Q1 2025 RTX Corp Earnings Call
Speaker Change: On the call today are Chris Collier, President and Chief Executive Officer, Neil Mitchell, Chief Financial Officer, and Nathan Ware, 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 our TX 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 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 on your telephone.
Speaker Change: May ask further questions by re inserting yourself into the queue as time permits.
Mr. Italia: With that I'll turn the call over to Mr Italia.
Mr. Italia: Thank you and good morning, everyone.
Mr. Italia: We're clearly in the middle of a highly dynamic operating environment right now and we will of course talk about that today.
Mr. Italia: But first I want to highlight the strong financial and operational performance, we delivered in the first quarter.
Mr. Italia: Starting with the topline we generated 8% organic sales growth.
Mr. Italia: Also drove a 120 basis points of segment margin expansion, which included strong contributions from each business segment.
Mr. Italia: And we generated strong free cash flow improvement of more than $900 million versus the prior year.
Mr. Italia: On an organic basis commercial aftermarket sales were up 21% commercial OE sales were up 3% on a difficult prior year compare and defense sales were up 4%.
Mr. Italia: Underlying these results is our continued focus on execution and the deployment of our core operating system.
Mr. Italia: Starting with the GTS program, PW 1100, MRO was up 35% year over year, and 14% sequentially and.
Mr. Italia: And we remain on track for over a 30% improvement for the full year.
Mr. Italia: This output is a key enabler for reducing Eog's, which we continue to expect to trend down in the back half of the year.
Mr. Italia: Isothermal forging I'll put also continued to be strong in the quarter. After a record output last year up over 10% versus prior year.
Mr. Italia: And our outlook for the fleet management plans remains consistent with our prior comments.
Mr. Italia: Our focus on supply chain also continues to yield results.
Mr. Italia: Collins overdue line items across all suppliers were down over 20% versus the prior year and that Raytheon material receipts were up again, marking eight consecutive quarters of year over year growth.
Mr. Italia: Also in the quarter, we made significant progress on two future franchises and our innovation pipeline.
Mr. Italia: Pratt received FAA certification for the <unk> advantage and important milestone for the program.
Mr. Italia: The advantage incorporates all of the learnings from the first 10 years of the GTS engine in service.
Mr. Italia: We expect it to provide up to two times the time on wing compared to the current engine and it will enter service with full life Mlps.
Mr. Italia: We remain on track for initial deliveries to Airbus later this year.
Mr. Italia: We're also certifying an upgrade package to incorporate roughly 90% to 95% the GTS advantage durability improvements into the existing fleet during MRO visits.
Mr. Italia: We're targeting next year to have this package available for customers.
Speaker Change: And at Raytheon, we have completed the prototyping and development phase of the lower tier air and missile defense sensor or <unk> program.
Speaker Change: <unk> brings advanced 360 degree performance to the market and more than twice the tracking range compared to the existing Patriot radar system enhancing protection against complex threat scenarios, including large quantities of unmanned aircraft systems and hypersonic weapons.
Speaker Change: <unk> can be integrated with battle tested industry, leading capabilities of Patriot, which is the backbone of air and missile defense for 19 partner countries around the world.
Speaker Change: <unk> will now transition into the production and deployment phase with continued deliveries to the U S. This year and next followed by deliveries to European customers.
Speaker Change: So overall, we've made good progress in the quarter on multiple fronts and we're pleased with our performance.
Speaker Change: Okay, Let me turn to the operating environment and our current thinking on tariffs, which we have outlined in terms of potential direct impacts on slide four.
Speaker Change: Generally speaking the aerospace and defense sector has operated a duty free environment and that has been instrumental to the industry maintaining one of the largest trade surpluses across American manufacturing industries for decades.
Speaker Change: Our industrial base is largely located in the U S, including about 70% of our employees and the majority of our total labor manufacturing hours.
Speaker Change: And on the supply chain side about 65% of our product spend is with U S suppliers.
Speaker Change: We also continue to invest in our U S industrial base.
Speaker Change: Over the last five years, we've invested nearly $10 billion to enhance our domestic manufacturing footprint and capabilities.
Speaker Change: And this year, we're planning another $2 billion of investment to further increase our U S capacity.
Speaker Change: For example, in the first quarter Raytheon completed a $60 million expansion project in Tucson, Arizona, which will significantly increase capacity to support growing sector demand.
Speaker Change: And this year <unk> kicked off a $285 million investment to expand our foundry in Asheville North Carolina.
Speaker Change: This is part of our broader turbine airfoil production strategy to support growing demand and to maintain a competitive cost structure combined.
Speaker Change: This industrial base and significant investment supports our position as a net exporter of goods out of the U S with.
Exports exceeding imports by over $12 billion last year.
Speaker Change: But like many companies in the industry, our supply chain and customer base, our global and we import raw materials parts and modules from around the world.
Speaker Change: In light of this we would be impacted if the current environment were to stay in place because not all regulatory and operational mitigation would address our tariff exposure.
Speaker Change: But the situation remains fluid and it's difficult to assess the impact of multiple variables from a change in the duration and size of the current tariffs to counter measures taken by other countries to the potential secondary effects of customer reactions and supply chain and operational disruptions.
As a result, we have not included the potential tariff impacts and our outlook for the year at this time.
Speaker Change: That said, we believe it is prudent and helpful to at least share some estimates of the direct impact of the current tariffs on our outlook.
Speaker Change: Assuming they were to stay in effect throughout the year.
Speaker Change: Now. These estimates don't include secondary tariff related impacts such as changes to customer demand.
Neil: So let me turn it over to Neil to take you through our assessment of the impacts.
Speaker Change: Neil.
Neil: Okay. Thanks, Chris Let me take you through the various categories of incremental direct tariff exposure and the level of pre tax operating profit impacts net of available mitigation. We have currently assess for each category.
Neil: Starting with Canada, and Mexico, assuming the U S. MCA agreement continues we estimate there would be a cost impact of around $250 million, assuming current tariff rates remain in place for the rest of the year.
