RTX Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 12 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies First Quarter 2023 Earnings Conference Call. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer Chris Kallio, President and Chief Operating Officer Neil Mitchell, Chief Financial Officer and Jennifer Reed, Vice President of Investor Relations. This call is being webcast live on the Internet and there is a presentation available for download from Raytheon Technologies' website

Speaker 1

atwww.rtx.com.

Operator

Please note, except where otherwise noted, The company will speak to results from continuing operations excluding acquisition accounting adjustments and net non recurring and or significant items often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward looking statements provided in this call are subject to risks and uncertainties. Raytheon Technologies' SEC filings, including its Forms 8 ks, 10 Q and 10 ks, provides details on important factors that could cause actual results to differ materially from those anticipated in the forward looking statements. Once the call becomes open for questions, we ask that you limit your first round to 1 question per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue as time permits.

Operator

With that, I will turn the call over to Mr. Hage.

Speaker 2

All right. Thank you, Latif, and good morning, everyone. I trust everyone had a chance to see the press release. It was clearly a good start to the year for RTX, Demand remains strong for both our commercial aerospace and our defense businesses. And I think importantly, we're seeing some stabilization in the supply chain.

Speaker 2

Before we get to the highlights for the quarter, let me just spend a couple of minutes on the macro environment. Starting on the commercial side, Domestic revenue passenger miles are now back to pre pandemic levels, 2019 levels as we exit March. This was led by a very strong rebound in China following their 0 COVID policy reversal. On the international front, we have seen continued improvement in RPMs reaching nearly 80% of 2019 levels. With strong consumer demand and record advanced booking, we expect total global air traffic to fully recover to 2019 levels as we exit the year.

Speaker 2

On the defense side, we're very encouraged by President's most recent fiscal year 2024 budget request of $886,000,000,000 that's up about 3%. And that's on top of last year's nearly 10% top line budget increase. The proposed budget includes broad based support for many of our key Technologies and capabilities, including a request to fund multi year munitions purchases for AMRAAM. It also And perhaps most importantly for us, the budget reflects the DoD's decision to move forward with the engine core upgrade for the F135 engine, which we believe is a win for both the warfighter and the taxpayer. This program will solidify Pratt and Whitney's position on the F-thirty 5 and will provide additional thrust, range and efficiency necessary to support the needs of the warfighter well into the next decade.

Speaker 2

Looking internationally, we're also seeing strong demand for defense capabilities as our allies prioritize additional defense spending. Poland recently announced plans to spend 4% of their GDP on defense this year. That's the highest level across all the NATO countries. And we continue to support Ukraine's ongoing needs, including the Pentagon's accelerated deployment of the Patriot missile defense system, adding another RTX capability to the Ukraine mission. Clearly, the demand environment remains strong across our end markets.

Speaker 2

And with that as a backdrop, let's turn to Slide 2 for the Q1 highlights. Importantly, we exited the quarter with a record backlog of $180,000,000,000 This included over $20,000,000,000 of new awards from some of our key franchises in the quarter. As an example, RMD received a $1,200,000,000 award for Patriot for Switzerland that marks the 18th Patriot Partner Nation. RIS was awarded $1,900,000,000 in classified awards. We also delivered solid financial performance with Strong year over year organic sales growth of 10% and adjusted EPS of 1.22 Regarding free cash flow, we started the year slowly due to some timings of higher working capital, which Neil will talk to you about in a bit.

Speaker 2

Importantly, though, we remain confident in our full year outlook of about $4,800,000,000 of free cash flow. As expected, sales growth was led by commercial aerospace with aftermarket up close to 20% and OEM shipments up close to 17% year over year. Additionally, in the quarter, we achieved an incremental $50,000,000 of gross merger cost synergies and we are quickly approaching the $1,500,000,000 target with more opportunities still ahead. On the capital allocation front, We repurchased more than $560,000,000 of our shares in the quarter and we remain on track for $3,000,000,000 of share repurchases for 2023. And as you saw yesterday, we increased our dividend over 7% from $0.55 to $0.59 a share, in line with our commitment to return at least $20,000,000,000 to share owners in the 4 years following the merger.

Speaker 2

We've done all this while continuing to invest in R and D, Additional capacity, automation and the digitization of our production facilities in order to support our growing backlog. As you can see, we're extremely well positioned for growth this year and well into the future. Every day, we're furthering our integration to unlock the Scale and breadth of RTX, all while driving additional technology synergies and a focus on operational performance. With that, let me turn it over to Mr. Kallio to talk about the progress we're making in regard to our business realignment, and I'll be back at the end for a wrap up and Q and A.

Speaker 2

Chris?

Speaker 3

Well, thank you, Greg, and good morning, everybody. I'm on Slide 3. As you know, we announced back in January our plan to realign our portfolio into 3 business units, Collins Aerospace, Raytheon and Pratt Whitney. And as we said, this realignment has 3 primary objectives. The first is to better align our market leading franchises with our customers' priorities, ensuring more effective coordination and collaboration across our businesses.

Speaker 3

The second is to enhance our performance and capture additional synergies from both a product and technology standpoint. And third, to better leverage our resources to optimize our investments and cost structure. So let me update you on where we are in the process. After continued internal analysis and customer engagement, we've determined the major content shifts within our portfolio necessary to achieve these objectives. First, the multi domain command and control solutions of RIS and R and D will transition to the Mission Systems strategic business unit within Collins.

