Okay. Thank you all for coming. We're going to move on with our next program. We're delighted to have RTX with us and their CFO, Neil Mitchill. Neil is going to tell us a little bit about Reg FD, make some comments, and then we'll be in the interview. Neil?
Great. Thanks, Cai. It's great to be here. Good morning, everyone. First, before I get started, just got to make the obligatory comments that I am likely to make some forward-looking statements this morning. Those statements are subject to risks and uncertainties. You can look at our 10-K and SEC filings to understand those risks a little bit better. So, Cai, maybe before we get started, I'll just open up with a couple of remarks. You know, we finished last year, 2023, very strong. On an adjusted basis, our sales were over $74 billion, up 11% organically. You know, really, really strong year. And of course, that was driven by the strength in our underlying markets across really all three segments. You know, we have three industry-leading segments in RTX: Pratt & Whitney, Collins Aerospace, and the Raytheon segments.
Our backlog as we ended the year was $196 billion, a record backlog for us. And our focus as we look at 2024 is really executing on that backlog. So we have a lot to do. I'd say about 60% of the backlog on the defense side will unfold over the next two years. And so our focus is making sure we deliver on our customer commitments, to shore up the supply chain and make sure that the suppliers can keep up with the growing pace of the OE and the aftermarket needs, as well as supporting the Raytheon business. And I think we're positioned for a really strong year as we look at our free cash flow growing from $5.5 billion to $5.7 billion for 2024 and on to $7.5 billion in 2025. With that, maybe I'll hand it back to you.
We can get into some of the Q&A.
Got it. So, 2024 outlook, you you know, maybe talk about the outlook. Where are the three where's the growth going to come from in the three businesses? And what are the watch items on your radar?
Sure. So no changes today to our 2024 outlook. We see sales of $78 billion-$79 billion for 2024. That's 7%-8% organic growth. So really strong top line. We'll see that convert to some really strong segment operating profit growth as well across really all three businesses. You know, we have some difficult compares. So last year, the aftermarket was up 26% at Collins and 20% at Pratt & Whitney and 23% overall. OE was up 20% overall, and our defense business is up in the low single digits, but still strong, 5% organically at Raytheon. So we'll see a lot of the same drivers in 2024 as we saw back in 2023. On the commercial side, it's really going to be the aftermarket, frankly.
You know, there's still a lot a lot of aftermarket opportunity, as we look at the continuing recovery after the COVID years. The narrow-body OE growth is going to continue to continue to be strong. Wide-body, some interesting statistics there. We'll probably get into them, but you know, still well below the 2019 levels on wide-body OE production. And that will generate, I think, as those volumes go up, more aftermarket opportunity. On the defense side, it's it's really about delivering the backlog. So at Raytheon, you know, we've got about $52 billion in the backlog today. We expect that to start rolling out, like I said, 60% of that over the next two years. And it's really about executing on the production contracts and getting some of the fixed-price development programs behind us as we go through this year and next year.
Those, I think, are the key drivers, Cai, as we think about 2024.
Got it. So one of the questions we're asking everybody at the conference is supply chain, inflation, and, you know, the availability of labor. Can you give us some more detail and, you know, how you're doing on the supply chain? Is it stable? Is it getting better? Is it, you know, give us some color on that if you could.
Yeah. So the supply chain has been a real problem for us for the last couple of years, as has been widely discussed, I think, amongst many companies, including ourselves. I would describe it broadly as stabilizing to improving. And that's not without a lot of effort, both on the part of the suppliers as well as ourselves. We still have folks at over 450 of our key suppliers today where we're working with them to try to improve, you know, their delivery, to support our customer needs. But you know, there's really a few things on the supply chain that continue to be watch items. We've talked a lot about rocket motors. I describe that as improving in certain, you know, areas, but still some ways to go.
The Raytheon team is all over that and working with our supplier to make sure that we improve the return to recovery on on-time delivery there. Structural castings, principally impacting the Pratt & Whitney business, both large commercial engines as well as Pratt Canada, continue to be a watch item for us. But we did see nearly 38% improvement in material receipts on structural castings in 2023. We don't need to see quite as big a step up as we get into 2024, but it's really going to be an important gating item as we continue to, you know, ramp up both on the OE side as well as the MRO side and the Pratt businesses. I'd say on microelectronics, another area that we've talked a lot about, that that seems to be stabilizing.
