Q3 2023 Raytheon Technologies Corp Earnings Call
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Good day, ladies and gentlemen, and welcome to the R. T X third quarter 'twenty to 'twenty three earnings Conference call. My name is let's see 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 Collier.
Didn't 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 Arts, yes 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.
Our SEC filings, including its forms 8-K, 10-Q, and 10-K provide details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements.
Once the call becomes open for questions. We ask that you limit your first round to one question per caller to give everyone the opportunity to participate.
To ask a question you will need to press star one one on your telephone you may ask further questions by Reinsert yourself into the queue as time permits.
With that.
I will now turn the call over to Mr. Hayes.
Alright, Thank you and good morning, everyone.
Before we start I want to spend just a minute acknowledging the tragic situation playing out in Israel today.
It has been devastating to see what has unfolded there over the last couple of weeks and our thoughts and prayers are with the people impacted including the thousands of <unk> employees the call Israel home.
With that said, let me turn to an update on our end markets.
On the commercial aerospace air travel demand remains strong.
We're seeing solid air traffic growth with global revenue passenger miles essentially back to 2019 levels and domestic air travel well above 2019 levels.
We also expect strong demand for holiday and business travel for the remainder of the year supporting continued aftermarket strength for both wide body and narrow body aircraft.
On the defense side, the elevated threat environment is continuing to drive increased defense spending globally.
Just one example in the quarter the United States approved moving forward with the sale of F 35 aircraft to South Korea, that's estimated to be worth about $5 billion and will support further growth with this customer for F 35 content for years to come.
Additionally, the U S State Department approved a significant sale to Spain for the Patriot Air and missile Defense systems earlier, this month and Thats expected to include approximately $1 billion of Raytheon contents.
And as Russia's invasion of Ukraine. Unfortunately continues we are seeing significant demand from the U S and our allies for advanced Air Defense systems and munitions.
During this past quarter. This included additional orders for <unk> <unk>.
<unk> was your precision guided artillery shells stinger anti aircraft munitions and toe anti tank guided missiles.
Domestically despite what we've seen over the last few weeks in D. C. We remain confident that there is bipartisan support for increased defense spending.
Operator: Good day ladies and gentlemen and welcome to the RTX third quarter 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.
<unk> continues to be well positioned across all three of our businesses.
Shifting to Pratt and Whitney Let me give you an update on the powder metal manufacturing quality matter.
Operator: On the call today are Greg Hayes, Chairman and Chief Executive Officer, Chris Kahya, 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 RTX website at www.rtx.com. 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. The company also reminds listeners that the earnings and cash flow expectations in any other forward looking statements provided in this call are subject to risk and uncertainties.
Our efforts to date have been heavily focused on ensuring the safety of our engines.
As you saw on the press release. This morning, we have finalized the charge recorded here in the quarter, which is in line with what we had previously disclosed.
So just a few thoughts on the powdered metal issue.
Through the early stages of removals and inspections of the PW 1100 engine, which powers. The <unk> hundred 20 Neo aircraft our outlook, both financially and operationally remains consistent with our expectations.
We've also made significant progress on the safety assessments for the other Pratt Whitney powered fleets that includes the PW 1500, which powers. The <unk> hundred 20, the PW 1900, which powers the Embraer E. Two and the V 2500, which powers the legacy <unk> hundred 20.
With the analyses substantially complete we do not expect any significant incremental financial impact as a result of those fleet management plans.
Operator: 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 that you limit your first round to one question per caller to give everyone the opportunity to participate. To ask a question, you will need to press star 1-1 on your telephone. You may ask further questions by reinserting yourself into the queue as time permits.
The focus of both Pratt Whitney and the entire <unk> organization is on maintaining the trust of our customers and our partners and we are relentlessly working to improve upon the plans we have in place today.
As I've said to many of you over the last few months, we remain confident in the future of our TX because the demand for our products is robust.
Our end markets remained resilient across both commercial aerospace and defense and our team is laser focused on driving performance excellence to meet our customer needs.
Greg Hayes: With that, I will now turn the call over to Mr. Hayes. All right, thank you and good morning everyone.
Our backlog is now a record $190 billion with a pipeline of both existing franchises and new technology development.
Greg Hayes: Before we start, I want to spend just a minute acknowledging the tragic situation playing out in Israel today. It has been devastating to see what has unfolded there over the last couple of weeks and our thoughts and prayers are with the people impacted, including the thousands of RTX employees that call Israel home. With that said, let me turn to an update on our end markets. On the commercial aeroside, air travel demand remains strong.
As we always have we continued to actively manage our portfolio.
You saw this morning, we reached an agreement to sell Raytheon's cyber services business and a cash sale for approximately $1 3 billion.
Which combined with the recently announced sale of columns actuation business. This will generate approximately $3 billion of gross proceeds in 2024.
Greg Hayes: We're seeing solid air traffic growth with global revenue passenger miles essentially back to 2019 levels and domestic air travel well above 2019 levels. We also expect strong demand for holiday and business travel for the remainder of the year supporting continued after market strength for both wide body and narrow body aircraft. On the defense side, the elevated threat environment is continuing to drive increased defense spending globally. Just one example in the quarter, the United States approved moving forward with the sale of F-35 aircraft to South Korea.
So with that let's turn to slide two.
As we also announced this morning, our board has approved a $10 billion accelerated share repurchase program or ASR, which we will be initiating tomorrow.
Simply put we see a significant discount between the intrinsic value of RPX and our current stock price.
The long term outlook of the GTS remains strong and <unk> franchises extend well beyond the GTS.
Greg Hayes: That's estimated to be worth about $5 billion and will support further growth with this customer for F-35 content for years to come. Additionally, the U.S. State Department approved a significant sale to Spain for the Patriot Air and Missile Defense systems earlier this month. And that's expected to include approximately $1 billion of Ritian economy. Contents. And as Russia's invasion of Ukraine, unfortunately, continues, we are seeing significant demand from the U.S, and our allies for advanced air defense systems and munitions.
The 2500 has about 6000 engines still flying and is in the sweet spot of its aftermarket cycle.
Pratt Canada continues to be the world's premier small engine manufacturer with an installed base of more than 60000 engines and.
In the military business of prep as the sole provider of engines fifth generation fighters.
Collins is a great portfolio with 70% of their product lines, serving as number one or two of their segments.
And strong margin expansion opportunities.
And lastly, our newly combined Raytheon segment has an incredible number of well established franchises along with a growing portfolio of next generation technologies and this includes <unk>, which is the next generation Patriot defense system, and the hypersonic attack cruise missile or happen.
Greg Hayes: During this past quarter, this included additional orders from nasams, Excalibur, which are precision-guided artillery shells, Stinger anti-aircraft munitions, and Toe anti-tank guided missiles. Domestically, despite what we've seen over the last few weeks in D.C., we remain confident that there is bipartisan support for increased defense spending, and RTX continues to be well-positioned across all three of our businesses.
Given the fundamental strength of the company and growth opportunities ahead, our board recently approved an $11 billion of authority to repurchase <unk> shares.
This includes 10 billion through an ASR program to help capture some of that value more immediately.
The new authorization replaces the company's previous program, which was approved in December of 2022.
This ASR of course is on top of the $2 6 billion, we've already repurchased year to date.
Greg Hayes: Shifting to Pratt and Whitney, let me give you an update on the powder metal manufacturing quality matter. Our efforts to date have been heavily focused on ensuring the safety of our engines. As you saw on the press release this morning, we have finalized the charge recorded here in the quarter, which is in line with what we had previously disclosed.
Altogether. This will increase our capital return commitment to shareowners to 36% $37 billion through 2025% from the time of the merger.
That's up from our previous range of 33% to 35 billion.
Greg Hayes: So just a few thoughts on the powder metal issue. Through the early stages of removals and inspections of the PW1100 engine, which powers the A320 neo-aircraft, our outlook, both financially and operationally, remains consistent with our expectations. We've also made significant progress on the safety assessments for the other Pratt and Whitney powered fleets. That includes the PW1500, which powers the A220, the PW1900, which powers the Ember Air E2, and the V2500, which powers the Legacy A320. With the analysis substantially complete, we do not expect any significant incremental financial impact as a result of those fleet management plans.
As I said this ASR program will commence almost immediately and will be funded through a combination of short and long term debt.
And importantly, we'll begin the process of deleveraging in 2024 in part supported by the proceeds from the recently announced dispositions that I just mentioned.
So despite near term headwinds the future of our T X remains bright and we remain steadfast in our commitment to deliver long term shareowner value.
With that let me hand, it over to Chris to provide additional color on the prep matters and to cover the Q3 highlights.
Thank you, Greg and good morning, everyone I'm on slide three.
As Greg said the powder metal situation is our top priority.
The bottom line is that our outlook for managing both the fleet impact and the financial impact remains intact since our last call and our team continues to execute on our fleet management and recovery plans.
Greg Hayes: The focus of both Pratt and Whitney and the entire RTX organization is on maintaining the trust of our customers and our partners. And we are relentlessly working to improve upon the plans we have in place today. As I said to many of you over the last few months, we remain confident in the future of RTX because the demand for our products is robust. Our end markets remain resilient across both commercial aerospace and defense.
Let me provide a few more details and I will start with the GTS.
With respect to the PW 1100, Theres no change to the plan we outlined in our September call. The fleet management plan and financial estimates remain consistent with what we said six weeks ago.
Our focus is on executing all elements of the fleet management plan in particular industrial output and material flow MRO output and customer support.
Greg Hayes: And our team is laser focused on driving performance excellence to meet our customer needs. Our backlog is now a record $190 billion with a pipeline of both existing franchises and new technology development. As we always have, we continue to actively manage our portfolio.
The first tranche of the engine removals has occurred and several of these engines were eligible for project visit work scope and the turnaround times are these visits averaged roughly 35 days.
Project visits will be a smaller portion of the overall shop visits the turnaround time is encouraging and our teams are continuing to identify further process improvements.
Greg Hayes: As you saw this morning, we reached an agreement to sell Raytheon's Cyber Services business in a cash sale for approximately $1.3 billion, which combined with a recently announced sale of Collins actuation business, this will generate approximately $3 billion of gross proceeds in 2024. So with that, let's turn to slide two.
From a process perspective additional bulletins will be released in the next few weeks that outline the life limits and repetitive inspection requirements that we detailed on our prior call.
