Morning, everyone. We're gonna get started with our next session. We have RTX here, Chris Calio, President and COO, incoming CEO, I guess, in May. With that, I'll turn it over to Chris for some opening remarks before forward-looking statements, and we'll get straight into Q&A.
Yeah. Good morning, everybody. Dave, thanks for having me. Yeah, first, before I get started, just the obligatory comments that I'm likely to make some forward-looking statements this morning, and those statements are subject to risks and uncertainties. And so please look at our 10-K and SEC filings to get a better sense of those risks and uncertainties.
Good.
With that, I'll turn it back over to you, and we can roll through your questions.
All right. Thanks. So you're about in a couple of months to step into the CEO role. As you know, prepare for that, what's your vision for RTX? How will you drive performance and growth from here?
Yeah. So when you think about RTX over the last few years, it's really been about the portfolio, right? Obviously, creating RTX in April of 2020 with the huge merger between UTC and Raytheon. And so we've been, you know, obviously very focused on integration and bringing those companies together. In many respects, during a difficult period during the pandemic, I would say we feel really good about where the portfolio is today. We feel we've got the right pieces in the right places. If you just think about, on both sides of the house, we're really well-positioned, defense franchises that meet the needs of today, given the geopolitical uncertainty that's out there, and then well-positioned on the fastest-growing commercial platforms, both at Collins and at Pratt.
All of that's culminated into an almost $200 billion backlog, $196 billion, by the end of 2023. So we feel really, really good about that. Now our attention turns to the sort of the near-medium term here, which is executing on that backlog, making sure that we meet the commitments of our customers, in terms of on-time delivery, quality, delivering out that backlog at the margins that you and, you know, we expect. And if you just dig a little bit deeper, sort of by business unit, clearly at Pratt, it's executing on the GTF fleet management plan. I'm sure we'll talk about that a little bit later on powdered metal, but continuing to execute on that within the guidance that we've provided, providing our customers as much lift as we possibly can.
At Raytheon, it's about delivering out the backlog at the margins that we said had improved margins. Obviously, we've had some margin headwind last year. We believe it's, it's only upwards from here, and we'll talk a little bit about how we're gonna do that. And then at Collins, it's about continuing to drive the incremental margins. Part of that's gonna happen through the absorption as the production rates continue to climb. And then part of that's gonna be about the structural cost reduction initiatives that we put into play that'll continue to take hold and, and provide benefit. And I think if you look at our investment priorities, they're aligned to those, those key focus areas that I just talked about. In 2023, we did about $10 billion in E&D and CapEx investment, about $7 billion or so in E&D, customer, and company, $2.5, in terms of CapEx.
And when you think about where we're deploying that CapEx, it's on things like automating our facilities, continuing to increase capacity in our footprint so we can continue to meet, you know, the demand, and continuing to deploy our CORE operating system. Again, those are a set of lean tools. It's our business system that we use to continue to drive productivity, efficiency, and quality. And then if you just think a little bit longer term in terms of creating differentiated technologies, that $7 billion or so that we're investing in E&D, you know, while we've gotta go execute in the near and medium term, this is a long-cycle business.
We've gotta continue to invest in the long term in terms of advanced capabilities, whether that be advanced materials, electrification, power and thermal management, microelectronics, contested battlespace, all of those things that are gonna continue to enhance the franchises we have today and build new franchises, you know, for tomorrow. So again, a lot of exciting things going on at RTX. I think our priorities are pretty clear. But at the end of the day, we've got a backlog, and we've gotta go execute on it.
Right. So you talked a little bit about the production ramp on the aero side. You know, talk about your view of, you know, the aero production ramp on the OE side, your view of the aftermarket, and what that looks like for both Collins and Pratt.
Yeah. Let me just step back and talk a little bit about the macro on commercial aerospace. It continues to be very strong. If you just think about we ended the year, roughly at 2019 RPK levels, about 5% over versus 2019, on the domestic side, about 5% or so under on what I would call long-haul international. So still some work to do there, perhaps some tailwind as that continues, you know, to grow. And when you just step back and think of RPKs generally, the way we're modeling this is kind of a 3%-5%, you know, growth annually, you know, out through the decade. So continue to believe there's gonna be strong demand for the product. And if you just think about on the OE side, Airbus, Boeing, what, 14,000 aircraft in backlog today.
Their positions are largely sold out through the decade. They've done a fantastic job, you know, driving demand for their for their product. And we're well-positioned on, I think, all those platforms, both Collins and Pratt. If you think about Collins, it's got two times the content on next-generation platforms as it did on legacy platforms. And when you think of Pratt, obviously, with the GTF, and we'll, we'll talk about some of the challenges we're working through now, but that program is much larger than we had ever anticipated and think it'll have a much longer run. And so continuing to invest in that architecture and driving the aftermarket will sort of be key to us.
