Q2 2025 RTX Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the RTX second quarter, 2025 earnings conference. Call my name is Latif and I will be your operator for today.
Speaker Change: As a reminder, this conference is being recorded for replay, purposes on the call today, are Chris Caleo, chairman and chief executive officer.
Speaker Change: Neil Mitchell Chief Financial Officer and Nathan wear, 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 RTX website at www.
Speaker Change: Rtx.com.
Speak to results from continuing operations, excluding acquisition accounting adjustments, and net non-recurring Andor 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 4 looking statements provided in this, call are subject to risk and uncertainties.
Speaker Change: RTX FCC filings, including its forms 8K, 10q, and 10K, provide details on important factors that could cause action 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 1, 1 question per caller to give everyone the opportunity to participate.
Speaker Change: To ask a question, you will need to press star 1 1 1 on your telephone,
Speaker Change: You may ask further questions by reinserting yourself into the queue as time permits.
Gallo: With that, I will turn the call over to Mr. Gallo.
Mr. Gallo: Thank you and good morning everyone.
Mr. Gallo: We delivered very solid results in the second quarter as we continue to execute in a dynamic operating environment.
Mr. Gallo: On the top line sales were up 9% organically year-over-year, including 16% commercial aftermarket growth, continuing the momentum from q1.
Mr. Gallo: Segment, operating profit was up 12% year-over-year supported by growth across all 3 of our segments.
And free cash flow for the quarter was approximately break, even as we previously discussed primarily related to the 4-week work. Stoppage at Pratt in May which we expect to recover in the second half of this year.
Mr. Gallo: We also continue to see exceptionally strong demand for our products with a Q2 book to Bill of 1.86 and our backlog. Now stands at 236 billion up 15% year-over-year and 9% sequentially driven by several notable wins in the quarter.
Mr. Gallo: Pratt booked over a thousand gtf engine orders, including up to 177 aircraft for Wizz Air and 91 aircraft for Frontier Airlines. As they further expand their gtf powered fleets.
Speaker Change: In rathvon booked over 5 billion of integrated air and missile defense Awards, including 1.1 billion for aim9x defectors.
Speaker Change: This is the largest order in the history of the program will benefit the US and international customers.
Speaker Change: I'll now turn to the current operating environment.
Speaker Change: In commercial Aerospace. OE production was strong and in line with our expectations for the first half of the year and we remain positive on the ramp continuing in the back half supporting growing demand for our products.
Speaker Change: Global rpk are also expected to continue to grow over 5% for the year, which supports lower retirement levels, and strong commercial aftermarket demand.
For example.
Speaker Change: Our v2500 powered aircraft lead has seen a 1% retirement rate so far this year.
Speaker Change: On the defense side, the growing need for air dominance is creating unprecedented demand for our core defense products across RTX.
Speaker Change: The US budget reconciliation legislation that passed earlier. This month contains over 150 billion for additional defense spending with about 50 billion of funding for golden, dome and Munitions. Again, both core areas for RTX.
Speaker Change: And longer term NATO allies. Have agreed to increase core defense spending to 3 and a half percent of GDP over the next decade with an increased focus on integrated air and missile defense.
Speaker Change: to support the growing demand across Europe, we continue to expand our regional Partnerships
For example, in the quarter rathvon entered into an industrial cooperation agreement, with the Spanish Ministry of defense that will support the production ramp for Patriot in the local region.
Speaker Change: So overall demand remains strong across our end markets and supports continued Topline growth across the business.
Speaker Change: On the trade front, it continues to be fluid. But our outlook on the impact of tariffs has improved for the year. As there have been some positive announcements to date such as the UK agreement, which provides exemptions for Aerospace components.
We also continue to improve our ability to mitigate tariff, headwinds including optimizing material flow, or possible, and through pricing actions.
Speaker Change: As a result of these developments and our strong, first half performance, we're increasing our adjusted sales outlook for the full year.
Speaker Change: We're also revising our adjusted EPS Outlook to incorporate drop through on the higher sales. Continued cost discipline across the business and our current assessment of tariff impacts
Speaker Change: and for free cash flow. We are maintaining our full year outlook.
Speaker Change: And you will take you through these details in a few minutes. But before he does, you provide an update on the progress. We're making on our strategic priorities, on slide 4.
Speaker Change: First is executing on our commitments.
Speaker Change: On the gtf, Fleet Management plan our financial and Technical Outlook remains consistent with our prior comments.
Versus the prior year and 10% sequentially.
Speaker Change: Which supported a 22% year-over-year Improvement in pw1100 Mr. Output, this quarter despite the Pratt work stoppage.
Speaker Change: And we remain on track for over a 30%. Mr. Output Improvement for the full year, which is the key enabler to reducing aogs in the second half.
Speaker Change: And at rathvon the team is leveraging. Our core operating system to significantly increase production this year for multiple sectors, including GMT, coyote and amram
in the quarter, both GMT and coyote saw output more than double year-over-year.
Speaker Change: Is innovating for future growth.
Speaker Change: Autonomy and AI are significant parts of our RTX cross company technology roadmap.
Speaker Change: Earlier this month, we announced a new partnership with Shield, AI to integrate AI based sensor and Target recognition capabilities into select raon products.
This includes loitering Munitions and our multi-spectral targeting system, which is a battle tested sensor package. That provides long-range surveillance and Target tracking for a variety of munitions.
Speaker Change: Also in the quarter, rathvon announced a collaboration with kongsberg, to co-develop sub Assemblies of the ghost. I radar
The ghost. I system adapts the fundamental technology of lands into a smaller 360° solution for advanced medium-range tracking that will detect drones cruise missiles and other Airborne threats.
This system Builds on the battle tested Nahum solution.
Speaker Change: Which has 13 partner countries and over a thousand intercepts over, just the last few years.