Speaker 3

To create a more focused business to support connected battlespace opportunities. Additionally, RIS' air traffic management business will be integrated into Collins' Connected Aviation Solutions strategic business unit further consolidating what we call the connected ecosystem of flight data and management into one business. These two moves will put Collins at the center of our company wide collaboration efforts. They will now be responsible for more than half of our revenue synergy projects. In parallel, we will move Collins' Intelligence, Surveillance and Reconnaissance business to a new Raytheon business unit, combining complementary sensing and imaging technologies to improve our offerings for multiple customer applications.

Speaker 3

And lastly, the new Raytheon business will merge the remaining RIS and RMD businesses When this is complete, the top customer of each of these strategic business units will account for 70% or more of that business unit sales. In addition, we'll establish a strategic business unit that will operate like a merchant supplier within the Raytheon business unit. We'll centralize components and subsystems that are sold internally as well as to a broad array of government, commercial and other prime customers, enabling us to sell more effectively into these channels. As part of this realignment, we're pleased to announce that the new Raytheon business unit will be led by Wes Kramer, currently the President of RMD. Russ has over 20 years of experience across multiple businesses and product lines within Raytheon and is uniquely qualified to lead this business.

Speaker 3

We are now in the middle of the implementation phase, including our analysis and validation of targeted gross cost savings. We will provide more details on the new design and the implementation status, including those savings at our investor meeting at the Paris Air Show. So overall, good progress thus far as we remain focused on our goal to operate under the new structure beginning in July. With that, let's move to Slide 4 and I'll provide an update on the current environment. In general, not a lot has changed since we spoke back in January and demand remains strong across our end markets.

Speaker 3

On the event side, as Greg mentioned upfront, Some of the awards we received in the quarter and our record backlog. On the commercial side, we saw strong aftermarket growth in the quarter As airlines are preparing to support the busy summer travel season, with air traffic increasing and retirements remaining very low, we continue to see strength in parts, repair, Provisioning and maintenance across our end markets. Given this demand, our focus remains on ensuring we have the capacity, Supply chain performance and operational excellence necessary to meet our commitments to customers. So let me start and provide some color on capacity. At RMD, we continue to invest in new test equipment, tooling and automation at our Tucson, Andover and Huntsville facilities to support the ramp up on key programs such as AMRAAM, Stormbreaker, SM3, SM6 and Patriot Gen T.

Speaker 3

At Pratt's Asheville, North Carolina Turbine Airfoil site, we now have 63% of machining production assets on-site and are progressing towards 1st article inspection by the end of May, on our way to improving productivity and cost in support of the high volume GTF and F135 programs. While in Tucson, we recently completed a classified space conversion, bringing our total number of classified seats added Over the past 2 years, almost 1,000 with the expectation of an additional 900 more by the end of 'twenty three. This will create the classified lab capacity for RMD on recent development wins such as Hakam, Halo and NGI. Furthermore, we are expanding our MRO network. This past quarter, 2 new facilities joined the GTF aftermarket network, a second MRO shop in Japan and 150 5000 Square Foot Shop at Delta Airlines Tech Ops in Atlanta.

Speaker 3

We of course also remain very focused on the health of the supply chain, which continues to be a challenge from a performance and cost perspective. Starting with performance, while we've experienced stabilization in certain areas such as electronics, Continue to experience challenges in castings, forgings, raw materials and machining. And you've heard us talk before about our in person support embedded our supplier sites Today, we are president of more than 400 suppliers with a focus on high impact locations. And specific to defense, we have significantly increased on-site support in the last quarter, allowing us to help clear bottlenecks, better execute engineering and quality initiatives, and provide improved overall visibility. And at RMD, this helped yield a 5% improvement in material receipts year over year, enabling increased flow through our factories.

Speaker 3

Additionally, we held an RTX supplier conference just a few weeks ago where we engaged with about 70 key suppliers to view detailed action plans to ensure future capacity and to reduce current overdue positions. On the cost side, The overall inflation picture remains persistently high and we are attacking those inflationary pressures from several angles. We have almost 2,000 cost reduction projects Ongoing related to our supply chain, both product and non product, including negotiating better contractual terms, transitioning work to lower cost sources, and part redesigns to reduce cost. We are also going deeper into our supply chain to better understand their usage of constrained raw materials such as aluminum, titanium and nickel, so we can get a complete picture of our embedded spend and to leverage total raw material purchases, drive improved cost positions and secure supply throughout our value stream. And lastly, we continue to leverage our core operating system to execute on our cost reduction initiatives as well as footprint modernization.

Speaker 3

As we previously talked about, we have thousands of ongoing projects, many of which are at the manufacturing line or cell level to take cost out of our operations. These range from things like redesigning material and machining flow to reduce labor hours and cycle time, implementing closed door machining to enable the completion of a part in one continuous process without any operator intervention. But these are relatively small initiatives with short paybacks. They are part of a continuous commitment to improvement and efficiency. So before I turn it over to Neil to recap the financials, I do want to provide a brief update on the GTF program.

Speaker 3

As you know, since the GTF program went into service in 2015, we have continued to introduce upgrades and improvements to increase reliability and durability. With respect to reliability, we have met the target level for dispatch reliability. This is now at mature engine levels. With respect to durability, We have improved time on wing since program inception. Again, time on wing meaning how long engines can be operated before needing to be removed for maintenance.