Lead times are recovering back to what we had traditionally seen, and we're starting to see, you know, catch up within the supply base there. All of that has obviously led to a lot of inventory, as we've looked to protect the schedule for our customers. As we, you know, look here in 2024, I expect that to be an opportunity for us to bring the inventory levels down, to right-size them. You know, today we're about $1 billion higher in inventory than we were, you know, back in 2019. And I think there's a big opportunity to improve our inventory turns there. So the supply chain situation is stabilizing, but there's still a ways to go, and we're working every single day. Just on the inflation side, maybe for a minute.
You know, last year we experienced about $2.3 billion ultimately in inflation, within our businesses, in part on the labor side and then the rest, obviously, on the product side. This year we're estimating about $1.7 billion. So an improvement, about $600 million of that is on the labor side. The rest is on the product side. The difference this year is we've been able to put pricing in in place, over the last year and a half, across our business. And that combined with our cost reduction activities are, you know, working to overcome fully that $1.7 billion a headwind that we expect this year.
What about labor? I mean, is it easy to get folks and have the, is the retention rate about the same? Is it improving at all?
So retention rates have significantly improved over the last 12 months. You know, we've seen that come back to, you know, more normalized level of, attrition and retention, which is a good thing. It's still difficult to get, you know, qualified folks for, you know, specific jobs. Notably, you know, there's a lot of classified work that we're working on to get people that have the, the clearances required to do these important programs, as well as some of the, you know, really complex, you know, manufacturing skills that we require. You know, we've talked a lot about welders, whether it's at our, you know, within our shops or at our suppliers. There definitely is, you know, some shortages, but it is easing, and we're seeing the retention improve.
And so I think that's a good thing for us as we look to 2024 and beyond.
Great. So sticking with commercial OE, so you talked about growth, I think, 10%-15%. What are your thoughts through 2025? And you mentioned the mix, wide-body versus narrow-body. What’s going on there?
So, you know, a couple of things. Let me start with Pratt & Whitney. We talked on the earnings call about the large commercial engine shipments going up about 20%, you know, between 2023 and 2024. We're continuing to work with our customer, there, Airbus in particular, to ensure that we can support their delivery needs, as well as balancing that with the needs of our airline customers, whether it's spare engines or it is the materials that go into the MRO network. And I think we're well positioned there. As I think about Collins on the OE side, you know, we're well calibrated to our OEM customer production schedules. I feel comfortable with our outlook relative to where, you know, Boeing is on their 737 production rates.
I think, you know, we're well positioned there to continue to see growth. We're coming off some difficult compares, obviously. As we've gone through 2020 all the way up through 2023, but we still expect to see good growth on the OE side. Specific to narrow-body, wide-body, just a couple of interesting facts, and I think it bodes well for how we think about getting from here to growth over the next couple of years. At Collins in particular, if you look at 2023 OE sales, we're about a little over 90% of 2019 levels on the narrow-body side. Really good recovery there. I think as we get through 2024, we'll be at or above where we were in 2019. On the wide-body side, though, we're about 45% of 2019 levels of sales.
Even as you get through 2025, that number just starts to tick over 60% of 2019 levels. While that's still well below where we were in 2019, I think it gives me a lot of confidence that there's a lot of growth opportunity there. We're kept capacitized to produce, obviously, at rates that were, you know, well above where we are today. And so as the incremental volume comes, we'll get much better absorption in our factories, and that will improve the margins that will support the incremental margin growth that we need to see in the Collins business over the next couple of years. The other thing about that I find, you know, helpful as we look forward on the OE side is we're coming off of low, very low levels of deliveries in 2020.
Therefore, you know, we see about a four-year average warranty period on a new system that we provide out of Collins in particular. And so as each year passes going forward, we're going to start to see more and more aircraft coming off of warranty. And that's going to support more and more aftermarket that will continue to fuel the Collins growth for the next couple of years and further support the significant op profit growth that we're expecting out of that business.
So turning to commercial aftermarket, you know, you're up, I think, 23% last year. You're projecting 10% this year. You know, comment on the drivers. That sounds feels a little bit low given all the restraints we're going to have to OE that maybe folks need to be spending more to fix the, you know, the planes that are there.
