Q4 2023 Raytheon Technologies Corp Earnings Call

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Good day, ladies and gentlemen, and welcome to the RPX fourth quarter 2023 earnings Conference call. My name is Lucy and I will be your operator for today.

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

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

Chris Collier, President and Chief operating Officer Neal.

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

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

Speaker Change: 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.

Speaker Change: 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.

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

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

Speaker Change: To ask a question you will need to press star one one on your telephone.

Speaker Change: You may ask further questions by Reinsert yourself into the queue as time permits.

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

Hayes: Alright, Thank you and good morning, everyone. We've got a lot to cover today, but let me start with the news we shared last month, which I'm sure you all saw.

Effective on May 2nd to date of our annual shareholders' meeting, Chris <unk> will become the new CEO of RPX.

Hayes: Chris has appointment as the result of a very deliberate and thoughtful succession planning process conducted by our board of directors over the past three years.

Hayes: Well I'm going to remain in my role as executive Chairman, Chris will be taking the reins of the company.

Hayes: As you all know I've worked with Chris for many years and I can't think of a better person to take on this role.

Hayes: Chris has a deep understanding of our industry are customers' needs and our operation and most importantly, he is an outstanding leader.

Speaker Change: Yes, I'd like to say that I'm honored to have led this organization for almost the last 10 years, but most importantly, I would like to thank each and every employee who has supported our mission over the last decade, we would not have been able to accomplish all we did if not for you.

Speaker Change: Going forward I have utmost confidence in <unk> ability to lead this great company and continue to drive performance and value creation for all of our stakeholders for years to come with that let me turn it over to Chris to take you through an update on our end markets and the year Chris.

Chris: Well good morning, everyone and thank you Greg.

Chris: Like to start by thanking all our <unk> employees for their contributions last year and I want to share how humbled I am that our board has given me the opportunity to lead this world class team.

Chris: As we move forward, our focus will continue to be on delivering a record backlog accelerating innovation and driving operational performance across the portfolio to meet our customer and shareholder expectations.

Speaker Change: I'd also like to acknowledge a couple of other leadership changes, we've recently announced.

Speaker Change: First I'd like to thank west Kramer for his significant contributions to the company as he transitions into retirement.

Operator: Good day, ladies and gentlemen, and welcome to the RTX fourth quarter 2023 earnings conference call. My name is Lateef, and I will be your operator for today.

Speaker Change: The course of his 20 year career here worth has led the development of some of <unk>, most successful programs, including LTM standard missile three and a range of strategic missile defense systems that defend the homeland and our allies.

Operator: As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer, and Chris Callia, President and Chief Operating Officer.

Speaker Change: What is also played a critical role in restructuring the Raytheon business unit to better align with the needs of our customers.

Speaker Change: With <unk> retirement, Phil Jasper has been appointed as president of the Raytheon business.

Operator: 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's 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 and any other forward-looking statements provided in this call are subject to risk and uncertainty. 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 11 on your telephone.

Speaker Change: <unk> brings with him over 30 years of experience in aerospace and defense.

Speaker Change: Recently led the Collins mission systems business re played a critical role in integrating Rpx's connected battle solutions this past year.

<unk> deep knowledge of our military customers and their priorities. He has experienced leading many business transformation initiatives throughout his career positions him well to lead Raytheon.

Speaker Change: Now before I cover the highlights of the year, let me get into an update on our end markets.

Speaker Change: First and foremost demand for our products and services in both commercial aerospace and defense has never been stronger.

Speaker Change: Air travel has returned to and in some cases surpassed pre pandemic levels in the global threat environment is driving unprecedented demand, especially in air defense systems.

Speaker Change: Starting with commercial Aero, we saw solid air traffic growth. This past year with global revenue passenger miles back to 2019 levels and domestic air travel now, 5% above 2019 levels as we exited the year.

Speaker Change: The strong recovery has helped drive significant aftermarket demand for both wide body and narrow body aircrafts with growth expected to continue into 2024.

Speaker Change: On the defense side increases in global spending have led to a defense backlog, which is now at 78 billion up 9 billion from a year ago.

Gregory J. Hayes: You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Hayes. All right, thank you, and good morning, everyone.

Speaker Change: Just this past quarter, we received a <unk> order with $2 8 billion from NATO, which is the largest gem T contract recorded and Raytheon history.

Speaker Change: Domestically, we are pleased that a bipartisan funding agreement has been reached supporting increased defense spending and expect Congress will complete their work on the full year 'twenty four appropriations Bill in the next several weeks.

Gregory J. Hayes: We've got a lot to cover today, but let me start with the news we shared last month, which I'm sure you all saw. Effective on May 2nd, the date of our annual shareholders meeting, Chris Callio will become the new CEO of RTA. Chris's appointment is the result of a very deliberate and thoughtful succession planning process conducted by our Board of Directors over the past three years. While I'm going to remain in my role as Executive Chairman, Chris will be taking the reins of. As you all know, I've worked with Chris for many years, and I can't think of a better person to take on this role. Chris has a deep understanding of our industry, our customers' needs, and our operation. And, most importantly, he's an outstanding leader.

Speaker Change: With that let me turn to slide to provide an update on 2023 and I'll start with some of the highlights.

Speaker Change: We delivered $74 3 billion and adjusted sales for the full year up 11% organically and adjusted EPS of $5 <unk> was up 6% year over year, both of which were ahead of our outlook.

Speaker Change: And more importantly, we ended the year with $5 5 billion in free cash flow, which also exceeded our commitment.

On a full year basis commercial aftermarket was up 23% commercial OE was up 20% and defense was up 4%.

Speaker Change: On the capital allocation front, we returned over $16 billion of capital to shareowners for the year, including $12 9 billion of share repurchases supported by our $10 billion ASR and $3 2 billion in dividends.

Gregory J. Hayes: I'd like to say that I'm honored to have led this organization for almost the last 10 years. But, most importantly, I'd like to thank each and every employee who has supported our mission over the last decade. We would not have been able to accomplish all we did if not for you.

Speaker Change: We're beginning the process of deleveraging this year to ensure we maintain a strong balance sheet, which will be in part supported by the closure of our previously announced divestitures.

Gregory J. Hayes: Going forward, I have the utmost confidence in Chris's ability to lead this great company and continue to drive performance and value creation for all of our stakeholders for years to come. With that, let me turn it over to Chris to take you through an update on our end markets and the year.

Speaker Change: At the same time, we remain focused on ensuring the business continues to be positioned to achieve sustained growth. In 2023, we spent almost $10 billion in capex and company and customer funded R&D, while capturing 95 billion in new bookings, resulting in company wide backlog growth of 12% and a book to Bill of one two.

Chris Callio: Well, good morning, everyone, and thank you, Greg. I'd like to start by thanking all RTX employees for their contributions last year. And I want to share how humbled I am that our board has given me the opportunity to lead this world-class team. As we move forward, our focus will continue to be on delivering our record backlog, accelerating innovation, and driving operational performance across the portfolio to meet our customer and shareholder expectations. I'd also like to acknowledge a couple of other leadership changes we've recently announced. First, I'd like to thank Wes Kramer for his significant contributions to the company as he transitions into retirement. Over the course of his 20-year career here, Wes has led the development of some of Raytheon's most successful programs, including LTAMS, Standard Missile 3, and a range of strategic missile defense systems that defend the homeland and our allies. He has also played a critical role in restructuring the Raytheon business unit to With Wes's retirement, Phil Jasper has been appointed as president of the Raytheon business.

Speaker Change: Eight ending the year with a record RPX backlog of 196 billion.

Speaker Change: So while theres a lot of positive momentum in our markets and across the business. We have two matters. We've been heavily focused on perhaps powdered metal situation and raytheon's margins. So.

Speaker Change: So let me hit these two head on and I'll start with powdered metal.

Speaker Change: Our top priority continues to be executed on our fleet management plans in both the financial and operational outlook remain consistent with our call last October.

Speaker Change: While we are still in the early stages and to provide a few more details on the progress we've made to date.

Speaker Change: As you saw <unk> issued the necessary service bulletins and service instructions to operators, which are entirely consistent with our underlying financial and operational assumptions that we previously communicated.

Speaker Change: The FAA is in the process of drafting the corresponding airworthiness directives, which we expect to be issued within the next month or so.

Speaker Change: And just as a reminder, 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.

Speaker Change: Continue to conduct ultrasonic angle scan inspections and powder metal parts and our findings remain consistent with our prior analysis and assumptions.

Speaker Change: Let me now turn to our industrial plants.

Speaker Change: You'll recall, our focus is on ramping production of HPT and HBC desks to support both OE and MRO deliveries, we've made solid progress here as well.

Chris Callio: Phil brings with him over 30 years of experience in aerospace and defense, and most recently led the Collins Mission Systems business, where he played a critical role in integrating RTX's connected battle solutions this past year. Phil has deep knowledge of our military customers and their priorities, and his experience leading many business transformation initiatives throughout his career positions him well to lead Raytheon. Now, before I cover the highlights of the year, let me get into an update on our end mark. First and foremost, demand for our products and services in both commercial aerospace and defense has never been stronger. Air travel has returned to, and in some cases surpassed, pre-pandemic levels, and the global threat environment is driving unprecedented demand, especially for air defenses.

Speaker Change: Continue to secure the necessary machining and inspection capacity for increased this production.

Speaker Change: Today, all OE GTS engines being delivered to our customers final Assembly lines contained disc produced from powdered metal manufactured after Q3 2021 and have full certified lives.

Speaker Change: On the GTS MRO front, we've begun installing full life desk during certain shop visits and the number of engines, receiving full life desk and MRO will increase throughout the year as we continue to ramp up production of these parts.

Speaker Change: Our estimated windowing turnaround time remains consistent with our prior guidance.

Speaker Change: <unk> grew GTS MRO output by almost 30% year over year in 2023, while also making investments in additional shops test cell capacity and repair capability to support even more growth in 2024.

Speaker Change: With respect to the number of Afg's, we continue to expect the roughly 350 on average that we previously guided.

However, we will likely see a lower peak level than previously anticipated due to the timing of the <unk> issuance and proactive fleet management by our customers.

Speaker Change: Additionally, our conversations with customers continued to progress to.

To date, we have finalized several customer support agreements and these have been in line with the assumptions, we outlined last year.

Speaker Change: And lastly, just a comment on the remaining <unk> fleets, both the financial and operational outlook remain consistent with what we discussed on our prior call. We continue to execute on those plans.

Chris Callio: Starting with Commercial Aero, we saw solid air traffic growth this past year, with global revenue passenger miles back to 2019 levels and domestic air travel now 5% above 2019 levels as we exited the year. The strong recovery has helped drive significant aftermarket demand for both wide-body and narrow-body aircraft, with growth expected to continue into 2024. On the defense side, increases in global spending have led to a defense backlog of $78 billion, up $9 billion from a year ago. Just this past quarter, we received a GEMT order for $2.8 billion from NATO, which is the largest GEMT contract recorded in Raytheon history.

Speaker Change: I'll now shift to Raytheon's performance, we continued to experience profitability challenges driven by productivity headwinds within the business primarily attributable to legacy fixed price development programs that we have previously discussed as well as continued supply chain and operational headwinds let.

Speaker Change: Let me start by providing some color around our productivity issues and it is important to note that we are in fact, achieving productivity in several parts of raytheon's business in particular in certain legacy product families, where we received success of awards that are creating scale in our factories and in our supply chain.

Speaker Change: For example, we increased gem T output by 50% year over year by using our core system to refine work instructions increased test equipment uptime and reduce product cycle time, all without additional capital our manpower.

Speaker Change: We also recognize productivity gains when we successfully retire technical and schedule risks on our contracts, which is more frequent in our programs in the production phase. However.

Speaker Change: However, those gains have been overcome by unfavorable productivity and other areas in.