Speaker Change: And it's another example of how we're expanding our regional Partnerships in Europe.
Speaker Change: And lastly, we can continue to Leverage The breadth and scale of our TX.
Speaker Change: The company we're implementing our proprietary data analytics and AI platform to accelerate our backlog and increase productivity across our operations.
Speaker Change: This platform is our digital backbone. That connects our Enterprise systems, thousands of shop floor machines and millions of hours of product data to enable more efficient operations and smarter, and faster decision-making.
Speaker Change: For example, in Collins avionics business, our Engineers are using this platform to reduce software development Times by around 30%, allowing us to deliver faster, and more frequent software upgrades to our customers.
Speaker Change: Shifting to the portfolio in the quarter, we entered into an agreement to sell, Collins, Simmonds Precision products, business for 765 million.
Speaker Change: And yesterday, we completed the 1.8 billion sale of our actuation business.
Speaker Change: Both transactions highlight our efforts to focus and invest in our core capabilities.
With proceeds, to be used to further, strengthen our balance sheet.
Lastly, we raised our dividend by 8% in the quarter reflecting our confidence in executing, our backlog, in the long-term cash generation capability of our company.
With this dividend increase. We now expect to deliver 37 billion of capital to share owners from the date of the merger through the end of this year.
Speaker Change: And we remain committed to a long-term capital return policy that includes growing. Our dividend and returning excess Capital to share owners.
Speaker Change: overall, we continue to make steady progress on our key priorities, and I'm pleased with the performance and momentum to the first half of the year,
Neil: With that. Let me turn over to Neil to take you through the results and our updated outlook for the full year.
Neil.
Neil: All right, Chris. Thanks, I'm on slide 5.
In the second quarter, adjusted sales of 21.6 billion were up 9% of both an adjusted and organic basis.
Growth was led by strength across all, 3 Channels with commercial aftermarket up 16% commercial, OE up 7% and defense up 6%.
Neil: Segment, operating profit of 2.7 billion was up, 12% driven by dropped through on higher volume and improved defense mix. And we saw 30 basis points of Consolidated, segment margin expansion.
Adjusted earnings per share of a $1.56, was up 11% from the prior year during by segment operating profit growth and a lower effective tax rate.
Neil: Earnings per share included approximately 6 cents of higher tariff costs.
Neil: On a gap basis. Epps from continuing operations was a $1.22 and included, 28 cents of acquisition, accounting adjustments and 6 cents of restructuring and other items.
As expected free, cash flow was an outflow of 72 million. This included approximately 250 million for powder metal related compensation, and 175 million related to tariff impacts.
Neil: So overall our first staff results were strong driven by end market demand and execution across all 3 segments.
Neil: Now, let's turn to slide 6 and I'll take you through our Outlook.
Strong first half performance. We are increasing our full year, adjusted sales Outlook to a range of 84.75 billion to 85.5 billion up from our prior range of 83 billion to 84 billion.
Neil: This translates to between 6 and 7%. Organic sales growth for the year up from our prior range of 4 to 6%.
Looking at it by Channel at the RTX level and adjusting for destitutes. We now expect commercial aftermarket sales to grow low teens up from our prior Outlook of around, 10% growth.
On the commercial, OE Side, sales are expected to grow High, single digits, year-over-year up from our prior Outlook of mid single digits.
Neil: And we continue to expect defense sales to grow, mid single digits across the company.
On the bottom line, we continue to improve our ability to mitigate tariff. Headwinds including expanding usmca coverage, qualifying additional parts for military, duty-free, exemptions and maximizing. The use of free trade zones in addition to the items that Chris mentioned
Neil: As a result, our current assessment of 2025 tariff costs, net of mitigations is around million dollars.
Neil: Well, approximately 125 million already incurred in the first half of the year.
Neil: In addition we see the associated cache impact to be around 600 million for the full year again a notable Improvement.
Neil: We have Incorporated these impacts into our updated full year outlook.
The taxes. We are pleased with several elements of the recently enacted legislation that restores the full expensing of research and development costs and maintain stability in the corporate tax rate and we continue to expect an effective tax rate of 19.5% for the full year.
Neil: In addition improved operating performance including additional profit growth at rathvon and volume dropped through at pratten Collins is providing 10 cents of eps Improvement, which partially offsets the 30 Cent tariff headwind.
Neil: All in we now see adjusted EPS at a new range of 5.80 to $5.95 for the full year versus our prior range of $6 to 6.15.
On free cash flow.
Neil: We continue to expect between 7 and 7.5 billion for the full year. As the headwind from tariffs will be offset by the benefit from improved cash taxes.
Neil: The primary drivers of our second half cash flow growth will come from segment profit and working Capital Improvements including the recovery from the work stoppage at Pratt.
Neil: With that, let me hand it over to Nathan to take you through the segment results for the second quarter.
Nathan: Okay. Thanks. Neil.
Neil: Starting with Collins on slide 7.
Nathan: Sales were 7.6 billion in the quarter.
Nathan: 9% on both an adjusted and organic basis driven by strength in commercial aftermarket and defense.
Nathan: Adjusting for the vestures, by Channel commercial. Aftermarket sales are up, 13% driven by a 20% increase in mods and upgrades a 12%, increase in parts and repair, and a 9% increase in provisioning.
Nathan: Defense sales were up, 11% driven by higher volume across multiple programs and platforms, including the F-35 and the survivable Airborne operations center programs.
Commercial OE. Sales were up 1% versus the prior year as expected lower volume on the 737, Max was more than offset by higher volume on other platforms, including the 787.