Yeah. So, you know, I think it's important to remember what we're coming off of. I mean, we saw 42% year-over-year provisioning growth at Collins. And at Collins, the provisioning is the stocking that the airlines do when they take on new aircraft. And so there clearly was a bit of restocking, I think, taking place there. So we can't assume that level of growth is going to recur. That said, I think 10% growth or thereabouts we're going to see at Collins in the aftermarket is very, very substantial on top of that 26%. And as I think about the Collins total sales, about half of their sales growth this year is going to come from aftermarket. But nearly all, I'd say the majority of the profit growth this year is going to come from aftermarket as well.
So it's a very rich aftermarket. You know, we'll see how airlines perform over the course of the year. And clearly, there's a number of dynamics that will support continued need for aftermarket parts there. But as I think about Collins, you know, it's really the difficult compares and a little bit of restocking that we expected. And, well, it'll moderate a little bit as we see 2024 and 2025 play out.
Got it. So what about price? I mean, my recollection is that, you know, most of the folks, last year or two have had like double-digit or high single-digit. I mean, if it's 10%, there doesn't seem like there's a whole lot of unit volume. Or is the price environment still strong?
The price environment still is strong. You know, without getting into the specifics, our pricing that we put in place in the last several months is consistent with what we did a year ago. So think, you know, double-digit price increases. Not all of that drops through right away, as you know, Cai, because on the Pratt side, a lot of our aftermarket is under a long-term contract. But we are getting good pricing drop through, where we can and the contractual provisions allow for that. And it serves as the new floor as we negotiate new contracts and new pricing arrangements going forward. So we are pushing through the pricing where we can do that, to remain fair because it's real.
I mean, the inflation costs of the business, the supply chain costs are, you know, up quite a bit over the last couple of years.
Right. You mentioned provision. So roughly what percent is provisioning of Collins aftermarket approximately?
don't have the number right off the top of my head, but I'd say it's about 10%-15% or so.
Okay. Okay. Okay. Pratt, you know, you mentioned, you know, large commercial engine delivery should be up about 20%. Should we expect an increase in spare engine deliveries, you know, at least in line with that to help support the AOG impact?
So, you know, as I said the other day, we will see about a 20% increase in the number of large commercial engine shipments. We shipped about 875 last year. We'll get into the exact split between OE, installs and spares. But yes, you should expect to see spares. We will see the spares numbers grow this year as we look to support our customers. You know, it's always a balancing act there to try to balance our the needs of Airbus in particular and support the OE demand. And we think we are prepared to support Airbus's needs in 2024. And then the rest of those engines will go into the fleet to support our customers and provide the necessary lift given the disruptions that we're experiencing this year. Maybe just on the Pratt & Whitney Canada business there.
You know, we we shipped a little over 2,000 engines last year. As I think about the year-over-year growth opportunity there, the demand is really strong across all channels within Pratt Canada. I'm thinking that, you know, we'll see mid- to high-teens growth year-over-year in the number of shipments at Pratt Canada as well. So that business is is is doing quite well. There's demand for probably a 20% increase in the aftermarket, at at Pratt Canada, in terms of shop visits. And, you know, given the continuation of supply chain constraints there, we'll probably see, you know, certainly double-digit growth, mid-teens-type growth in the number of shop visits there. So all fueling, really good really good profitable growth at Pratt & Whitney.
Got it. And so speaking of shop visits, at—you know—at Pratt, what do you expect for shop visits of large commercial engines? And, you know, given the amount of GTF MRO to accomplish, what are the bottlenecks to kind of completing these visits efficiently?
So let me break this down into a couple of things. I'll start with the mature engines, the legacy engines. As we look at 2024, I expect we'll see about a 3%-4% increase in the number of shop visits for large commercial engines. Now that comprises, you know, our legacy V2500, our PW4000 and PW2000 engines principally. The Vs probably see about 800 shop visits this year. On the PW4s, those will be up a little bit. I think the PW2000s will be, you know, down a little bit. Those two will offset. So essentially, we're going to see about a 3%-4% increase in the number of shop visits for V2500, which obviously is very profitable. The mix of those visits is heavier. So that comes with better content and therefore, again, more profit on the mature commercial engine side of the business.