Speaker Change: In 2023, but 70% of this headwind came from challenges on fixed price development programs and the remaining 30% was driven by unfavorable material costs as well as supplier delinquencies, which have had the effect of extending the period of performance in several cases.

Chris Callio: Domestically, we're pleased that a bipartisan funding agreement has been reached supporting increased defense spending and expect Congress will complete its work on the full year 24 appropriations bill in the next several weeks. With that, let me turn the slide to provide an update on 2023, and I'll start with some of the highlights. We delivered $74.3 billion in adjusted sales for the full year, up 11% organically, and adjusted EPS of $5.06 was up 6% year-over-year, both of which were ahead of our outlook. And, more importantly, we ended the year with $5.5 billion in free cash flow, which also exceeded our commitment. On a full-year basis, commercial aftermarket was up 23%, commercial OE was up 20%, and defense was up 4%. On the capital allocation front, we returned over $16 billion of capital to share owners for the year, including $12.9 billion of share repurchases, supported by our $10 billion ASR, and $3.2 billion in dividends.

Speaker Change: So what are we doing about it.

Speaker Change: Our plan to stabilize the current performance and deliver profitable growth consists of a few elements.

Speaker Change: One we expect improvement in our fixed price development programs as we satisfy certain technical and programmatic milestones.

Speaker Change: We will also be more selective and disciplined about the work we pursue moving forward.

Speaker Change: Two we are making modifications in our approach to winning new work, we continue to ensure that our new contracts and additional contractual lots have better protection from supplier inflation. This will take some time to play through but we expect this will help us improve our margin profile.

Speaker Change: Three we continue to drive improved supply chain performance and material flow overall, our material receipts were up 8% in 2023 and.

Speaker Change: And we need to continue on that trajectory here in 2024.

Speaker Change: Fourth we continue to take indirect cost actions that will help us avoid some of the headwinds we experienced in 2022 and 'twenty. Three for instance, we optimize raytheon's realigned business structure by further consolidating and streamlining several of our sub business units earlier this month.

Speaker Change: This will reduce indirect costs and overhead and better position the business for profitable growth.

And lastly, there'll be some tailwind that comes from a mix shift in our business as development programs and technical refreshes move into production and the mix of our sales shifts more towards Fms and Dcs.

Speaker Change: So theres, obviously, a lot of work to do.

Speaker Change: But this business has a strong foundation and it starts with its product portfolio.

Chris Callio: We're beginning the process of deleveraging this year to ensure we maintain a strong balance sheet, which will be in part supported by the closure of our previously announced divestitures. At the same time, we remain focused on ensuring that our business continues to be positioned to achieve sustained growth. In 2023, we spent almost $10 billion in CapEx on company and customer funded R&D while capturing $95 billion in new bookings, resulting in company-wide backlog growth of 12% and a book-to-bill of 1.28, ending the year with a record RTX backlog of $196 billion. So while there's a lot of positive momentum in our markets and across the business, we have two matters we've been heavily focused on: Prath-Powdered Metal Situation and Raytheon's Margin. So let me hit these two head-on, and I'll start with powdered metal.

I said earlier the demand for Raytheon products is incredibly strong and I am confident that Phil and the team are focused on addressing these challenges and delivering this record backlog at the margins that we need.

Speaker Change: With that let me turn it over to Neil to take you through our fourth quarter results.

Neil Mitchell: Thanks, Chris turning to slide three.

Neil Mitchell: We finished the year strong and ahead of our expectations with solid growth in organic sales across all three segments, even as the year over year comparisons became more difficult.

Neil Mitchell: Overall segment operating profit for the year was up 18% versus 2022.

Neil Mitchell: We also ended the year with strong free cash flow as you heard from Chris.

Neil Mitchell: For the fourth quarter, we had adjusted sales of $19 8 billion up 10% organically versus the prior year. This.

Neil Mitchell: This was primarily driven by growth in commercial aerospace as well as growth across defense and all three segments.

Neil Mitchell: Adjusted earnings per share of $1 29 was a bit better than our expectations and up 2% as profit from higher commercial aftermarket at Pratt and Collins and drop through on higher defense volume was partially offset by the expected headwinds from higher interest taxes and lower pension income keep.

Neil Mitchell: Keep in mind, we dealt with about $2 $3 billion of inflationary headwinds in 2023 of which about a quarter of that was in the fourth quarter, which we largely overcame through pricing and cost reduction actions.

Neil Mitchell: On a GAAP basis earnings per share from continuing operations was $1 five per share and included 29 of acquisition accounting adjustments.

Neil Mitchell: <unk> <unk> benefit related to a customer settlement and <unk> net charges associated with restructuring and other nonrecurring items.

Chris Callio: Our top priority continues to be executing on our fleet management plans, and both the financial and operational outlook remain consistent with our call last October. While we are still in the early stages, let me provide a few more details on the progress we've made to date. As you saw, Pratt has issued the necessary service bulletins and service instructions to operators, which are entirely consistent with our underlying financial and operational assumptions that we previously communicated. The FAA is in the process of drafting the corresponding airworthiness directives, which we expect to be issued within the next month or so.

Neil Mitchell: And finally, we delivered free cash flow of $3 9 billion in the quarter, bringing our total free cash flow for the year to $5 5 billion, which is about $700 million ahead of our prior outlook as powder metal related impacts have shifted and year end collections were stronger than expected.

Neil Mitchell: That let me hand, it over to Jennifer to take you through the segment results and I'll come back and share our thoughts on 2020 for 2025.

Jennifer Reed: Thanks, Neal starting with Collins on slide four sales were $7 million in the quarter up 12% on both an adjusted and organic basis, driven primarily by continued strength in commercial OE and aftermarket growth.

Collins: Commercial aftermarket sales were up 23% driven by a 27% increase in provisioning, a 26% increase in parts and repair and an increase of 7% and mods and upgrades in the quarter.

Chris Callio: And just as a reminder, it is common practice for a fleet management plan to be communicated through multiple service bulletins and airworthiness directives to address different engine models, compliance times, or components and sections of the engine. We continue to conduct ultrasonic angle scan inspections on powdered metal parts, and our findings remain consistent with our prior analysis and assumptions. Let me now turn to our industrial plan. You'll recall our focus is on ramping production of HPT and HPC discs to support both OE and MRO delivery. We've made solid progress here as well. Continue to secure the necessary machining and inspection capacity for increased disk production. Today, all OE GTF engines being delivered to our customers' final assembly lines contain discs produced from powdered metal manufactured after Q3 2021 and have full certified lives.

Collins: Commercial OE sales for the quarter were up 17% versus the prior year driven by continued growth in both narrow body and wide body platform.

Collins: And military sales were up 1%, primarily due to higher delivery.

Collins: <unk> operating profit of one <unk>.

Collins: 4 billion was up $190 million or 22% from the prior year with drop through on higher commercial aftermarket volume and favorable mix, partially offset by lower commercial OE drop through on OE volume was more than offset by higher production costs. In addition, higher R&D expenses offset by lower.

Collins: SG&A.

Collins: Shifting to Pratt <unk> Whitney on slide five sales of $6 4 billion were up 14% both on an adjusted and organic basis with sales growth across all three channels commercial OE sales were up 20% in the quarter driven by higher engine deliveries and favorable mix in large commercial engine and Pratt Canada.

Collins: Commercial aftermarket sales were up 18% in the quarter driven by higher volume in both large commercial engine and Pratt Canada businesses.

Collins: And in the military business sales were up 4%, primarily driven by higher Sustainment volume, which was partially offset by lower material input and production program.

Collins: Adjusted operating profit of $405 million was up $84 million from the prior year, primarily driven by drop through on higher commercial aftermarket volume and favorable commercial OE mix.

Collins: This was partially offset by higher commercial OE volume higher production costs and unfavorable military contract adjustment in the <unk>.

Collins: Absent of a benefit from a prior year customer contract adjustments and finally higher R&D expense was offset by lower SG&A.

Chris Callio: On the GTF-MRO front, we have begun installing full-life desks during certain shop visits, and the number of engines receiving full-life desks in MRO will increase throughout the year as we continue to ramp up production of these parts. Our estimated wing-to-wing turnaround time remains consistent with our prior guidance. Pratt grew GTF-MRO output by almost 30% year over year in 2023, while also making investments in additional shops, test sale capacity, and repair capability to support even more growth in 2024. With respect to the number of AOGs, we continue to expect the roughly 350 on average that we previously guided. However, we will likely see a lower peak level than previously anticipated due to the timing of the AD issuance and proactive fleet management by our customers.

Collins: Now turning to Raytheon in slide six.

Collins: Sales of $6 9 million in the quarter were up 3% on an adjusted basis and 4% organically, primarily driven by higher volume on advanced technology and airpower program.

Collins: Adjusted operating profit for the quarter of $618 million was up $48 million versus the prior year, driven primarily by higher volume and lower operating expenses, partially offset by unfavorable net program efficiencies.

Collins: Bookings and backlog continue to be very strong as we finished the year in the fourth quarter $9 1 billion of bookings resulted in a book to Bill of 133 and ended the year backlog of 52 billion.

Collins: And for the full year Raytheon's book to Bill with one to two.

Collins: I'll turn it back to Neal to provide some color on 2024.

Neal: Thank you, Jennifer let's turn to slide seven before I get into the specifics on our 24 financial outlook just a couple of comments on the environment as we look ahead.

Neal: So let me start with the positives as Chris said global Rpms are back to 2019 levels. However, they have not fully recovered with respect to long haul international travel, particularly wide body, but that is expected to continue to be a tailwind for us going forward on.

Chris Callio: Additionally, our conversations with customers continue to progress. To date, we have finalized several customer support agreements, and these have been in line with the assumptions we outlined last year. And lastly, just a comment on the remaining Pratt & Whitney fleets. Both the financial and operational outlook remain consistent with what we discussed on our prior call.

Neal: On the narrow body side demand for new aircraft remains strong which continues to support both OE and aftermarket growth.

Neal: Specific to the commercial OE side with increasing commercial production rates, we expect commercial OE revenue will be up between about 10% and 15% and 24.

Neal: And with respect to commercial aftermarket. We currently expect sales to be up over 10% in 'twenty four and Thats on top of the 23% growth we saw in 'twenty three.

Chris Callio: We continue to execute on those plans. I'll now shift to Raytheon's performance. We continue to experience profitability challenges driven by productivity headwinds within the business, primarily attributable to legacy fixed-price development programs that we have previously discussed, as well as continued supply chain and operational headwinds. Let me start by providing some color around our productivity issues.

Neal: Turning to defense Global defense spending remains elevated which will continue to support our backlog ahead as our key programs remain well funded.

Neal: Across <unk>, we remain laser focused on driving operational excellence to deliver cost reduction and further margin expansion.

Neal: In 2023, we achieved $295 million of incremental <unk> merger cost synergies keeping us on track to achieve our $2 billion and.

Chris Callio: And it's important to note that we are in fact achieving productivity in several parts of Raytheon's business, in particular on certain legacy product families where we've received successive awards that are creating scale in our factories and in our supply chain. For example, we increased GEMT output by 50% year over year by using our core system to refine work instructions, increase test equipment uptime, and reduce product cycle time, all without additional capital or manpower. We also recognize productivity gains when we successfully retire technical and schedule risks on our contracts, which is more frequent in our programs in the production phase. However, those gains have been overcome by unfavorable productivity in other areas.

Gross cost synergy goal by the end of 2025.

Neal: On the challenges side, there are certain pockets, where inflation remains elevated and we will see the lingering effect of the past couple of years inflation as we deliver on our backlog.

Neal: 24, we expect to see about $1 7 billion of material and labor inflation, which we expect to be more than offset by higher pricing and the benefits from our digital transformation projects and other aggressive cost reduction initiatives across the company.

Neal: And as Chris said before we continue to focus on executing on our GTS fleet management plan and are working relentlessly to mitigate further disruption to our customers.