Neil: With respect to China at <unk>.
Neil: Current U S and China tariff rates, we estimate there would also be a cost impact of around $250 million again, assuming the tariffs remain in place through year end.
Neil: Keep in mind, our business in China, primarily serves local customers and China accounts for only about 2% of our global imports.
Neil: As it relates to the rest of the world. We estimate there would be a cost impact of around $300 million at the 10% tariff rate currently in place.
Neil: And finally on steel and aluminum we estimate the cost would be around $50 million for the year.
Neil: For all of these scenarios, we would expect to see most of the impact in the back half of the year as inventory is liquidated.
Neil: And from a cash perspective, we assume there would be a bit larger drag due to the timing of inventory consumption and duty drawback recovery and this impact will be evenly spread over the rest of the year.
Neil: Going forward, we expect the landscape to continue to evolve and will update our assessment accordingly.
Chris: Now, let me turn it back over to Chris.
Chris: As Neil said, we're closely tracking the changes in the global trade environment.
Chris: Some of the exemptions we've had in the past, we'll continue to apply such as the military duty free exemption for U S government and foreign military sale contracts. We are also working to implement and capture additional mitigation visa.
Chris: These include regulatory mechanisms such as temporary imports under bond duty drawbacks free trade zones, contractual and pricing actions and implementing operational changes such as leveraging different suppliers and assembly sites.
Chris: Despite these near term uncertainties I want to remind everyone that our company remains exceptionally well positioned in all of our key end markets given the strength of our product portfolio, which is reflected in our backlog.
Chris: We exited the quarter with a backlog of 217 billion, which was up 8% year over year and includes a 125 billion of commercial orders and $92 billion of Defense Awards.
Chris: On the commercial side, we remain cautiously optimistic that aircraft utilization will remain strong supporting continued aftermarket demand but.
Chris: But of course, we will closely monitor consumer sentiment as we approach the busy summer travel season.
Chris: On the OE front, we expect production of new aircraft remains strong given the backlog levels on our OEM customers.
Chris: On the defense side, we're encouraged that the continuing resolution passed with funding for key priorities, including next generation of depth of propulsion standard missile sectors, all teams radars and our Coyote counter UAS system.
Chris: There is also growing commitment to increased defense budgets globally.
Chris: Of note the European Union has pushed for an additional $850 billion in defense spending over the next four years focused on munitions and integrated air and missile defense products, which are fully aligned to our core capabilities, such as Patriot Naas, Ams Coyote and F 35.
Chris: These are all battle proven and tested systems, and our partners and allies rely on each and every day for National security.
Chris: Additionally, we have strong and longstanding international co production and co sustainment agreements with European companies, including <unk> and <unk> to position us well to help meet the increased demand across the region.
Chris: Before I hand, it back over to Neil Let me reiterate that we are very pleased with the performance in the first quarter and the progress we're making on our three strategic priorities.
Chris: Executing on our commitments.
Chris: Innovating for future growth and leveraging our breadth and scale.
Chris: And while the industry is operating environment is dynamic our team is experienced and we'll remain focused on execution and the things in our control.
Chris: Okay with that I'll turn it back over to Neal to take you through the first quarter results Neil.
Neil: Thanks, Chris I'm on slide five.
Neil: Chris said operationally, we are off to a strong start to the year in the first quarter adjusted sales of $20 3 billion were up 5% and up 8% organically led by strength in commercial aftermarket segment.
Neil: Segment operating profit of $2 5 billion was up 18% as drop through on higher volume the benefit of cost reduction activities and improved defense mix drove a 120 basis points of segment margin expansion with strong performance in all three segments and highlighting the continued momentum on our cost transformation activities across the.
Neil: <unk>.
Neil: We've now seen four consecutive quarters of year over year consolidated segment margin expansion.
Neil: Adjusted earnings per share of $1 47 was up 10% from the prior year driven by segment operating profit growth, which was partially offset by an expected higher effective tax rate and a higher share count.
Neil: On a GAAP basis EPS from continuing operations was $1 14, and included 27 of acquisition accounting adjustments and <unk> <unk> of restructuring and other items.
Neil: And free cash flow was $792 million in the quarter, which included approximately 200 million for powder metal related compensation.
Neil: On the capital deployment front, we returned $890 million of capital to shareowners during the quarter primarily through dividends.
Neil: And on the sale of the actuation business at Collins, we continue to make good progress on key milestones and are working through the remaining items required to close.
Neil: That let me hand, it over to Nathan to take you through the segment results for the first quarter Nathan.
Nathan: Thanks, Neal starting with columns on slide six.
Nathan: Sales were $7 2 billion in the quarter up 8% on an adjusted basis, and 9% organically driven by strength in commercial aftermarket and defense.
Nathan: Adjusting for divestitures by channel commercial aftermarket sales were up 13% driven by a 15% increase in parts and repair and 18% increase in mods and upgrades and a 1% increase in provisioning.
Nathan: Defense sales were up 10%, primarily due to higher volume across multiple programs and platforms, including multiple <unk> programs. The survival of Airborne operational Center program and F 35.
Nathan: In commercial OE sales were up 2% versus the prior year as higher <unk> hundred 20 regional and 787 volume was partially offset by lower 737 Max volume.
Nathan: Adjusted operating profit of $1 2 billion was up $179 million versus the prior year driven by drop through on higher commercial aftermarket and defense volume.
Nathan: The resulting margins at Collins expanded 130 basis points in the quarter versus prior year.
Speaker Change: Turning to Collins full year outlook, excluding the potential impact of the tariffs that Neil discussed we continue to expect sales to grow low single digits on an adjusted basis and mid single digits organically with.
Nathan: With operating profit growth between $500 million and $600 million versus 2020 for sure.
Speaker Change: Shifting to Pratt <unk> Whitney on slide seven.