On the GTF, we're going to see a much more significant step up in the number of shop visits. Not going to put a number on it, but you know, what we're doing there is making sure that we are well capacitized to support the number of engines that are coming off wing due to the powder metal issue that we have talked at length about. As I think about, you know, the key success factors as we deliver engines out of the MRO network, it's really going to be about material flow. So as we think about powder metal parts, the discs, we have enough forging capacity. So forging capacity is not a bottleneck for us.
You know, we're able to, between us and our suppliers, make sure that we can forge enough discs where we are continuing to secure additional capacities in the area of inspections and in terms of machining. And I think we're making a lot of solid progress there. So the MRO network is really going to be paced by, you know, the material that we can get to flow into that network to support the number of shop visits. That said, we're working other actions.
I think Chris mentioned a few of them on our earnings call to make sure that we can scope the work, you know, properly for the engines that are coming into the shop to match the nature and the extent of that work we have to do with the remaining duration for other elements of the engine that may come in later on in their lifecycle. For example, you know, we may have an engine that's flying in a, you know, fairly benign environment. And we're able to go in and do a very targeted repair that takes less than, you know, your normal MRO turnaround time, to put in an inspected part rather than a new part, shorten that turnaround time, get that part back out. We'll see that engine again, but that will be on a regularly scheduled basis.
So we're working to optimize the work scopes in the shops to make sure that we can counter any issues that we may encounter on the material side. The other thing we've done is we've introduced and industrialized over 1,300 repairs last year to parts that are in the GTF engine. We've got a really, really skilled aftermarket network that are part of the GTF program. And so these folks are constantly developing repairs that allow us to, you know, fix parts rather than put new ones in when these engines do come in for repairs. So that'll also help to alleviate some of the pressure in the supply chain around material as we ramp up, you know, substantially the GTF aftermarkets.
So you've been adding a lot of capacity. What, you're at 16?
We're at 16. We'll be at 19 by the end of next year. Right. So the capacity for doing overhauls is on schedule and increasing as we expected.
You know, but you know, not all of them come on and they're going at 100 miles an hour out of the gate. Can you give us any kind of what sort of is the growth rate and sort of practical capacity of sort of maybe total hours through shop visits or some metrics that makes kind of some sense?
Yeah. So I think the way I would talk about it is that, you know, first of all, we've got 16 shops already. So we have a lot of experience, unfortunately, perhaps in doing overhauls on this engine. So the network is very close. We share a lot of information among our network partners to make sure that when we add new, you know, whether it's new procedures or one shop comes up with a good idea, you know, we pass that around through the network. So as we stand up new shops, these are not shops that have never these kinds of, you know, overhauls before. I think that you can expect that learning curve to be fairly, you know, fairly flat. It's not going to be a steep learning curve for these new shops.
We'll be able to pick up the work pretty quickly and get our capacity increased. You know, I was down at West Palm Beach not too long ago looking at our overhaul line there. There's some really interesting, you know, approaches that they're taking to, you know, how we get into the compressor section of the engine, for example, you know, turning it on its end, if you will, so we can access the parts very, you know, discreetly as opposed to ripping the entire engine apart and creating more work for us to do. So I think there's a lot of creativity going on right now to develop, you know, very thoughtful and more efficient ways of going through these engines. I expect that to continue.
Right. So simplistically, I mean, the capacity to sort of deal with engines is going up over time. And I think you said on the call that, the number of AOGs, if anything, has moved to the right. Wouldn't that mean there's going to be less time waiting for induction?
So, as I think about, you're right about that. We said that the peak was going to be here in the first quarter. We still believe it will. And it did come down a little bit because the Airworthiness Directive is yet to be issued. And so that's given airlines a little bit more time to use the engines. They've also gotten more aggressive on pairing engines on their aircraft to create, you know, a lift with two engines that are not subject to a removal. So those things have, you know, allowed us to kind of bring the peak down. But now we're going to see a more sustained level of average aircraft on ground. The real constraint comes back to what I was talking about before. It's really about the material flow.
So, you know, we're going to have these engines sitting in the parking lot. We already had some sitting in the parking lot before the powder metal issue. Really, the burndown is going to come as the material begins to flow into the MRO network. And we're able to, you know, conduct all these overhauls. The goal here is to ultimately get, you know, full-life powder metal parts into the MRO network. So these overhauls, you know, when the engines leave, they have the maximum time on wing available for the customer.