Neal: And of course, we're continuing to support the health of the supply chain.

While we are seeing continued improvements there are areas that remain challenged.

We are dedicating resources, including suppliers will provide structural castings rocket motors two critical areas to continue to pace our recovery.

Chris Callio: In 2023, about 70% of this headwind came from challenges with fixed price development programs. And the remaining 30% was driven by unfavorable material costs, as well as supplier delinquencies, which have had the effect of extending the period of performance in several cases. So what are we doing about it?

Neal: And as I mentioned back in October we continue to see headwinds due to the actions we have taken to preserve the improved funded status of our pension plans as well as the recognition of historical asset experience.

Neal: And finally, we are keeping an eye on the U S and global tax environment.

Neal: <unk> action on the fiscal year 'twenty for budget and of course, the broader geopolitical and macroeconomic environment.

Chris Callio: Our plan to stabilize the current performance and deliver profitable growth consists of a few elements. One, we expect improvement in our fixed price development programs as we satisfy certain technical and programmatic milestones. We will also be more selective and disciplined about the work we pursue moving forward. Two, we are making modifications in our approach to winning new work.

Neal: With that backdrop, let me tell you how this translates to our financial outlook for the year on slide eight.

Neal: At the <unk> level, we expect another year of solid growth in adjusted sales segment operating profit and earnings per share along with continued strength in free cash flow.

Neal: Before I get into the details let me share with you a couple of key assumptions embedded in our outlook as it relates to the two dispositions, we announced last year.

Neal: First with respect to the Raytheon cyber security business, we have assumed that this transaction will close here in the first quarter.

Neal: Therefore on a reported basis, we will see about a $1 $3 billion year over year reduction in reported sales and about an $80 million year over year headwind to operating profit.

Chris Callio: We continue to ensure that our new contracts and additional contractual lots have better protection from supplier inflation. This will take some time to play out, but we expect this will help us improve our margin profile. Three, we continue to drive improved supply chain performance and material flow. Overall, our material receipts were up 8% in 2023, and we need to continue on that trajectory in 2024. Fourth, we continue to take indirect cost actions that will help us avoid some of the headwinds we experienced in 2022 and 23. For instance, we optimized Raytheon's realigned business structure by further consolidating and streamlining several of our sub-business units earlier this month.

Neal: The Collins 24 outlook still includes the actuation business as we continue to work on the business disposition.

Neal: So with that starting with sales at the RPX level, we expect full year 2020 for sales of between $78 $79 billion.

Neal: Which translates to organic growth of between 7% and 8% year over year.

Neal: From an earnings perspective, we expect adjusted EPS of between $5 25 to $5 40.

Neal: That's up 4% to 7% year over year and.

Neal: And we expect to generate free cash flow of about $5 7 billion for the year and despite only being a $200 million year over year through a strong operational improvement. So let me take you through the moving pieces.

Neal: First we're expecting strong segment profit growth and working capital improvement to drive $2 $3 billion of improvement year over year.

Chris Callio: This will reduce indirect costs and overhead and better position the business for profitable growth. And lastly, there will be some tailwind that comes from a mixed shift in our business, as development programs and technical refreshes move into production, and the mix of our sales shifts more towards FMS and DC. So there's obviously a lot of work to do, but this business has a strong foundation, and it starts with its product portfolio.

Neal: Embedded in that is about $100 million headwind on higher Capex in 'twenty four as we continue to invest in capacity expansion digital transformation and operational monetization.

Neal: Payments related to powder metal impacts are expected to be a headwind of about $1 3 billion.

Neal: We will also see a net headwind of about $500 million, primarily from higher interest expense principally from the debt we issued to fund the ASR and.

Neil G. Mitchill: As I said earlier, the demand for Raytheon's products is incredibly strong, and I'm confident that Phil and the team are focused on addressing these challenges and delivering this record backlog at the margins that we need. With that, let me turn it over to Neil to take you through our fourth quarter results. Thanks, Chris.

Neal: And finally, a headwind of about $300 million from lower pension Cas recovery.

Neal: Now, let me turn to our EPS walk star.

Neal: Starting at the segment level operating profit growth of about 16% is expected to result in approximately 72 cents of EPS growth at the midpoint of our outlook range.

Neal: With respect to pension while markets have improved since our call in October that will still be a headwind of about 36 year over year.

Neil G. Mitchill: We finished the year strong and ahead of our expectations with solid growth in organic sales across all three segments, even as the year-over-year comparisons became more difficult. Overall, the segment operating profit for the year was up 18% versus 2022. We also ended the year with strong free cash flow, as you heard from Chris. For the fourth quarter, we had adjusted sales of $19.8 billion, up 10% organically versus the prior year. This was primarily driven by growth in commercial aerospace, as well as growth across defense in all three segments. Douglas Harned, Peter Arment, John Walsh, Josh Pokrzywinski, Nigel Coe, Myles Walton. Keep in mind, we dealt with about $2.3 billion of inflationary headwinds in 2023, of which about a quarter of that was in the fourth quarter, which we largely overcame through pricing and cost reduction On a GAAP basis, earnings per share from continuing operations were $1.05 per share and included 29 cents of acquisition accounting adjustments, a six-cent benefit related to a customer settlement, and one cent of net charges associated with restructuring and other non-recurring items.

Neal: And as I just mentioned given the increased debt outstanding interest expense will be <unk> 30 headwind.

Neal: A lower average outstanding share count, resulting from our recent ASR will provide a tailwind of about 37.

And finally, our tax rate in 'twenty four is expected to be approximately 19, 5% versus the 18, 5% in 2023. This combined with higher corporate investments in digital transformation for us.

Neal: And a <unk> 16 headwind year over year.

Neal: All of this brings us to our outlook range of $525 to $5 40 per share.

Neal: Okay with that let's go to slide nine to get into our outlook by segment, where we expect continued organic sales and earnings growth across all three businesses, starting with Collins, we expect full year sales to be up mid to high single digits on both an adjusted and organic basis, primarily driven by both wide body and narrow body commercial OE production ramps.

Neal: And continued commercial aftermarket.

Neal: Military sales of Collins are expected to be up low to mid single digits for the year.

Neal: With respect to Collins adjusted operating profit, we expect it to grow between 650 at $725 million versus last year. This was primarily driven by drop through on higher volume across all three channels as well as higher pricing and the benefit from continued cost reduction initiatives.

Neal: Turning to Pratt Whitney, we expect full year sales to be up low double digits on an adjusted and organic basis versus prior year, driven by higher OE deliveries in both Pratt large commercial engine and Pratt Canada businesses as well as continued growth in shop visits across legacy large commercial engines, GTS and Pratt Canada.

Jennifer Reed: And finally, we delivered free cash flow of $3.9 billion in the quarter, bringing our total free cash flow for the year to $5.5 billion, which is about $700 million ahead of our prior outlook, as powder metal-related impacts have shifted and year-end collections were stronger than expected. With that, I'll hand it over to Jennifer to take you through the segment results, and I'll come back and share our thoughts on 2024 and 2025. Thanks, Neil. Starting with Collins on slide four.

Neal: Military sales at Pratt are expected to be up mid single digits, driven by higher F. 35, Sustainment volume is heavy overhauls continue to ramp.

As a result, we expect <unk> adjusted operating profit to grow between 400 $475 million versus last year, primarily on commercial aftermarket drop through and military growth, which will be partially offset by higher large commercial OE deliveries.

Neal: And at Raytheon on an organic basis, we expect sales to grow low to mid single digits versus 2023, as we deliver our backlog and continue to see supply chain improvement.

Jennifer Reed: Sales were $7 billion in the quarter, up 12% on both an adjusted and an organic basis, driven primarily by continued strength in commercial OE and aftermarket growth. By channel, commercial aftermarket sales were up 23%, driven by a 27% increase in provisioning, a 26% increase in parts and repair, and an increase of 7% in mods and upgrades in the quarter. Commercial OE sales for the quarter were up 17% versus the prior year, driven by continued growth in both narrow-body and wide-body platforms. And military sales were up 1%, primarily due to higher delivery. Adjusted operating profit of $104 billion was up $190 million, or 22% from the prior year, with drop-through on higher commercial aftermarket volume and favorable mix, partially offset by lower commercial OE, as drop-through on OE volume was more than offset by higher production costs.

Neal: Adjusted operating profit at Raytheon is expected to be up between 100 $200 million versus prior year, driven by drop through on higher volume and improvement in productivity, which will be partially offset by mix headwinds.

Neal: Keep in mind, we'll see about $80 million of year over year headwind from the divestiture of the cyber security business. This year.

Neal: And to wrap up our outlook at the <unk> level higher intercompany activity will increase sales eliminations by about 10% year over year and we've included an outlook for some of the below the line items and pension in the webcast dependencies.

Neal: Finally, let me make a few comments on our 2025 financial commitments as you know there've been some significant changes in the macro environment. Since we first established these long term targets impacts ranging from Russian sanctions elevated inflation issues with labor availability and of course, the associated disruptions throughout the supply chain and we.

We continue to take incremental actions to further reduce costs realign our business units, increasing pricing and investing in productivity improvements to combat these headwinds.

Neal: The factors underlying our long term assumptions however have been also positive.

Neal: Such as the pace of the commercial air recovery and demand for our defense products and services.

Neal: All that said despite those puts and takes we continue to expect Collins and Pratt to be within the sales and operating profit 2020 to 2025 growth targets, we discussed last year at our Investor day.

Jennifer Reed: In addition, higher R&D expenses were offset by lower SGMA. Shifting to Pratt & Whitney on slide five, sales of 6.4 billion were up 14%, both on an adjusted and organic basis with sales growth across all three channels. Commercial OE sales were up 20% in the quarter, driven by higher engine deliveries and a favorable mix in large commercial engines in Pratt Canada's business. Commercial aftermarket sales were up 18% in the quarter, driven by higher volume in both large commercial engines and Pratt Canada's business.

Neal: However, because of the recent performance at Raytheon, we are Recalibrating our outlook for this segment when taking into account divestitures. We now expect the 2020% to 2025% annual growth rate for adjusted sales to be between three and three 5% that's down slightly from our previous expectation of three five to four 5%.

Neal: For the same period, driven largely by the initiatives, we talked about upfront it will take some time to convert over the next couple of years.

As you know demand remains strong and our robust backlog will continue to support significant top line growth going forward.

Neal: Similarly, with respect to raytheon's adjusted operating profit growth given the continued productivity challenges. We described we now see Raytheon 2020 to 2025 annual growth rate to be between one and two 5% which is down from our prior outlook of between five 5% to seven 5%.

Jennifer Reed: And in the military business, sales were at 4%, primarily driven by higher sustainment volume, which was partially offset by lower material input on production programs. Adjusted operating profit of $405 million was up $84 million from the prior year, primarily driven by drop-through and higher commercial aftermarket volume and favorable commercial OE max. This was partially offset by higher commercial OE volume, higher production costs, an unfavorable military contract adjustment, and the absence of a benefit from a prior year customer contract adjustment. And finally, higher R&D expense was offset by lower SG&A.

Neal: As a result of this segment change we now see the RPX level adjusted sales annual growth rate from 2020 through 2025 to be between five five and 6% on an organic basis, that's down slightly from our prior outlook of between six and 7%.

Neal: And taking into account the adjustment to raytheon's operating profit outlook. We now see overall RPX adjusted margin expansion to be between 500 550 basis points between 2020 in 2025 and Thats down from our prior outlook of between 550 and 650 basis points. However.

Neal: However, importantly, there is no change to our <unk> 2025 free cash flow target of $7 5 billion as.