And just by way of background. It is common practice for our fleet management plan to be communicated through multiple service bulletins and air worthiness directives to address different engine models compliance times, our components in sections of the engine.
Greg Hayes: As we also announced this morning, our board has approved a $10 billion accelerated share repurchase program or ASR, which we will be initiating tomorrow. Simply put, we see a significant discount between the intrinsic value of RTX and our current stock price. The long-term outlook of the GTF remains strong and press franchises extend well beyond the GTF. The V-2500 has about 6,000 engines still flying and is in the sweet spot of its aftermarket cycle.
Now, let me share some details on our other gtx programs.
For the PW 1590, 500, we will Institute a fleet management plan that will largely inside the shop visit plans that are already in place for these fleets.
We believe the financial impact won't be significant and is contemplated in our current contract estimates and our financial outlook for Pratt.
As part of this plan, we will place a shorter life limit on certain early configuration parts and inspection requirement at about 5000 cycles for current configuration parts.
Greg Hayes: Pratt Canada continues to be the world's premier small engine manufacturer with an installed base of more than 60,000 engines. And the military business of Pratt is the sole provider of engines on 5th generation fighters. Collins has a great portfolio with 70% of their product lines serving as number one or two in their segments and strong margin expansion opportunities. And lastly, our newly combined Raytheon segment has an incredible number of well-established franchises along with a growing portfolio of next-generation technologies.
There'll be some incremental <unk> in the first half of 2024, we believe these will be largely mitigated by the end of the year.
Regulators and air Framers are aligned with this recommendation, we expect the service bolt in implementing these actions will be released beginning in November followed by air Worthiness directives.
Let me now turn to the <unk> 2500, and as a reminder, we've had a fleet management and inspection plan in place since 2021.
We're going to augment this plan by accelerating certain inspections, but expect this too will have very little impact operationally or financially.
Greg Hayes: This includes LTAMS, which is the next-generation Patriot Defense System, and the hypersonic attack cruise missile or HACM. Given the fundamental strength of the company and growth opportunities ahead, our board recently approved an $11 billion authority to repurchase RTX shares. This includes $10 billion through an ASR program to help capture some of that value more immediately. The new authorization replaces the company's previous program, which was approved in December of 2022. This ASR of course is on top of the $2.6 billion we've already repurchased year-to-date.
It will result in a total of roughly 100 or less incremental removals stretched out over the next four years. The majority of these visits having a project visit work scope.
Again, very manageable given the size of the <unk> 2100 fleet the number of spare engines available and engines in the market with available Green time.
All of this is contemplated in our current contract estimates and Pratt financial outlook.
Saxon will be communicated through a service Bolton to be released in the November timeframe.
And lastly, turning to the F 35, the joint program Office is reviewing our fleet management plan recommendation, which we believe will have limited if any operational impact on the customer.
Greg Hayes: Altogether, this will increase our capital return commitment to shareholders to $36 to $37 billion through 2025 from the time of the merger. That's up from our previous range of $33 to $35 billion. As I said, this ASR program will commence almost immediately and will be funded through a combination of short and long-term debt. And importantly, we'll begin the process of de-leveraging in 2024 and parts supported by the proceeds from the recently announced dispositions that I just mentioned. So, despite near-term headwinds, the future of RTX remains bright and remains steadfast in our commitment to deliver long-term shareholder value.
We continue to evaluate the balance of the Pratt fleet containing powdered metal and expect any fleet management plan updates if needed to have limited impact.
Our fleet management plan is largely set let me turn to the operational initiatives. We are focused on to support our customers' <unk>.
Increasing capacity and reducing turn times in our MRO shops, and ramping up the production of new full life powder metal parts.
First with respect to MRO, we're accelerating previously planned investments in the GTS network to increase capacity and bring more shops online to support our customers.
Chris Kahya: With that, let me hand it over to Chris to provide additional color on the Pratt Matters and to cover the Q3 highlights. Thank you, Greg. Good morning, everyone.
Just last month <unk> announced they are adding capacity at their Singapore engine center, which will be perhaps a third facility expansion this year.
Chris Kahya: I'm on slide three. As Greg said, the powder metal situation is our top priority. The bottom line is that our outlook for managing both the fleet impact and the financial impact remains intact since our last call. And our team continues to execute on our fleet management and recovery plans. Let me provide a few more details and I'll start with the GTS. With respect to the PW-1100, there's no change to the plan we outlined in our September call.
And earlier this month MRO shops operated by China Airlines and Korea are inducted their first GTS engines by the end of the year Iberia and maintenance will also be joining the GTS aftermarket network.
Once complete this network will have 16 sites globally, having brought online six partner shops. This year with plans for an additional three shops to come online by 2025, bringing the total to 19.
Chris Kahya: The fleet management plan and financial estimates remain consistent with what we said six weeks ago. And our focus is on executing all elements of the fleet management plan. In particular, industrial output and material flow, MRL output and customer support. The first tranche of the engine removal has occurred. And several of these engines were eligible for project visit work scope. And the turnaround times for these visits average roughly 35 days. While project visits will be a smaller portion of the overall shop visits, the turnaround time is encouraging and our teams are continuing to identify further process improvements.
This will enable the network to be able to conduct more than 2000 annual shop visits in 2025 to support the global GTS fleet, a roughly five fold increase from 2019.
We're also leveraging our extensive knowledge and talent across RPX to drive process enhancements to help us improve turn times in our MRO shops compared to our baseline plan.
<unk> is a cross functional team focused on part availability repair development in industrialization and process improvements on the shop floor.
Second and as we said in September our objective is to replace as many HPT and HBC disks as possible with full life desks when engines come in for a shop visit in order to maximize their time on wing when they leave the shop as.
Chris Kahya: And from a process perspective, additional bulletins will be released in the next few weeks that outline the life limits and repetitive inspection requirements that we detailed on our prior call, and just by the way of background, it is common practice for a fleet management plan to be communicated through multiple service bulletins and air-worthiness directives to address different engine models, compliance times, or components and sections of the engine. Financial impact won't be significant and is contemplated in our current contract estimates and the financial outlook for Pratt.
As we've said before we've previously made the necessary powdered metal production and forging capacity investments.
And now are increasing our machining and inspection capacity.
Our baseline plan today forecast Q2, 2024 to get to a run rate capacity for gas production. We are working to accelerate this timeline, which will allow us to replace an even larger portion of the fleet with full life parts.
So to wrap up on powdered metal or fleet management plans on the most impacted fleets are largely complete the financial impact has been reassessed and remains consistent with what we said on our September 11th call on the subject and we are fully focused on executing these plans.
Chris Kahya: As part of this plan, we will place a shorter life limit on certain early configuration parts and an inspection requirement at about 5,000 cycles for current configuration parts. There will be so many incremental AOGs in the first half of 2024, but we believe these will be largely mitigated by the end of the year. Regulators and air framers are aligned with this recommendation, we expect a service bulletin implementing these actions will be released beginning in November followed by air-worthiness directives.
I'll shift now to the third quarter highlights, which Neil will provide some additional color on in a few minutes.
On an adjusted basis organic sales grew 12% our third consecutive quarter of double digit growth in segment operating profit grew 15%.
Adjusted EPS was in line with our expectations at $1 25, but we had strong free cash flow of $2 8 billion in the quarter.
Sales growth was again led by the continued commercial air traffic recovery with strong commercial OE growth of 26% and 25% commercial aftermarket growth, while defense sales were up 2% year over year.
Chris Kahya: Let me now turn to the V-2,500 and as a reminder, we've had a fleet management and inspection plan in place since 2021. We're going to augment this plan by accelerating certain inspections, but expect this too will have very little impact operationally or financially. It will result in a total of roughly 100 or less incremental removals stretched out over the next four years, the majority of these visits having a project visit work scope.
In the quarter, we captured $22 billion in new bookings and had a book to Bill of one 109 across our TX, bringing our backlog to a record 190 billion.
Finally, Q3 was the first quarter, we officially began operating in a realized three business unit structure.
<unk> to develop initiatives to leverage our scale and breadth to better enable customer alignment and best in class cost structure.
Chris Kahya: Again, very manageable given the size of the V-2,500 fleet, the number of spare engines available and engines in the market with available green time. All of this is contemplated in our current contract estimates and Pratt's financial outlook. This action will be communicated to a service bulletin to be released in the November timeframe.
Respect to our 2023 outlook with one quarter to go we are raising both our reported and adjusted sales outlook for the year.
On a reported basis, we expect sales to be approximately $68 5 billion and on an adjusted basis, we expect sales to be approximately 74 billion.
Chris Kahya: And lastly, turning to the F-135, the joint program office is reviewing our fleet management plan recommendation, which we believe will have limited if any operational impact on the customer. We continue to evaluate the balance of the Pratt fleet, containing powdered metal and expect any fleet management plan updates if needed to have limited impact.
Up about 10% organically versus the prior year.
We're also tightening our EPS range and have incorporated a few cents of tax headwind from some recent IRS guidance around R&D capitalization, which Neil will discuss further.
As a result, we now see adjusted EPS between $4 98, and 502 for the year.
Chris Kahya: With our fleet management plans largely set, let me turn to the operational initiatives we are focused on to support our customers, increasing capacity and reducing turn times in our RO shops and ramping up the production of new full-life powder metal parts. First, with respect to MRO, we're accelerating previously planned investments in the GTF network to increase capacity and bring more shops online to support our customers. Just last month, Pratt announced their adding capacity at their Singapore engine center, which will be pressed third facility expansion this year.
Additionally, we expect free cash flow for the year to improve by approximately $500 million driven primarily by the IRS guidance I just mentioned just favorable from a cash perspective.
Therefore, increasing our free cash flow outlook to approximately $4 8 billion.
So with that let me turn it over to Neil to take you through the additional details on the quarter.
Thanks, Chris I'm on slide four.
As you saw we finalized our estimate for the PW 1100 powder metal matter here in the third quarter and have recorded a $5 $4 billion sales charge, our share of which resulted in a $2 9 billion operating profit impact.
Chris Kahya: In earlier this month, MRO shops operated by China Airlines and Korea Air inducted their first GTF engines. By the end of the year, Iberian maintenance will also be joining the GTF aftermarket network. Once complete, this network will have 16 sites globally, having brought online six partner shops this year, the plan for an additional three shops to come online by 2025, bringing the total to 19. This will enable the network to be able to conduct more than 2000 annual shop visits in 2025 to support the global GTF fleet, a roughly five-fold increase from 2019.