But simplistically, if the material flow is more or less what you expected, not that it's getting better, but basically the number of engines coming at you is basically a little lower or more pushed out. I would think that the time for induction is down. And I think what out of the 250-300 is like 100-150. So like a major portion is that. And if you get that down, you know, there's fewer AOG days to pay and the $3 billion number might have some opportunity.
Yeah, I think, you know, listen, I think it's still a lot of time in the parking lot and still very early in our process. So I would like to see a few more reps here on how the MRO network is performing before we say there's a big opportunity there. Right now, we would say we're still pretty balanced when we look at the flow of material with the flow of engines. But, you know, trust me, we're doing everything we can to, you know, improve that turnaround time, bring that time in the parking lot and in the shop down over the next, you know, 6-12 months.
Great. So if we turn to Raytheon, the entire defense industry has had, you know, a lot of challenges here in 2023. You know, what do you expect going forward, particularly on the fixed-price development programs? You know, what programs are involved for you guys? What milestones can we track? And, you know, when are these programs going to be over and behind us?
So there's a lot there. Let me start with, just a couple of comments on the Raytheon business. We've been talking about these issues in our business for some time now. I think we were probably one of the earliest to talk about some of the pressures. And a lot of those pressures, fixed price development programs aside, and I'll get back to that in a minute, are really, you know, the result of significant supply chain constraints, significant microelectronic delays, you know, during the last couple of years. And the compounding effect of labor shortages, both in the supply chain and then the impact that has had in our own shops, all of that extending the period of performance. And so that has caught up to us. So inflation, supply chain, labor has really, you know, plagued the Raytheon business.
Frankly, it hurt our other defense businesses within Pratt & Collins, as well. You know, in the past, we've been able to overcome those kinds of headwinds with additional forms of productivity, you know, whether it's reducing the time to produce something, bundling, you know, our purchases with our suppliers to get a lower price. But in this inflationary environment with these, you know, headwinds, we have not been able to do that. So, you know, that's why we've adjusted our outlook, both for 2024 and for 2025 for the Raytheon business. On the fixed price development programs. You know, we talked about this a little on the earnings call. Unfortunately, there's just a handful, I guess, fortunately is another way to think about it. There's just a handful of programs.
It's really a couple of them that we have been dealing with over the last year and a half that have continued to plague us with difficult technical challenges. And in one case, you know, I think we signed up for some work that, frankly, we were not well equipped to do. I can say that those couple of contracts represent less than 1% of our backlog. And that about 90% of that will be burned down by the end of next year. So we are getting through those technical hurdles. We're adding additional subject matter experts. Of course, that brings on a little bit additional cost, but I think that is worth it because in the long run, the way to get these things behind us is to burn down the technical risk and deliver the capability to the customer.
In some cases, we're having conversations with our customers to, you know, think about how to renegotiate what we've promised to deliver. Give them the capability that they need. However, do that in a manner that allows us to either do it more quickly and certainly at a lesser financial burden than it currently has on us. So we're not out of the woods on a couple of those fixed-price development programs. They are classified, so I can't really get into more detail, but I can say the tail on them, you know, gets us largely through them by the end of next year. And I think a lot of lessons learned coming out of this. You know, we're being a lot more disciplined about the work we do take on. You know, in terms of the technical specifications.
We're also being a lot more disciplined about the way in which we contract to take on that work. So making sure that we have, you know, proper back-to-back protections with our supply chain. In terms of, you know, making sure that costs that they give to us, we can flow the customer and vice versa. We're also, you know, thinking long and hard about fixed-price contracts, you know, when it makes sense to enter in a fixed-price contract because you know, some of the stuff we do is incredibly difficult and we need to make sure that the contract affords, you know, the right protections and specificity around what we're signing up to do when we're going to do that. And in this inflationary environment, which I think is going to continue to persist.
I would rather trade, you know, predictability for the opportunity for, you know, a lot of upside and frankly, to protect ourselves on the downside. So we're thinking a lot about that as we enter into new contracts going forward.
Now, what you're talking about is like similar Northrop said the same thing. You know, they have the issue on the B-21. But, you know, are there still programs that were bid on a fixed-price basis before everyone got religion that we aren't seeing today, but you know, you guys really worry about or you feel that's pretty clean and relegated to these guys?