Jennifer Reed: Now turning to Raytheon on slide six. Sales of $6.9 billion in the quarter were up 3% on an adjusted basis and 4% organically, primarily driven by higher volume on advanced technology and air power programs. Adjusted operating profit for the quarter of $618 million was up $48 million versus the prior year, driven primarily by higher volume and lower operating expenses, partially offset by unfavorable net program efficiency. However, bookings and backlog continue to be very strong as we finish the year. In the fourth quarter, $9.1 billion of bookings resulted in a book-to-bill of $1.33 and an end-of-the-year backlog of $52 billion.

Neal: As we remain confident in the significant cash generating capability of our businesses and we are continuing to drive structural cost reduction and working capital improvements as we invest in the business deliver on our commitment to return 36 $37 billion of capital to shareowners. The date of the merger through 'twenty five.

Neal: So with that I'll hand, it back to Greg to wrap things up.

Gregory J. Hayes: Okay. Thanks, Neil on Slide 10, let me just.

Gregory J. Hayes: Wrap this up I know, we've covered a lot of ground today, but I know, there's some key takeaways that everybody should.

Gregory J. Hayes: Should focus on here, obviously 2023 was a challenging year.

Gregory J. Hayes: The earnings performance of our Raytheon business, obviously was disappointing.

Gregory J. Hayes: <unk> powder metal issue.

Gregory J. Hayes: But importantly demand remains strong across both of our commercial and defense markets, 11% organic growth in 2023 is just the beginning.

Neil G. Mitchill: And for the full year, Raytheon's book to bill was 1.22. With that, I'll turn it back to Neil to provide some color on 2024. Thank you, Jennifer. Now, let's turn to slide seven.

Gregory J. Hayes: With the strength of our $196 billion backlog, we're confident that we'll continue to see strong organic sales and earnings growth.

Along with accelerated free cash flow generation over the coming years.

Gregory J. Hayes: I believe we have the best positioned A&D portfolio industry, leading franchises and robust demand for our products and technologies.

Neil G. Mitchill: Before I get into the specifics on our 24 financial outlook, just a couple of comments on the environment as we look ahead. So, let me start with the positives. As Chris said, global RPMs are back to 2019 levels. However, they have not fully recovered with respect to long-haul international travel, particularly wide body.

Gregory J. Hayes: This positions us well for the future.

Gregory J. Hayes: Secondly, we're intensely focused on execution to support our customers and to drive operational performance improvement.

Gregory J. Hayes: We're clearly going to face challenges this year with the continued ramp of the supply chain and the impact of higher costs.

Gregory J. Hayes: Everyone at <unk> is working tirelessly to overcome these obstacles and ensure that we deliver on our commitments.

Gregory J. Hayes: Lastly, we are staying disciplined in managing the business to continue investing in differentiated technologies and innovation.

Neil G. Mitchill: But that is expected to continue to be a tailwind for us going forward. On the narrow body side, demand for new aircraft remains strong, which continues to support both OE and aftermarket growth. Specific to the commercial OE side, with increasing commercial production rates, we expect commercial OE revenue to be up between about 10 and 15 percent in 2024. And with respect to the commercial aftermarket, we currently expect sales to be up over 10% in 24. And that's on top of the 23% growth we saw in 23. Turning to defense, global defense spending remains elevated, which will continue to support our backlog as our key programs remain well funded.

Gregory J. Hayes: Strengthening our balance sheet, all while continuing to return significant capital to our shareholders.

Speaker Change: I want to close again by thanking all the <unk> employees, who have been working diligently every single day over the last year to deliver on our mission to create a safer more connected world.

Speaker Change: With that let's go ahead and open it up for questions.

Speaker Change: In the interest of time and to allow for broader participation. You are asked to limit yourself to one question.

Speaker Change: To ask a question you will need to press star one one on your telephone.

Speaker Change: The first question comes from the line of Robert Stallard.

Speaker Change: <unk> Research. Please go ahead Robert.

Neil G. Mitchill: Across RTX, we remain laser-focused on driving operational excellence to deliver cost reduction and further margin. In 2023, we achieved 295 million of the incremental RTX merger cost standard, keeping us on track to achieve our $2 billion in gross cost synergy goal by the end of 2025. On the challenges side, there are certain pockets where inflation remains elevated, and we will see the lingering effect of the past couple of years' inflation as we deliver on our backlog.

Robert Stallard: Thanks, so much good morning.

Robert Stallard: Good morning, Rob.

Robert Stallard: Chris and David for your first question on the GTS situation.

Chris: It does sound like some things have moved since your update in October I think you mentioned that the scheduling of the <unk> looks like it's going to be slight different profile and also that could be related cash impact of that just wondering if you could give us some more color on that development.

Speaker Change: Yes, you bet, Rob and good morning so.

Rob: You did say here this morning that we do expect that.

Rob: Peak to continue to be here.

Rob: In Q1 in terms of Eog's, and then tread downward thereafter.

Neil G. Mitchill: In 2024, we expect to see about $1.7 billion of material and labor inflation, which we expect to be more than offset by higher pricing and the benefits from our digital transformation projects and other aggressive cost reduction initiatives across the country. And, as Chris said before, we continue to focus on executing on our GTF fleet management plans and working relentlessly to mitigate further disruption to our customers. And of course, we're continuing to support the health of the supply. While we are seeing continued improvements, there are areas that remain challenged where we are dedicating resources, including suppliers who provide structural castings and rocket motors, two critical areas that continue to pace our recovery. And as I mentioned back in October, we continue to see headwinds due to the actions we have taken to preserve the improved funded status of our pension plans, as well as the recognition of historical asset experience And finally, we're keeping an eye on the U.S. and global tax environment, congressional action on the fiscal year 24 budget, and, of course, the broader geopolitical and macroeconomic environment.

Rob: We think that peak is going to come down a bit since our initial assessment because really two reasons one the timing of the AED has shifted a bit to the right and then two customers.

Rob: Customers took some proactive.

Rob: Our fleet planning and decided to.

Rob: Some cases accelerate some of their removals as they were doing their fleet planning for the year. They were paring engines doing all those things to make them more efficient.

Rob: Again.

Rob: Peak here in Q1 trend downward.

Rob: After that and then it'll be a more of a steady state as we've talked about in our October and September guides on the matter you mentioned, a little bit on cash being pushed out again that was the dynamic time as we're going through and having discussions with our customers on special support we've made some progress on special support I think we've.

Rob: Talked about that upfront, we've signed several agreements with our customers some important customers with large fleets.

Rob: The timing of that cash just simply moved out from the.

Rob: Second half of 'twenty three 'twenty four same same total aggregate amount of 6% to seven the timing moved a little bit to the right for the reasons I talked about.

Speaker Change: Thanks, Chris.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question.

Speaker Change: Comes from the line of Cai von <unk> of Cowen Your question. Please hi.

Neil G. Mitchill: So with that in mind, let me tell you how this translates to our financial outlook for the year on slide eight. At the RTX level, we expect another year of solid growth and adjusted sales, segment operating profit, and earnings per share, along with continued strength and free cash. Before I get into the details, let me share with you a couple of key assumptions embedded in our outlook as it relates to the two dispositions we announced last year. First, with respect to the Raytheon cyber security business.

Cai: Yes, thanks, so much so.

Cai: Your cash flow hit from powdered metal issue.

Speaker Change: Excuse me.

Speaker Change: 300 <unk>.

Speaker Change: And higher.

Speaker Change: And you said can you tell us how big was the impact in 'twenty three and are we still going to be a $3 billion and therefore, there is a plus of about $300 million pick up in 'twenty five.

Speaker Change: Hi, good morning, it's Neal.

Neal: I'll take that one so.

Neil G. Mitchill: We have assumed that this transaction will close here in the first quarter. Therefore, on a reported basis, we will see about a $1.3 billion year-over-year reduction in reported sales and about an $80 million year-over-year headwind to operating profits. The Collins 24 Outlook still includes the actuation business as we continue to work on the business disposition.

Neal: Chris was just talking about when we closed out 2003 for a variety of reasons.

Neal: Cash flows shifted to the right. So the impact in 'twenty three for powder metal related disbursements was essentially zero.

Neal: So we moved about half of that into 2024.

Neal: The $1 three that youre seeing still holding $1 five and our 25 outlook.

Neal: And then we see the rest spilling into into early 2026, and so we will continue to work obviously the agreements with our customers and that will drive.

Neil G. Mitchill: So with that, starting with sales, at the RTX level, we expect full-year 2024 sales of between $78 and $79 billion, which translates to organic growth of between 7 and 8% year over year. From an earnings perspective, we expect adjusted EPS of between $5.25 and $5.40, and that's up 4% to 7% year over year. And we expect to generate free cash flow of about 5.7 billion for the year.

Neal: Ultimate timing of the payments, but you can see our assumptions that we've laid out there.

Speaker Change: Thank you very much good luck.

Speaker Change:

Speaker Change: Okay.

Speaker Change: Thank you.

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

Sheila: Good morning, everyone.

Sheila: <unk>.

Sheila: I can't help but compare and contrast, given can you just reported this morning, and they're talking about margins being flattish.

Sheila: Aerospace based on OE mix and lead services mix so.

Sheila: Just looking at Pratt can.

Sheila: Can you talk about the dynamics Berg of NTT volumes are growing early GTS shop visits tightened higher so what drives margin.

Neil G. Mitchill: And despite only being up 200 million year over year, there are strong operational improvements. So let me take you through the changes. First, we're expecting strong segment profit growth and working capital improvement to drive $2.3 billion of improvement year over year. Embedded in that is about a $100 million headwind on higher CapEx in 2024 to continue to invest in capacity expansion, digital transformation, and operational modernization. Payments related to powder metal impacts are expected to be a headwind of about $1.3 billion. We'll also see a net headwind of about $500 million, primarily from higher interest expense, principally from the debt we issued to fund the ASR. And finally, I had one of about $300 million from lower pension cash recovery. Now, let me turn to our EPS wall.

Sheila: 100 basis points higher.

Sheila: Whats embedded into the guide.

Sheila: Great color on the revenue assumption.

Sheila: Yes.

Sheila: Some assumptions on maybe the aftermarket specifics on the margins as well as the military overall increasing is that beneficial.

Speaker Change: Sure. Thanks, Sheila let me share a couple of other details that we didn't get into in the prepared remarks. So we did talk about the over overall sales of wrapping up in the low double digit range.

Sheila: $400 million to $475 million of operating profit the aftermarket sales are going to be up sort of low teens. So the drop through on the aftermarket is going to be the principal driver of the year over year profit increase and we've talked a lot about expanding the margins on our both our legacy and GTS.

Sheila: Aftermarket as we increase the volumes there. So some of that will start to show up in 'twenty, four and Thats a driver of drop through on the OE side. We think the sales are going to be up in the mid teens range.

Sheila: The good news there as we look at engine productions, which think about that is up about 20%.

Sheila: You will see about a headwind of maybe $125 million associated with that higher volumes. So we're getting much better absorption.

Neil G. Mitchill: Starting at the segment level, operating profit growth of about 16% is expected to result in approximately 72 cents of EPS growth at the midpoint of our outlook range. With respect to pension, while markets have improved since our call in October, there will still be a headwind of about 36 cents year over year. And as I just mentioned, given the increased debt outstanding, interest expense will be a 30-cent headwind. Additionally, a lower average outstanding share count resulting from our recent ASR will provide a tailwind of about $0.37.

Sheila: As the volumes return back to levels that we've seen pre pandemic and that we have been capacity is too. So I think thats. Another place that we're going to get some margin expansion and then.

Sheila: Again, I'm not sure we got into this but military will be up in the mid single digit range I'd say again, we had 5% growth on the topline there and of course that comes with good drop through too.

Sheila: As we get into 2024, so that's the story.

Sheila: Look into 'twenty for just a little more color there.

Sheila: Great. Thank you Youre.

Speaker Change: You're welcome.

Speaker Change: Thank you.

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

Myles: Thanks. Good morning, I was wondering maybe if you can comment on the offset to the lower implied earnings drop through from the 25 guidance what was the offset to allow you to maintain the cash flow there.