This is in line with what we communicated in September and resulted in reported sales of $13 5 billion in the third quarter.
As Chris said, we had adjusted sales of $19 billion for the quarter up 12% organically versus the prior year.
Growth was primarily driven by strong demand across our commercial OE and aftermarket businesses as Oems continue to ramp production and airlines supported the busy summer travel season.
We also saw positive growth in defense as we continued to execute on our growing backlog.
Chris Kahya: We're also leveraging our extensive knowledge and talent across RTX to drive process enhancements to help us improve turn times in our Romero shops compared to our baseline plan. This includes a cross-functional team focused on part of availability, repair development and industrialization, and process improvements on the shop floor. Second, and as we said in September, our objective is to replace as many HPT and HPC disks as possible with full-life disks when engines come in for a shop visit in order to maximize their time on wing when they leave the shop.
On a GAAP basis.
Earnings per share from continuing operations was a loss of <unk> 68 and.
That included a $1 53 charge from the Pratt matter as well as 40 from acquisition accounting adjustments restructuring and other nonrecurring and non operational items.
Adjusted earnings per share of $1 25 was up 3% year over year with higher segment operating profit, partially offset by lower pension income a higher effective tax rate and higher interest expense.
Chris Kahya: As we said before, we previously made the necessary powder metal production in forging capacity investments, and now are increasing our machining and inspection capacity. Our baseline plan today forecasts Q2 2024 to get to run rate capacity for disk production. We are working to accelerate this timeline, which will allow us to replace an even larger portion of the fleet with full-life parts.
As Chris alluded to the IRS recently provided guidance on R&D capitalization with respect to customer funded R&D for certain cost plus contracts. This.
This means a portion of our previously capitalized R&D costs for tax purposes will now be currently deductible.
While this will result in a slightly higher effective tax rate going forward and will reduce our cash tax payments in the quarter. This resulted in about a <unk> <unk> headwind to adjusted earnings per share for the full year. We expect this to be about <unk> <unk> of headwind.
Chris Kahya: So to wrap up on powdered metal, our fleet management plans on the most impact of fleets are largely complete. The financial impact has been reassessed and remains consistent with what we said on our September 11th call on the subject, and we are fully focused on executing these plans.
Finally, as we had anticipated we had strong free cash flow generation in the quarter, a $2 8 billion.
Chris Kahya: I'll shift now to the third quarter highlights, which Neal provides an additional color on in a few minutes.
Which included a benefit of approximately $500 million from the Irs's R&D capitalization guidance I just discussed.
Chris Kahya: On an adjusted basis, organic sales grew 12 percent, our third consecutive quarter of double-digit growth, and segment operating profit grew 15 percent. Adjusted EPS was in line with our expectations at $1.25, but with strong free cash flow of 2.8 billion in the quarter. Sales growth was again led by the continued commercial air traffic recovery, a strong commercial OE growth of 26 percent and 25 percent commercial aftermarket growth, while in the quarter, we captured 22 billion in new bookings and had a book to bill of 1.19 across RTX, bringing our backlog to a record of 190 billion.
Now with that let's turn to slide five to get into the Q3 segment results.
So before I begin just a reminder, we are now reporting three business units Collins and Pratt and Raytheon.
Starting with Collins adjusted sales were $6 7 billion in the quarter up 17% on both an adjusted and organic basis, driven primarily by continued strength in commercial OE and aftermarket growth.
By channel commercial aftermarket sales were up 30% driven by a 35% increase in both provisioning as well as parts and repair while modifications and upgrades were up 9% in the quarter.
Chris Kahya: Finally, Q3 was the first quarter we officially began operating in our real-line three business unit structure. We are continuing to develop initiatives to leverage our scale and breadth to better enable customer alignment, investing class cost structure. To respect to our 2023 outlook, with one quarter to go, we are raising both our reported and adjusted sales outlook for the year. On a reported basis, we expect sales to be approximately $68.5 billion, and on an adjusted basis, we expect sales to be approximately $74 billion, up about 10 percent organically versus the prior year.
Sequentially commercial aftermarket sales were up 6%.
Commercial OE sales were up 27% versus the prior year driven by growth in both narrow body and wide body platforms and military sales were down 1%, primarily due to the timing of deliveries.
Adjusted operating profit of $1 4 billion was up $287 million or 38% in the prior year, but drop through on higher commercial aftermarket and OE volume, partially offset by higher production costs unfavorable military mix and higher SG&A expenses.
Chris Kahya: We're also tightening our EPS range and have incorporated a few cents of tax headwind from some recent IRS guidance around R&D capitalization, which Neil will discuss further. As a result, we now see adjusted EPS between 498 and 502 for the year. Additionally, we expect free cash flow for the year to improve by approximately 500 million driven primarily by the IRS guidance I just mentioned, just favorable from a cash perspective.
For the full year, given the continued strength in commercial OE and aftermarket. We now expect Collins sales range to be up low to mid teens, an increase from the previous range of up low double digits to low teens.
With respect to operating profit, we are maintaining adjusted operating profit and our prior range of up $825 million to $875 million versus the prior year shifting.
Chris Kahya: We are therefore increasing our free cash flow outlook to approximately $4.8 billion.
Neil Mitchell: So with that, let me turn it over to Neil to take you through the additional details on the quarter. Thanks, Chris. I'm on slide four. As you saw, we finalized our estimate for the PW-1100 powder metal matter here in the third quarter, and I've recorded a $5.4 billion sales charge, our share of which resulted in a $2.9 billion operating profit, and David Impact. This is in line with what we communicated in September and resulted in reported sales of $13.5 billion in the third quarter.
Shifting to Pratt <unk> Whitney on slide six.
As it relates to the powder metal matter for the PW 1100 in September we communicated that we expected the gross financial impact to be in the range of $6 billion to $7 billion.
With an expected Q3 pretax operating profit impact of approximately $3 billion.
As I just mentioned in the third quarter, we recorded a $5 $4 billion sales charge, resulting in a $2 9 billion pre tax operating profit impact representing our net program share in line with where we expected.
Neil Mitchell: As Chris said, we had adjusted sales of $19 billion for the quarter of 12% organically versus the prior year. Growth was primarily driven by strong demand across our commercial OE and aftermarket businesses as OEMs continued to ramp production and airlines supported the busy summer travel season. We also saw a positive growth in defense as we continue to execute on our growing backlog. On a gap basis, earnings per share from continuing operations was a loss of 68 cents and included a $1.53 charge from the Pratt matter as well as 40 cents from acquisition accounting adjustments for structuring and other non-recurring and non-operational items.
Recall, I mentioned that certain elements of the grow 6% to $7 billion cost will be booked upfront and the remainder will be booked over the remaining life of the contracts.
So looking at perhaps quarterly results on an adjusted basis sales of $6 $3 billion were up 18% and 17% on an organic basis with sales growth across all three channels.
Neil Mitchell: Adjusted earnings per share of $1.25 was up 3% year over year with higher segment operating profit partially offset by lower pension income, higher affected tax rate and higher interest expense. As Chris alluded to, the IRS recently provided guidance on R&D capitalization with respect to customer funded R&D for certain cost plus contracts. This means the portion of our previously capitalized R&D costs for tax purposes will now be currently deductible. While this will result in a slightly higher effective tax rate going forward, we'll reduce our cash tax payments. In the quarter, this resulted in about a two cent headwind to adjusted earnings per share for the full year we expect this to be about three cents of headwind.
Commercial OE sales were up 25% in the quarter driven by higher engine deliveries and favorable mix in the large commercial engine business.
Commercial aftermarket sales were up 21% in the quarter driven by both higher volume and content as well as favorable mix in both the large commercial engine and Pratt <unk> Whitney Canada businesses.
And in the military business sales were up 7% driven by higher F 35 development and Sustainment volume.
Neil Mitchell: Finally, as we had anticipated, we had strong free cash flow generation in the quarter of $2.8 billion, which included a benefit of approximately $500 million from the IRS's R&D capitalization guidance that just discussed.
Adjusted operating profit of $413 million was up $95 million from the prior year with drop through on higher commercial aftermarket sales, partially offset by higher commercial OE volume higher production costs unfavorable military mix as well as higher R&D expenses.
Looking ahead due to higher commercial OE and military volume, we now expect Pratt's adjusted sales to be towards the higher end of our prior range are up mid teens versus prior year.
Given the higher military sales as well as better mix across OE and aftermarket. We're also increasing perhaps adjusted operating profit from our prior range of up $210 million to $175 million to a new range of up $350 million to $400 million versus the prior year.
Neil Mitchell: Now with that, let's turn to slide five to get into the Q3 segment results.
Turning now to Raytheon on slide seven.
Neil Mitchell: So before I begin, just a reminder, we are now reporting as three business units, Collins, Pratt and Raytheon. Starting with Collins, adjusted sales were $6.7 billion on the quarter, up 17% on both an adjusted and organic basis driven primarily by continued strength and commercial OE and aftermarket growth. By channel, commercial aftermarket sales were up 30%, driven by a 35% increase in both provisioning as well as parts and repair, while modifications and upgrades were up 9% in the quarter.
Sales of $6 5 billion in the quarter were up 3% on an adjusted and organic basis, primarily driven by higher volume able power programs, including aimed NYNEX and advanced technology classified programs.
Adjusted operating profit of $570 million was down $124 million versus the prior year, driven primarily by higher volume on lower margin programs and lower net program efficiencies, including additional headwind on certain fixed price development programs.
In addition, as expected there was an unfavorable impact of about $20 million from our significant contract option exercised in the quarter.
Neil Mitchell: Sequentially, commercial aftermarket sales were up 6%. Commercial OE sales were up 27% versus the prior year driven by growth in both narrow body and wide body platforms and military sales were down 1% primarily due to the timing of deliveries. Adjusted operating profit of $1.04 billion was up $287 million or 38% in the prior year with drought through on higher commercial aftermarket and OE volume, partially offset by higher production costs on favorable military mix and higher SGNA expenses.
Raytheon had seven $4 billion of bookings in the quarter, including $1 $9 billion in classified awards of $412 million Award for the next generation short range Interceptor program.
And a $383 million award for Hawk and Patriot Sustainment.