So, you know, I think it's my job to always worry about things. And so we're making sure that we're looking into our backlog and understanding what's there. You know, like I said earlier, 60% of that backlog burns out over the next two years. Some of it has a longer tail on it. That's mostly the international stuff, which is priced at better margins. As you think about the level of takedown that we had in our outlook for the business, we've tried to calibrate that to what the current margins are that are sitting in the backlog, taking into, you know, account all of the inflationary pressures, the latest supply chain numbers that we have, the you know, we're not taking credit for a lot of productivity going forward, you know, for 2024. We've assumed, you know, net zero productivity.
For 2025, we've assumed $100 million of productivity. You know, in the past, this business generated 3 or 4 or $500 million a year of productivity. So I don't again, don't think we're out of the woods, Cai, but we did take into consideration what we've seen and recognizing that in this environment, it's unlikely that we'll be able to overcome, you know, sort of these structural inflationary and fixed price contract headwinds with the kinds of productivity that we once were able to do.
Right. But if we turn to the other side, demand, I mean, you know, like everybody wants their defense system. Everybody wants munitions. Talk to us about like the book-to-bill outlook for this year, particularly, you know, foreign customers in particular have been strong.
So yeah, you're right, Cai. Demand is not an issue for the Raytheon business. We've seen incredible bookings over the last several years. And we expect that to continue. You know, I expect the book-to-bill to be, you know, well over 1.0, you know, approaching 1.1 or even higher this year. Again, depending on, you know, the international ordering timeframe. So another good strong year of bookings. As you think about where's that going to come from? Well, there's clearly the restocking, you know, efforts that are going on. And there are clearly a lot of demand for air defense systems. So GEM-T, AMRAAM, SPY-6, you know, SM-6. On the defense systems, it's more Patriot, it's NASAMS, it's SPY-6.
As we look to the end of this year and early next year, we expect to see LTAMDS, the next generation of Patriot, enter the marketplace. So, you know, across the board, we're seeing really strong demand. We see about a third of our backlog today is from international customers. And I expect that to continue to grow over the coming months and years as well. As we think a little bit longer term in this business. You know, we see defense spending probably in the 3%-4% per year growth globally. I think that that'll be weighted towards a higher percentage internationally. As the foreign customers continue to, you know, stock up on munitions as well as these important air defense systems.
As it relates to the Raytheon business in particular, as that mix shifts to international customers, we should see margins improve commensurate with where this business historically was. I think it would not be unreasonable to see this business, you know, 12% or better as we get out of this, you know, trough of fixed price contracts we're in today and out of this inflationary environment with better contracting and a stronger mix of international customers.
That could happen. I assume not 25, but more 26-ish.
It's going to be, you know, not 25 because look at our outlook between here and 2025, you're in the 10%-10.5% range. But you know, as these international orders, you know, start to come through the income statement, you know, then you'd see the weighted, you know, the weighted margin go up.
Got it. So basically talk to us about Collins and the margins. I think, you know, they're executing well, you know, but I think you talked about, was it 30% incremental margins and then they're going to 40%? How come they're going up?
Well, you know, it goes back to what I said a little bit a little bit ago, Cai. You know, the business at Collins has really good aftermarket margins, you know? And so as more and more engines or not engines, more and more aircraft come off of warranty, that aftermarket growth is going to fuel the profit growth. And you know, if you look at 2024 in particular, like I said, half the revenue growth coming from aftermarket, you know, the majority of the profit growth. So you get really good drop through. So volume and aftermarket in particular are going to be the two biggest drivers over the next two years for Collins margin improvement. The other thing going on that we've talked about for some time now is that Collins has been going through, I'd say, a number of integration activities for the last several years.
And there's been a fair number, fair amount of investment associated with that, whether it's reducing the number of digital platforms, consolidating footprint, you know, consolidating the supply chain. All of those things require investment. And so as we go through the next year and a half, what we're going to see is we're going to see that spending curtail and we're going to see the savings from those investments start to show up as well. So that would coupled with the volume growth is going to, you know, drive those incremental margins that you're seeing. So I think in this year's outlook, you'll see, you know, somewhere around high 30s near 40% incrementals. Next year, it would be around 45%. And again, it's going to be that aftermarket growth dropping through. Even as the OE get, you know, increases over the next several years.
The margins there are obviously much lower than what we see on the aftermarket side.
Right, right. So working capital, I mean, talk to us about free cash flow. You know, when you did the walk, I think on the Q4 call, you know, it looks like you're assuming like $2 billion plus in working capital. Like that's a very big number given the sales growth you're looking at. How are you going to get there?