Speaker Change: And maybe for Chris.

Neil G. Mitchill: And finally, our tax rate in 2024 is expected to be approximately 19.5% versus 18.5% in 2023. This, combined with higher corporate investments and digital transformation, will result in a $0.16 headwind year over year. All of this brings us to our outlook range of $5.25 to $5.40 per share. Okay, with that, let's go to slide nine to get into our outlook by segment, where we expect continued organic sales and earnings growth across all three businesses. Starting with Collins, we expect full-year sales to be up mid to high single digits on both an adjusted and an organic basis, primarily driven by both wide-body and narrow-body commercial OE production ramps and continued commercial aftermarket. Military sales at Collins are expected to be up low to mid single digits for the year.

Speaker Change: By the end of.

Speaker Change: Say 'twenty four would you have achieved in terms of incorporation of fully life parts into the fleet.

Speaker Change: Just as a metric maybe we can sort of monitor about it. Thanks.

Speaker Change: Thanks miles good morning, let me start let me maybe start to frame the answer to that question with a little bit of an updated walk between 23 and 25 on free cash flow to get to the $7 5 billion and then I'll talk about.

Speaker Change: Obviously offset the reduction in the profit as part of that so as we look from 'twenty three of $5 $5 billion that $2 billion increase is going to come principally from what I would call operational growth about $4 8 billion to.

$2 9 billion of which is going to come from the pre tax segment operating profit Neil pointed out that that will be lower than our prior guide and that's around the midpoint. The remaining growth's going to come from working capital improvement about $2 2 billion about half of which we will deal with here in 'twenty four as we look to hold our inventory flat so.

Speaker Change: Our 23 headwind operationally was about.

Speaker Change: About $1.600 billion, rather so we're looking year over year to improve that.

Neil G. Mitchill: With respect to Collins' Adjusted Operating Profit, we expect it to grow between $650 and $725 million versus last year. This is primarily driven by drop through on higher volume across all three channels, as well as higher pricing and the benefit from continued cost reduction initiatives. Turning to Pratt & Whitney, we expect full-year sales to be up low double digits on an adjusted and organic basis versus the prior year, driven by higher OE deliveries in both Pratt's large commercial engine and Pratt Canada business, as well as continued growth in shop visits across Legacy, Large Commercial Engines, GTF, and Pratt-Khanna. Military sales at Pratt are expected to be up mid-single digits driven by higher F-135 sustainment volume as heavy overhauls continue to ramp up.

Speaker Change: And then we will have about a half of im sorry, $400 million of Capex between 23, and 25, so that'll be a headwind.

Speaker Change: And then I just talked about the $1 billion five dollar powder metal impact and about $1 billion headwind that's split pretty evenly between.

Speaker Change: Sorry.

Speaker Change: Pretty evenly between interest and improvement in taxes, and then finally, a few hundred million dollars of pension headwind all of that should get you to seven 5 billion. So what's changed as we look out to 2025, there's been really three things that are that are different.

Speaker Change: We've got about $1 billion net of tax lower operating profit baked into this long term guide, but that's been offset by about $700 million of improvement in taxes, most notably on the back of improvements in our R&D position as well as a couple of hundred million dollars based on the assumptions, we see today with respect to our pension and <unk>.

Speaker Change: And then a little bit of additional working capital.

Neil G. Mitchill: As a result, we expect Pratt's adjusted operating profit to grow between $400 million and $475 million versus last year, primarily due to commercial aftermarket drop-through and military growth, which will be partially offset by higher large commercial OE delivery. And at Raytheon, on our organic basis, we expect sales to grow low to mid-single digits versus 2023 as we deliver our backlog and continue to see supply chain improvement. Adjusted operating profit at Raytheon is expected to be up between $100 and $200 million versus the prior year, driven by a drop through on higher volume and improvement in productivity, which will be partially offset by mixed headwinds.

Speaker Change: So those are the key drivers.

Speaker Change: And ill talk about the full life incorporations as he said upfront and I think we had made this commitment early on in September October timeframe full life powder metal parts in OE. So at our customer's final Assembly lines.

Speaker Change: Starting this year so.

Speaker Change: Thats a good thing.

Speaker Change: Keep in mind, the OE engines have the latest build standard and so when you add in the full life parts of those and get the maximum time on wing for the customers and also keep in mind.

Speaker Change: That means that the full life parts will go into our spare engines, which are going out to lift the fleet again maximizing.

Speaker Change: Time on wing on the MRO side, what we said was we were going to see.

Speaker Change: Start the incorporation in Q2.

Speaker Change: This year, we've actually started that a little bit earlier.

Speaker Change: We found opportunities to put full life parts into MRO, where we think it makes the most sense my time on wing perspective.

Speaker Change: As we said early on in the year, we're not going to get all of our shop visits with with full life parts, we're going to ramp throughout the year, where we don't incorporate the full life parts into MRO, we're going to continue to obviously spec those parts with the <unk> inspection that we developed and they will they will be put back into <unk>.

Neil G. Mitchill: Keep in mind, we'll see about 80 million of year-over-year headwind from the divestiture of the cybersecurity business this year. And to wrap up our outlook at the RTX level, higher intercompany activity will increase sales eliminations by about 10% year over year. And we've included an outlook for some of the below-the-line items and pension in the webcast dependent. Finally, let me make a few comments on our 2025 financial commitments. As you know, there have been some significant changes in the macro environment since we first established these long-term targets, impacts ranging from Russian sanctions, elevated inflation, issues with labor availability, and, of course, the associated disruptions throughout the supply chain. And we continue to take incremental actions to further reduce costs, realign our business units, increase pricing, and invest in productivity improvements to combat these headwinds. Other factors underlying our long-term assumptions, however, have also been positive, such as the pace of the commercial air recovery and demand for our defense products and services.

Speaker Change: Service until the next inspection interval.

Speaker Change: And keep in mind, one of the things that we've been doing is just looking at the build standard in the interval for each of these engines that are coming in.

Speaker Change: There are opportunities to sort of match up.

Speaker Change: Based on where the condition of the engine and where it is and where it flies in terms of the environment. A part that's been inspected it's not at full life match it up with.

Speaker Change: Engine, that's going to be coming in for another reason around that same time, so you're not actually driving.

Speaker Change: An incremental visit.

Speaker Change: So again, that's sort of the.

Speaker Change: The algorithm that we're kind of going through each and every day with the fracking to show to maximize our allocation in the full life parts, but the MRO will be a ramp throughout the year I think ultimately we'll get to roughly the same place that we had assumed we would had we started in Q2, but it will be a ramp throughout the year and all of that.

Speaker Change: Has been factored into our outlook.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question.

Speaker Change: Comes from the line of Peter Amit.

Peter J. Arment: Baird. Please go ahead Peter.

Peter J. Arment: Thanks, Good morning, everyone.

Peter J. Arment: Chris.

Neil G. Mitchill: All that said, despite those puts and takes, we continue to expect Collins and Pratt to be within the sales and operating profit 2020 to 2025 growth targets we discussed last year at our Investor Day. However, because of the recent performance at Raytheon, we are recalibrating our outlook for this segment. When taking into account divestitures, we now expect the 2020 to 2025 annual growth rate for adjusted sales to be between three and three and a half.

And Raytheon.

Peter J. Arment: You talked about some of the headwinds could you maybe give us a little more color on just where we are in terms of the profile of the fixed price development programs.

We're peaking now and and then kind of related to all this just as when should we start to see more of that mix shifts from more of the MF MF Fms that you kind of talked about where we could see some better pricing.

Peter J. Arment: Yes.

Peter J. Arment: Okay.

Speaker Change: Okay. Thanks Peter.

Speaker Change: Again, as we've talked about the productivity issues at Raytheon about 70% as we said upfront we're in.

Speaker Change: In the fixed price development programs.

Speaker Change: I'll characterize some of these Peter as in some cases. These are contracts that we took on that maybe weren't in our core capability.

Speaker Change: And we signed up for requirements and other specifications that were really really difficult until it's taken us some time to continue to work through those in some cases, what were doing theater as we're taking subject matter experts from across the company and just adding resources to these programs that adds a little bit of expense, obviously, but I think in the law.

Neil G. Mitchill: That's down slightly from our previous expectation of 3.5% to 4.5% for the same period and driven largely by the initiatives we talked about up front that will take some time to materialize over the next couple of years. As you know, demand remains strong, and our robust backlog will continue to support significant top-line growth going forward. Similarly, with respect to Raytheon's adjusted operating profit growth, given the continued productivity challenges we described, we now see Raytheon's 2020 to 2025 annual growth rate to be between 1 and 2.5%, which is down from our prior outlook of between 5.5 to 7.5%.

Speaker Change: Long term it gets the capability to the customer faster and ultimately.

Speaker Change: As better financially for us and for the customer and then in some cases on these fixed price development programs.

Speaker Change: Giving discussions with customers about either restructuring specifications are altering requirements in a way that still get capability.

Speaker Change: Needed and Thats helpful.

Speaker Change: But we can get to them frankly in a shorter period of time and with a better financial profile. Both conversations continue to go I will tell you that we will.

Speaker Change: Got a handful here that we're still going to be powering through in 2024 and see that horizon.

Speaker Change: Getting better in the next 12 to 18 months on these as we as we go through certain milestones theater and satisfy some contractual requirements.

Speaker Change: Then get into a different phase of the agreement and feel better about our ability to go and execute.

Speaker Change: Chris maybe I would add just a couple of the financial points around our assumptions.

Chris: Financially going into 'twenty four.

As you think about the $100 million to $200 million profit increase.

Chris: The first thing I would say is in 'twenty, three we had about a $240 million headwind associated.

Chris: Associated with these negative productivity.

Neil G. Mitchill: As a result of this segment change, we now see the RTX level adjusted sales annual growth rate from 2020 through 2025 to be between five and a half and 6% on an organic basis. That's down slightly from our prior outlook of between 6% and 7%. And taking into account the adjustment to Raytheon's operating profit outlook, we now see overall RTX Adjusted Margin Expansion of between 500 and 550 basis points between 2020 and 2025. And that's down from our prior outlook of between 550 and 650 basis points. However, importantly, there is no change to our RTX 2025 free cash flow target of $7.5 billion.

Chris: You said two thirds, 70% associated with these fixed price development programs, principally a couple of them as we look to 'twenty four our assumption is that our absolute value of productivity is zero. So we will see about a $200 million improvement year over year, we'll see about $100 million at the midpoint from volume.

Chris: Little bit of headwind as the lower margins were all through the backlog in 2004.

Chris: And that's what we've contemplated both in the 'twenty four 'twenty five outlook.

Chris: All of that gets you down to our guide of course is that $80 million of headwind I talked about.

Chris: And as you kind of look into 'twenty five.

Chris: Our productivity assumption is about $100 million step up so again this business at one time generated three four or $500 million a year of productivity, but we need some time for that to play through to see those kinds of margins, but 2025 would not mark the peak of where we see raytheon's margin potential.

Neil G. Mitchill: As we remain confident in the significant cash generating capability of our businesses, and we are continuing to drive structural cost reduction and working capital improvements as we invest in the business and deliver on our commitment to return $36 to $37 billion of capital to shareholders on the date of the merger through slide 25. Okay, thanks, Neil. I'm on slide 10.

Speaker Change: I appreciate it thanks, Chris.

Speaker Change: Youre welcome.

Speaker Change: Thank you.

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

Noah: Hey, good morning, everyone.

Noah: Sure.

Noah: I just want to make sure I have.

Noah: The starting point on the <unk>.

Noah: Implied margin correct.

Noah: This new 500 to 550 to 20% to 25%, so given restatements and the like so I am looking at 2020.