This resulted in a book to bill of 116% and backlog of $50 billion.
Year to date Raytheon has a book to Bill of one 107.
For the full year, we continue to expect sales to be up low to mid single digits with respect to operating profit while the supply chain continues to improve as evidenced by the increase in material receipts. We have seen the last three quarters breakdown continues to have productivity and mix challenges. These.
Neil Mitchell: For the full year given the continued strength and commercial OE and aftermarket, we now expect Collins sales range to be up low to mid teams and increase from the previous range of up low double digits to low teams. Williams. With respect to operating profit, we are maintaining adjusted operating profit in our prior range of up $825 to $875 million versus the prior year.
These stem from a combination of the fixed price development programs, we've previously discussed as well as higher production costs.
As a result of reducing raytheon's adjusted operating profit from the prior range of up $125 to $175 million to a new range of up 25% to up $75 million versus the prior year.
Neil Mitchell: Shifting to Pratt Whitney on slide six, as it relates to the powder metal matter for the PW-1100. In September, we communicated that we expected the gross financial impact to be in the range of $6 to $7 billion with an expected Q3 pre-tax operating profit impact of approximately $3 billion. As I just mentioned in the third quarter, we recorded a $5.4 billion sales charge resulting in a $2.9 billion pre-tax operating profit impact representing our net program share in line with where we expected.
Before I hand, it back to Greg just a couple of comments on the environment for 2024.
Overall, we anticipate another year of solid growth in organic sales segment operating profit margin and free cash flow. However.
However, the level of free cash flow growth will be tempered by the step up in cash impacts associated with the powder metal matter as well as some headwind from cash taxes related to R&D.
Neil Mitchell: Recall, I mentioned that certain elements of the gross $6 to $7 billion cost will be booked up front and a remainder will be booked over the remaining life of the contracts. So, looking at Pratt's quarterly results on an adjusted basis, sales of $6.3 billion were up 18% and 17% on an organic basis with sales growth across all three channels. Commercial OE sales were up 25% in the quarter driven by higher engine deliveries and favorable mix in the large commercial engine business.
While commercial air travel demand has been incredibly strong from passengers and airlines, we see growth beginning to normalize as we head into 2024 with RP case back in 2019 levels and the year over year compares becoming more difficult. However.
However, overall, we expect continued growth in OE and aftermarket, including the ongoing recovery of the wide body on.
On the defense side, we continue to expect strong international and domestic demand, which has already driven a 2023 year to date book to Bill of 122, and a record defense backlog that will continue to convert to solid growth over the next several years.
Neil Mitchell: Commercial aftermarket sales were up 21% in the quarter driven by both higher volume and content as well as favorable mix in both the large commercial engine and Pratt Whitney Canada businesses. And in the military business, sales were up 7% driven by higher F-135 development and sustainment volume. Adjusted operating profit of $413 million was up $95 million from the prior year with drop through on higher commercial aftermarket sales partially offset by higher commercial OE volume, higher production costs, unfavorable military mix as well as higher R&D expenses.
Inflation has begun to moderate.
There are still pockets that remained persistently high within our manufacturing base. We expect this to continue into the next year.
We continue working all the mitigation actions we've had in place the past two years and we will implement additional strategic initiatives to offset the pressure we expect to see in 2024.
Finally, as you know we have seen a lot of volatility in the financial markets and interest rates. We expect this to drive further pension headwind next year that could be about 45 on a year over year basis, given current market conditions and the actions. We are taking to preserve improved funded status of the pension plans.
Neil Mitchell: Looking ahead, due to higher commercial OE and military volume, we now expect Pratt's adjusted sales to be towards the higher end of our prior range or up mid teams versus prior year given the higher military sales as well as better mix across OE and aftermarket were also increasing Pratt's adjusted operating profit from our prior range of up 200 to 275 million to a new range of up 350 to 400 million versus the prior year.
So obviously a lot of moving pieces here, but we are focused on driving execution and aggressive cost reduction and remain optimistic as we look ahead towards 2020 for 2025 with that I'll hand, it back to Greg to wrap things up.
Okay. Thanks Neil.
Just take a step back if we can for a minute I know theres a lot of information. We've given you today, but really I think there are three key takeaways from our discussion first of all I believe we have our arms around the operational and financial impacts of the powdered metal issue.
Neil Mitchell: Turning now to Raytheon on slide 7, sales of 6.5 billion in the quarter were up 3% on an adjusted and organic basis, primarily driven by higher volume, table power programs, including AIM-9X and advanced technology classified programs. Adjusted operating profit of $570 million was down 124 million versus the prior year, driven primarily by higher volume on lower margin programs and lower net program efficiencies, including additional headwind on certain fixed price development programs.
Our focus at Pratt Whitney it across <unk> is now executing on those plans that Chris laid out.
Secondly, strong demand continues in our end markets as evidenced by the 12% organic revenue growth. We saw this quarter and $190 billion backlog, we ended the quarter with <unk>.
Finally, we see tremendous value in <unk> today, and we're going to utilize our strong balance sheet to take advantage of this through a $10 billion ASR.
With that let me stop and open it up for questions.
In the interest of time and to allow for a 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.
Neil Mitchell: In addition, as expected, there was an unfavorable impact of about 20 million from a significant contract option exercised in the quarter. Raytheon had $7.4 billion of bookings in the quarter, including 1.9 billion in classified awards, a $412 million award for the next generation short range interceptor program, and a $383 million award for Hawk and Patriot Sustainable. This resulted in a book to bill of 1.16 and backlog of $50 billion. Here to date, Raytheon has a book to bill of 1.17.
Our first question.
It comes from the line of.
Peter Arment Baird.
Yes, thanks, good morning, everyone.
Hey, Greg the last time, the last time you guys on the update call in September you talked about kind of the the headwinds that you would see in Pratt and Whitney margins as you look out kind of to the mid decade has there been any change to that or you could just give us an update on how you think that progresses. Thanks.
Neil Mitchell: For the full year, we continue to expect sales to be upload amid single digits with respect to operating profit while the supply chain continues to improve as evidence by the increase in material receipts we have seen the last three quarters. Raytheon continues to have productivity and mixed challenges. These stem from accommodation of the fixed price development programs we have previously discussed as well as higher production costs.
I think thanks Peter.
Neil Mitchell: As a result, we're reducing Raytheon's adjusted operating profit from the prior range of up 125 to 175 million to a new range of up 25 to up 75 million versus the prior year.
What we've laid out as you recall back in September we talked about the fact that some of the costs associated with the inspection interval.
And up in contract accounting that Brett and then it'll depress margins on the aftermarket by about a point over time.
Not significant but it's all contemplated in the Pratt guidance as we think about 'twenty four 'twenty five.
Neil Mitchell: Before I hand it back to Greg, just a couple of comments on the environment for 2024. Overall, we anticipate another year of solid growth in organic sales, segment operating profit, margin and free cash flow. However, the level of free cash flow growth will be tempered by the step up in cash impacts associated with the powder metal matter, as well as some headwind from cash taxes related to R&D.
Great I'll leave it there thanks.
Thanks Peter.
Thank you.
Our next question.
Comes from the line of Noah <unk> of Goldman Sachs.
Hey, good morning, everyone.
Good morning Noah.
Can you spend a little more time on defense margins I mean I heard the.
Neil Mitchell: While commercial air travel demand has been incredibly strong from passengers and airlines, we see growth beginning to normalize as we head into 2024 with RPK's back at 2019 levels and the year over year compares becoming more difficult. However, overall, we expect continued growth in OE and aftermarket, including the ongoing recovery of the wide body.
Specifics you noted in the quarter, but just.
Continues to move lower.
There's some bigger broader thing happening at the at the end market level.
And.
Neil did you ever provide a new consolidated.
Once we consolidated the two segments margin target that's in the 20 fives and just as you spoke to 'twenty four earlier in the call can you just kind of update us on how you're expecting that defense margin to progress into the middle of the decade from here.
Neil Mitchell: On the defense side, we continue to expect strong international and domestic demand, which has already driven the 2023 year-to-date book to bill of 1.22 and a record defense backlog that will continue to convert to solid growth over the next several years. While inflation has begun to moderate, there are still pockets that remain persistently high within our manufacturing base. We expect this to continue into the next year.
Hey, No express maybe I'll start and then ask Neil to talk about the consolidated Raytheon first in terms of the end markets demand remains very robust here Neil to talk about the 1.17 book to Bill in the quarter excuse me year to date to $7 4 billion in bookings in the quarter and the overall.
Neil Mitchell: We'll continue working all the mitigation actions we've had in place the past two years and will implement additional strategic initiatives to offset the pressure we expect to see in 2024.
Backlog of $50 billion, so really strong demand for the products.
Neil Mitchell: Finally, as you know, we have seen a lot of volatility in the financial markets and interest rates. We expect this to drive further pension headwind next year. It could be about 45 cents on a year-over-year basis, given current market conditions and the actions we are taking to preserve improved funded status of the pension plans.
We have had some headwinds we've had some inflation hitting some fixed price programs, we've had a handful of challenging fixed price development contracts.
There have been a bit of a drag.
That said, we have had some productivity gains in certain areas as you might suspect those mature higher volume programs. We have had some efficiency gains by leveraging supply chain with larger buys.
Neil Mitchell: So obviously a lot of moving pieces here, but we are focused on driving execution and aggressive cost reduction and remain optimistic as we look ahead towards 2024 and 2025.
And as we look forward the supplier volume is growing labor.
Greg Hayes: But that I'll hand it back to Greg to wrap things up. Okay, thanks, Neil.
Labor attrition rates are decreasing and frankly stabilizing. So those are those are some very positive signs as kind of we look forward in the defense business.
Greg Hayes: Let's just take a step back if we can for a minute. I know there's a lot of information we've given you today, but really I think there are three key takeaways from our discussion. First of all, I believe we have our arms around the operational and financial impacts of the powdered metal issue. Our focus at Pratt Whitney and across RTX is now executing on those plans that crystallate out.
We just need to get through key milestones on those fixed price development contracts, we've talked about those on several calls now.
And we've got some key milestones coming up over the next 12 months or so.
That we've got a hit and get these programs. So those milestones and then ultimately sold off.