Speaker 3

We are not yet at the level we and our customers expect. This has put stress on the operations of the fleet. We continue to develop upgrades to the current GTF configuration to improve durability. We are also expanding our MRO capacity and working to reduce shop visit turnaround times to improve service availability. It will take some time to realize these benefits, but we are continuing to invest in time on wing improvements as we were able to do over the course of the V2500 program.

Speaker 3

And of course, in parallel, we continue to execute on our GTF advantage development program, our next generation GTF configuration. It will incorporate all of our experiences and technical learnings since entry into service. Okay. With that, let me turn it over to Neil to walk through our financial results.

Speaker 4

Thank you, Chris. I'm on Slide 5. As Greg noted, Sales of $17,200,000,000 were up a strong 10% organically versus the prior year. This growth was driven by both commercial aerospace and defense despite some of the environmental challenges we continue to face. Adjusted earnings per share of $1.22 was up 6% year over year with Strong segment operating profit growth of 15%, partially offset by the expected lower pension income and a higher effective tax rate.

Speaker 4

On a GAAP basis, earnings per share from continuing operations was $0.97 per share and included $0.25 of acquisition accounting adjustments, And finally, free cash flow was an outflow of $1,400,000,000 in the first quarter, which is historically our lightest quarter of the year due to the timing of incentive compensation payments and seasonality in our defense businesses. In addition to these typical dynamics, the timing of sales and cash collections as well as supply chain and capacity constraints drove higher working capital in the Q1 of this year. We expect to generate positive free cash flow beginning in the Q2 as commercial Deliveries accelerate and performance as well as other funding milestones are achieved. And importantly, as Greg said, We remain confident in delivering about $4,800,000,000 in free cash flow for the full year. So with that, let's turn to Slide 6 and get into the segment results.

Speaker 4

Beginning with Collins, sales were $5,600,000,000 in the quarter, up 16% on an adjusted basis and up 17% on an organic basis, driven primarily by the continued recovery in commercial aerospace end markets resulting in higher flight hours and higher OE production rates. By channel, commercial aftermarket sales were up 24% on an adjusted basis and 26% organically driven by a 43% increase in provisioning and a 29% increase in parts and repair, while modifications and upgrades were up 1% organically in the quarter. Sequentially, commercial aftermarket sales were up 8%. Commercial OE sales were up 12% versus the prior year driven by production ramps in narrow body, business jets and wide body. And military sales were up 9% due to both higher material receipts and manufacturing throughput.

Speaker 4

Adjusted operating profit of $800,000,000 was up $216,000,000 from the prior year with drop through on higher volume and favorable mix partially offset by higher production costs and higher SG and A expense. Looking ahead, on a Full year basis, we continue to expect Collins' sales to grow low double digits and operating profit of between $750,000,000 8 $25,000,000 increase versus 2022. Turning to Pratt and Whitney on Slide 7. Sales of $5,200,000,000 were up 15% on an adjusted basis and 16% on an organic basis with sales growing across all segments. Commercial OE sales were up 27% in the quarter on higher engine deliveries within both Pratt's large commercial engine and Canada businesses.

Speaker 4

Commercial aftermarket sales were up 14% in the quarter, primarily driven by increased volume and favorable mix. In the military business, sales were up 13%, driven by the F135 production contract award in the Q2 of last year and higher F135 sustainment volume. Adjusted operating profit of $434,000,000 was up $126,000,000 from the prior year, driven primarily by drop through on higher commercial aftermarket, a favorable contract matter and higher military sales, which was partially offset by conversion on higher commercial OE volume. Turning to Pratt's full year outlook, we continue to expect sales to grow low to mid teens and operating profit growth of $200,000,000 to $275,000,000 versus 2022. Shifting to RI and S on Slide 8.

Speaker 4

Sales of $3,600,000,000 were in line with our expectations and flat versus prior year, both on an adjusted and organic basis. This was driven by lower command, control and communications programs, which was mostly offset by higher revenue from cyber and services programs. Adjusted operating profit in the quarter of $330,000,000 was down $48,000,000 versus prior year, driven primarily by lower net program efficiencies spread across several programs. RIS began the year with strong orders in the quarter of $4,300,000,000 resulting in a book to bill of $1,340,000,000 and a backlog of over $17,000,000,000 This brings RIS' rolling 4 quarter book to bill to 1.09. In addition to the significant bookings Greg mentioned earlier, RIS also received a $650,000,000 award for the next generation jammer and a $275,000,000 Space Development Agency award for missile tracking satellite constellation.

Speaker 4

Looking ahead, We continue to expect RIS' full year sales to be flat with operating profit growth of $75,000,000 to $125,000,000 versus 2022. Turning now to Slide 9. RMD sales were $3,700,000,000 up 4% on an adjusted basis and up 5% organically, primarily driven by higher sales in Advanced Technology and Air Power programs. Adjusted operating profit of $335,000,000 was down $52,000,000 versus prior year, driven by the lower by lower net program efficiencies and higher development program mix, partially offset by higher volume. Lower net program efficiencies included the unfavorable impact of a significant option exercise in the quarter, which had about 100 basis point impact on the margin.

Speaker 4

Like RINs, RMB's bookings were also very strong to start the year with $5,200,000,000 of bookings in the quarter, including an over $600,000,000 SPICE 6 award. This resulted in a record backlog of $35,000,000,000 and a book to bill of 1.43 in both the quarter as well as on a rolling 4 quarter basis. And for the full year, we continue to expect RMD sales to grow low to mid single digits with operating profit growth of between $175,000,000 $225,000,000 versus 2022. With that, I'll turn it back to Greg to wrap things up.