Gregory J. Hayes: Let me just wrap this up. I know we've covered a lot of ground today, but I know there are some key takeaways that everybody should focus on. Obviously, 2023 was a challenging year. You know, the earnings performance of a Raytheon business was obviously disappointing, as was the Pratt Powder Medal. But importantly, demand remains strong across both our commercial and defense businesses. 11% organic growth in 2023 is just the beginning, with the strength of our $196 billion backlog. We're confident that we'll continue to see strong organic sales and earnings growth, along with accelerated free cash flow generation over the coming years. I believe we have the best positioned A&E portfolio, with industry-leading franchises, and robust demand for products and technology.

Segment operating margin all in of eight point to implying that the 25 is <unk>.

Noah: <unk> two to 13, 7%. So is that correct and then can you just talk a little more about getting there from this 24 guidance it would seem to either require.

Noah: Pretty nice step up in the Raytheon defense margin or.

Noah: Acceleration in the Incrementals at Pratt and Collins or all of the above.

Speaker Change: Thanks Noah.

Speaker Change: You kind of look at the multi multi year outlook here, what we've done at the top end as we've tightened up the range a little bit for the RPX sales and margin.

Speaker Change: Still see Collins and Pratt being within the range as we talked about frankly the drivers are all the same that we talked about six months ago in the last quarter as well the aftermarket is going to fuel that we're going to get better absorption and we'll see the benefits of lower spending on investments, we've been making to drive cost reduction and the benefit of that cost reduction so.

Speaker Change: If you put all of that that's going to put Pratt and Collins and that range, probably closer towards the middle of the high end of that range and then we just talked about the Raytheon pieces altogether. So I think at the midpoint when you take into account the dispositions that we've either completed or have announced youll see that our margin assumption at the architecture level is about.

Gregory J. Hayes: This positions us well for the future. Secondly, we're intensely focused on execution to support our customers and drive operational performance. We're clearly going to face challenges this year with the continued growth of the supply chain and the impact of higher costs. But everyone at RTX is working tirelessly to overcome these obstacles and ensure that we deliver on our commitment. Lastly, we're staying disciplined and managing the business to continue investing in differentiated technologies and innovation, strengthening our balance sheet, all while continuing to return significant capital to our shareholders. I want to close again by thanking all the RTX employees who have been working diligently every single day over the last few weeks to deliver on our mission to create a safer, more connected world. With that, let's go ahead and open it up. In the interest of time and to allow for broader participation, you're asked to limit yourself to one question. To ask a question, you will need to press star 11 on your telephone.

Speaker Change: The same as where we were projecting before these tweaks for the Raytheon Recalibration.

Speaker Change: Okay, and just to make sure I have the.

Speaker Change: What you said to miles correct.

Speaker Change: And the five 7% of free cash this year and the 75 next year.

Speaker Change: Each of those assumes about $1 billion of positive change in working capital each year is that right.

Speaker Change: Correct and as you think about from 'twenty three to 'twenty four.

Speaker Change: Inventory is going to essentially our plan is to stay flat that will be about 80% of what generates that year over year working capital benefit in 2004, and then as you look to 'twenty five.

We will see continued improvement in inventory as well as the benefit of customer advances. So we've realized a lot of customer advances over the last couple of years. They will burn down and then as we see these international orders come back and Youll see that pick up in the year 25.

Speaker Change: Okay. Thanks very much welcome.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Doug Harned net.

Bernstein <unk> company. Please go ahead Doug.

Operator: The first question comes from the line of Robert Stollard of Vertical Research. Please go ahead, Robert. Thanks so much, good morning.

Douglas Stuart Harned: Good morning, Thank you.

Douglas Stuart Harned: It sounded from what you said, Chris you made some good progress on the <unk>.

Chris Callio: Good morning, Rob. Chris, inevitably your first question on the GTF situation. Updating October, mentioned, http://TheBusinessProfessor.com, I don't know if you could... Yeah, you bet, Rob, and good morning. So we did say here this morning that we do expect the peak to continue to be here, you know, in Q1 in terms of AOGs and then to tread downward, you know, thereafter. Again, we think that peak is going to come down a bit since our initial assessment because of two reasons. One, the timing of the AED has shifted a bit to the right.

Douglas Stuart Harned: <unk> profile here for the GTS, but.

Douglas Stuart Harned: When you look at your customer base, you may have some who find that a high number of eog's could put their financial performance at risk and whether or not those issues are caused by Pratt.

Douglas Stuart Harned: Could easily be targeted for responsibility that you already had the earlier go first lawsuit. So how do you think about.

Douglas Stuart Harned: The risks for you with airlines that couldnt be in a stressed financial position and maybe more difficult perhaps than you might normally compensate our customer.

Speaker Change: Yes, Thanks, Doug.

Speaker Change: First of all.

Speaker Change: Tell you that we are engaging with our customers each and every day to try to figure out how best to support them, whether thats through deductions, whether that's through special support whether thats. The spare engine allocation whatever whatever it may be and you're right. There are some customers out there.

Speaker Change: 10 to 12, I think as we've talked about before theyre going to be more impacted than others. There are some that are all pratt fleets, whether at the GTS and <unk> 2500, <unk>. So again, working very hard with them to come up with a compensation structure relative to the powdered metal AIG situation.

Chris Callio: And then two, customers took some proactive, you know, fleet planning and decided to accelerate some of their removals as they were doing their fleet planning for the year. They were pairing engines and doing all those things to make them.

Chris Callio: So again, peak here in Q1, trend downward, you know, after that, and then it'll be more of a steady state as we talked about in our October and September guides. You mentioned a little bit about cash being pushed out again, Rob. That was, Dynamic time as we're going through and having discussions with our customers on special support. We've made some progress on special support. I think we've talked about that up front. Signed several. But the timing of that cast just simply moved out from the second half of 23 into 24.

Speaker Change: That's fair.

Speaker Change: And that can give them a little bit of lift obviously, it won't make up for all of the disruption that they're having in the fleet and in all of the things that they've got to do.

Speaker Change: To accommodate for these removals, but again doing the best we can to come up with a fair set of compensation structures to help out during these trying times and then of course.

Speaker Change: Communicate with them.

Speaker Change: <unk> about what we're seeing in terms of the assumptions that we're talking about here full life incorporation MRO MRO output all the things that are going to drive better fleet support for them. So obviously, you don't want to be in a position where.

Chris Callio: Same, same total aggregate amount of six to seven, just the timing moved a little bit to the right. Thank you. Our next question comes from the line of Cai Rumohr of Cohen. Your question, please, Cai. Yes, thanks so much.

We're putting our customers in harm's way, and where theyre going to be very upset with us and wanted to take action, but I will tell you. We've got a track record of coming to agreement with our customers on some of the more difficult problems. We faced I'm confident we're going to we'll do it again.

Neil G. Mitchill: So, your cash flow hit from the powdered metal issue is $300 million higher in 2020 than you said. Can you tell us how big the impact in 2023 will be? And are we still going to be at $3 billion and, therefore, there's a plus of $300 million pickup in 2025? Thanks. Hi, good morning. It's Neil.

Speaker Change: And if I can are you seeing a.

Speaker Change: Any improvement in the time the induction time to get these engines in the shop as part of this ALG profile.

Right now Doug the Wingo wing turnaround time remains consistent with what we had talked about previously I will tell you.

Speaker Change: I kind of alluded to this earlier, we are continuing to aggressively pursue with our aftermarket partners again, we've got some tier one aftermarket.

Speaker Change: Providers as part of the GTS aftermarket network trying to come up with what I would call light or medium type work scopes that can take the in shop time.

Neil G. Mitchill: Yeah, I'll take that one. So, you know, as Chris was just talking about when we closed out 23 for a variety of reasons, cash flows shifted to the right, so the impact in 23 for powder metal related disbursements was essentially zero, so we moved about half of that into 2024. That's the billion three that you're seeing still holding a billion five in our 25 outlook, and then we see the rest spilling into early 2020. We'll continue to work Thank you very much. Thank you. Our next question comes from the line of Sheila Cahill-Agnew, of Jeffries. Your question, please, Sheila? Good morning, everyone.

Speaker Change: Down further again trying to maximize the time on range depends on the operator depends on the condition of the engine, but we're aggressively pursuing a number of work scopes that can take the in shop time down. In addition, I think you've heard US talk about this before we have industrialized a significant number of repairs.

Speaker Change: On the GTS one thing about <unk> 102023, we've got another.

Speaker Change: Significant step up here in 'twenty four.

Speaker Change: <unk>.

Speaker Change: Okay.

Thank you.

Speaker Change: Our next question.

Speaker Change: Comes from the line of David Strauss of Barclays. Your question. Please David.

Neil G. Mitchill: I can't help but compare and contrast Given-G just reported this morning, and they're talking about margins being flattish in aerospace based on the OE mix and LEAP services mix. So, you know, just looking at Pratt, can you talk about the dynamics there given GTF volumes are growing, and early GTF shop visits climb higher? So what drives margins 100 basis points higher? Like what's embedded into the guide?

David Strauss: Thanks, Good morning.

David Strauss: Good morning.

David Strauss: Wanted to ask.

David Strauss: What exactly is the bottleneck, Chris to be able to ramp up production of full life. This given that I think the powder metal switch occurred a while ago I guess I'm just kind of confused there why why it's not easier to ramp up the production of these full like this.

Neil G. Mitchill: Neil, you gave great color on the revenue assumption. Can you give some assumptions on maybe the aftermarket specifics on the margins as well as the military overalls increase? Is that beneficial?

David Strauss: And then can you touch on what you're expecting for.

David Strauss: Large commercial engine deliveries in 'twenty, four and your confidence in being able to to meet air buses requirements.

Neil G. Mitchill: Sure. Thanks, Sheila. Let me share a couple of other details that we didn't get into in the prepared remark. So we did talk about the overall sales of Pratt being up in the low double-digit range, you know, $400 to $475 million in operating profit. The aftermarket sales are going to be up sort of in the low teens. So the drop through on the aftermarket is going to be the principal driver of the year over year profit. We talked a lot about expanding the margins on our, you know, both our legacy and GTF aftermarket as we increase the volumes there. And so some of that will start to show up in 24.

David Strauss: Sure.

David Strauss: So.

David Strauss: As we talked about David did the powdered metal value stream, we're asking it both our own shops, and our supply chain to step up significantly here. So that we can incorporate in MRO.

David Strauss: As we talked about earlier and in OE. So so much more than that value stream clearly had anticipated.

David Strauss: Mid year last year again, we feel like we've got.

Pretty adequate forging capacity within our own four walls and with the with the supply chain.

David Strauss: But again, we've got it we've got to continue to ramp up inspection capacity, we've got to wrap up machining capacity all critical parts of that of that value stream and I'll tell you as you ramp up and we saw this.

Neil G. Mitchill: And that's a driver of the drop. On the OE side, we think the sales are going to be up in the mid-teens range. The good news there, as we look at engine production, which is up about 20%. We'll see about a headwind of maybe a hundred and twenty five million dollars associated with that higher volume. So we're getting much better absorption as the volumes return back to levels that we had seen pre-pandemic and that we've been capacitized to.

David Strauss: In 2019, as we're ramping and we're ramping up again here.

David Strauss: As you take these parts to volume that our supply chain wasn't necessarily anticipating in that we weren't necessary necessarily anticipating you've got to continue to double down on the fundamentals of the quality of the yield the tooling and the maintenance all the things that are instrumental in enabling that volume jobs. So.

David Strauss: Again, I would say we've made solid progress thus far and are generally tracking to where we thought we would be but again, we got to continue to step up throughout the year, especially as we want to increase the number of full life parts, we put into MRO to your question about Airbus I think Neil.

Neil G. Mitchill: So I think that's another place that we're going to get some margin. And then, again, I'm not sure we got into this, but the military will be up in the mid-single-digit range. I'd say, again, you know, we had 5% growth on the top line there. And, of course, that comes with good drop-through, too, as we get into it. So that's the Pratt story as we look into 24 just a little more.