Nathan: Adjusted operating profit. Of 1.2 billion was up, 104 million versus the prior year as dropped through on higher commercial, aftermarket and defense volume. Favorable defense mix and lower R&D expense more than offset on favorable commercial OEM mix and the impact of higher tariffs across the business
Nathan: Turning to Collins full year outlook. We now, expect sales to grow mid single digits on an adjusted basis and high single digits organically.
Nathan: Up from our prior range of up, low single digits on an adjusted basis and up mid single digits, organically driven by strength in commercial aftermarket and defense.
Nathan: With respect to operating profit. We now expect growth between 275 and 350 million versus 2024 compared to our prior. Expectations of up between 500 and 600 million driven, by the expected impact of tariffs, which was partially offset by increased volume drop through.
Nathan: Shifting to Pratt and W on slide 8.
Despite the impact of the 4 week, work stoppage that occurred in the quarter sales of 7.6 billion or up, 12% on both an adjusted and organic basis driven by strength and Commercial aftermarket and Commercial Oe.
Nathan: Favorable Mexican pra, Canada.
Commercial Louis sales were up, 15% driven by favorable mix in large commercial engines and higher Pratt Canada volume.
Nathan: In military engines, sales were flat driven by f135 volume, including the impact of contract award timing.
Nathan: Adjusted operating profit of 608 million, was up, 71 million versus the prior year as favorable commercial only mix drop through and higher commercial. Aftermarket volume and lower R&D expense more than offset on favorable commercial aftermarket mix. The impact of higher tariffs across the business and the 4 week work stoppage.
Nathan: Turning to Pratt's full year outlook. We now expect sales to grow low double digits on an adjusted and organic basis.
An increase from our prior range of up, high single digits driven by strengthening commercial aftermarket and Commercial low. We mix
Nathan: with respect to operating profit. We now expect growth between 200 and 275 million versus 2024 compared to our prior expectation. Of up between 325 and 400 million driven, by the expected impact of tariffs partially offset by increased volume. Drop through
Speaker Change: now, turning to rathvon on slide 9,
Sales of 7 billion and a quarter or up 6% on both an adjusted and organic basis driven by higher volume on land and air defense systems, including International Patriot and naams and higher volume on Naval programs, including spy 6, and evolved sea Sparrow missile.
Speaker Change: This was partially offset by expected lower development program volume with an air and space defense systems.
Adjusted operating profit of 8009 million was up, a 100 million versus the prior year driven by favorable program mix including International Patriot and higher volume.
Speaker Change: Bookings in the quarter were 9.4 billion resulting in a book to Bill of 1.35 and a backlog of 63 and a half billion dollars.
Speaker Change: on a rolling 12-month basis, raton's book to bill is 1.49
other key Awards in the quarter included over, 1.2 billion for sm3 production, and approximately 650 million. For spy, 6 production,
Turning to raton's full year outlook, we continue to expect sales to grow low, single digits, on an adjusted basis and mid single digits organically.
With operating profit growth between 225 and 300 million versus 2024 up from our prior expectation of between 150 and 225 million driven by favorable international program. Mix,
Chris Caleo: With that, I'll hand it back over to Chris. For some closing remarks,
Okay. Thanks Nathan. I'm on. Slide 10.
Chris Caleo: We have a great moment to cross RTX through. The first half of the year, we delivered strong top and bottom line growth and our end markets, remain robust.
Chris Caleo: Seen by our recent customer wins and 1.86 booked to bill in the quarter and our backlog. Now stands at 236 billion.
Chris Caleo: Looking toward the second half of the year. We are focused on what we can control. Executing our backlog, driving cost discipline and investing in innovation.
Chris Caleo: With that, let's open it up for questions.
Chris Caleo: And the interest of time and to allow for broader participation, you are asked to limit yourself to 1 question. To ask a question, you will need to press star 1 1 1 on your telephone,
Speaker Change: Our first question comes from the line of Jason merki of City. Please go ahead. Jason
Jason merki: Hey, good morning everybody. Good morning.
Hey, Chris wondering if you wouldn't spend a few minutes on Raytheon and maybe talk about um, the multi-year outlook here. Um, you've got a, had a really solid book to bill here over the trailing 12 months, as you just highlighted, and
Jason merki: Yes, we'll highlighted. Um, the upward pressure on budgets, both domestically and internationally the Partnerships that you're setting up.
In Europe, um, for Patriot production, for example. So just kind of curious. Um, when you think, you know, based on the feedback that you're getting from customers, we might begin to see
Jason merki: Birds flowing on on on on some of this Outlook and um, how quickly you think you can convert that into Revenue? Once you begin seeing, you know, words, for example, on golden dome, um,
And um, just kind of the the the opportunities and and challenges that you have ahead of you to, to go, you know um convert all of this Pipeline and backlog into Revenue, just kind of what what the multi-year Outlook looks like here from a growth perspective. And thanks, uh, thanks for the thoughts.
Well thanks Jason. And I think you sort of let off with how I would start this story which is really on the demand profile. I mean rathvon did have another very strong quarter uh of demand a 1.35 book to Bill. If you look at their backlog, you know, since the end of 2023 it's up about 25% and it's in those areas, Jason that we've said before are really core, right? Integrated air and missile defense factors, you know, sensing
Jason merki: You mentioned the international demand which again Europe you know the 3 and a half percent that's going to play out over the next decade or so we continue to see strong demand and Mena region in Asia Pacific given the Indo pacom you know threat. Um if you just think also just about reconciliation you mentioned it 25 billion for golden dome, another 25 billion for afectar. We think golden dome in particular is really well aligned with our core capabilities and product portfolio. You know again battle tested and proven systems at each layer think Patriot Nays Sams, you know, coyote
Jason merki: Additional levels of potential protection on the coast with our Tippy to radar and the long range sm3. And so really demand across the board and and our Focus this year has really been on ramping. We're going to see significant increases this year on a number of Key Programs GMT. And coyote are going to double in particular amram
And so, when we talk about ramping, it's a it's about capacity. And it's about the supply chain, we're investing about 250 million this year in capacity, Tucson, McKinney Camden, and we're injecting people into the supply chain, which is again, why you're seeing material growth for the ninth straight quarter, you know, at rathvon. So the demand signal is again super strong. Um, we continue to form key Partnerships in Europe, set up, second sources, co-production all the things that help, you know, drive this backlog and execute, you know, on this demand. I I won't I won't speculate on when some of this stuff like golden dome turns into turns into sales and awards but you know there's a significant opportunity there for us and you know we are well positioned and highly engaged in that process.