Speaker Change: Sales of $7 $4 billion were up 14% on both an adjusted and organic basis with sales growth across all three channels.
Speaker Change: Commercial aftermarket sales were up 28% in the quarter, driven by higher volume and favorable mix across both large commercial engines and Pratt Canada.
Speaker Change: And military engine sales were up 4% driven by increased engine deliveries on the tanker program and higher volume on the F 135 engine core upgrade program.
Speaker Change: Commercial OE sales were up 3% in the quarter, primarily driven by increased deliveries.
Speaker Change: As a reminder, commercial OE sales were up 64% in Q1 of 2024.
Speaker Change: Adjusted operating profit of $590 million was up $160 million versus the prior year as increased deliveries and large commercial engines was more than offset by drop through on higher commercial aftermarket volume and favorable commercial aftermarket mix.
Speaker Change: Lower R&D expense more than offset higher SG&A expense.
Speaker Change: All of this resulted in margin expansion of 130 basis points in the quarter versus prior year.
Speaker Change: Turning to <unk> full year outlook, excluding the potential impact of tariffs. We continue to expect sales to grow high single digits on an adjusted and organic basis with operating profit growth between 325 and $400 million versus 2024.
Speaker Change: Now turning to Raytheon on slide eight.
Speaker Change: Sales of $6 3 billion in the quarter were down 5% on an adjusted basis as a result of the cyber security divestiture completed at the end of the first quarter of last year.
Speaker Change: As expected on an organic basis sales were up 2% driven by higher volume on land and air Defense systems, including International Patriot and El <unk>.
Speaker Change: Which was partially offset by lower development program volume with an air and space Defense systems.
Speaker Change: Adjusted operating profit of $678 million was up $48 million versus the prior year, driven primarily by favorable mix and $15 million of improved net productivity.
Speaker Change: This was partially offset by the absence of the cyber security business the.
The resulting margins at Raytheon expanded 120 basis points in the quarter versus the prior year.
Speaker Change: Bookings in the quarter were $4 4 billion.
Speaker Change: <unk> and our book to Bill of <unk> seven.
Speaker Change: And on a rolling 12 month basis Raytheon's book to Bill is 135.
Speaker Change: Key awards in the quarter included over $750 million for Netherlands Air and missile defense capabilities.
Speaker Change: $650 million of classified awards and about $250 million of evolved sea Sparrow missile orders for Japan.
Speaker Change: Turning to raytheon's full year outlook exclude.
Speaker Change: Excluding the potential impact of tariffs, we continue to expect sales to grow low single digits on an adjusted basis and mid single digits organically.
Speaker Change: With operating profit growth between 150 and $225 million versus 2024.
Speaker Change: With that I'll hand, it back over to Chris for some closing remarks.
Chris: Okay. Thanks, Nathan I'm on slide nine.
Chris: We open up to questions I want to emphasize that <unk> is built to perform in any environment. The fundamentals of our business remain intact and our continued focus on execution has delivered a strong start to the year.
Chris: We have industry, leading products on the highest growth platforms in commercial aerospace and defense and our commitment to innovation over the long term continues to pay off with next generation products, such as the <unk> advantage and El times, demonstrating our leadership and future growth opportunities.
Chris: The long term structural demand for our products and technologies all remain in place today. Additionally, the need for our defense solutions that provide critical security to the U S and our allies has never been stronger and.
Chris: So I'm confident that these trends will drive significant growth for us over the coming years.
Chris: With that let's open it up for questions.
Speaker Change: In the interest of time and to allow for a broader participation. You are asked to limit yourself to one question to ask a question you will need to press star one on your telephone.
Chris: Our first question.
Speaker Change: It comes from Peter Amit of Baird. Please go ahead Peter.
Chris: Yes, Thanks, good morning, Christy Neal and nice results.
Speaker Change: Hey, Chris.
Speaker Change: Thanks for the details on tariffs. It's very helpful. Obviously things are very dynamic. So I guess I'll ask a question on related to kind of the current defense environment.
Speaker Change: Are we seeing that we arm Europe effort.
Speaker Change: A big opportunity for Raytheon or does it change.
Speaker Change: Any of the timing of awards that you were looking at and then I guess just overall do you expect still the Raytheon business have a book to bill above one this year. Thanks.
Speaker Change: Yes, Thanks Peter.
Speaker Change: I would say that.
Speaker Change: The focus of the EU on ramping up prevent presents an opportunity for Raytheon clearly I mean, if you just think of the countries. They are Poland's up close to 5%. The UK has talked about taking spending up Germany obviously.
Speaker Change: Obviously, the EU announcement.
Speaker Change: For support for the $850 billion of additional defense spending over the next four to five years and I think again as I said upfront clear opportunity for Raytheon given its core competency in integrated air and missile defense systems.
Speaker Change: These are proven battle tested products think Patriot GMT, Naas Ams Coyote and.
Speaker Change: And we've got a very strong European installed base got eight Patriot users.
Speaker Change: We've got strong co production and co sustainment relationships as I said in my remarks, I mean, we've got nine suppliers in Poland alone on Patriot and BDA partnership on the Gem T ramp up so again strong demand in the region and strong partnerships overall I would tell you overall on raytheon's.
Speaker Change: Demand signal that Hasnt changed I think there are some timing issues that will recover in the year, which we expected, but the global demand remains strong we expect book to bill of one or more.
Speaker Change: I appreciate the color thanks, Chris.
Robert Stallard: Our next question comes from Robert Stallard.
Speaker Change: Vertical research. Please go ahead Robert.
Thanks, so much good morning.
Speaker Change: Good morning.
Robert Stallard: Yep.
Robert Stallard: Chris Oneal.
Robert Stallard: Fluid situation with the whole trade War thing.
Robert Stallard: In terms of the $850 million you've laid out here is that a gross or a net number. After you apply these mitigation and shipments that your peers. This morning said that they were essentially going to pass on cost charged to customers.