David Strauss: Said, it before up about 20% year over year here in 2004 and again.

David Strauss: <unk>.

Have discussions with Airbus all the time, they understand the fleet condition, they understand where we're ramping on powdered metal parts and the like and so we feel good about our ability to meet the commitment we made to them here in 2024.

Neil G. Mitchill: Great, thank you. Thank you. Our next question comes from the line of Myles Walton of Wolf Research. Your question, please, Myles. Good morning.

Speaker Change: Thanks very much.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Ronald Epstein of Bank of America. Please go ahead Ronald.

Neil G. Mitchill: I was wondering, maybe Neil, if you could comment on the offset to the lower implied earnings drop through from the 25 guidance. What was the offset to allow you to maintain the cash flow there? And maybe for Chris, what would you have achieved by the end of, say, 24? Just as a metric, maybe we can sort of monitor it by. Thanks. Thanks, Myles. Good morning.

Ronald Jay Epstein: Hey, good morning, guys good.

Ronald Jay Epstein: Good morning.

Ronald Jay Epstein: Things are subject a little bit.

Everybody seems to be talking about.

Ronald Jay Epstein: Outer metal thing.

And Collins Collins outlook looks really good.

Ronald Jay Epstein: Can you give some color around how much of that is being driven by wide body in interiors.

Ronald Jay Epstein: Starting to really see a pickup there right because the one thing that Rob kind of waiting for us.

Ronald Jay Epstein: The pickup in the wide body market.

Ronald Jay Epstein: The interiors business is generally a good leading indicator of what's going on.

Ronald Jay Epstein: Let me start Ron and maybe Chris can add something.

Ronald Jay Epstein: Let me give you a couple of details.

Ronald Jay Epstein: First on.

Ronald Jay Epstein: On the aftermarket side at Collins, we expect that to be up high single digits to low double digits, I'd say, 10% or more on the OE side mid to high single digits, and we're going to see as everyone knows about 40% Incrementals, there and yes wide body is going to be a big driver. So as we can.

Neil G. Mitchill: Let me start. Let me maybe start to frame the answer to that question with a little bit of an updated walk between 23 and 25 on free cash flow to get to $7 and a half billion. And then I'll talk about, obviously, offsetting the reduction. So, and as we look, uh, from twenty-three of five and a half billion dollars, the $2 billion increase is going to come principally from, you know, what I would call operational growth of about $4.8 billion. 2.9 billion, of which is going to come from the pre-tax segment operating profit.

Ronald Jay Epstein: A lot of narrow body.

Ronald Jay Epstein: Catch up in growth over the last couple of years, we do expect that the shift to the wide body now keep in mind on the wide body OE side for Collins, the margins are a bit thinner there, but it does it does set us up for.

Ronald Jay Epstein: Good longer term.

Ronald Jay Epstein: Sections, especially as you get into 'twenty five in <unk> and beyond is that comes off warranty and converts to aftermarket.

Ronald Jay Epstein: Around the interiors business I think still timid said this back in June.

Ronald Jay Epstein: That business is is growing but it's nowhere near levels of 2019, and so we don't see that coming back until about 2026. So the good news is there's a lot of runway there and we are seeing a lot of activity. There. So I think that will be a growth driver, but clearly we are starting to see a bit more of a shift from narrow body into wide.

Neil G. Mitchill: Neil, you pointed out that that will be lower than our prior guide and that's around the mid-to-low teens. The remaining growth is going to come from working capital, about 2.2 billion, about half of which we will deal with here in 24 as we look to hold our inventory flat. So our 23 headwind operationally was about $600 million, so we're looking year over year to improve that. And then we'll have about a half of the, I'm sorry, 400 million in CapEx. 23, that'll be it.

Ronald Jay Epstein: Body as we go into the next couple of years, where maybe the only thing I would add to that Brian is that Steve and team are very focused on that transformation within interiors I think there is there is.

Ronald Jay Epstein: Some opportunity.

Ronald Jay Epstein: <unk> sites to continue to remove ERP systems as you know theres been an integration that's been going on in that interiors business.

Ronald Jay Epstein: In particular, so I think a lot of good work on continuing to transform the cost footprint in the interiors business. So when that volume continues to come back.

Neil G. Mitchill: And then I just talked about the billion and a half dollar powder metal impact, about a billion dollar headwind that split pretty evenly between interest and improvement in taxes, and then finally, a few hundred million dollars of pension. All of that should get you to seven and a half billion. So what's changed as we look out to 2025? There are really three things that are.

Ronald Jay Epstein: We'll be at the types of margins that you would expect.

Speaker Change: Got it got it and if you have you guys seen any airlines any customers yet.

Question, retrofits and upgrades to interiors on their existing wide body fleet.

Speaker Change: Ron that is actually an ongoing process. We're in the process of working with a number of airlines as they're going through their retrofit. It keep in mind that as a three to five year process to upgrade. These things. So we are still finishing up things that we had signed up for back in 2018.

Chris Callio: The first is we've got about a billion dollars net of tax lower operating profit baked into this long-term guide. But that's been offset by about $700 million of improvement in taxes, most notably on the back of improvements in our R&D position, as well as a couple hundred million dollars based on the assumptions we see today with respect to our pension outlay, and then a little bit of addition. So, those are the key, and I love all of you, talk to you now about the full life incorporations. As we said, you know, up front, I think we had made this commitment early on in September, October time, the full-life powder metal part. In OE, so at our customer's final assembly line starting this year. So that's a good thing.

Speaker Change: 2019.

Speaker Change: But again as Neil said.

Speaker Change: <unk> is coming back, but given the long cycle nature of these upgrades that youre not going to see a heck of a lot of it.

Speaker Change: For more than 45 is certainly more in 2006.

Speaker Change: Got it alright, thank you very much.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: Our final question comes from the line of Seth Sigman.

Seth Michael Seifman: J P. Morgan your question please sir.

Seth Michael Seifman: Yeah. Thanks, good morning.

Seth Michael Seifman: Maybe just following up on Collins and kind of.

Seth Michael Seifman: The growth outlook for this year, when we think about how much.

Seth Michael Seifman: Production rates horizon, we think about the strengthening aftermarket kind.

Seth Michael Seifman: Kind of.

Seth Michael Seifman: What's the potential for upside on the topline there and I guess, how much is how much of a drag on the military business, it's a pretty significant chunk of the portfolio and given the growth rate in the second half and what you are forecasting overall for for 2004. It seems like maybe this is a business thats really.

Chris Callio: Keep in mind the OE engines have the latest build standards. And so when you add in the full life parts to those, you get the maximum time on wing for the customers. And also keep in mind

Seth Michael Seifman: Our military business, that's going to participate in the in the budget growth in outlet growth that we're seeing now.

Chris Callio: That means that the full-life parts will go into our spare engines, which are going out to lift the fleet again, maximizing, you know, the time on. On the MRO side, what we said was we were going to start the incorporation in Q2 of this year. We've actually started that a little bit earlier. We've found opportunities to put full-life parts into MRO where we think it makes the most sense from a time-on-link perspective. But, as we said early on in the year, we're not going to get all of our shop visits with full-life parts. We're going to ramp throughout the year where we don't incorporate the full-life parts into MRO. We're going to continue to obviously inspect those parts with the angle scan inspection that we developed, and they will be put back into service until the next inspection comes in. And keep in mind, one of the things that we've been doing is just looking at the build standard and the interval for each of these engines that are coming in; there are opportunities to sort of A part that's been inspected, it's not at full life, match it up with an engine that's gonna be coming in for another reason around that same time, so you're not actually driving an incremental.

Speaker Change: Good morning, Seth Let me, let me start.

Speaker Change: I wouldn't characterize the defense business within Collins is a drag I think the defense business in 2003 was flat at the topline and it experienced a lot of the same issues we've been talking about on.

Speaker Change: The Raytheon side in terms of the impacts of inflation the delays in the supply chain, but as we look to 'twenty four we're going to see I'd say healthy growth there low to mid single digits.

Speaker Change: As we catch up in the supply chain catches up and we burn down the overdue there and I think we're really well positioned on a lot of strategic platforms remember we moved.

Speaker Change: Businesses from the Raytheon segment into the Collins mission systems business to.

Speaker Change: To create more synergistic opportunity there and I think that's really taking taking hold and theres a lot of a lot of good proposal activity. There. So I think it's a great fit and its in the right place in Collins.

Speaker Change: More broadly I think just talking about.

Speaker Change: The aftermarket potential at Collins.

Speaker Change: Very strong, but we just put up some significant numbers, there with aftermarket up 26% and provisioning up 42% on a full year. So clearly there's been a surge in aftermarket over the last year and so we're dealing with some very difficult compares and on the OE side, we'll start to see.

Speaker Change: That that growth moderate, but again still on the back of some really strong 17% growth in 'twenty. Three so I think <unk> is well positioned and I think the defense business is a good fitments in the right place there for it right now again.

Chris Callio: So again, that's sort of the algorithm that we're kind of going through each and every day with the Pratt team to try to maximize our allocation to the full life parts. But the MRO will be a ramp throughout the year. I think ultimately we'll get to roughly the same place that we had assumed we would have had we started in Q2, but it'll be a ramp throughout the year. And all of that's been factored into our allocation. Thank you. Our next question comes from the line of Peter Arment up Baird. Please go ahead. Thanks. Good morning, everyone.

Speaker Change: I'll just add much like the interiors and Steve and team have a plan to continue to drive structural cost reductions within Collins to help margin expansion, we've talked about moving engineering presence the best loss cost locations by 2025 by significant number same with manufacturing hours. So a lot of centre of excellence actives.

Speaker Change: Going on within Colorado continue to help with their with their cost footprint in and support the margin expansion.

Speaker Change: Great. Thanks very much.

Speaker Change: Thank you.

Speaker Change: Okay. Thank you everyone for calling in listening today as always Jennifer in her Investor Relations team will be available all day to answer whatever further questions you might have.

Chris Callio: Hey, Chris, on Raytheon, you talked about some of the headwinds. Could you maybe give us a little more color on just where we are in terms of the profile of the fixed price development speaking now, and then kind of related to all this. When should we start to see more of those mixed shifts? FM.

Speaker Change: So with that thank you with every wonderful day take care.

Speaker Change: Okay.

Speaker Change: This now concludes today's conference you may now disconnect.

Chris Callio: Yeah, okay. Thanks, Peter. So, again, as we talked about the productivity issues at Raytheon, about 70%, as we said up front, were in the fixed price development programs. And I'll characterize some of these, Peter, as in some cases, these are contracts that we took on that maybe weren't in our Core Capability Suite, and we signed up for requirements and other specifications that were really, really difficult. And so it's taken us some time to continue to work through those. In some cases, what we're doing, Peter, is we're taking subject matter experts from across the company and just adding resources to these programs. It adds a little bit of expense, obviously, but I think in the long term it gets the capabilities faster and, ultimately, is better financially for us and for the country.

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Chris Callio: And then in some cases on these fixed price development programs, we're having discussions with customers about either restructuring the specifications or altering the requirements in a way that still gets the capability, you know, that's needed and that's helpful, but that we can get to them, frankly, in a shorter period of time, and with, you know, a better financial. Both conversations continue. I'll tell you that we have got a handful here that we're still going to be powering through in 2024 and see that horizon, you know, getting better in the next 12 to 18 months on these as we, as we go through certain milestones, Peter, and satisfy some contractual requirements, we then get into a different phase of the agreement and feel better about our ability to go in. Chris, maybe I would add just a couple of the financial Thanks for tuning in. We'll see you next time.

Speaker Change: Okay.

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Neil G. Mitchill: Thank you. As you think about the $100 to $200 million profit increase, the first thing I would say is, in 23, we had about a $240 million head start. Associated, negative productivity. As you said, you know, two-thirds, 70% associated with these fixed price developments, principally. As we look to 24, our assumption is that our absolute value of productivity is zero.