Jason merki: Great, thanks.
Jason merki: Thank you.
Speaker Change: Our next question comes from the line of Robert Stallard of vertical research. Please go ahead, Robert
Thanks so much. Good morning, good morning. Hey Rob.
Speaker Change: Chris and Neil thanks for the update on the Tariff situation, which is obviously tough to predict. Uh, but I was wondering if you could give us a bit more detail on some of the moving parts you've given him Q2 versus q1. Uh, whether you've factored in or seen uh any negative uh developments on the demand side particularly from US Airlines. Thank you.
Speaker Change: Yep.
Speaker Change: Well, I'll start on the, on the Tariff front. Rob, give a little more color there, you know, as we set up front and prepared remarks, our initial Outlook was 850 million. We've now reduced that to 500 million about half of that reduction comes from the reduced rates and the pausing another, the other half comes from the improved, mitigation actions that we've talked about think usmca think, you know, um, some certain pricing actions optimizing the flow of material around our Network,
Um, so that's, that's the Tariff piece. And again, as an overall sort of macro, look at tariffs, I think, you know, countries want to get deals done. I think there's going to continue to be some escalation and flare-ups that sort of the nature of how these things work. But I I think even with some of the more difficult negotiations that are out there generally, speaking people want stability, they want predictability and we're confident that those deals, you know, will get done. We haven't seen it at at this stage, bleed, through into demand. You just look at the commercial aftermarket here. In the first half, again, really strong, 18%, organic growth. We've seen increased shop visits, uh, in the pra platforms, both v2500 and a pra Canada.
Speaker Change: If you look at Collins, you know, all their channels had booked a bills over 1, some very strong Demand on mods and upgrades.
Speaker Change: And again on a more macro level, I would say, the consumer sentiment index continues to rise on employment remains low. I think the airline commentary has been around a more stable environment which you know provides a good platform for continued strength in the aftermarket.
Speaker Change: So again, I think we've we've got our arms around, you know, tariffs as we see them today and continue to see strength in the market.
And Rob. Let, let me give you a little bit of color on, on the segments. So, if you think about the 5 0, 0,
They're revised Outlook and about 225 relates to Pratt and Whitney. And if you think about the second quarter, so what's behind us? We got about 100 million or so behind us. 60 of it is sitting inside of the Collins numbers in the second quarter and 40 million is sitting inside of the Pratt numbers. Um and I I already mentioned how much cash we've incurred to date in terms of an outflow? It's about 175. So we got about 425 to go for the rest of the year. Just a little extra color from the segment perspective.
Speaker Change: That's great. Thanks so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Miles Walton.
Of wolf research. Please. Go ahead miles.
Miles Walton: Thanks, good morning. Um maybe just 1 clarification first and then a question. So the clarification in terms of the Tariff assumptions, are you assuming that they revert on August 1st back to the Liberation day levels or the the new levels or or just they continue at PACE where they are? Um and then the real question is on the reconciliation Bill. If you can just put a a finer point on the specific benefit, you got from the the R&D capitalization reversal and how that proceeds over the the coming few years. Thanks.
Sure. Thanks miles for the question, uh, just to clarify on, um, the, the Tariff piece. So, you know, our 500 million contemplates, the rates that are currently in effect today. Um, so we haven't you know, contemplated something going up on August 1st or anything that might transpire after that, however, I'll make a couple of comments on that. The first is should should rates change go up. You know, we'll probably see about a couple of months of that hit the income statement, the rest would sit in inventory, at the end of the year. Um, we think that between um, the way we're looking at the year in terms of our risk and opportunities, as well as the range we provided on the earnings per share, we'd be able to absorb that I would say, the same thing on the Free Cash Flow side. So that's why we've got a range around those 2, uh, particular metrics. And um, you know, as we sit here today, there's still a lot, uh, to learn over the next couple of months, and we'll be monitoring that. And of course, as Chris just said, we're working our mitigations to continue to offset any additional headwind that might come
On the tax side. Um again pleased to see the permanent restoration of R&D in particular, as you all know, the the tax rules are very complicated. Uh, so we're dealing with, um, a number of Provisions that are embedded in that legislation. Uh, we do see a little bit of uh, income statement headwind this year. We're offsetting that with some other operational, uh, tax, uh, items for the year. So no net impact there. Keeping our effective tax rate, at 19 and a half percent on the cash side. Um, as you probably
We all know this bill was effective as of the beginning of 2025. And so, again, a lot of complexities, there we do expect a cash benefit, uh, to come this year. It's fairly, um, moderate, um, it probably accounts for 2530 cents, the offset to the Tariff headwind that we're seeing this year, but we'll expect that to continue to be a benefit going forward in 267 and 8 as we continue to um, you know, work through the, you know, the the varying provisions of that that bill including, you know, the the capitalization versus expensing of research and development and how we handle that and the interplay with um, some corporate Alternative, Minimum taxes. So very complex, but big big picture. It's favorable, you know, great to see the corporate tax rate maintained at 21%. I think that's really important for American companies to maintain our competitive, uh, global global Edge. And uh, you know, we're continuing to invest research development here in the United States as well as capital, um, and we get a bonus deduction for that as well from the provision.