Speaker 2

Okay. Excuse me. Thank you, Neil. I'm on Slide 10 here. Just a couple of thoughts before we open it up I think 1st and foremost, given the strength of our backlog and the continued end market demand, we as a team remain extremely confident we can deliver our 23 guidance and our 2025 commitments.

Speaker 2

Our success, of course, begins with ensuring that we're meeting our customers' most critical needs. We're keeping a watchful eye on external factors. I would tell you that Chris and the entire senior leadership team remain laser focused on mitigating supply chain constraints and driving productivity and efficiency improvements across all of the businesses. More importantly, we're continuing to invest in innovative solutions And differentiated technology that will continue to drive long term growth. Last thought is earlier this month marked 3rd anniversary of the merger.

Speaker 2

We've been able to accomplish a lot so far even with this challenging environment. And we know there's a lot more progress we can make with the ongoing business realignment, which will set up RTX for success for decades to come. We look forward to sharing more of this information on our transformational efforts and our long range

Operator

The first question comes from the line of Myles Walton

Speaker 2

of Wolfe Research.

Operator

Your question, Myles. Thanks. Good morning. Good morning, Chris.

Speaker 1

Hey, Greg or maybe Chris, I don't know which, but on RMD, obviously this has been one where you're sort of trying to get to the bottom And it sounded like it was a contract option exercise, it was 100 basis points. But even with that, you obviously have an implied 12.5% margin for the rest In the guidance, I'm just curious, what's driving that? How profitable is the backlog growth you've now built up? I think that's one of the questions that everybody has. And I know after realignment, RMD won't exist, but it will still be part of the business obviously.

Speaker 3

Yes. Hey, Myles, this is Chris. Thanks for the question. Look, agree, we'd like to be seeing the margins improving at A bit of a faster rate, but there are some real positives in this business when you step back. Most of it will be the backlog.

Speaker 3

If you think about the book to bill over the last 12 months, It's a 1.43, which is really phenomenal, but some key wins and some potential franchise areas. As Neil noted in his remarks, we did have a option exercise in the Q1, it's good business, let's make no mistake about that. But because of the accounting resulted in a bit of a negative impact, about 100 basis points. If you exclude that, it would put RMD at a bit over 10%, sort of in line with where we were in Q4. As you

Speaker 4

sort of look ahead to the

Speaker 3

R and D margin profile, the two principal drivers of that margin improvement are going to be material flow and flow in our factory and of course just absorption brought on by higher Material receipts and of course the labor that goes with it. So if you think about the factory flow, We had a 15% increase in Q4 in terms of material sheets, another 5% here in Q1 and we're starting to see the results in the factory. You heard Greg talk prior about kits fill rates being in the 50s. The material flow that we've seen lately has brought the kit fill rate up into the low 70s. Our historical rate is in more than the mid 80s, but as we continue to drive more material, You'll see more material flow in the factories getting those kit fill rates up and that's going to reduce the period of performance.

Speaker 3

And then again the second one, again it's just math with increasing material volume and labor, we're going to see better absorption of our fixed indirect support costs, So more productivity there. So that's the margin sort of profile and story at R and D.

Speaker 1

Okay. And is it Particularly back end loaded to the year, I would imagine the second half?

Speaker 4

Myles, this is Neil. Yes, I expect that to accelerate as the year goes on, but I would point to the As Chris said, with the kit fill rates in the 70s, as that grows into the 80s and then Higher as the year progresses, you'll see the productivity, the confidence around our ability to shorten that period of performance improve and that will show up in the EACs. The other thing I'll say is that option we had, again, as Chris said, good business. There may be another one. But again, this is Really good business coming on the heels of increased customer demand.

Speaker 4

So we'll be sure to continue to talk about that. But I think the fundamentals of the backlog are Strong as we look at the margin embedded in that backlog, it's above 10% and that gives us the confidence that that margin expansion will come over time. Thank

Operator

you. Thank you. Our next question comes from the line of Noah Poponak of Goldman Sachs. Your question, Noah.

Speaker 5

Hey, good morning everybody.

Speaker 1

Hey, good morning Noah.

Speaker 3

Hey Noah.

Speaker 5

Can we just spend a little bit more time on the frat margin and I guess what's happening with pricing in the aftermarket, maybe specifically in the engine? Just sounds like out there in the industry given limited parts supply, limited MRO availability that pricing is Maybe much better than normal. So curious what you're seeing on that front, especially the things that are not on some version of a long term agreement. And what does that mean for the frac margin going forward?

Speaker 2

No, let me start, it's Greg. First of all, on the pricing side, With all of the inflation that we've seen over the last 18 months, I would say Pratt and Collins were both relatively aggressive last year in catalog price increases. And so I think we are seeing some of the benefits of that aftermarket part increase. But Keep in mind on GTF for instance, more than 75% of all of those customers are on long term support agreements. So you really aren't seeing The benefit of pricing there.

Speaker 2

Similarly, on the OEM contracts, again, we have some benefit of pricing, but it is very limited Based upon the indices, obviously there's a dead band there. So we're not getting, I would say, a lot of Pricing power today, it's not to say that we won't improve as time on wings, Chris was talking about improves, margins will improve, But pricing is not the driver of this. This is really demand driven is what's driving top line here.