Greg Hayes: Secondly, strong demand continues in our end markets. That's evidenced by the 12% organic revenue growth we saw this quarter and the $190 billion backlog we ended the quarter with. Finally, we see tremendous value in RTX today and we're going to utilize our strong balance sheet to take advantage of this through a $10 billion ASR. Who's that?
Thanks, Chris Let me just pick up on that where you left off we definitely did provide a consolidated view.
Youre looking at margins around the mid point, a little bit north of 12% when you get into 2025.
I think as we look at the backlog and the mix of what we see the sales shifting to between now and then we talked about this.
This year being sort of a low point of our mix more domestically focused that we see that increasing over the next couple of years to be a bit heavier on the foreign side not surprising given the demand signals that we're seeing so those are going to be the key drivers that get us heading in that direction. What we do know is that we have a really large backlog $50 billion on the defense side right.
Operator: Let me stop and open it up 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 1-1 on your telephone.
Now and expect that to continue to grow and we're focused on executing as we transitioned a number of programs as Chris was alluding to from early production to full rate production and those those programs mature. So we know the formula for driving productivity.
Peter Arment: Yeah, thanks.
Greg Hayes: Good morning, everyone. Hey, Greg. The last time you got on the update call in September, you talked about kind of the headwinds that you would see in Pratt Winding margins as you look out kind of to the mid decade. Is there been any change to that or you could just give us an update on how you think that progresses? Thanks. Thanks, Peter. You know, what we laid out as you recall back in September, we talked about the fact that some of the costs associated with the inspection interval will end up in contract accounting and Pratt and that will depress margins on the aftermarket by about a point over time. Not significant, but it's all contemplated in the in the Pratt guidance as we think about 2425.
<unk> seen some challenges this year and I think on the development programs, we will see that happen over the next 12 months, but that's.
Thats the story longer term.
Is that is the rate of expansion in 'twenty four 'twenty five similar Neil or is it more weighted to 'twenty five.
Peter Arment: Great. I'll leave it there. Thanks. Thanks, Peter. Thank you.
It's going to be more weighted to 25, we've got as you know our growing backlog here, but that will play out in sales probably.
Later next year and.
Accelerating through 2025.
Okay. Thank you.
Thank you.
Our next question.
Comes from the line of.
Myles Walton of Wolfe research.
Thanks.
Hey, Neal maybe on the GTS and looking forward.
Noah Poponak: Our next question comes from the line of Noah Poppeneck of Goldman Sachs. Hey, good morning, everyone. Good morning, Noah.
Okay.
Endeavour on something that.
Noah Poponak: Can you spend a little more time on defense margins? I mean, I heard the specifics you noted in the quarter, but just, you know, continues to move lower. Is there some bigger, broader thing happening at the at the end market level? And Neil, did you ever provide a new consolidated?
It looks pretty pretty challenging in terms of 45% of the GTS powered <unk> hundred 20 fleet on the ground in managing all of the customers and their expectations on your own execution I'm wondering could you just lay out.
Sort of the biggest risks in your screen looking at is it part availability as discovery of what incremental work might happen. When you open up these engines is it.
That's MRO network coming online and there's just a lot balancing and maybe just a prioritization.
Neil Mitchell: Once you consolidated the two segments margin target that's in the 25s and just, you know, as you spoke to 24 earlier in the call, can you just kind of update us on how you're expecting that defense margin to progress into the middle of the decade from here? Thank you. Hey, no, it's gross.
The risk register it would be helpful.
Yes.
Well this is Chris maybe I'll kick it off the single biggest.
Lever that we've got here and you've kind of alluded to it is MRO output I mean, obviously its a challenging time for the customers is going to be a fair amount of the aircraft on the ground, but we've got to accelerate MRO output and the key parts of those are capacity and material flow and capacity side you heard about the.
Chris Kahya: Maybe I'll start in the next meal to talk about the consolidated rate. You know, first in terms of the end markets, you know, demand remains very robust. Here, Neil, talk about the 1.17 book to bill in quarter or excuse me, year to date. 7.4 billion in bookings in the quarter and the overall backlog of 50 billion. So really strong demand for the products. You know, that said, we have had, you know, some headwinds.
Expansions that we're doing both within the frat shops and across the network in terms of material flow you've heard us talk about this before we our.
Chris Kahya: We've had some inflation hitting some fixed price programs. We've had a handful of challenging fixed price development contracts that have been a bit of a drag. You know, that said, we have had some productivity gains in certain areas. As you might suspect, those mature higher volume programs. We have had some efficiency gains by leveraging, you know, supply chain with larger buys. And as we look forward, you know, the supplier volume is growing.
Our objective is to put in full life HPT and HBC discs at these shop visits and we've got to continue to ramp those up.
Again that ramp up is well underway and progressing and key process steps like the powder metal production forging and heat treat.
Investments have already been made and that capacity is in place and then for more downstream processes like Sonic inspection and machining.
Chris Kahya: Labor Christian rates are, you know, decreasing, frankly, stabilizing. So those are, those are some very positive signs as kind of we look forward in the defense business. And I'll say we just need to get through key milestones on those fixed price development contracts. We've talked about those on several calls now. And we've got some key milestones coming up over the next 12 months or so. That we've got to hit and get these programs through those milestones and then ultimately sold off. Thanks, Chris.
We're accelerating capacity there to make sure that we can meet this demand and so some of this performed by Pratt and our partners and some by third parties, but again very very focused on the spectrum capacity.
Machining capacity at the end of the day.
Morrow output is what's going to support our customers and ultimately take down the <unk> and therefore take down the <unk>.
Penalties are going to have to pay to our customers.
Neil Mitchell: Let me just pick up on that where you left off. We definitely did provide a consolidated view. You're looking at margins around the midpoint a little bit north of 12% when you get into 2025. I think as we look at the backlog and the mix of what we see the sales shifting to between now and then we talked about this year being sort of the low point of our mix, more domestically focused. You know that we see that increasing over the next couple of years. [inaudible] We're going to be able to do that. We're going to be able to do that. [inaudible] Schmuss.
Just a quick follow up is that 19 number in 2025 of MRO shops.
Current than your target earlier this year I think it's the same and so maybe just what has changed in terms of neuro network expansion.
Yes fair enough.
The same but we've accelerated as best we can some of these investments I mean, they were in our plan we've accelerated much as much of that spend as we can and again, it's bringing on the inspection capacity.
The MRO shops.
That's a key to unlocking.
The MRO throughput that I talked about and then just beyond that for a second miles and you heard us talk earlier about the <unk>.
35% or so day turnaround times on those project visits and again, we know those arent the preponderance of the visits were going to get but theres a lot of learnings that go on in a lot of learning curve that gets it gets it gets.
Capital is when we're doing these things so how quickly can we tear down.
<unk> limits repairs test cell time literally every part through every gate in MRO, taking taking time out and being more efficient and putting more resources in those areas.
Thanks, guys.
Thank you.
Our next question.
Comes from the line of Rob Stallard of vertical research.
Thanks, so much good morning.
Good morning, Rob.
This might be a question for Chris.
Following up on the pilot and metal issue and when do you spoke about this in September you seem them pretty convinced that the issue would not be a problem on the 800 <unk> two and <unk> 500, it does sound like him.
Something you went on that although you said, it's not significant so I'm wondering if you could elaborate on how the inspections has progressed on those engines. Thank you.
Sure yes, thanks for the question.
I think we.
We had telegraphed on the on the last call as we're going through our analysis is that those fleets would be far more manageable in terms of the impact and while we will have.
Inspections and life limits.
590, 800, as we said they will largely fall within the shop visit forecast, we have today, but maintenance intervals on those frankly are shorter than on the 1100 and so that's why many of these life limited inspections fit within those plans.
On the V 2500, again, we continued down that.
Inspection accelerated inspection path, we've had in place for about two years now we're about halfway.
Through that through that suite and as we continue to do those inspections and learn more and analyze the data from those inspections.
To pinpoint.
Certain engines based on sort of their profile parts, they've got an thrust.
Other characteristics that we've targeted for accelerated inspections, but again I think thats very manageable. That's a total of about 100 or less shop visits stretched out over four years and again those are those are largely going to be project visit work scopes and we've got a lot of.
Experience on project work scopes on the V 2500, those are in a $40 to 45 day turnaround time, we've become very very proficient at those so again, that's why we're calling those very manageable.
And we will not have significant.
Financial or operational impacts.
That's great. Thanks, Chris.
Thank you.
Our next question.
Comes from the line of Sheila <unk> of Jefferies.
Chris Kahya: Is that 19 number in 2025 of emero shops different than your target earlier this year? I think it's the same and so maybe just what has changed in terms of emero network expansion. Yeah, fair enough, it is the same, but we've accelerated as best we can, you know, some of these investments. I mean, they were in our plan, but we've accelerated, you know, much as much of that spend as we can.
Thanks, Good morning, guys and maybe you could just walk us through cash on one place Dalian generated year to date, our final volume for the year.
How do you think about the biggest drivers on a segment basis.
As you head into the final quarter of 2023.
Yes, Kevin stepped up support payments next year, what are the puts and calls.
And then if you don't mind I just wanted to ask on the 10 billion ASR.
Chris Kahya: And again, it's bringing on the inspection capacity into the emero shops. That's the key to unlocking sort of the emero throughput that I talked about. And then just beyond that for a second miles, and you heard us talk earlier about the 35 or so day turnaround times on those project visits. And again, we know those aren't the preponderance of the visits we're going to get. But there's a lot of learnings that go on and a lot of learning curve that gets, you know, that gets, that gets, you know, tappled when we're doing these things.
Why announce it now and now.
The risk some of the MRO basketball GTS.
Okay.
Alright, Thanks, Sheila let me start with.
What we need to do on free cash flow.
So we were pleased to see $2 $8 billion of free cash flow for the quarter clearly.
Strong and in line with the trajectory, we need to see for the full year and as you look at the fourth quarter. There's really two major parts that are going to drive getting to the $4 8 billion in the first is clearly operating profit.
Chris Kahya: So it's how quickly, you know, can we tear down inspection limits repairs, test cell time, literally every part through every gate and MRO, you know, taking, taking time out and being more efficient and putting more resources in those areas. Thanks for us.
We feel comfortable with that given the ranges, we just put out there.
We need to see about $2 billion, a little over $2 billion of working capital improvement in the fourth quarter and I would break that down into about three buckets.