On the aftermarket side, you just step back and say, "Look, tremendous growth in 2023." I think overall, it was like 23% year-over-year commercial aftermarket growth, you know, on the back, again, of the positions that I just talked about. If you think about 2024, we're thinking about 10% year-over-year commercial aftermarket growth, again, on the back of an incredibly strong 23%, you know, the year before. So, like, as we said, we're sort of back to 2019 levels. So you start to see that growth moderate a bit, but still, again, very strong 10% year-over-year. And on commercial OE, we're modeling this at 10%-15% growth year-over-year, sort of this year. And if you think of where some of that's coming from, obviously, the GTF deliveries, both to our air framers and the spares production, about 20% growth year-over-year.
And Collins, of course, has a lot of content on Boeing platforms, in particular 737 MAX. And so we're pretty much calibrated with their guidance in terms of the production environment, you know, this year. So again, well, well-positioned, I think, on the fastest-growing platforms. That'll help us both in terms of OE and then long aftermarket tails that I think we're gonna continue to enjoy.
Supply chain. You've talked a lot about the challenges there, both in your aerospace businesses but as well as your defense businesses. How much has this kind of held back your, your growth? And what, you know, where are the hotspots? What mitigation plans do you have in place to kind of continue to deal with those?
Well, one thing, when you talk about the supply chain, you know, we're part of the supply chain. I've got a pretty important.
Yeah. You have a supply chain.
I've got a pretty, pretty, pretty important customer here who would say, like, you know, that they need us to step up, you know, our performance as part of the supply chain. But when I think about our supply chain, in 2023, I would say, it was, you know, steady, steady progress. Just kinda look across the board, you know, Raytheon had about, you know, 8% year-over-year growth in material receipts. We've talked a lot in the past about structural castings at Pratt being an inhibitor, and that growth was about 30% or more, you know, year-over-year. Microelectronics was largely sort of out of our way. I think we took some pretty aggressive actions in 2021 and 2022 to make sure we had the capacity we needed. So those lead times are back, I would say, in the normal space. And then Rocket Motors.
We talk about Rocket Motors a lot. I would say towards the end of the year, we started to see sort of a, a positive trend there. But across all of those value streams that I just talked about, we need continued growth in 2024. I just said we're gonna have 20% year-over-year growth on, on GTF engines. So we're gonna need continued growth in structural castings, forgings, the discs. People know that we're ramping up, obviously, the powdered metal, you know, production. So again, from a just from a performance perspective, I think there's, there's more to do there. And if you just look at our 14,000 product suppliers, the large majority of our overdue comes from a fraction of that, 14,000. And so we have taken our teams - we've talked about this before - forward-deployed them into our supply base, number one, to understand their WIP positions.
So we have a better sense as to what we can commit to our customers, and in helping them through any engineering issues or quality issues. We're also trying to put more folks on long-term agreements, David. I mean, again, if you look at Pratt and Collins, they're about 80% or so on long-term agreement in their supply chain. Raytheon is much smaller. And so we're trying to take that number up. Again, gives the supply chain visibility into the demand and also gives them the confidence to invest and hire. Now, from a cost perspective, I will tell you that it is still a challenge. In 2024, we're projecting about $1.7 billion in inflation. That's about $600 million on the labor front, about $1 billion-$1.1 billion on the product side. So continued headwinds from an inflationary perspective.
Some of that's coming from, I would say, pre-pandemic long-term contracts that are rolling off and people, you know, wanting to, sort of make up a little bit for what they feel like they had to sacrifice during those periods. And so those are ongoing negotiations. Some are suppliers that have, you know, significant leverage by virtue of the fact that they're in a very constrained value stream, have unique IP, just have a unique leverage sort of, you know, position. And then again, we're continuing to hold our supply chain as accountable as we possibly can. But sometimes you've gotta balance that against the need for continued delivery, you know, and material, you know, flow. And so we're gonna continue to focus on the cost reduction efforts that we've got.
Again, there are certain suppliers, given their sort of stature in the value stream, that can get above inflationary type, you know, increases. And so then we've gotta control what we can control, which is negotiating what we can but driving cost reduction throughout our own network, which is, again, one of the reasons we continue to deploy aggressively our CORE operating system. I mean, the other piece of that equation, of course, David, is the pricing. So like, we've gotta continue to drive pricing to help mitigate a lot of this continued cost pressure that we're seeing in the supply chain. And again, there's only so much that we can do there, but we've continued, you know, to drive that because I think our customers are getting pricing, you know, as well.