Miles Walton: So all good and uh you'll see that in the numbers as we get uh into next year.
Miles Walton: All right. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Scott disa of disa Bank. Your line is open Scott.
Scott: Hey, good morning.
Speaker Change: What is Scott? Hey, Scott. Sorry to ask another question on tariffs. But Neil, should we expect the net impact of terrorists to decline in 2026 relative to 2025? Assuming these current rates hold, and then does that net impact, decline more for cash than it does for ebit as you go into next year?
Speaker Change: Scott, thanks for the question. Um you know, I don't want to get too far ahead of us for 26 but what I will tell you is that um, you know, we're continuing to aggressively work to mitigation strategies here. We've been very successful in identifying opportunities to qualify more of our, our Imports, under the usmca, provisions, military military, duty-free exemptions, um, putting Bonds in place for goods that get re-exported. Um, so I think we have a number of things, Chris alluded to, you know, some of the pricing actions as well.
Speaker Change: Seeing good traction. Don't want to put a number on it today but our intent here is to continue to aggressively mitigate these uh these headwinds so that we don't see a larger year-over-year headwind coming into 26.
Speaker Change: Thank you.
You're welcome.
Speaker Change: Thank you. Our next question comes from the line of Sheila, Kahu of Jeffrey's. Please go ahead. Sheila.
Sheila: Good morning guys, and thank you so much. Um, maybe we could talk about the core business because it performed very well at Pratt. So, um, the guidance is now double digit, aftermarket growth for Pratt. After 24% in H1 implies a steep, steep deceleration, how are we thinking about aftermarket? Whether it's spares works good, the 22% mro output on gtf, despite the strike. Um, and I think you mentioned the 2500 retirements that 1% year to date. So maybe just based on G commentary last week. They're extending their shop. Visit Peak as well. How are you thinking about?
Sheila: Volume profit drop through on the 2. Large commercial engine programs.
Speaker Change: Hey, good morning. Sheila
Speaker Change: So, you know, I'll sort of pick up to, to kind of where you were going here on the mro output at Brad on the gtf 1100 again. We were we were pretty pleased up up 22% in Q2 you mentioned that's despite sort of the parts supply impact from the 4 week, work stoppage. Also on heavier work Scopes, so feel good about that output.
Speaker Change: and that's key, obviously to continuing to move the, you know, aogs down here in the second half of the year on the v2500 continue to see, sort of strength in, in that, in that program, um, where obviously halfway through the year and and feel really good about the 800 or show or so shop, visits that we forecasted for the year and I'll tell you when you look a little bit longer term there, um, I think that program is going to continue to have strength
Speaker Change: Frankly Beyond where we thought it would 3, 4 years ago, that platform continues to perform exceptionally. Well demand is there and even that shop visits potentially start to come down at some point, I think you'll start to see the content go up. So feel really good about gtf and the v2500 and then, of course, there's also pra, Canada, uh, continued strength there in their shop visits and on their portfolio. So feel good about the Pratt commercial, aftermarket story.
Speaker Change: And maybe just to put a finer point on on some of the changes in our Outlook. Sheila you know we talked about Pratt sales, now being up low, double digits for the year. Um think about that. It's about 800 million of the 1.6 billion Topline increase at the RTX level at the midpoint about half of that, is going to be aftermarket. Um, so we now see the aftermarket up mid teens. Um, we've been working as, you know, to balance our our, uh, deliveries between installs um, spares and mro. So again, we see, you know, good growth in the back half as well, the Compares get more difficult, um,
Speaker Change: Not just at at prep but also at Collins um about 300 million of the 800 million dollar increase is on the OE side. We continue to see good mix there and the rest is sitting in the defense business. So just a little extra color on the prep business.
Speaker Change: Thank you. You're welcome.
Speaker Change: Thank you. Our next question comes from the line of Ron Epstein, a Bank of America. Your question please, Ron.
Ron Epstein: Hey, good morning guys. Um a little bit, a little bit about what you're seeing and OE production rates. It does seem we're starting to see some stability and lift in the Boeing narrow body rates and wide body rates and you know what are you seeing on your end? And then on the Airbus side it seems like 8350 is still kind of, you know, challenged. And you know, what's that mean for for colins. Um, and and what's going on with A320?
Ron Epstein: Ron, let let me start maybe a little bit, um, and then Chris can can pile on, um, you know, at Collins. You know, 1% 0e growth here in the second quarter. We expected the first half of the year to be a little bit lighter. The Compares, get a lot easier as we get into. Um,
Chris Caleo: Another 250 is in the aftermarket just to keep going here. And the rest is in defense. We had a really strong year, uh, start to the year for the Collins defense business. Um, Chris anything you want to add? I would just agree with your overall sentiment Ron, which is, I think we are seeing stability in the, in the rates at Boeing to continue to to grow with the focus there on the production system. So that's great. And and for Collins it's it's it's just making sure that we stay out of their way and continue to to deliver at the rates that they need. Making sure that we got the supply chain in place on some of the constrained material again as we've said before, in the past, we've got capacity for a much higher rate. So this will just come down to making sure we've got the material where we need it, when we need it, but feel good about that. And then on on the 8320, um, again agree continue to to ramp there, you know, as well Ron we had the the work stoppage of course, which impacted you know, a little bit here in the quarter. But again think we're going to make that up in the balance of the year and on the engine side it it really is
Chris Caleo: Is still about allocating material between mro and production and we work closely with Airbus in doing that because we've got to make sure that we balance the continued ramp there especially as it relates to structural castings and isothermal forging with what we need on the mro side. Because again, got to continue to support that Fleet and move the aogs down here in the second half of the year, which is our plan.
Chris Caleo: Gotcha, thank you.