Speaker 4

Maybe I'll just add about the margin profile, Brad. Obviously, as we look at the rest of the year, Noah, We expect the engine deliveries to increase. Think about between 35% 40% year over year, you saw 42% in the first Quarter, that will obviously come with some negative engine margin headwind. I would put a number around $250,000,000 in terms of rest of year NEM headwind that would then coupled with the strong aftermarket that we're expecting to continue at Pratt, you'll see that margin sort of level out as the year goes on and those engine deliveries increase.

Speaker 5

Okay. Thanks very much. I appreciate it.

Speaker 2

Thanks, Lou.

Operator

Thank you. Our next question comes from the line of Rob Stallard of Vertical Research. Your question, Rob.

Speaker 6

Thanks so much. Good morning.

Speaker 1

Good morning, Rob.

Speaker 6

Maybe just a follow-up actually on Noah's question with regard to Pratt. 14% aftermarket growth year on year in the quarter, given the aggressive price increase that Greg referred to feels a bit low. And then secondly on those GTF volumes, how do those compare versus Airbus' A320 ramp plan? Thank you very much.

Speaker 4

Okay. So let me start on the aftermarket. 14% Pratt and Whitney consolidated level aftermarket growth on top of 37% a year ago. So when I think about that, it's still very strong growth. We have seen shop visits increased low double digits here in the Q1 and we expect that to continue as the rest of the year Continues, Rob.

Speaker 4

I would tell you that the legacy engines remain very strong, even the PW2000s and 4000s. On the V2500, the shop visits continue. They are paced by some of the structural casting issues that we've talked about. So I think As we've seen improvement there and I'll let Chris talk about that in a minute, we do expect to see accelerated growth in terms The Pratt Whitney aftermarket on a full year basis, we still think Pratt's aftermarket will be up 20% to 25% year over year. So nothing concerning in the Q1 results.

Speaker 4

As you know, incredible demand as we look at the rest of the year For the flying fleets of the Pratt engines.

Speaker 3

Hey, Rob, this is Chris. Maybe just a comment on the OE deliveries. Greg mentioned stabilization in the supply chain. I would say on Structural Castings, we continue to see Some improvement and that's obviously critical for Pratt. If you think about the key constraint castings at Pratt, they were up about 30% sequentially this quarter.

Speaker 3

Now that's not to the level of flow that we need. We continue to see some manpower, sort of labor challenges in that supply chain and we're taking some actions To try to address that, whether it be offload, whether it be helping to improve yields in the manufacturing process, But we are lockstep with Airbus on their demand for the year and we are hand to mouth right now given given some of the constraints. But again, lockstep with the demand and that will continue to increase as we move into the back half of the year.

Speaker 4

Chris, maybe just to add on to that a little bit. The key constrained structural castings, that 30% is a sequential improvement And the number of castings that we've been able to get in the Q1. So continue to have the challenges, but good sign as we gain momentum Starting the year.

Speaker 6

Right. That's great. Thanks so much.

Operator

Thank you. Our next question comes from the line of Matt Akers of Wells Fargo. Please go ahead, Matt.

Speaker 1

Yes. Hey, good morning. Thanks for

Speaker 2

the question. I wonder if

Speaker 1

you could touch a little bit more on working capital. I mean, a little bit of a bigger impact than we've seen in Q1. Prior year is kind of spread across contract assets, receivables, inventories, anything that's kind of drove that this quarter?

Speaker 4

Sure. Thanks, Matt. Certainly, working capital was a drag on the quarter. I would say about We typically see breakeven ish type cash flow. We were expecting probably a slight outflow.

Speaker 4

It's obviously a little bit worse than that. About $500,000,000 of that I Characterized as an inventory build. The silver lining here is that with the easing of the supply chain constraints, We've seen an incredible amount of inventory come in. We're also looking to balance that and make adjustments in our MRP As we look at the rest of the year, but about, I'd call $500,000,000 of the excess there associated with the inventory build, We increased our inventory $700,000,000 So we plan to grow our inventory and in sort of a good news situation, it grew a little bit further. I fully expect that to turn the other way as we go through the rest of the year.

Speaker 4

On the contract asset side, that really was in our defense business. Again, the seasonality of those businesses is that we invest in the products, we ship them, And then we make milestone collections as we meet performance milestones. I expect those performance milestones to be met as we go through the rest of the year. So again, Slightly higher than we had planned. We did get those billings out in early April and they've already been collected.

Speaker 4

So I'm not concerned about that. And the last piece we saw in terms of the Q1 was a slight increase in our receivables, probably about a couple of $100,000,000 And frankly, that's due to the timing of sales. If they came a little bit later in March, we'll collect that here in the Q2. So As we look at the rest of the year and I think about getting from the outflow of $1,400,000,000 up to Our objective of $4,800,000,000 or so, here's how I would characterize that walk. The majority of that's going to come from profit that we've yet to realize, So nearly $5,500,000,000 $6,000,000,000 there.

Speaker 4

We expect working capital to be flat year over year, so we'll have an improvement of about $2,700,000,000 about half which will come from inventory. We've got some puts and takes, a few $100,000,000 net of taxes and pension, And then of course, a little under $2,000,000,000 of capital CapEx left to go in the year. And if you do all that math, you get to about the $4,800,000,000 If you look at the Q4 of last year, I think we generated about $2,200,000,000 of cash. So I do expect it to be back ended, But turning cash positive in the 2nd quarter, pretty consistent with what we saw last year, which was in the $750,000,000 range And that's after absorbing about $650,000,000 of incremental cash taxes that we'll pay here in the 2nd quarter because of the R and D impact. So we feel confident in the full year, obviously a lot to do, but it's nice to have the inventory given the strength of the demand that we're all seeing here in the business.