Robert Stallard: Ability do you have that particularly on the commercial aerospace side of things.
Speaker Change: Yes, Thanks, Rob Yes. The 850 is inclusive of mitigation, Rob those mitigation regulatory like we talked about things like duty drawback.
Robert Stallard: Contractual.
Robert Stallard: And again, that's pricing and other mechanisms and I'll talk about that in second and then operational where are there things, where we can optimize the flow of material and work.
Robert Stallard: Again get the best mitigation, we can from the tariff regime.
Robert Stallard: <unk>.
Robert Stallard: We've been operating in a highly inflationary environment over the last several years and so I think we've done pretty proficient at knowing where and how to pass along higher costs through pricing.
Robert Stallard: Again situation is fluid there are a number of variables that are out there and so we came into the year with a number of sort of levers we would potentially pull if we saw things change in the marketplace.
Robert Stallard: To let things sort of play out.
Robert Stallard: And then to the extent that we see some softening or other things then we're going to go and execute on that playbook, but again, we know how to push pricing I think just got to be balanced about it given where we are with our customers.
Speaker Change: Alright, thanks, guys.
Speaker Change: Thank you our next question.
Speaker Change: It comes from the line of Myles Walton of Wolfe Research. Please go ahead Myles.
Myles Walton: Thanks, Chris you mentioned that the tariff side didn't assume a change.
Myles Walton: Changes in customer buying behavior operational disruption could you maybe talk about those as elements of watch items in particular, the China strategy as it relates to aircraft and aircraft parts.
Myles Walton: What your assumptions are there in terms of what they may or may not do and then also.
Myles Walton: Relative to supply chain disruptions, where.
Myles Walton: Are you most focused to ensure that that these tariff issues don't create supply chain disruptions.
Bob: Yes, Thanks, Bob I'll take the supply chain piece first.
Bob: Just think of the first quarter, we saw again, some steady improvements continuing in our supply base.
Bob: Heard me talk about structural castings that proud of 16% year over year, you heard me talk about raytheon's material growth eight straight quarters Collins, bringing down overdue line items rocket Motors again, one of our key suppliers saw output up substantially in Q1 year over year. So saw some continuing stability.
Bob: An improvement in the supply chain as we exited Q1, and so obviously, we're going to stay super tight with our supply base, making sure that we're all working together on tariff mitigation and the movement of work and making sure that we don't see those disruptions I mean keep in mind. The industry has been used to a duty free.
Bob: And so all of us have had to come up with different sort of processes and protocols to avail ourselves of these mitigation that we've talked about and so again, we want to stay locked tight with our supply base to make sure. We know how to do this and we keep parts flowing we've seen in the past what happens when you kind of our Hershey jerky with your supply chain, we saw that in Covid. It takes a while to Rick.
Bob: Cover we want to continue that moving forward.
Bob: On China, I mean look it's obviously an important market for commercial aerospace both in terms of RP K growth fleet growth.
Bob: Say that western companies are pretty integral to the growth in China as well. So I don't want to get out ahead of ourselves here to see how this plays out I think we've just got to kind of sit back and see where it stands.
Bob: Point back to what I said before the U S.
Bob: The industry has a large trade surplus is a great example of U S competitiveness advanced manufacturing and technology leadership, and then ultimately we hope.
Bob: <unk> that's recognized.
Bob: On the supply chain front out of China, and we've been on a path to develop multiple sources globally for a while now a lot of that was hastened frankly out of Covid and so we're going to continue to accelerate those efforts.
Chris: Thanks, Chris.
Bob: Thank you.
Speaker Change: Our next question comes from the line of Ronald Epstein of Bank of America. Your question. Please Ronald.
Ronald Epstein: Yeah, Hey, good morning, guys.
Bob: Brian.
Bob: So yes, just recently as you all know.
Bob: The decision.
Bob: And at <unk>.
Bob: Aircrafts.
Speaker Change: Any idea and gap when that could be because I would imagine it's going to be one of the <unk> engines from you guys or your competitor.
Bob: You have any color on that.
Bob: Well I guess, what I would say here Ron is we got an award in Q1 for about $550 million to continue to progress on that gap and we're actually very pleased with what we're seeing on the testing side.
Bob: And we're getting some some great feedback from that and from the customer.
Bob: And again I think I think Pratt has a demonstrated record of providing leading fighter propulsion technologies at scale and it's making significant strides on technologies that are going to improve range and stealth. So again, we're excited that <unk> is moving forward.
Bob: Hopefully, what we're doing and then gap.
Bob: Will yield some benefit and we're again, we're pleased with how that program is moving and the funding that underpins it.
Speaker Change: Got it thank you.
Bob: Thank you.
Speaker Change: Our next question comes from the line of Scott Mitchell.
Speaker Change: Deutsche Bank.
Your question please Scott.
Scott: Hey, good morning, Chris have you seen any operational impacts of the Sps fire at either Collins and Pratt and then for RPX is most of that loss fastener capacity being made up by Sps itself on existing contracts.
Speaker Change: Anything to get that demand sales by alternative suppliers. Thank you.
Speaker Change: Yes got it.
Scott: Our team.
Speaker Change: Separate and apart from tariffs and all the analysis there was.
Speaker Change: It was working really hard on understanding the impacts from that fire, we're working closely with not only sps, but but others, where we could potentially pick up the slack there.
Speaker Change: I will tell you that as we continue to sort of move forward here worked through with some alternate suppliers work through with Sps, We're feeling more optimistic in our ability to avoid any notable impacts given the fire.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you our next question.
Speaker Change: Comes from the line of Sheila <unk>.
Speaker Change: <unk> of Jefferies. Please go ahead Sheila.
Sheila: Good morning <unk>.
Speaker Change: Sure.
Speaker Change: I wanted to go back to tariffs and I appreciate that's a pretty tough job and that type of aircraft that are say a.
Speaker Change: So we are maybe in your comments you mentioned the <unk> I just wanted to clarify that the net impact and how do we think about that across.