$500 million of inventory improvement again, I think given the demand signals, we're seeing in the growth we'll see in sales in the fourth quarter, we see that as achievable and manageable.
Rob Stallard: Thank you.
We are expecting some significant advances and achievement of milestones on the defense side.
Chris Kahya: Our next question comes on the line of Rob Stollard of vertical research. Thanks for watching. Good morning, Rob. This might be a question for Chris falling up on the powder metal issue. When you spoke about this in September, you seemed pretty convinced that the issue would not be a problem on the A220, the E2 and the V2 500. But it does sound like there is something going on there now, although you said it's not significant.
So when you think about net liabilities and advances on contractual.
Long term contracts, that's about $1 $2 billion. So that's a big piece of the fourth quarter and then the rest really is the timing of disbursements that I would call normal in the course of business here. So a lot to do but we have good line of sight to to those things as we look to closing out the year.
Chris Kahya: So I was wondering if you could elaborate on on how the inspections have progressed on those engines. Thank you. Sure up. Yeah. Thanks for the question. So I think we, we had telegraphed on the on the last calls we're going through our analysis is that those fleets would be far more manageable in terms of the impact. And while we will have, you know, inspections and life limits. On the 1500 in 1900 as we said, they will largely fall within the shop visit forecast we have today.
To get into specifics about next year or the year after other than to say, we do see free cash flow growth in 'twenty four and.
Chris Kahya: The maintenance intervals on those, frankly, are shorter than on the 1100. And so that's why many of these life limits and inspections fit within those plans on the V 2500. Again, we've continued down that inspection, accelerate inspection path. We've had in place for about two years. Now we're about halfway, you know, through that, through that suite. And as we continue to do those inspections and and learn more and analyze the data from those inspections, we're able to pinpoint certain engines based on sort of their profile, parts they've gotten them thrust, you know, other characteristics that we've targeted for accelerated, you know, inspections.
And we will come back in January and provide more of a roadmap as to how you get there and.
Greg you want to talk about the ASR, yes sure.
Sure. The question around the ASR timing I think it's a relevant question.
I'll tell you we had a fulsome discussion with the board.
About the timing of the ASR and what convinced manner.
Our management team and the board that it was the right time is our confidence in the powdered metal resolution and having bound to the financial impact of that.
We saw this as an opportune time to double down on the stock and again, if you think about it we bought $2 6 billion back year to date. This is another $10 billion at what I believe to be a significant discount to intrinsic value.
And if this is the time to buy and I think we're doubling down on in terms of our confidence confidence in the future of our T X, but also confidence that we really do have our arms around the powder metal issue.
Great. Thank you.
Thank you thanks sure.
Our next question.
Comes from the line of Ronald Epstein of Bank of America.
Chris Kahya: But again, I think that's very manageable. That's a total of about 100 or less shop visits stretched out over four years. And again, those are those are largely going to be project visit workscopes. And we've got a lot of experience on project workscopes on the V 2500. Those are in a 40 to 45 day turnaround time. We've become very, very proficient at those. So again, that's why we're calling those, you know, very manageable and will not have significant financial or operational. Thank you.
Hey, good morning, guys.
Alright.
When you look back on this situation.
Right I mean, my understanding is.
First kind of creeped up.
The 2015 timeframe.
Here, we are today what are the lessons learned.
Go forward basis, because perhaps a going concern there'll be new engines in the future.
What are the big takeaways did not have this happen again.
Hey, Ron this is Chris.
Yes.
Are the incident that led to all of this was in March of 2020, and it wasn't until after we went through sort of a rigorous records review and did all of the investigation in the metallurgical analysis did we actually come to realize this was it an incredibly rare defect we hadn't seen it before and then we were able to go back into.
Sheila Kahyaoglu: Our next question comes from the line of Sheila Kahyaoglu of Jeffries. Thanks. Good morning, guys.
Neil Mitchell: Maybe if you could just walk us through cash 1.6 billion generated here to date 4.8 billion so as a year, how do you think about the biggest drivers on a segment basis? As you've had in terms of the final quarter of 2023 and then just give and step up to us payments next year, what are the puts and takes fair? And then if you don't mind, I just have to ask on the 10 billion ASR, you know, why announce it now and not, you know, the risk some of the MRO output risk on the GTS. All right. Thanks, Sheila.
Trace it to 2015, but again, we didn't we didn't have that data in hand to make that determination until again much later into 2020, and if you just sort of step back and say okay.
Once you figure that out what would you guys do about it what we've made a number of systemic changes, perhaps powder metal processing facility, both manufacturing process changes and inspection techniques.
We've gone through a rigorous safety risk assessment I think as you've heard us describe before which incorporated all of the learnings from all of our inspection data into our models read across every one of our programs and you've seen us kind of go through those one by one as we prioritize the most impacted fleets, but again gets read across every single.
Neil Mitchell: Let me start with what we need to do on free cash flow. So, you know, we were pleased to see 2.8 billion dollars of free cash flow for the quarter clearly strong and in line with the trajectory we need to see for the full year. And as you look at the fourth quarter, there's really two major parts that are going to drive getting to the 4.8 billion. The first is clearly operating profit.
<unk> engine program that we've got and then of course, we have responded by developing comprehensive fleet management plans that are a combination of the enhanced inspections that we've developed and the life limits on the parts.
Neil Mitchell: And we feel comfortable with that given the ranges we just put out there. And we need to see about 2 billion dollars and a little over 2 billion dollars of working capital improvement in the fourth quarter. And I would break that down into about 3 buckets, about 500 million dollars of inventory improvement. Again, I think given the demand signals we're seeing and the growth will see in sales in the fourth quarter, we see that as achievable and manageable.
I'd say, maybe more broadly an unrelated to powder the powdered metal situation.
We've continued to build.
The leverage outside resources and expertise, we've got a product safety review committee comprised of outside industry experts and veterans that come in and look at our key engineering processes.
Neil Mitchell: We are expecting some significant advances and achievement of milestones on the defense side. So when you think about net liabilities and advances on contractual, you know, long term contracts, that's about 1.2 billion dollars. So that's a big piece of the fourth quarter. And then the rest really is the timing of disbursements that I would call normal in the course of business here. So a lot to do, but we have good line of sight to those things as we look to the closing out the year.
Site visits interview senior management, and then below trying to understand culture and processes and what we can do better and they make recommendations and we implement those and Thats something we do on a regular basis again unrelated to the powdered metal, but we're not afraid to go leverage outside of <unk>.
Sources to give us another perspective.
Neil Mitchell: Not going to get into specifics about next year or the year after other than this, we do see free cash flow growth in 24. And we'll come back in January and provide more of a roadmap as to how you get there.
And I mean does that mean kind of going forward and just sort of the nuts and bolts of Pratt, it's just going to require some more investment.
Yes.
Greg Hayes: And Greg, you want to talk about the ASR? Yeah, sure. The question around the ASR timing, I think it's a relevant question. And I would tell you we had a full sum discussion with the board about the timing of the ASR. And what convinced the management team and the board that it was the right time is our confidence in the powder mental resolution and having bound the financial impact of that. We saw this as an opportune time to double down on the stock.
Restructure engineering or whatever.
Kind of make sure everything where it should be.
Okay.
But we're going to continue to invest Ron in automation for sure. Both in terms of the manufacturing process and our quality system I will tell you. We're also making investments in machine learning. So that we can look at all of this.
Thousands and thousands of inspection records and data that we've got in house to help us better identify anomalies get out ahead of issues before they.
Greg Hayes: And again, if you think about it, we bought 2.6 billion back year to date. This is another 10 billion at what I believe to be a significant discount to intrinsic value. And, you know, if this is the time to buy. And I think you know, we're doubling down in terms of our confidence confidence in the future of RTX, but also confidence that we really do have our arms around the powder mental issue.
Greg Hayes: Great. Thank you.
Turn into something Unfortunately that has an impact on the fleet and on our customers. So we're going to continue to invest in those areas. We had those investment plans in place we're going to we're going to continue to accelerate those again, all part of the modernization of our of our footprint.
How we do things better faster leaner.
Got it thank you.
Ronald Epstein: My next question comes on the line of Ronald Epstein, of Bank of America. Hey, good morning, good. When you look back on this situation, right, I mean, my understanding is it first kind of creeped up and call it the 2015 timeframe.
Thank you.
Our next question.
Comes from the line of Seth assessment of J P. Morgan.
Okay.
Thanks very much.
Yeah.
Hi, good morning.
Small small bundle here.
Questions about cash.
I mean given.
Chris Kahya: And here we are today, what are the lessons learned? You know, like on a go-forward basis, because, you know, perhaps a going concern, they'll be new engines in the future. What are the big takeaways and not have this happen again? Hey, Ron, this is Chris. Yes, you know, are the incident that led to all of this was in March of 2020. And it wasn't until after we went through sort of a rigorous records review and did all of the investigation and the medical analysis.
Given what the consensus is next year $5 2 billion youre buying back $10 billion.
Accelerating.
Mark repurchase I mean is it pretty fair to assume that.
St is not going to be disappointed in what you guys have to say in January regarding cash and then when we move out to 2025, and we think just about the impact the change in R&D and the change in the interest expense that you'll have from the share repo.
Chris Kahya: Did we actually come to realize this was an incredibly rare defect we hadn't seen it before and then we were able to go back and trace it to 2015. But again, we didn't, we didn't have that data in hand to make that determination. So, again, much later into 2020, and if you just sort of step back and say, okay, once you figure that out, what would you guys do about it? Well, we made a number of systemic changes, you know, perhaps, you know, powder metal processing facility, both manufacturing process changes and inspection techniques.
How should we be thinking about the 2025 target versus what you told us last month.
Okay.
Yeah.
Okay. Thanks for the question.
We're not going to get ahead of 2024, but we do see free cash flow stepping up we are.
Comfortable with our $7 5 billion 2025 free cash flow.
Target that we've talked about and as you think about what is going to be higher interest and increased benefit from the R&D impact those will just about offset in 2025 and so that's why today I feel comfortable.
Chris Kahya: We've gone through a rigorous safety risk assessment. I think you've heard us describe before, which incorporated all of the learning from all of our inspection data into our models, right across every one of our programs. You've seen us kind of go through those one by one as we prioritize the most impacted fleets, but again, gets right across every single engine program that we've got. And then, of course, we've responded by developing comprehensive fleet management plans that have a combination of the enhanced inspection. And then, you know, we've seen some of the things that we've developed and the life limits, you know, on the parts.