So, you know, the principal way that we're going to get there is manage our inventory. You know, it really comes down to that. You know, as we've been looking at our inventory levels, we have protected our customers' delivery schedules, given all the supply chain constraints that we've seen. As I said, the inventory has grown by $1 billion. So about half of that working capital improvement will come this year as we simply seek to maintain our inventory levels relatively flat to last year. Then as we get into next year, you know, we've also experienced some advances, particularly on the defense side, international advances, and we'll burn those advances down this year. Then as we replenish those orders in the future, we'll see more advances coming in next year. So that will give us additional working capital benefit in 2025.
So those are the real two pieces. Now you say we've been talking about inventory reduction for a while. I think the last couple of years certainly been a little bit of an anomaly with the supply chain constraints. And a lot of uncertainty around where the volumes were going. I think we have a much better handle on that as I look back to projections we were making back in 2021 around the recovery. I think we've pinned the commercial recovery pretty well. And so now we are laser focused on driving optimization of the inventory. It's one of our top goals of the year to align better our sales inventory and ops planning with our financial forecasting and our cash flows and the demand profiles coming in from our customers. So we're looking at inventory turns. We're looking at, you know, supplier overdue.
We're trying to better match, you know, our inputs of material to where the supply chain is calibrated in terms of I'll call it the slowest part in the bill of material. So a lot of work going on starting now, looking out multiple years at a time so that we get better, you know, synchronization of our demand and our inventory inputs over the next couple of years.
So if you look at cash flow in terms of risks and opportunities, I mean, just sitting on the outside, it looks like inventory—it could be a challenge, but it looks kind of like maybe the GTF fleet plan could be an opportunity. Is that correct? What are the risks and opportunities in the cash flow?
So, to me, as I look about the risks and opportunities, powder metal aside, and I'll come back to that in a second. I really think this is about the volume and our projections around the economy, frankly. And today, you know, we're seeing continued strong demand for commercial air traffic. And if that continues coupled with, you know, the expected growth on the defense side that comes with, you know, good, robust, you know, regular cash flows, predictable cash flows. Then I think, you know, the volatility, if there's going to be any, is really about, you know, do we get the volume on the sales and profit side on the aftermarket? Because that's the biggest driver. You know, working capital will also be a challenge for us if that volume doesn't come.
But if the volume is here, I think we're going to be well positioned to deliver the working capital improvement. On the powder metal side, you know, our outlook today is the same as it was three weeks ago. Nothing's changed. We still see about a $3 billion cash impact, $1.3 billion this year, $1.5 next year, and the rest in 2026. I think it's too early to call that, you know, an opportunity. I mean, clearly, you know, we're going to work, you know, with our customers to get support agreements in place. We've talked about that. And you know, those cash flows will, you know, marry, if you will, up with the number of AOGs and the number of days. And so, you know, will it flux a little bit? Possibly. I still feel comfortable with the totality of that $3 billion estimate.
Got it. So, capital allocation to wrap up, you committed $36 billion-$37 billion through 2025. Talk to us about your your path going forward. I mean, you've done the ASR. What about M&A? How should we think about deployment?
Sure. So a couple of things on capital deployment. The first is we remain very committed to our dividend. And so that will continue this year and through next year and in the foreseeable future growing with earnings. And I think if you just, you know, look at we've delivered $29.4 billion of capital to shareholders since the merger. Our commitment is $36-$37 billion. The dividend alone almost gets you all the way there. There'll be a couple hundred million dollars of, I'll call it ancillary buyback that we do in the course of the business over the next couple of years. But by and large, this is going to come down to, you know, continuing our commitment to the dividend. And you know, that's how we'll return cash over the next couple of years.
On the M&A front, you know, we like the portfolio we have, but we're always looking at the portfolio to make sure that all the pieces of it fit. That process is always ongoing. We have a couple of dispositions that are announced and on the horizon. You know, right now, you know, we're not in the market, obviously, for any large M&A. You know, it would be bolt-on type M&A that would augment the technologies we already have. We have a technology roadmap of 13 critical technologies and we're looking for things that might fit to augment that, you know, both in the near and the medium to long term where it's appropriate. We do like the portfolio we have, but we always remain opportunistic.
Terrific. I think we're up at the.