Speaker Change: The rest of it kicking into Q4 and across the segments is there any timing mismatch, where it hits Collins and Pratt in 2006.
Speaker Change: I will tell you that provides.
Sheila: Sure. Thanks Sheila.
Sheila: Obviously, a lot of estimates involved in kind of assessing the impact here, but just to be clear. The 850 on the page is an approximation. It is net of mitigation as Chris talked about there are a variety of mitigation is available to us and frankly many of them are new in terms of our application of them because.
Sheila: Yes.
We lived in an environment, where most of our goods were coming across the border without a duty and so we will continue to mature our mitigation strategies and in part the size of the number reflects the time that it takes to mature that so if you just step back though let.
Sheila: Let me break that down just a tad for you and again this assumes the rates.
Sheila: Are out there today remain in effect for the rest of the year think about that it's about a nine month period.
Sheila: I'd say the Raytheon impact is very minimal think about that as like a penny per share kind of a number the rest of it the residual impact is split pretty evenly between Collins and Pratt.
Sheila: A little over $400 million each as I think about the timing of that if this were to play out in effect.
Sheila: As it is today think about that fairly.
Sheila: Back half loaded on the earnings side.
Sheila: Because some of this will end up in inventory and then turn through the P&L as the inventory is sold.
Sheila: And then I guess, the other comment I would make I made a comment that the cash flow impact would be a bit larger and that's because of the timing lag on getting the duty drawback cash back to us So think about that as about 15% to 20% above the rough estimate that we provided today, so I think though.
Sheila: As I really step back I think there's a lot of variability yet to come here and so what we wanted to do today was just provide a framework and break it down by by bucket of applicable tariffs in countries. So that as things evolve it will be easier for you and for us to model that those changes and of course.
Sheila: When that firms up we'll take that into account and baked it into our outlook.
Speaker Change: Great. Thank you.
Sheila: Welcome.
Sheila: Thank you.
Speaker Change: Our next question comes from the line of Seth Sigman of Jpmorgan. Your line is open Sir.
Seth Sigman: Thanks, very much good morning.
Speaker Change: Morning, Seth.
Speaker Change: Just wanted to ask about the apology to be attractive but in the.
Speaker Change: You mentioned not assuming changes in customer behavior, but.
Speaker Change: Just kind of the latest indication youre getting in order activity in kind of the shorter cycle areas of <unk>.
Speaker Change: Collins aftermarket and what what kind of might be most exposed if we were to see.
Speaker Change: A significant slowdown in air travel for the rest of the year.
Speaker Change: Thanks, Seth that's a good question, let me start and I'll hand, it off to Chris if he has anything to add.
Speaker Change: I would anchor ourselves first and foremost back to the first quarter was a good solid first quarter I know that things have changed.
Speaker Change: As we exited the quarter, but our order activity was strong our aftermarket was really was really strong and as we looked at the first few weeks here in April we've seen no major changes in the behaviors of our customers now that's a relatively short period of time.
Obviously, given the dynamics in the environment, but as we look ahead I think and go around the business I'll start with the OE side.
Speaker Change: The demand there remains very strong obviously, it's a constrained environment, there's a lot of demand for new aircraft and we expect that to largely continue.
Speaker Change: If you stick with Pratt <unk> Whitney for a minute and you think about the aftermarket there clearly tremendous demand for GTS aftermarket we saw.
Speaker Change: Strong output as Chris alluded to in his opening remarks in the first quarter and expect us to be on track to continue to deliver growth there throughout the rest of the year.
Speaker Change: And on the V 2500 side I talked about 800 shop visit outlook for the full year and we were right in line with about a quarter of that in the first quarter, So and I'd say the same on the PW two thousands and four thousands are legacy engine. So the indicators there are pretty consistent I think we've got a good <unk>.
Speaker Change: <unk> view of the customer demand profile and we've factored in some of the things you are hearing about it from our customers.
Speaker Change: On the on the Collins side I would say the same applies on the OE outlook and as you think about the aftermarket really strong first quarter. The compares get a little bit more difficult, but again as we looked at April so far those orders remain intact. Now there is a reason we have a range on our outlooks and I think as.
Speaker Change: We sit here today I think our ranges operationally could absorb some of the impact if there is softening.
Speaker Change: In the later part of the year, we're coming on a really important part of the travel season.
Speaker Change: And as those aircraft fly they require parts they require maintenance and the slots coming into the shops are obviously constrained and I think our customers are going to want to maintain their position in line.
Speaker Change: Yes, I think the only thing that I would add Seth and it's building on something Neil said, which is really kind of the process that we go through and we've got people embedded with our airline customers service reps are customer facing teams do bottoms up analysis with our customers and have a really really solid understanding of their assumptions on traffic.
Speaker Change: On capacity and of their plans and the levers.
Speaker Change: They are thinking about sort of pulling in.
Speaker Change: So as we see how this sort of plays out.
Speaker Change: We will take action as necessary.
Speaker Change: We're watching those buying patterns, we watch them on a daily basis, and we react quickly when we see shifts.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jason Gursky of Citi. Please go ahead Jason.
Jason Gursky: Hey, good morning, everybody Hey, Jay.
Speaker Change: Neil I was.
Speaker Change: I'm wondering if you just a clarification one if you'd be willing to talk about the gross impact of tariffs you've talked about the net impact here.
Speaker Change: And then Chris I'm wondering.
Speaker Change: Just to get your initial thoughts and takes take on.
Speaker Change: Some of the executive orders that have been coming out of the White house. It looks like they want to get engaged in procurement reform and then they go off and rewrite federal acquisition regulation.
What should we be.
Speaker Change: Looking forward from the outside is necessarily a good thing to go see procurement reform and trying to cut down on red tape and speed up acquisition processes or are there. Some things that we should be kind of be on the watch it for that might have unintended negative consequences for the industrial lease.