Seth: Welcome. Thank you. Our next question comes from the line of Seth safeman of JP Morgan. Your line is open. Seth
Hey um, thanks very much and good morning. Seth
Seth: Chris, I was wondering. Um, there there's been some reports in the Press about, um, upgrades at the FAA and, uh, and the role that that RTX might play in that. Um, I was wondering if, if you could help us out in terms of of how to think about that opportunity,
Speaker Change: Yeah, absolutely. Seth, you know good morning FAA modernization. I think is something that that's pretty critical. I think that's a bipartisan sort of agreement. We were, we were, you know, pleased to see the funding that was in the uh, that was in the, the reconciliation Bill, the 12 and a half billion, which is, I think is a good pretty good down, payment on what you're going to need to overhaul. Uh, the the air traffic system. Again, we, we play in some very specific areas in there. We've got very strong market share on the on The Radars that are installed and so there's an opportunity there. It's also an opportunity on um, just the automation that goes, you know, into the towers and whatnot where we have a very strong position. So, again, working with the FAA, on on modernizing and, and upgrading, um, those those systems and then again there's an opportunity I think on the aircraft, you know, equipage side
Speaker Change: As you know, you know, Collins has a number of packages there that help with ground control and and other things that happen on the runway. So these are all opportunities. I think that I put into the FAA modernization bucket again. A big opportunity for Collins
Speaker Change: Thanks very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Peter. Ahmed, a beard, please go ahead. Peter
Good morning. Chris Neil Nathan um Chris um back the big picture questions on on sort of a where we're going with kind of
Speaker Change: Doom and missile defense activity. There's obviously in the most recent budget requests, we saw big step up for
Speaker Change: Tax. And I was just thinking about the knockdown effects for for ltams. How do how do we think about the longer term production output? There is we see a big rampur? Are there any impacts?
Speaker Change: Peter was a little bit choppy. I think you were asking me about um, a factor production on Patriot. Is that where you were going?
There's any changes? Yeah, Yeah. Yeahs related to that? Yeah sure.
Well look as it relates to just golden dome, I think, you know, Patriot we believe is going to be a very important part of that especially if you want to make a significant impact over the next 2 to 3 years, I think there are opportunities to, to take, you know, Patriots that are potentially an inventory today, deploy, those, as part of the golden dome architecture, and of course, we'd have to go. And then, you know, backfill those and, and you're seeing Patriot demand all across Europe as well. There's been some recent reporting, you know, there. And again, I think that presents an opportunity
About elams is the integration potential. It has with Patriot, you've got 19, Patriot countries out there today, you know, leveraging, their investment leveraging. The upgrade that they've made by integrating ltams with Patriot, I think it'd be pretty powerful.
Christine Leok: Thank you. Our next question, comes from the line of Christine. Leok of Morgan Stanley. Please go ahead, Christine. Hey morning. Uh, Chris, Neil and Nathan, um, maybe on long term, free cash.
Christine Leok: Significant multi-year Tailwind. You've talked about commercial Aerospace OE improving aftermarket is so strong defense. Bookings up and your supply chain investment should accelerate earnings in the next few years.
Speaker Change: So if we think about, you know, 90 to 100% free cash flow conversion to net income reversal of some of the working capital, you've invested and the end of the gtf. Cash outflow is from the powdered metal issue, should 10 billion dollars. Be the minimum free cash flow in 2027 and Beyond.
Speaker Change: Christine let me start. Thanks for the question. I know there's a lot of interest in our free cash flow. First of all, I want to emphasize the fact that we're we're uh confident in our 7 to 7 and a half billion dollars for this year. Obviously there's um, work to do in the second half. There's a few things that are going to drive that um, just to remind
Speaker Change: Mind everyone, we'll see a recovery from the Pratt strike, which is what impacted us here in the second quarter. Um, and that's, that's about a billion dollars. So we expect most of that to recover in the third quarter. We got a number of delivery Milestones that are attached to, um, to cash receipts as well. Um, particularly in the rathvon business, there's some International advances. Those can be, uh, lumpy. Um, but certainly feel confident, those are within the year, um, and then you'll, you'll notice when you get to look at our balance sheet to receivables, are a little higher. So we expect to collect that naturally here in the third quarter, um, and then we haven't talked about it, but the contract, uh, award timing for Pratt, with respect to Lots, 18 and 19 on the f135, um, is expected to, um, come into play here in the third quarter, and that will drive some upside in both sales and cash. So, starting with this year, of course, longer term, if you just look at, you know, the guides we've provided this year, there's about, you know, call it 1.2 billion dollars of powdered metal related.
Speaker Change: Um compensation in the full year and if you add that back you get to about 8 and a half billion dollars of what I'd call. Operational free cash flow that's well over 100% of adjusted net income and for all the reasons you articulated continued growth on the OE side strength. And the aftermarket with rpk is continuing to grow and the 3 to 5% range for example,
Speaker Change: Strong, strong defense, backlog. A lot of it sitting in our backlog today.
Speaker Change: Certainly not going to put an exact number on it today but we expect to see Tailwind, um, in the free cash flow over the next several years, and I would add to that the benefits that I just talked about a little earlier, uh, with respect to, uh, the tax legislation. So feeling really confident in the free cash flow generation of the company. Um, and we're starting to see that, uh, be more regular occurrence through, uh, the quarterly Cadence.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Doug. Harnet of Bernstein. Please go ahead. Doug.
Speaker Change: Uh, good morning. Thank you, Doug.
Speaker Change: You know, this quarter was uh was a very good quarter for ra on margins and you know, sometime back, you had a goal of getting those margins up to um, you know, 12 plus percent and this was close. Um, can you talk about how you see this trajectory going forward? Um, given that, you know, 1 of the issues had been, um, performance on some fixed price development programs, which we were hoping to see get wrapped up. And then the other side of this, you've got a lot more International, demand mature, fixed price programs. Ahead of you. How should we think about getting to that 12%, plus number now?