Speaker 1

Okay. That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Your question please, Sheila.

Speaker 7

Thank you and good morning, Greg, Chris and Neil. Neil, since you're so good with the numbers and you keep giving us detail, I wanted to ask another one on product performance. What drove the strength in the quarter of 8.3% margins versus the 6% implied for 2023? And sort of What drives the lower margins for the year and how do we think about the aftermarket drop through given some of the prior commentary on GTF aftermarket And how do we think about the PWC and military mix as well?

Speaker 4

Four questions. Let me see if I can remember the month. Here we go. So in the Q1, as I think about the 8.3% margin for Pratt, there were really Two things that I would point to. Clearly, we had the drop through from the aftermarket growth, so you have that.

Speaker 4

We also had a favorable contract matter settled. That was about $60,000,000 so that won't repeat, but it was good news. And we also had We had year over year headwind and negative engine margin of about $50,000,000 but obviously I expect as we go through the rest of the year, as I said earlier, About another $250,000,000 a headwind as those engine volumes step up. So I think that's the Pratt story. We clearly will See the aftermarket continue to grow in the remainder of the year.

Speaker 4

We'll get good drop through on that and that should help partially offset the negative engine margin headwind that will come with the higher engine deliveries. The other piece of that in terms of thinking about the GTF and time on wing, basically what I could say is Our estimates today contemplate everything that we know about the engine. We feel very comfortable with where we are with our contract accounting And any challenges in terms of cost or additional resources we need to put into that area are already contemplated in the outlook that we have for Pratt and for RTX as a whole. So I don't see that as being a headwind, against our expectations for the year.

Speaker 7

Thank you.

Speaker 4

I feel like I missed one of those.

Speaker 7

It's okay. I asked too many. Thank you.

Speaker 4

Thanks, Sheila.

Operator

Thank you. Our next question comes from the line of Peter Arment of Baird. Your question, Peter.

Speaker 1

Yes, thanks. Good morning, everyone. One of those questions is for Greg or Chris. Maybe just Focusing on R and D and just $35,000,000,000 backlog, I mean, you've had some big wins. Obviously, Swiss win was a big one.

Speaker 1

But maybe if you could just talk a little bit about, Obviously, customer engagement is very high or probably at its highest levels ever. Maybe you could just talk about kind of the backdrop ability to continue to grow backlog or some of the bigger booking opportunities that are still out there? Thanks.

Speaker 2

Yes, Peter, let me start and I'll turn it over to Chris. But look, we had a very, very strong booking Good quarter at RMD. Obviously, the Patriot, dollars 1,200,000,000 for Switzerland, so that's a What we've been working on for a number of years, it's the 18th country to be a Patriot operator. But we see continuing demand That even is still not in the backlog. We know, for instance, so far we've only seen about $2,000,000,000 of awards related to Ukraine munitions replenishment, we expect that we'll see more of that coming up later this year and into next year.

Speaker 2

We also know that As LTAMs, which is the Patriot upgrade system is certified later this year that we'll start See orders internationally for LTAMs also start to pick up as well as the U. S. DoD, we're also I think you're going to see very strong bookings on SPY-six and SPY-six is the new radar system for the Navy. We've had the initial low rate production contract on that, but again, much more to come on SPY-six, not just this year, but into the future. On top of that, of course, AMRAAM continues to be very, very solid.

Speaker 2

There's Tomahawk, which will eventually be replaced by the LRS. So the fact is the backlog at RMD is only going to grow we think over the next Couple of years. I think again, one of the issues that RMD has, if you will, is you're going to see lower margins on some of these new development contracts, which is Depressing the margin this year and next, that will start to turn around as we get into 2025, but it's going to take some time, but That is going to grow. And the other piece of the puzzle we won't really talk a lot about is the other international customers. Right now, our international sales at R and D are only about 30 That's below historical levels.

Speaker 2

That should also improve as we get into LTAM's next generation of AMRAAM delivery. So Lots of good news out there. For us, it's just a question of getting it out the door at this point. As Chris mentioned, we still are Constrained from a supply chain standpoint, although it's getting a hell of a lot better. We still have work to do and we talked about structural castings at Pratt.

Speaker 2

For R and D, it's all about Rocket Motors and that impacts tow, that impacts Javelins, that impacts Stingers, that impacts SM6, SM3. So again, as we work through those supply chain issues on Rocket Motors, that should also drive Extraordinary growth in the top line over the next couple of years.

Speaker 1

Appreciate it. Thanks.

Operator

Thank you. Our next question comes from the line of Ron Epstein of Bank of America. Your line is open, Ron.

Speaker 8

Hey, good morning.

Speaker 4

Hey, Ron.

Speaker 8

A question that's come up a lot among investors is when you think about The GTF and its variance, and all the long term contracts that have been sold with it, correct me if I'm wrong, it was about 80% of And you're having these time on wing issues. Like you mentioned to Sheila, it's not an issue this year. But as we go out over time, how can we get confidence that those contracts were actually priced right, particularly the ones that were put in place earlier in the program?

Speaker 2

Ron, let me I'll turn it over to Chris. Obviously, Chris is intimately familiar with this having run the commercial engine business in Pratt. I would say the one bright spot is most of those contracts were 8 to 10 years in length. If you think about it, they were entered this engine was introduced back in 2015. So as you think about the long term outlook, I am very confident margins are going to improve because we'll have a chance to relook at some of those contracts.