Speaker Change: Well, Thanks, Jason Let me, let me start by talking about the tariffs a little bit I mean, I think it's it's mostly important to look at the net impact if you were to apply.
Speaker Change: The tariff rates to gross imports are gross movement across borders in the case of tariffs coming from other countries I think that would <unk>.
Speaker Change: Skew that number considerably.
Speaker Change: Particularly given some of the mitigation that are available to US you think about U S. MCA for goods, moving Canada, Mexico, and the United States.
Speaker Change: Fully cover us it's not the same as the commercial aircraft agreement that was in place and is no longer available, but that mitigate things in a significant way. Similarly on the on the defense side of the military military duty free.
Speaker Change: Options that were available to.
Speaker Change: That covers a significant amount of the gross impact it gets a little bit.
Speaker Change: More difficult because theres a lot more paperwork involved what it requires temporary import under bond or drawbacks.
Speaker Change: I think again, that's why we've laid out a net number here I think that's the most important thing and as I said before we're continuing to operationalize. The mitigation efforts. There is a fair amount of work to do.
Speaker Change: To ensure our products meet.
Speaker Change: Qualifications are either U S MCA.
Speaker Change: Or are able to qualify for temporary import under bond and of course drawbacks, because we need to track the parts on a serial number basis. So a lot to do I expect us to be able to mature that and.
Speaker Change: Improved things if this were to last multiple multiple years Chris.
Speaker Change: Yes on your second question, Jason I would just say look we applaud the administration's effort to streamline procurement the faster we can move to award and contract the better it gets us to line up our labor more quickly it gets us to get our supply chain on contract.
Speaker Change: More quickly takes risk frankly out of some of the bids time is never your friend as Youre trying to execute those things. So again, we see that as a net positive all around I mean, the focus for US Jason when you think about the executive orders and frankly, just the administration writ large is executing on our.
Speaker Change: <unk> backlog.
Speaker Change: The feedback that of course, we're getting is we need more of your product and we need it faster and so partnering with both the administration.
Speaker Change: And our supply chain, identifying where we see bottlenecks trying to eliminate those bottlenecks and keep the ramp going we've seen progress on a number of key programs. Thank gem T think coyote here in the first quarter and we still got to ramp ahead of us across a number of factors because the demand is really strong.
Speaker Change: Thank you our next question.
Speaker Change: It comes from the line of Gautam Khanna of Cowen.
Speaker Change: Your question please goto.
Speaker Change: Yes. Thank you good morning, guys.
Speaker Change: Good morning.
Speaker Change: I'm wondering if we could switch to OE.
Speaker Change: I was curious are you seeing any sort of.
Speaker Change: Production rate.
Speaker Change: Expectation declines on the <unk> hundred 50 or other products and.
Speaker Change: And if you could just update us on supply chain constraints and how those progress I know you've made some comments in the opening but can you just elaborate on 787 million.
Speaker Change: And some of the other areas that were.
Speaker Change: Long poles in the tent before thanks.
Speaker Change: Sure.
Speaker Change: Look.
Speaker Change: We all are.
Speaker Change: Ill.
Speaker Change: Echo what Nick said earlier, which is the air framers have strong firm backlogs and are focused on continuing the ramp right they need to keep material flow going through their shops from the supply chain. So we don't see any material changes there and again, we see a ramp ahead and we want to stay out of their way make sure. They.
Speaker Change: What they need from us as they are moving up that ramp.
Speaker Change: On supply chain I named some of the key part families sort of upfront here in terms of where we're seeing progress rocket motors structural structural castings again, we see steady improvement.
Speaker Change: Across again, we've got ramps ahead of us and our plans we've got to continue to see that improvement.
Speaker Change: On 787, we've done I think a very good job and working and partnering with Boeing on heat exchangers feel like that is now up to where it needs to be on 787 and.
Speaker Change: And we're going to continue to keep a close eye on that as Boeing continues to ramp.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Kristine <unk> of Morgan Stanley.
Speaker Change: Your line is open Christine.
Christine: Hey, good morning, everyone.
Speaker Change: Good morning, Neil.
Speaker Change: Morning.
Speaker Change: It's been in a negative impact on tariff, but I would imagine that in the discussion that the administration is having with other countries on how to close the U S trade deficit the aerospace defense industry its role as the next X.
Speaker Change: Net exporter and we can't really be ignored.
Speaker Change: I guess first are you having any discussions about that and are you seeing incremental demand from international orders.
Speaker Change: From this and second.
Speaker Change: Alien dollar U S defense budget kind of came under the radar a few weeks ago.
Speaker Change: And taking into this into consideration I mean, how much flexibility do you have in ramping up capacity.
Speaker Change: Yes.
Speaker Change: Yes, thanks for saying look we've been consistent in our advocacy.
Speaker Change: Through.
Speaker Change: The number of channels legislative with the administration on exactly what you just said again, we really believe that the U S Aerospace and defense industry is really well positioned to meet what the administrative sort of north star in trade objectives are and that this industry has just been a shining example of you.
Speaker Change: <unk> competitiveness and U S manufacturing prowess.
Speaker Change: If you just think about all the investments we make here in the U S. Both in terms of our people our factories and our technologies again those are the things that we continue to emphasize.
Speaker Change: On the on the 2026 sort of a budget I guess, we'll see how that ultimately shakes out again focus areas will continue to be integrated air and missile defense Homeland missile defense counter UAS I think all things that are in our core competency to your point on capacity and rate increases well.
Speaker Change: Again, you've heard us talk about our backlog today, we are in.
Speaker Change: And urgent mode in terms of increasing capacity across the board I gave you. The example of Tucson previously we've done it in Huntsville, we've done it in Camden, Arkansas, we're doing it across our footprint for the very reason that you mentioned, which is the demand is strong today and we see that continuing into the future and we've got to be ready to continue to me.
Speaker Change: That demand.
Speaker Change: Great. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of.
Speaker Change: David Strauss of Barclays. Please go ahead David.