Speaker Change: Okay.

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Neil G. Mitchill: So we'll see about a $200 million improvement year over year. We'll see about a hundred million at the midpoint from volume, and a little bit of headwind as the lower margins roll through the backlog in 24, you know, and that's what we've contemplated both in the 24 and the 25 out. All of that, you know, gets you down to our guide, of course, which is that $80 million.

Neil G. Mitchill: And as you kind of look into 25, our productivity assumption is about $100 million step up. So again, this business at one time generated $300,000, $400,000, $500,000 a year of productivity, but we need some time for that to play through to see those kinds of marks. 2025 would not mark the peak of where we stand.

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Neil G. Mitchill: Thanks. Thank you. Our next question comes from the line of Noah Poponak of Goldman Sachs. Please go ahead. No.

Neil G. Mitchill: Hey, good morning, everyone, and Noah. Neil, just want to make sure I have the I guess the starting point and implied margin correct in the, you know, in this new 500 to 550 range of 20 to 25. So, given you know, restatements and the like, so I'm looking at 2020. Segment Operating Margin All In of 8.2, implying that the 25 is... 13.2 to 13.7. So is that correct? And then, can you just talk a little more about getting there from this 24 guidance, it would seem to either require, you know, a pretty big step up in the Raytheon defense margin or, you know, an acceleration in the incrementals at Pratt and Collins or all of the above? Thanks, Noah.

Chris Callio: So, you know, as you kind of look at the multi-year outlook here, what we've done at the top end is we've tightened up the rain, RTX Sales and Marketing. Thank you. We still see Collins and Pratt being within the ranges we talked about. You know, frankly, the drivers are all the same that we talked about six months ago and the last quarter as well. The aftermarket.

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Neil G. Mitchill: We're going to fuel that, we're going to get better absorption, and we'll see the benefits of lower spending on investments we've been making to drive cost reduction and benefits. So if you put all that together, that's going to put Pratt and Collins in that range, probably closer to the middle of the high end, and then we just talked about Raytheon, all together. So, I think at the midpoint, when you take into account the dispositions that we've either completed or have announced, you'll see that our margin assumption at the RTX level is about the same as the objections and Raytheon. Okay, and just to make sure I have your the what you said to Myles correct. In the 5-7 of free cash this year and the 7-5 next year. Each of those assumes about a billion dollars of positive change in working capital each year. Is that right?

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Neil G. Mitchill: That's correct. And as you think about from 23 to 24, inventory is going to essentially stay flat. That will be about 80% of what generates that year over year working capital better in 24. And then as you look to 25, you know, we'll see continued improvement in inventory as well as the benefit of customer advances. So we've realized a lot of customer advances over the last couple of years. They burn down, see these international orders, come back in, and you'll see that pick up in the year. Okay, thanks very much.

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Operator: Thank you. Our next question comes from the line of Doug Harnett of Bernstein and Company. Please go ahead, Doug. Good morning.

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Chris Callio: Thank you. It sounded, from what you said, Chris, that you made some good progress on the AOG profile here for the GTF, but when you look at your customer base, you may have some who find that a high number of AOGs could put their financial performance at risk, and whether or not those issues are caused by Pratt, you could easily be targeted for responsibility. You already had the earlier go-first lawsuit, so how do you think about... the risk for you with airlines that could be in a stressed financial position and maybe more difficult, perhaps than how you might normally compensate a customer?

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Chris Callio: Yeah, you know, thanks, Doug. I mean, first of all, I'll tell you that we engage with our customers, you know, each and every day to try to figure out how best to support them, whether that's through conductions, whether that's through special support, whether that's through spare engine allocation, whatever, whatever it may be. And you're right, Doug, there are some customers out there. 10 to 12, I think, as we've talked about before, they're gonna be more affected than others. There are some that are all Pratt suites, whether it be GTF and V2500.

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Chris Callio: And so, again, working very hard with them to come up with a compensation structure relative to the powdered metal AOG situation that's fair, and that can give them a little bit of a lift. Obviously, it won't make up for all of the disruption that they're having in the suite and all of the things that they've got to do to accommodate for these removals, but again, we are doing the best we can to come up with a fair set of compensation structures to help out during these trying times. And then, of course, communicate with them consistently about what we're seeing in terms of the assumptions that we're talking about here, full life incorporation, MRO, MRO output, all the things that are going to drive, you know, better fleet support. So obviously, we don't want to be in a position where we're putting our customers in harm's way and where they're going to be very upset with us and want to take action.

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Chris Callio: But I'll tell you, we've got a track record of coming to agreements with our customers on some of the more difficult problems we've faced, and I'm confident we're going to be able to do it again. And if I can, are you seeing any improvement in the time, the induction time, to get these engines in the shop as part of this AOG profile? You know, right now, Doug, the wing to wing turnaround time remains consistent with what we had talked about previously. I will tell you, and we kind of alluded to this earlier, we are continuing to aggressively pursue with our aftermarket partners. Again, we've got some tier one, you know, aftermarket providers as part of the GTF aftermarket network, trying to come up with, you know, what I would call light or medium type work scopes that can take the, you know, in shop time down further again, trying to maximize time on wing just depends In addition, I think you've heard us talk about this before, we've industrialized a significant number of repairs on the GTF. I want to say about 1,300 in 2023.

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Chris Callio: We've got another, you know, significant step up here in 24. All. Thank you. Our next question comes from the line of David Strauss of Barclays. Question, please. David.

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Chris Callio: Thanks, good morning, morning; wanted to ask what exactly is the bottleneck Chris to be able to ramp up production of full life discs given that you know I think the powder metal switch occurred a while ago. I guess I'm just kind of confused there why it's not easier to ramp up the production of these full life discs. And then could you touch on what you're expecting for large commercial engine deliveries in 24 and your confidence in being able to meet Airbus's requirements? Thanks. Sure.

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Chris Callio: So, you know, as we talked about, David, the powdered metal value stream, we're asking it, both our own shops and our supply chain, to step up significantly here so that we can incorporate it into MRO, as we talked about earlier, and in OE. So much more than that value stream clearly had anticipated, you know, mid-year last year.

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Chris Callio: Again, we feel like we've got pretty adequate forging capacity within our own four walls and with the supply chain. But again, we've got to continue to ramp up inspection capacity, we've got to ramp up machining capacity, all critical parts of that value stream. And I'll tell you, as you ramp up, and we saw this in 2019, as we were ramping, and we're ramping up again here, as you take these parts to a volume that our supply chain wasn't necessarily anticipating and that we weren't necessarily anticipating, you've got to continue to double down on the fundamentals, the quality, the yield, the tooling, and the maintenance, all the things that are instrumental in enabling To your question about Airbus, I think Neil said it before, up about 20 percent year-over-year here in 2024, and again, we have discussions with Airbus all the time. They understand the fleet condition.

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Chris Callio: They understand where we're ramping up on, you know, powdered metal parts and the like. And so, you know, we feel good about our ability to meet the commitment we made to them here in 2020. Thanks very much.

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Neil G. Mitchill: Thank you. Our next question comes from the line of Ronald Epstein of Bank of America. Please go ahead, Ronald.

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Neil G. Mitchill: Hey, good morning. More on... Just change the subject a little bit, about the powder metal and Colin's. I mean, Colin's outlook looks really good. Can you give some color around how much of that is being driven by the wide body and interiors and if you're starting to really see a pickup there? Because the one thing that we're all kind of waiting for is the pickup in the wide body market. The interiors business is generally a good leading indicator of what's going on. Let me start, Ron, and maybe Chris can add something.

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Neil G. Mitchill: You know, let me give you a couple details. First, on the aftermarket side at Collins, we expect that to be up high single digits to low double digits. I'd say, you know, 10% or more. On the OE side, mid to high single, and we're gonna see, as everyone knows, about a 40% increment. And yes, the wide body is going to be a big driver. So as we've, you know, seen a lot of narrow bodies, Peter Arment, John Walsh, Josh Pokrzywinski, Nicholas Haren, Nick Oliver, Dr. Nicholas Lukasiak, David compact, Eoun Boutman, 25 and six and beyond as that comes off warranty and converts to. You know, around the interior business, I think Steve Timmons said this back in June, that business is growing, but it' And so we don't see that coming back until about 2026.

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Neil G. Mitchill: So the good news is, you know, there's a lot of runway there, and we are seeing a lot of activity there. So I think that will be a growth driver. Clearly, we're starting to see a bit more of a shift from narrow bodies to wider bodies.

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Neil G. Mitchill: Yeah, maybe the only thing I would add to that, Ron, is that Steve and his team are very focused on the transformation of the interior. I think there's some opportunity to consolidate sites, and continue to remove ERP systems. You know, there's been an integration that's been going on, and that interior is busy. I think a lot of good work on continuing to transform the cost footprint in the interiors business, so when that volume continues to come back, it'll be at the types of margins that you would expect. Got it. And have you guys seen any airlines, any customers yet, requesting retrofits and upgrades to interiors on their existing widebody fleets?

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Chris Callio: You know, Ron, that's actually an ongoing process, of working with a number of airlines as they are going through their retrofitting. Keep in mind that it is a three-to-five-year process. We are still finishing things that we had signed up for back in the day. But again, as Neil said, business is coming. But given the long cycle nature of them, you're not going to see a heck of a lot, more than 25 and certainly, Got it.

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Operator: Cool. All right. Thank you very much.

Operator: Thank you. Our final question comes from the line of Seth Seifman of JPMorgan. Your question, please, Seth. Yeah, thanks. Good morning.

Neil G. Mitchill: Maybe just following up on Collins and kind of the, you know, growth outlook for this year, when we think about how much OE production rates are rising, and we think about the strength in the aftermarket, kind of, you know, what's the potential for upside on the top line there? And I guess how much of a drag the military business is. It's a pretty significant chunk of the portfolio. And, you know, given the growth rate in the second half, and you know, what your forecast and overall for the next 24, it seems like maybe this isn't a business that's really a military business that's going to participate in the budget growth and outlay growth that we're seeing now. Good morning, Seth. Let me start.

Neil G. Mitchill: You know, I wouldn't characterize the defense business within Collins as a drag. I think the defense business in 23 was flat at the top line, and it experienced a lot of the same issues we've been talking about on the Raytheon side in terms of the impacts of inflation and the delays in the supply chain. But as we look to 24, we're going to see, I'd say, healthy growth there, low to mid-single digits as we catch up and the supply chain catches up and we burn down the excess... And I think we're really well positioned on a lot of strategic platforms. Remember, we moved businesses from the Raytheon segment into the Collins Mission Systems business to create more synergistic opportunities there. And I think that's really taking hold, and there's a lot of good proposal activity there. So I think it's a great fit. It's in the right place in college.

Neil G. Mitchill: More broadly, I think just talking about the aftermarket potential at Collins, very strong, but we just put up some significant numbers there with aftermarket up 26% and provisioning up 42% on a full year. So clearly, there's been a surge in aftermarket over the last year. And so we're dealing with some very difficult comparisons.

Neil G. Mitchill: And on the OE side, we'll start to see that growth moderate, but again, still on the back of some really strong, you know, 17% growth. So I think Collin's well-positioned, and I think the defense business is a good fit, and it's in the right place there. Again, I'll just add, much like the interiors, I think Steve and his team have a plan to continue to drive structural cost reduction within Collins to help with, you know, margin expansion. We've talked about, you know, moving engineering presence to the best loss cost locations by 2025 by a significant number, same with manufacturing hours. So a lot of center of excellence activity is going on within Collins that'll continue to help with their cost footprint and support.

Neil G. Mitchill: Great. Thanks very much. Okay, thank you everyone for calling in and listening today. As always, Jennifer and her investor relations team will be available all day, questions. So with that, thank you and have a wonderful day. This now concludes today's conference. You may now disconnect. Thank you for watching! Thanks for watching! ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??