Speaker Change: Doug. Let me, let me start here. You've pointed out a number of the positives here, and, and we agree. Um, we're really happy with the performance in the second quarter. Um, I would attribute that a lot to what I call the base margin on the mix,
Speaker Change: Gency balance if you will on the productivity so about 15 million dollars year-over-year productivity year to date um you know, starting to turn the quarter there. But I think what's most important is seeing it in the base, margins of the programs that we're adding the bit to the backlog. The other important point is in our backlog, you'll note that the foreign, uh, composition is up 2 points. Um, year-over-year. So, again, with the new orders that we're adding, we're seeing it come in with, with higher margins. So I'd say, uh, those those bids are being put out there, you know, contemplating the current cost structure, uh, for products that are right in our wheelhouse. And we know how to how to execute on and the supply chain continues to improve. So, all of those, uh, create tailwind and we'll get us, you know, on on that Journey. Well, on that Journey to the 12 plus percent margins, that we see rathvon at
Sure.
Good morning odm. So on the on the gtf advantage, again, production has already begun, you know, we've got deliveries planned for the, you know, later in this year towards the end of this, uh, end of this year, the cut over the spiral end. As you called it, it's going to happen over a couple years and that's the appropriately, manage the risk and sure the production maturity and supply chain stability. Um, and then as you noted there is the, the hot section sort of plus package that we're putting together, which is the 35 or so you know parts of the GTS advantage that we're going to that we're going to Kit these comprise the majority overwhelming majority almost 90% of the of the durability improvements from the gtf advantage and those are going to start to enter into mro next year.
Speaker Change: Uh supply chain overall, I would say continue to see improvements. You know, I mentioned the structural castings up over 20% you know at Pratt. I also mentioned the 9 consecutive quarters of material growth at rathvon and then at Collins again, it's got a huge uh, supply chain Network and we've seen reduced overdue line items about the tune of about 25% so far this year, all really, you know, good. Um,
Signs for us. And I would tell you that this is 1 of the main areas of our core operating system. Um, you know, sitting side by side with our suppliers, making sure, they understand our demand, making sure that if there are producibility, you know, changes that we can make. If there are specification changes that, you know, that we can make, whatever we can do to sort of help Drive throughput in our supply chain, uh, are things that that core has been, you know, really instrumental in helping us get to this level of stability. Again, more to do. We continue to have ramped up as I said before on gtf. Mro in the back, half of the year you, you heard Neil talked about some of the OE growth that we're seeing. So again, not taking our foot but any measure off the pedal, there's a lot to do there but feel good about the progress so far on the first half of the year.
Speaker Change: Thank you. Our next question comes from the line of David Strauss of Barclays. Please go ahead. David.
David Strauss: Thanks, good morning.
Speaker Change: Morning, morning morning, good good Chris. Uh, you you've highlighted a number of times the
uh, your forecast for uh, gtf, a ogs to come down in the second half of the Year, any sort of quantification of what that, you know, what, that might look like, in terms of how much we should expect aogs to come down the second half of the year and then, you know, just a quick 1 if you could touch on some of the non-recurring items in,
Speaker Change: The quarter, the customer bankruptcy of Pratt. And then, uh, the extent of the restructure and you're doing it at Collins. Thanks.
Speaker Change: Yep.
Speaker Change: On the aogs. Dave, I'll just say, you know they they stabilized and and we're expecting them to come down meaningfully here in the second half and that's going to again be on the back of continued growth and mrl output. As I said.
Speaker Change: Continue to see that ramp, you know, happen. Um, you know, in that 30% increase range as we move through the year, that's going to be the instrumental piece of this, that's what's going to move this down, meaningfully here in the second half of the year.
Speaker Change: Yeah. Um, let me pick up on the non-recurring items. First of all, you saw we had a, a charge at Pratt. Whitney we we did. Have an Airline customer that filed for bankruptcy. Um, unfortunately, however, we are continuing to work with that customer as you'd expect. Um, and over time, I, I believe that they will continue to utilize our our assets and that uh, in the long term, we will likely um, you know, realize some recovery there. But as a matter of practice we um reserved for that uh when that occurs so that that's that with respect to Collins. Um, You probably saw in the first quarter, we had a, a, fairly sizable restructuring charge for continuing, um, our our actions there, there's a broader effort at Collins to undergo some, some significant transformation. As you know, brought a lot of companies together to create Collins and we've done a lot of work, but there's still more to do, um, and that work gets harder and harder and more invasive as it relates to footprint and the like, um, but, you know, right.
Speaker Change: Izing the business, right? Sizing the back office, reducing our footprint, increasing our automation. Those are all projects that Collins is aggressively undertaking right now. And so you saw the first part of of the restructuring which was largely headcount related. And as we continue to work through that, I suspect there'll be some others too. But um not going to get ahead of the team there. Um but pleased to see what their uh focused on right now.
Thank you. Our next question comes from the line of Scott Mikus of millyz research. Please go ahead Scott.
Speaker Change: Neil, Chris, very nice results. Um I wanted to ask about Pratt and the gtf hot section plus offering. Um, given that 80% of the gtf fleet is on Power by the hour maintenance agreements.
Speaker Change: The customer wants to retrofit to the gtf. Hot section plus is that cost being covered by the customer or buy RTX. And then as you do those retro fits. Should we expect favorable EAC adjustments at Pratt from time on Wing benefits or there's benefits already baked into your margin. Booking rates there. Yeah.
Speaker Change: Yeah, thanks Scott.