Speaker Change: Thanks, Good morning, David.
Speaker Change: Just a follow up I think on some questions have been asked first of all the 2500 the shop visit assumption. There. This year. If that's held in and how you think the 2500 shop visits would hold up in a let's say flattish kind of flight hour environment. If we go into recession. That's first question and then.
Speaker Change: Secondly on on GTS and powder metal, Chris you've talked about the ramp that you saw last year and expecting this year on powder metal material and MRO capacity I guess how.
Speaker Change: How much how much do we ultimately or do you ultimately need to see.
Speaker Change: Powder metal capacity MRO capacity increase I guess beyond what youre thinking about for 2025 to be able to accomplish fixing all of the I think 3000 engines a need of parts replaced thanks.
Speaker Change: Sure I'll start with the last part David and then maybe you want to talk <unk>.
Speaker Change: 2500, when we think about the GTS, we management plan, David again pleased with the MRO output I'll note here that this MRO output was also on heavier work scopes compared to Q.
Speaker Change: Q4, so really pleased about that continue to see continued improvement and in sharp turnaround time, a lot of that is taking time out of gates, one and <unk> three.
Speaker Change: In terms of capacity again, I don't think it is.
Speaker Change: It's an MRO.
Speaker Change: Sharp issue, we've got the number of shops that we need in network, it's really just optimizing the flow within each one of those and again as I said before that comes down to the gate to material flow when we see materially material flowing.
Speaker Change: We see turn times come down substantially as I said, we're taking as much as we can out of the gates, one and three as we continue to drive better flow with our supply chain into gate too as we continue to see that improve we feel really good about the shops, we have in our network and their ability to take that material.
Speaker Change: And shrink turn times substantially.
Speaker Change: Thanks, Chris David on V 2500, rather.
Speaker Change: 800 shop visits was our estimate coming into the year as you pointed out we were up 7% in the first quarter of this year year over year in terms of our inductions right on track for about a quarter of the full year output. We're also seeing the mix of those shop visits trend towards heavier overhauls given the the age of that fleet.
Speaker Change: If you were to project that out if I were to project that out in a flatter.
Speaker Change: <unk> I think it holds pretty solidly we saw 11 retirements of V 2500 powered aircraft in the first quarter as you know over the last several years those retirements have been relatively low it's still a relatively young fleet and frankly, there is a tremendous amount of demand still as you all know in the narrow body.
Speaker Change: Area and so I think for a short period of time, even in a lower demand environment those shop visits would likely stay relatively consistent.
Speaker Change: Customers need that lift and as we continue to get the GTS fleet back up in the Air then I think we would see that start to tail off a little bit, but that's a little bit of a ways out.
Doug Harned: Thank you. Our next question comes from the line of Doug Harned Bernstein. Please go ahead Doug.
Doug Harned: Alright, good morning, Thank you.
Speaker Change: Doug.
Chris over the over the last couple of years, you've had a really.
Speaker Change: Big increase in backlog at Raytheon.
Speaker Change: That's been helped by international particularly Europe.
Speaker Change: When you look forward looking at mid single digit growth this year at Raytheon it seems to be.
Speaker Change: Do you have an outlook, that's well below what one might expect from that backlog growth can you comment on.
Speaker Change: The timing in which we should see that backlog flow into revenues and perhaps also how youre thinking about some of the buy European movement inside Europe, and how youre participating in kind of on the ground.
Speaker Change: In Europe as well.
Speaker Change: Yeah, maybe maybe I'll start with the second part first Doug as I was saying upfront.
Speaker Change: We view the increased defense spending in Europe, as an opportunity and we all saw the $850 billion support over the next four to five years to continue to build up.
Speaker Change: European munitions and defense overall.
Speaker Change: As I said one of the biggest needs are integrated air and missile defense systems, and effectors, which is again right in our core competency Patriot GMT Naas, Ams <unk>, which we just mentioned getting through milestone C and going into production another opportunity there so again.
Speaker Change: <unk> feel like.
Speaker Change: That's a real opportunity for us, especially on the back of the very strong partnerships that we have in terms of coal production and coal Sustainment. We don't go it alone in Europe on some of our key programs and we think Thats a competitive advantage.
Speaker Change: In terms of the timing of the sort of.
Speaker Change: Backlog, if you will Doug again, some of that is driven by contractual terms and length of those contracts how those play out but again <unk> got some very long lead material items that sit in many of these programs that take time again I'll go back to the point I made before the more streamlining we can do especially.
Speaker Change: On Fms you saw that with one of the <unk> that the government had sort of put out there streamlining that process faster that we can get supply our supply chain on contract get long lead material flowing and shorten those delivery cycles.
Speaker Change: And the only thing I would add sorry, I'll just add another point or two here I mean, if you looked within.
Speaker Change: And within the businesses land and Air Defense system, that's up strong double digits, right, where you would expect to see.
Speaker Change: The growth, we're seeing it it's offset by some expected headwinds and lower development programs and that frankly is.
Speaker Change: Lumpy it's timing.
Speaker Change: So I think as you step back and look at the broader Raytheon portfolio, we still feel good about the mid single digit sales growth. This year, we expected the headwind we saw in the first quarter. We have a couple of points of that headwind in the second quarter, frankly, but underlying the bread and butter of the Raytheon portfolio and remains on track and our execution is.
Speaker Change: On track, there and we're seeing capacity increases and thats translating to output. So I think those are a couple of dynamics going on within the business.
Speaker Change: Okay very good thanks.
Speaker Change: Thank you.
Speaker Change: Next question comes from the line of Scott Mike.
Speaker Change: <unk> Research. Please go ahead Scott.
Speaker Change: Good morning, Scott.
Speaker Change: Chris a quick question on Pratt there is a labor negotiation of the vote on a contract in early May I am just wondering how you're approaching that and if there's any contingency contingency plans put in place. If there is a strike to still work down the GTS eog's.