Speaker 2

But Obviously, there's a challenge today with margins because time on wing is not what we expected it to be. Reliability And durability are the 2 issues and reliability is great, 99.98% dispatch reliability. Time on wing is the challenge. But again, I think as Chris explained, we've got some solutions to that, which we'll see over the next couple of years.

Speaker 3

Yes. And just to build on that, Ron, this is Chris. This is why that we are running as fast as we can to continue to insert upgrades into the fleet during shop visits. We've talked before about the sort of the Block D upgrades, which are really aimed at combustor hot section and improving time on wing in those areas. That's only about We're only about 50% of the way through the fleet in terms of those upgrades.

Speaker 3

And so again, we've had some Part constraints and shortages and labor in our MRO network, which has impacted our ability to output MRO to levels that we and our customers Want, which is why we're adding more capacity to that MRO network. You heard me talk about the new Japanese facility. Delta, obviously, a Top tier provider joining the network helpful there as well. So adding capacity to networks that we continue to accelerate these upgrades and improve the time on weighing. At the end of the day, that's what it's all about.

Speaker 3

In addition to the contract mix that Greg talked about, It's also about accelerating our repair development, making sure that we've got a full suite of repairs in our MRO networks that we're not always having to replace parts. We can repair parts at a better cost and improve turn times.

Speaker 8

And if I may as a follow on to this question, same thing. My understanding is the gear is just fine. It's the other stuff that's wearing out

Speaker 3

quicker.

Speaker 8

How that happened? Because it was everybody was worried about the gear, not the other stuff.

Speaker 2

I think to your point, Ryan, the gear has proved to be extremely reliable. We have not seen a gear failure out there In any of the 3,000 engines or so that we've delivered. But again, we're operating in some very harsh environments. And I would tell you that we probably didn't spend enough Time testing for those harsh environments, specifically places like India. And that's where we've seen lower life on the combustor.

Speaker 2

We've seen some lower life On the turbine, blades just because of the harsh conditions there. So, as we move forward to Chris's point, we have the advantage coming online. It's got More testing has got all the learnings from the existing fleet. This should be significantly more durable out there in In terms of time on wing, it's going to take us a couple of years before we can get all of those upgrades introduced.

Speaker 3

To your point, Greg, and Ron, you're 100% right. The gear and And the fuel burn performance have been spot on in meeting expectations. Keep in mind, this was a new architecture And we've had some learnings along the way. The only thing I'll remind you, I kind of mentioned this in my remarks, we had a similar journey on the V2500 And it took us a while to get to the levels today that people are enjoying on the V2500. Big difference, of course, has been the ramp up on the GTF, has been a massive ramp versus when the V went into service.

Speaker 3

So there's a little bit more, I would say, Time and buffer, to help manage that fleet as it was entering into service, but the playbook is there on the V, we've got to follow it on the GTF.

Speaker 8

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of David Strauss of Barclays. Your question, David.

Speaker 9

Thanks. Good morning, everyone.

Speaker 2

Good morning, David. Good morning, David.

Speaker 9

Greg, specifically on the MAX, I think you previously Comment that the expectation around Collins and the OE growth rate there was for the MAX to be in the low 30s For you all for the full year, is that still what you're thinking even with the new issues that have developed here? And then second part of the question just on Rocket Motors. Your view of the potential Aerojet acquisition by LA checks and how that potentially could improve things in terms of rocket motor availability? Thanks.

Speaker 2

Yes. In terms of 7 37 MAX, I think current production rate is about 31 a month. Boeing had talked about moving that up 37 a month by the end of the year. I would tell you, Collins is right now, I think we're all set at the 31 a month It might get a little bit better during the course of the year, but I think again that wouldn't be an issue in terms of our ability to ramp production to meet that. But Right now, again, I think Boeing's got some challenges.

Speaker 2

We'll hear what they have to say here in another day or so. But we're, I would say, in Constant contact with both Boeing and Airbus on OEM rates both at Pratt and at Collins. So no surprises there to think of or to talk about. As far as Rocket Motors, obviously the potential acquisition by L3 Harris of Rocketdyne is something that we have been discussing. There's always a concern I think when you have One of your key suppliers going through a merger or an acquisition is that they lose focus on delivering And quality and we are again laser focused.

Speaker 2

We've got folks out at Aerojet Rocketdyne every single day. We'll see what happens. I know there's a second request right now with L3 Harris as it relates to their potential acquisition. And we have been obviously in contact with everyone as it relates to that. So we'll have to see what happens.

Speaker 2

But I would tell you in the current antitrust environment, no deal is certain until it is actually done. So we'll have to see how this plays out and make sure that again that the Aerojet Rocketdyne continues to focus on delivery And not get distracted by this deal.

Speaker 9

Great. Thanks very much.

Speaker 3

Thanks, Steve.

Operator

Thank you. Our next question comes from the line of Rob Spingarn, Amelius Research. Your question please, Rob.

Speaker 4

Good morning.

Speaker 2

Hey, Rob.

Speaker 3

Good morning.

Speaker 10

Neil, just going back to Collins and I think in 2019 about 40%, 45% of the aftermarket there was from wide bodies. I wanted to see if you could update us on where that is now and How it's trending relative to narrow bodies, maybe this year and next?