Staying with the $7 $5 billion target for 2025.
Of course, there is a lot of time between now and then but those are the two moving pieces, we see today.
Great. Thanks very much.
Youre welcome.
Thank you.
Our next question.
It comes from the line of Christine <unk> of Morgan Stanley .
Hey, good morning, guys.
Good morning Christine.
Chris Kahya: I would say maybe more broadly and unrelated to powdered, the powdered metal situation. We've continued to leverage outside resources and expertise. We've got a product safety, you know, review committee comprised of outside industry experts and veterans that come in, look at our key engineering processes. Do site visits, interview senior management and then below, trying to understand culture and processes and what we can do better and they make recommendations. And we implement those and that's something we do on a regular basis.
So maybe moving.
Final question. The White House is requesting 106 billion. It's helpful. Then growth funding for a number of national security priorities, which includes over $50 billion of investments for the U S defense industrial base.
Looking at this request you got equipment for your clean Air and missile defense raised morale and replenishment of stockpiles or both.
And this seems to be.
Quite nicely with the Raytheon defense portfolio.
How much of this opportunity is addressable to the company and if the dollars are appropriated when would be the earliest you could see that convert to revenue.
Chris Kahya: Again, unrelated to the powdered metal, but we're not afraid to go leverage outside resources to give us another perspective. And does that mean kind of going forward in just sort of the nuts and bolts of Pratt is just going to require some more investment in, you know, infrastructure engineering or whatever to just kind of make sure everything's where it should be. Well, we're going to continue to invest Ron in automation for sure, both in terms of manufacturing process and our quality system.
Christine Let me let me start on that so I think I mentioned earlier in the conversation we've seen about $3 billion of orders so far.
Related to Ukraine, and replenishment and Thats really replenishing U S War stocks, we expect another $4 billion of <unk>.
Orders in the next two years and most of that will play out over the next 24 to 36 months in terms of delivery. So you won't see a big revenue pop EBIT next year from this as we think about this next tranche.
Chris Kahya: I'll tell you, we're also making investments in machine learning so that we can look at all of this, the thousands and thousands of inspection records and data that we've got, you know, in house. To help us better identify anomalies get out ahead of issues before they, you know, turn into something unfortunately that has an impact on the fleet and on our customers. So we're going to continue to invest in those areas. We've had those investments plans in place. We're going to continue to accelerate those. Again, all part of the modernization of our footprint and how we do things, you know, better, faster leaner. Thank you.
100, plus $1 billion.
Requests, which is more than $40 billion for Ukraine.
Whats youre going to see is the same things that we have been seeing but in much higher quantities.
Obviously, they Sam systems, which is the short range Air Defense system.
The additions that we're using there we're going to see those orders pick up we would think significantly the same is true with the with the Patriot Air Defense system again, those are gem T missiles that we supply for that those are in short supply today. So again big ramp there, but youll also are also going to see other.
Weapons systems come into play specifically around countering the unmanned air vehicles, we have systems today like the Coyote.
Which is very effective in terms of short range.
Seth Seifman: Next question comes from the line of Seth Seifman of J.P. Morgan. Thanks very much, and good morning.
Dealing with these unmanned air vehicles, so again I think it really across the entire Raytheon portfolio youre going to see a benefit.
Neil Mitchell: Maybe a small bundle here of questions about cash. I mean, given, you know, given what the consensus is next year, $5.2 billion, you're buying back $10 billion or you're accelerating stock repurchase. I mean, it's pretty fair to assume that, you know, the street's not going to be disappointed in what you guys have to say in January regarding cash. And then when we move out to 2025, and we think just about the impact, the change in R&D and the change in the interest expanse that you'll have from the share repo, how should we be thinking about the 2025 target versus, you know, what you told us last month.
This restocking on top of what we think is going to be an increase in the Dod top line again as we continue to replenish stocks and also replenish some of the fleet in the Pacific So Thats SM twos and threes.
Other munitions that really are a huge part of this backlog that we've got today.
Thanks, Greg and how do you think about the margin profile of these incremental opportunities are these all new contract margin accretive.
No actually.
I wouldn't say, they're margin accretive nor would I say they are detrimental to margins. These are <unk>.
Going on to kind of normal cost type programs, so youre talking about margins.
10 11, 12%.
And again these are well known in terms of the cost of these systems.
Neil Mitchell: Okay, Seth. Thanks for the question. You know, we're not going to get ahead of 2024, but we do see free cash flow stepping up. We are comfortable with our $7.5 billion 2025 free cash flow target that we've talked about. And as you think about what is going to be higher interest and a increased benefit from the R&D impact, those will just about offset in 2025. And so that's why today, I feel comfortable, you know, staying with the $7.5 billion target for 2025. You know, of course, there's a lot of time between now and then, but those are the two moving pieces we see today.
We've been producing them for years. So we know what the costs are and again I think.
Again, it is helpful to overall margins, but it's not hugely accretive I think Neal 10 to 12 is kind of kind of the sweet spot I think thats exactly right. These are mature.
<unk> programs that we've got a lot of history on it's all about getting the supply chain ramped up to deal with the increased production that we expect.
Great. Thank you.
Thank you.
Our next question comes from the line of Matt Akers of Wells Fargo.
Seth Seifman: Great. Thanks very much. You're welcome. Thank you.
Hey, guys. Good morning, Thanks for the question.
Christine Lee-Wogg: Our next question comes from the line of Christine Lee-Wogg of Morgan Stanley. Hey, good morning, guys. All right, Christine.
I guess, maybe just to clarify the section 174.
The $500 million benefit as part of that.
<unk>.
Recovery from the 2022 payment and I guess, how should we think about that sort of carrying forward.
Christine Lee-Wogg: So maybe moving to a defense question, you know, the White House is requesting $106 billion in supplemental spending for a number of national security priorities, which includes over 50 billion investment for the US defense industrial base. Would you get this request? You've got equipment for Ukraine, air and missile defense for Israel and replenishment of staff file for both. And this seems to fit quite nicely with the rate beyond defense portfolio. So how much of this opportunity is addressable to the company? And if the dollars are appropriated, what would be the earliest you could see this convert to revenue?
Benefit into 2024.
Thanks, Thats a good question, yes. Some some of that is in fact, the recovery of the 2022 over payments. If you will we were able to file our tax return on on a basis that assumed deductibility of these cost plus R&D contracts.
What will happen, though is it'll be a little bit of a headwind next year, because we'll get a little bit more cash back this year in the form of making lower estimated tax payments and then next year, we will start to bake that into our next year's estimated tax payments and.
And filing so that is how that will play out if you kind of look at it over a multi year period of time, it's about 40% of what we previously were deferring and amortizing.
Greg Hayes: Christine, let me start on that. So as I think I mentioned earlier in the conversation, we've seen about $3 billion of orders so far related to Ukraine replenishment. And that's really the replenishing US war stocks. We expect another $4 billion of orders in the next two years. And most of that will play out over the next 24 to 36 months in terms of delivery. So you won't see a big revenue pop even next year from this.
So if you kind of stretch that through 2026, that's about $1 $7 billion of incremental.
<unk> and free cash flow over that period.
Okay. Thank you.
Thank you.
Our next question comes from the line.
Doug Harned Bernstein <unk> company.
Greg Hayes: As we think about this next tranche, the president's $100 plus billion request, which is more than $40 billion for Ukraine. What you're going to see is the same things that we have been seeing, but in much higher quantities. So obviously the NASAM systems, which is the short range air defense system and the AMREM munitions that we're using there, we're going to see those orders pick up. We would think significantly. The same is true with the with the Patriot air defense system.
Good morning, Thank you.
Good morning.
Chris when you talked about the.
On the GTS on the project visits I mean, 35 days sounds like very short number.
When you look forward before you would do.
You had talked about.
Removal to return time of $2 50 to 300 days kind of a peak level of Aig's H one of 600 to 650.
Greg Hayes: Again, those are GMT missiles that we supply for that. Those are in short supply today. So again, big ramp there, but you're also going to see other. Weapons systems come into play specifically around countering the unmanned air vehicles and we have systems today like the Coyote, which is very effective in terms of short range dealing with these unmanned air vehicles. So again, I think really across the entire Raytheon portfolio, you're going to see a benefit of this restocking.
Now that you are looking at this process in more detail.
Can you give us a sense of how any of that May have changed and then also if you are unable to do the.
Replacement of discs in fibers, and so forth and the short term presumably.
As in earlier revisit then you would've liked before how does that affect your customers in the way youre thinking about the economics.
Yeah, good questions Doug.
Greg Hayes: On top of what we think is going to be an increase in the DOD top line. Again, as we continue to replenish war stacks and also replenish some of the fleet in the Pacific. So that's SM2's, SM3's and other munitions that are really a huge part of this backlog that we've got today.
The reason I mentioned the early very early sort of handful of project visits and how we've done on the turnaround times is honestly just to show.
People that we are incredibly focused on taking minutes hours days out of this and that can translate to the larger scope.
Neil Mitchell: Thanks, Greg. And how do you think about the margin profile of these incremental opportunities? Are these new contracts, margin accretage? No, actually, I wouldn't say they're margin accretive nor would I say they're detrimental to margins. These are going out of kind of normal cost type programs. So you're talking about margins, 10, 11, 12%. Again, these are well known in terms of the cost of these systems. We've been producing them for years.
Shop visits that we're going to face the organization's incredibly focused on literally every gate.
Within that within that process, including taking.
Time out of the test cell process.
But right now Doug those key assumptions that you just laid out.
The wing to wing $2 50 to 300 <unk>.
Those are the assumptions those are what's baked in to the financial impact that we've talked about here and we're doing everything we can to go improve.
Neil Mitchell: So we know what the costs are. And again, I think, you know, again, it's helpful to overall margins, but it's not hugely accretive. I think Neil 10 to 12 is kind of sweet stuff. I think that's exactly right. These are mature, you know, programs that we've got a lot of history on. It's all about getting the supply chain ramped up to deal with the increased production that we expect.
Matt Akers: Great. Thank you.
Improve upon those and as I said earlier MRO output.
To us is the linchpin.
On that and so.
That's kind of where the organizations focus is Doug and that's where we've got to get better each and every day to your point about.
The new full life desks.
Yes.