Speaker Change: Um, on the, on the hot section plus again, that'll be a customer Buy customer determination, I mean, to be very Frank, we've invested, you know, heavily in in, in the gtf advantage and of course, heavily in the hot section plus. And so Our intention is to get value for those Investments as we offer them into mro. But again, we will look customer by customer contract by contract and sort of take, uh, the right position, you know, based on on those contracts and on the customer situation. But again, our overall posture is, we should be getting value for that investment, and yes, it is going to have a, a significant time on Wing benefit. As we said, the advantage itself was going to be kind of a, a 2X time on Wing Improvement. And the hot section plus is going to get 90 to 905 percent of that time on Wing, you know, benefit. So do expect it to be, you know, a significant shot in the arm for the program and for the fleet,
Speaker Change: And with respect to the margins. Um, you know, I've talked about the fact that the gtf margins are positive, um, when you average the last couple of years, they're double digit. Um, we continue to be measured in our approach. Their, you know, these are long-term contracts. We don't want to get ahead of ourselves. Um, we've contemplated a certain aspect of time on wing and the base, uh, contract assumptions. But, um, you know, we're we're really excited about, um, this additional option and where it makes sense. We'll be putting that into these engines with the customers. Um, and
Speaker Change: To the extent that drives a better benefit. We'll see that, you know, later in the contract term. But right now, taking a very prudent approach to, to maintaining the margins where they are on the gtf program.
Speaker Change: All right, thanks for taking the question.
Speaker Change: Thank you. Our next question comes from the line of Gavin Parsons of UBS. Please go ahead. Gavin
Gavin Parsons: Thanks guys. Good morning.
Speaker Change: good morning, Gavin
Speaker Change: Maybe carrying through on on Pratt margins. What's the right? Medium-term margin rate for Pratt and how should we think about, you know, kind of that the directional gtf Services, margin expansion, the OE engine loss and spare mix, and then other contributors like v2500 and Brad, Whitney Canada, thanks.
You think about the growth drivers there. Um, we're going to continue to ramp up on the OE side. Um, that's going to drive a little bit of headwind, um, over the next couple of years. As we put more and more of those engines on Wing, uh, a new aircraft,
Speaker Change: On the aftermarket, but that's going to continue to grow as well. Um, that's going to grow profitably and it's going to grow above the composite, um, Pratt margin that you see today, so I expect Tailwind to the overall Pratt margins. Um, you know, over the next couple of years, again, not going to put a number on it, but, um, you know, certainly the ingredients are there, Chris talked about the v2500, uh, today, you know, if you asked us a year ago, about the outlook on shop visits, it would have been lower, we're seeing Improvement, um, and the number of shop visits and the mix. Those are much heavier on the V so that I I see sustained revenue and profit from those, um, aftermarket visits over the next several years as well. All of that, I think puts us in a, in a position where Pratt's margins continue to expand sequentially. Um, as we go through 25, 26 27, um, as we've talked about longer term,
Speaker Change: Pratt, um, is a mid- teens low, you know, low to mid teens business. Um, we've seen those kinds of margins in the past. Um, we've gotten a lot of our engineering and development, uh, behind us with respect to the gtf advantage.
Speaker Change: That will start to shift to other, you know, priorities. However, um, the ingredients are there for a growing aftermarket and don't forget about Pratt Canada and the military engine business. Both very profitable above well above, um, where the Pratt composite margin is today, and those will continue to grow and volume as well, contributing to improved margins in the prep business. So, all right ingredients. Um, and feeling, you know, really confident about the gtf advantage which will continue to grow and start to overtake that v2500, as those volume come down late in the decade.
Thank you.
Noah papanack: Our next question comes from the line of Noah papanack of Goldman Sachs. Please go ahead. Noah
Noah papanack: Hey, good morning, everyone.
Speaker Change: Um, Chris you've made a few comments on the call here, suggesting overall aftermarket, um, mro, I guess, you know, engine and outside of the engine are different. But that aftermarket capacity has improved
Speaker Change: I, I guess has there been a step function Improvement in ability to get work through, or is it more of a stabilization? I'm
Speaker Change: Curious, if you can put a finer point on that and then Neil on the, on the R&D cache, in free cash flow. Um, is there any is there any refund or retroactive ketchup? Or is it pure?
Speaker Change: You had a expense versus amortization mismatch this year and now, that's gone.
Speaker Change: No, let me, let me start on the R&D. I mean, it's it's pretty complicated and over the last couple of years, we've been, um, you know, getting some refunds on the tax side. As it relates to R&D as definitions have been crystallized, uh, through the regulations. Um, that's it as it relates to this year's, um, Outlook and the improvements.
Speaker Change: I'd say, you know, like I said, about 25% or so of the of the free cash flow Tailwind comes from um, the implementation of this new regulation. It's pretty complex. And how we're going about doing that because it does Drive, our taxable income lower with the expensing and the continued amortization of the prior years. So I won't get into any of the other technical things here. But over time, all of the research and development that we have capitalized and we will continue to incur, we'll be deductible for tax purposes, as it relates to the US expenditures and so that will drive a continued sustained cash, tax benefit over the next several years.
Chris Caleo: Chris. Yeah and no on your question I think we were going is on gtf, Mr. Output. And yeah, please with the 22% here and that that's a yes. We've added capacity and additional shops to the gtf network. We've talked about that a few times, but really, when you think about the growth in output, it's improving the velocity and efficiency and our Workhorse existing shops today. Think MTU. Think Pratt. Think, you know, uh, Delta, those are the shops that continue to to, to drive output to, to drive, you know, material into the shop into shrink the in shop turn time that I referenced earlier.
Thank you with that. I would now like to turn the conference back to Nathan, where
As always the investor relations team and I will be available for follow-up questions.
Thank you all for joining and have a good day.
Chris Caleo: this now, concludes today's conference, you may now disconnect