Speaker 4

Thanks for the question, Rob. I think what I would say about the growth at Collins right now is the majority of it is still coming from the narrow We have started to see widebody begin to improve. I don't have the exact number in front of me on that mix today, but As we think about the wide body environment, those volumes are coming up. I would say, Particularly seeing that in the interiors business on the OE side As they continue to take those production levels up. And as you said, Today, I think Collins is more in the on the OE side, probably about 30% of their OE sales relate to wide body with about 40% from narrow body.

Speaker 4

And on the aftermarket side, I'm sorry, but let me just stop there. I think that's enough for those numbers right now.

Speaker 10

Okay. If I could just ask for a follow-up, this is a follow-up to Ron's question on the GTF losses on engine delivery. And I think you mentioned recently somewhere that that's about $1,000,000 per engine. Yes. How much of that is learning curve versus need for new productivity versus volume?

Speaker 10

In other words, Which of those three things will improve

Speaker 3

the most?

Speaker 4

Volume. Clearly, volume as we Per engine reduction in negative engine margin. As you'll recall, we were already producing in the high 50s rates as we kind of entered into 2020. And when you think about the headwind we saw here in the Q1 on 40% higher volume, we're getting good absorption as we We're always working productivity. We're working productivity to offset the growing Costs that we're seeing particularly on the casting side.

Speaker 4

So we're doing all of those things, but I would say What's going to drop to the bottom line is going to be driven by that higher volume and the absorption that comes from that.

Speaker 10

Great. Thanks, Neil.

Operator

Thank you. Our next question comes from the line of Ken Herbert of RBC. Your question please, Ken.

Speaker 5

Yes. Hi, good morning. I wanted to stay on College Aerospace for a minute. The Q1 aftermarket numbers were continuing to be pretty strong. You're seeing better pricing.

Speaker 5

Is it fair to assume that there's upside to sort of the full year aftermarket expectations within Collins? Or How do we see the sort of the remainder of the year progressing with tough comps but with still very strong fundamentals of demand?

Speaker 4

Thanks for that question, Ken. Clearly, the Q1 was a good strong start. Collins has a lot of operating profit Growth in our year over year plan between $750,000,000 $825,000,000 and certainly seeing a little over $200,000,000 of that Happened in the Q1 was encouraging. And I think when you look at the provisioning numbers that we saw from Collins, Very strong, obviously. I think a lot of that was driven by these airlines getting ready to put their fleets Up in the air and be prepared to continue to fly through the summer travel season.

Speaker 4

It's certainly a watch item today. I would say Our aftermarket outlook for Collins is in the low teens plus range. So certainly a positive indicator, but it's one It's a little early to kind of take those numbers up, but certainly if they continue at this level, there will be goodness and we'll see that goodness Drop to the bottom line, but certainly a great start driven by all the right things. The China reopening certainly gave a boost in The Q1 for Collins and as we see OE deliveries continue to at least stabilize and grow as the year goes on. And I think that too will add some tailwind there, but a little early to kind of give a bigger number at this point.

Operator

Great. Thank you. Thank you. Our next question comes from the line of Kai Van Rumohr of Cowen. Your question please, Kai.

Speaker 11

Thanks so much. So, 2 issues at Pratt. First, You mentioned NEM was $50,000,000 in the Q1, deliveries were up $48,000,000 So that's a little more than $1,000,000 a unit. And yet if we look at the back part of the year, it should be another 50 to 70 something like that. And so why does NEM go up to 2.50 that seems And acceleration in the level per unit.

Speaker 11

And secondly, your aftermarket in the Q1 up 14%. If I take out price, You're probably flat to up 1% and I recognize it's a tough year over year compare. Why was it so low and as part of that The casting shortage and having to allocate parts to OE. Thank you.

Speaker 4

So let me take the first one. I think we can take it offline, Kai, and Jennifer can help you a little bit. But I think as we look at the volume uptick as we go through the rest of the year, you'll find that When you combine that with the mix of new and spare engines that are negative engine margin is Stable, if not reducing a little bit. So feel good about that. There's a number of different engine families that make that up.

Speaker 4

We don't see any issues there in terms of cost headwinds or degradation on a per engine basis as the rest of the year goes. As you think about the aftermarket, a couple of thoughts there. I'd mentioned that we were addressing and dealing with The material flow and availability, certainly the castings are playing a part in that in terms of allocations among MRO and OE deliveries, but we did see price improvements in the Pratt and Whitney portfolio as we do every year, And the volume is also dropping through. The content on the shop visits is also stepping up across almost all segments of Pratt and Whitney, large and the small engine business as well. So we're seeing the right momentum there, and I do expect that as We continue to see the casting improvements alleviate as the year goes on.

Speaker 4

You'll see that also drop through in the top and bottom line.

Speaker 2

Yes, I mean, the key for Pratt in terms of the aftermarket really goes back to V2500 and we see very strong input. I think Shop visits were up more than 10% here in the quarter. So the pricing is a part of it to Neil's point, but really it is the volume coming back into the shop

Operator

Thank you. At this time, I'd like to turn the call over to Greg Hayes for any closing remarks. Sir?

Speaker 2

Okay. Well, thank you everyone for listening in today. As always, Jennifer and her team will be around to answer all of your questions over the next couple of days. Thanks again for listening and take care. We'll see you.

Speaker 2

Bye.

Operator

This now concludes today's conference. You may now disconnect.

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Earnings Conference Call
RTX Q1 2023
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