Our plan today is to put those in.
Neil Mitchell: Our next question comes from the line of Matt Acres of Wells Fargo. Yeah, guys, good morning. Thanks for the question. I guess maybe just to clarify the section 174, the 500 million dollar benefits part of that recovery from the 2022 payment. And I guess how should we think about that sort of carrying forward that benefit into 2024? Thanks.
At OE first in the first quarter of the year and then starting in MRO in the second quarter of the year at each of the shop visits to the extent that.
The ramp up and the output isn't where it needs to be on those we're not going to waste the induction.
The engines will come in they'll get an infection and to your point. They will have to then come back in at a 28% to 3800 cycle.
Cycle Reinspect, depending on the thrust of the engine, which is why it's so critical for us to continue this ramp up in powder metal forgings.
Neil Mitchell: That's a good question. Yes, some some of that is, in fact, the recovery of the 2022 over payments, if you will, we were able to file our tax return on on a basis that assumed deductibility of these cost plus R&D contracts. What will happen though is it'll be a little bit of a headwind next year because we'll get a little bit more cash back this year in the form of making lower estimated tax payments.
When the engines leave the shop for these visits they have got the longest time on wing. They can have and we don't see these back in our MRO shops. During this period because it will add just more congestion.
And then if I may one of the.
The frustration that I've heard out there is you've taken the original tranche the first tranche off in September but airlines.
Neil Mitchell: And then next year, we'll start to bake that into our next year's estimated tax payments and and filing. So that's how that'll play out. If you kind of look at it over a multi year period of time, it's about 40% of what we previously were deferring and amortizing. So if you kind of stretch that through 2026, that's about $1.7 billion of incremental goodness and pre cash flow over that period. Okay, thank you.
Airlines haven't.
Seem to be somewhat in the dark on the next set of.
Engines that need to come off wing and when that impact.
What has taken so long and being able to help.
Help them know exactly what the impact and timing will be.
We're actually having those discussions Doug I've been part of many of them.
Doug Harned: Thank you. Our next question comes from the line of Doug Harnett of Bernstein company. Good morning. Thank you. Good morning.
Again customer by customer looking at their engines by serial number again.
Got to look at the cycle times on those and bounce them off against the fleet management plan. So it is a.
Chris Kahya: Chris, when you talked about the, on the GTF, on the project visits, I mean, 35 days sounds like a very short number. When you look forward, before you would, you would talk about removal to a return time of 250 to 300 days, kind of a peak level of AOGs and H1 of 600 to 650. Now that you're looking at this process in more detail, can you give us a sense of how any of that may have changed.
It's a rigorous and thorough process or having those conversations with customers. So they understand their specific impacts as we said back on the September call.
Sure.
The lion's share of these incremental shop visits that we're going to have.
The 6% to 700 and that 23 to 26, but two thirds of those or 23 and relatively early in 'twenty, four and Thats what causes that <unk> dug that six that peak of 650, <unk> and I think we talked earlier about when we're going to provide.
Chris Kahya: And then also, if you're unable to do the replacements of discs and fibers and so forth in the short term, presumably, that's an earlier revisit than you would have liked before. How does that affect your customers and the way you're thinking about the economics? Yeah, good questions, Doug. So the reason I mentioned the early, very early, sort of handful of project visits and how we've done on turn around times is honestly just to show, you know, people that we are incredibly focused on taking minutes, hours, days out of this and that can translate to the larger scope, you know, shop visits that we're going to face and the organization's incredibly focused on, literally, you know, how we're going to do that.
Provide some of those service bolt ins and the <unk> that are going to follow on so that those communications are happening, but youre going to see that impact early in 'twenty four.
Very good thank you.
Thank you.
Our next question comes from Ken Herbert of RBC capital markets.
Yeah, Hey, good morning.
Good morning.
Chris I wanted to follow up on that comment regarding your customer conversations can you provide any more sort of granularity on where you are in those conversations and obviously you've got it sounds like incremental confidence in the ability to sort of bracket the risk around these with all the uncertainty still the sort of timing on the shop visit.
Chris Kahya: Really every gate within that, within that process, including taking, you know, time out of the test cell process. But right now, Doug, those key assumptions that you just laid out, the the wing to wing 250 to 300, the peak AOGs, those are the assumptions, those are what's baked in, you know, to the financial impact that we talked about here. And we're doing, you know, everything that we can to go. So improve upon those, and as I said earlier, MRO output to us is the linchpin, you know, you know, on that.
How are those conversations going and just give us any sort of metrics around.
What gives you that incremental confidence I guess on the customer side.
Sure Ken Thanks for the question. So the focus as you might imagine over the last several months is walking our customers through the safety risk analysis that they understand that and what we're doing to ensure the continued safe operation of the fleet then understanding the fleet management plans.
Chris Kahya: And so that's kind of where the organizations focus is, Doug, and you know, that's where we've, we've got to get, you know, better each and every day. To your point about the new full-life discs, yes, you know, our plan today is to put those in at OE first in the first quarter of the year, and then starting in MRO in the second quarter of the year at each of these shop visits, to the extent that the ramp up, and the output isn't where it needs to be on those.
Click limits, the inspection intervals and its impact on their specific fleets, we're going to have certain customers that are going to be more impacted than others just by virtue of their size.
Their reliance on the GTS.
It differs by customer conversations as you might imagine they're difficult customers understand what we're doing from a safety risk perspective, and think we're doing the right thing, but they are certainly not happy with the net effect and they have not been happy with the fleet health, even prior to powdered metal and our output on.
Chris Kahya: We're not going to waste the induction slot, you know, Doug, the engines will come in, they'll get an inspection into your point. They'll have to then come back in at a 28 to 3,800, you know, cycle re-inspect depending on the thrust of the engine, which is why it's so critical for us to continue this, you know, ramp up and putter metal forging. So that when the engines leave the shop for these visits, they have got the longest time on wing, you know, they can have, we don't see these back in our MRO shops during this period, because it'll add just more congestion.
And MRO and getting them to spare assets.
And the engines in our shops.
They need and so those are obviously difficult conversations as you might imagine, Ken and having them with each customer individually as we go through and tailor their support packages again, some are more impacted than others.
But those conversations are ongoing and they will continue into the early part of the year once people truly understand the fleet by fleet customer by customer impact and the changes they are going to have to make to their flights their network and whatnot. So those conversations are happening will progress early into next year.
Chris Kahya: And then if I may, one of the frustrations that I've heard out there is, you've taken the original tranche, the first tranche off in September, but airlines haven't seem to be somewhat in the dark on the next set of engines that need to come off wing and win that impact. What has taken so long and being able to help them know exactly what the impact in timing will be? We're actually having those discussions though, I've been part of many of them, you know, again, customer by customer, looking at, you know, their engines, by serial number, again, because you've got to look at the cycle times on those and bounce them off against the fleet management plan, so it is, you know, it's a rigorous, you know, thorough process, but we're having those conversations with customers, so they understand their, you know, specific impacts.
Okay.
Thank you.
Thank you that does conclude the Q&A portion of our call I would now like to turn the call back to Greg Hayes for closing remarks.
Okay. Thanks, Rajiv and thanks, all for listening in today as always Jennifer and the IR team will be around to take your calls and we look forward to seeing all of you in the coming weeks and months take care. Thank you.
Okay.
This now concludes today's conference you may now disconnect.
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Chris Kahya: As we said back, on the September call, the lion share of these, you know, incremental shop visits that we're going to have, the six to 700 and that 23 to 26, like two thirds of those are 23 and relatively early in 24. That's what causes that bow wave dog, that peak of 650, you know, A.O.G. 's, and I think we talked earlier about when we're going to provide some of those service bulletins and the A.D.'s that are going to follow on. So that those communications are happening, you're going to see that impact, you know, early in 24.
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Operator: Very good. Thank you.
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Ken Herbert: The next question comes from Ken Herbert of RBC Capital Markets. Yeah, hey, good morning. Good morning. Hey, Chris, I wanted to follow up on that comment regarding your customer conversations. Can you provide any more sort of granularity on where you are in those conversations and obviously you've got sounds like incremental confidence in the ability to sort of bracket the risk around these with all the uncertainty still was sort of timing on the shop visits. How are those conversations going and just give us any sort of metrics around, you know, what gives you that incremental confidence, I guess, on the customer side?
So.
Okay.
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Chris Kahya: Sure, Ken, thanks for the question. So the focus, as you might imagine, over the last several months, is is walking our customers through the safety risk analysis to understand that and what we're doing to ensure the continued safe operation of the fleet, then understanding the fleet management plans. The cyclical limits, the inspection intervals and its impact on their specific, you know, fleets, we're going to have certain customers. Ken, that are going to be more impacted than others just by virtue of their size, you know, their reliance on the GTS.
Chris Kahya: Again, it differs by customer conversations, as you might imagine, they're difficult customers understand what we're doing from a safety risk perspective and think we're doing the right thing. But they're certainly not happy with the net effect and they've not been happy with the fleet health, even prior to powdered metal and our output on MRO and getting them the spare assets and the engines in our shop, you know, that they need. And so those are obviously difficult, you know, conversations, as you might imagine, Ken, and we're having them with each customer individually as we go through and tailor their support packages.
Yeah.
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Chris Kahya: Again, some are more impacted than others, but those conversations are ongoing and they will continue into the early part of the year once people truly understand the fleet by fleet, customer by customer impact and the changes they're going to have to make to their flights, their network and whatnot. So those conversations are happening, we'll progress, you know, early into next year. Thank you.
Okay.
Okay.
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Operator: That does conclude the Q&A portion of our call.
Greg Hayes: I would now like to turn the call back to Greg Hayes for closing remarks. Okay, thanks, Lucifer. Thanks all for listening in today. As always, Jennifer and the IR team will be around to take your calls and we look forward to seeing all of you in the coming weeks and months. Take care. Thank you.
Operator: This now concludes today's conference. You may now disconnect. Thank you. [inaudible] Strauss, David Strauss, David Strauss,[inaudible] Strauss, David Strauss, David Strauss, David Strauss,[inaudible] Strauss, David Strauss, David Strauss, David Strauss,[inaudible] David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss,[inaudible][inaudible] David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss,[inaudible] David Strauss, David Strauss, David Strauss, David Strauss,[inaudible] Strauss, David Strauss, David Strauss, David Strauss[inaudible]
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