Speaker Change: Yeah.
Speaker Change: Well look I won't get into the specifics of that one Scott I'll, just say that I think we've had a pretty good track record over the last few years in a highly inflationary market with getting large significant union negotiations to agreement without any interruption and we're cautiously.
Speaker Change: Optimistic that we can do that here as well we have a longstanding relationship with this labor Union. There is a lot of demand in the system.
Speaker Change: Obviously feel like we can get to the right place there and continue to meet the demands of our customer.
Speaker Change: Alright, thanks for taking the question.
Speaker Change: You bet.
Speaker Change: Thank you. Our next question comes from the line of Matt Akers of Wells Fargo. Please go ahead, Matt.
Matt Akers: Hey, guys. Good morning, Thanks for the question.
Matt Akers: Sorry to go back to the tariffs, but I guess one question. We're getting this morning is kind of why why are you not able to pass through more of this $88 50, I guess, just either whether it's contract an escalation or just aftermarket pricing or kind of drawbacks. Because there are a lot of your product ultimately.
Matt Akers: Get the export is that not the right way to think about it or is there maybe like a timing mismatch that maybe you could get this back in the future or maybe could you, possibly do better than this if you are able to recover some of that.
Matt Akers: Well, let me break this.
Matt Akers: Two parts here so.
Matt Akers: In terms of can we do better. So you sort of set upfront. These are relatively new sort of processes and systems that we've put in place to avail ourselves of the mitigation the regulatory mitigation and some of the operational mitigation. So as we continue to get reps on those I suspect that we will get.
Matt Akers: Those more learned out and there could be opportunities.
Matt Akers: On pricing again, I would say that we had experienced over the last few years and how to pass along higher costs through pricing to our customers, where we're reasonable again I think you have to be balanced you have to balance that against a number of factors your contract of course.
Matt Akers: Yes.
Matt Akers: But what the market will bear what the market landscape is we have not been shy about pushing through higher costs through pricing and we'll continue to look for opportunities to do that.
Matt Akers: But I don't think it is.
Matt Akers: It is not a panacea for all things tariff.
Matt Akers: Okay. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Noah <unk> of Goldman Sachs. Your question. Please Noah.
Matt Akers: Hi, good morning, everyone.
Speaker Change: Hey, Noah.
Speaker Change: Neal your full year guidance for segment EBIT at Pratt and Collins I think implies that margins are pretty flat sequentially through the year, maybe even down a little at Collins.
Speaker Change: Can you talk about that how much of that is actual pre.
Speaker Change: Pre tariff fundamental drivers in the business and how.
Speaker Change: How much of that is leaving cushion.
Speaker Change: Therefore absorb.
Speaker Change: Tariffs if they stuck.
Speaker Change: Thanks, Bill I appreciate the question and I think if we were sitting in an environment with maybe a little less uncertainty I feel like we're well positioned within our outlook and that's how we started the year as we talked about 90 days ago strong first quarter really pleased with the margins we saw both at Collins.
Speaker Change: And at Pratt and I would I would comment.
Speaker Change: That was on.
Lower spare engines and more install engine. So I think I'm really pleased to see the kinds of margins, we're seeing there with the mix of the install.
Speaker Change: Versus spare engine mix in the first quarter.
Speaker Change: And as we look out to the rest of the year, we'll see.
Speaker Change: Higher installs at Pratt.
Speaker Change: Will bring with it a little bit of headwind as it does all the time.
Speaker Change: But I remain cautiously optimistic I think at this juncture in the year given the uncertainty we're seeing.
Speaker Change: Around the customer base, we're going to sit here and hold that for.
Speaker Change: For the rest of the year, we will look at it again in another 90 days and the strength continues then that will be great. If if not I think we got a little room to absorb some softening that might take place as.
Speaker Change: As we exit exit the summer months, so I'll just leave it at that for now and of course 90 days, we'll be back to provide an update.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Kevin: Our final question comes from the line of Gavin Parsons of UBS. Please go ahead Kevin.
Speaker Change: Thanks, Good morning.
Speaker Change: Hey, Kevin.
Speaker Change: Maybe just following through on Raytheon margins, there I think the guide for the full year implies about 10, 5% and I think that's where the $100 million productivity. So given you did 10 seven in the first quarter was $15 million of productivity I guess versus there is anything abnormal in that margin and then second longer term on Raytheon margins anything that Keith.
Speaker Change: You from achieving that.
Speaker Change: 100 basis points of volume plus 100 basis points of productivity that you had been talking about a couple of years ago.
Three investor day.
Speaker Change: Sure. Thanks for the question.
Speaker Change: Listen I think we're pleased with the Raytheon margins in the first quarter. Two obviously, it's not where we think the full potential of the businesses. We think it can get back into the 12 plus percent range and will we saw about $15 million year over year of productivity improvement. We had said, we'd see about $100 million on a full year basis and still hold that expectation.
Speaker Change: So again mix contributed in a significant way in the first quarter that mix can vary throughout the course of the year, but we're definitely seeing a trend towards more international mix.
Speaker Change: The Raytheon.
Speaker Change: Sales and backlog and we expect that trend to continue so again.
Speaker Change: At this point in the year just wanted to make sure we reserve a certain amount of contingency here.
Speaker Change: I feel good about how we started the year and I expect us to continue to see that play out we have big growth in absolute dollars in profit for Raytheon as we move through the rest of the year.
Speaker Change: <unk> really.
Reliant upon the continued supply chain health again, we've seen good movement, there eight consecutive quarters of material growth. So again, assuming all of that holds we expect that margin as we go through the rest of the year as well so thanks for the question.
Speaker Change: Thanks.
Speaker Change: With that I would now like to turn the conference back to make them aware.
Speaker Change: Alright. Thank you Latif that concludes today's call as always the Investor relations team and I will be available for follow up questions. So thank you all for joining us today and have a good day.
Speaker Change: This now concludes today's conference you may now disconnect.
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