension income and a higher effective tax rate.
On a GAAP basis earnings per share from continuing operations was <unk> 90 per share and included 26 of acquisition accounting adjustments and <unk> <unk> charge related to an airline customer insolvency and five of restructuring and segment and portfolio transformation costs.
Free cash flow of $193 million was generally in line with what we discussed when we were together in Paris last month.
And finally on the capital allocation front, we repurchased $596 million in shares putting us at about $1 2 billion year to date on track for $3 billion in share repurchases for the full year.
So, let's turn to slide four to get into the Q2 segment results.
Beginning with R&D sales were $4 billion in the quarter up 12% on an adjusted basis and 13% organically.
Primarily driven by higher volume from airpower advanced technology, and land warfare and air Defense programs.