And then, as I said before about holding the supply chain accountable, just think about Raytheon last year. We went out and looked at about 70,000 parts in the Value Stream. There's just so many different, you know, we can do here. And ultimately, we were able to resource or dual-source about 4,000 of those. So continuing to consolidate with our best-performing suppliers, holding people accountable, also part of the playbook.
Moving over to the GTF, let's take it, I guess, near-term and then, obviously, something longer term.
Yep.
So the last update we heard directly from you on the Q4 call, there was no real update, kind of steady state, other than I guess you talked about the peak AOG kind of leveling out, maybe being a little bit lower. Update us maybe, you know, update us on the progress there in terms of the ramp-up of, you know, disc production, how this is progressing over the last couple months.
Yeah. Yeah. You may recall, David, that we came out in September and laid out a number of key assumptions and sort of performance metrics that we needed to continue to drive. So overall, I would say we're still in the early days, obviously, here in Q1, but consistent results with what we had, you know, laid out there in terms of our key performance metrics in September. So maybe just to go a little bit deeper there, I would say we've done a number of inspections, obviously, since that time, both on the GTF and V2500. And those results are consistent with the assumptions that we've been carrying. So that's good. You mentioned peak AOG. The airworthiness directive, the AD, hasn't. The final AD has not dropped yet and been issued. So that's pushed to the right a little bit.
But again, we think some of the airlines—well, we know some of the airlines have been proactively, you know, removing engines, pairing them with other engines to try to mitigate AOGs. But at the end of the day, we think that 350 average is still consistent. You mentioned the ramp-up on full-life new metal parts. So today, we are delivering to our airframe customers engines with full-life metal parts in accordance with what we had committed to. On the MRO side, we are starting to insert those parts into certain visits. And that's gonna ramp throughout the year. Again, it's the powder creation. It's the machining. It's the forging. And it's the inspection capacity. Those are the key parts of this value stream as we continue to drive that ramp.
And as I said, we're holding serve at this particular time. But that's gonna have to continue to ramp throughout the year 'cause we wanna insert more and more of these into MRO to try to drive, you know, the Time on Wing. And then the last piece, I guess, would be MRO, you know, performance. We've talked about the wing-to-wing turnaround time, that 250-300. Again, I would say that remains, you know, consistent. If you think about the GTF MRO output last year, it was up about 30% year-over-year. But we need to continue to take that up a notch, obviously, given the number of removals. And we're doing all the things that you would expect us to be doing. It's really driving the creation of as many different work scopes as we can.
So is there something in between a very heavy and a very light that we can bring to bear that will help turn time? It's developing repair capabilities so that you don't always need, you know, new parts and have to rely on the supply chain. We developed something like 1,300 GTF repairs in the network last year. And then it's working with our network partners on what I would call sort of best practices on turnaround times. As you know, we've got some fantastic, you know, partners in our GTF MRO network, MTU, Delta TechOps with Lufthansa, and others.
So we share best practices throughout that network to go figure out, you know, work scopes, how to take days out of turnaround time, anything we can do to take that 250 and 300 and make it better to get our customers as much lift as possible. But as I said, early days and consistent with what we laid out on our last couple calls.
Okay. Thinking about the longer term.
Yeah.
There are concerns around market share, profitability, particularly around the, you know, the aftermarket and the long-term service agreements.
Yep.
How, how do we kinda put all of this that's happening in, in context of the of that?
Maybe, again, just step back for a minute. I alluded to it earlier on the size of the program and the opportunity in front of us. If you think about when we first launched the GTF and the business case that we had associated with it, the volumes today are almost 3x what we had originally, you know, anticipated. I think it's gonna have a longer run than obviously we thought when the program was launched. And that's great. That means we're gonna, you know, be able to put more product out there and have, you know, a larger installed base and a longer aftermarket run. So, you know, if you just step back, feel really good about the prospects on the program and the volumes and where we think we can take it.
Obviously, we've got some of these headwinds on Powdered Metal in front of us right now. And in terms of its aftermarket impact, I think we said previously, well, it'll cost us about a point in terms of GTF aftermarket for us. But we still believe we can get to teens' margins in the GTF aftermarket in that 2020-25 timeframe. And that's on the back of some early entry-into-service contracts rolling off. That's on the back of continued cost reduction that we've done in our MRO shops. And then, of course, continuing to upgrade the configuration to extend Time on Wing, right? The longer Time on Wing, the more shop visits you avoid, the less cost, you know, you're putting into those engines.
So again, feel good about the trajectory, ultimately, of the GTF, you know, aftermarket, as we work through Powdered Metal, which, of course, it's no small challenge. But if you just think, you know, longer term on this program, again, feel really good about it. You asked about market share. And if you just think about the sales campaigns that we're involved in today, we're out there, you know, offering the GTF Advantage. You know, obviously, when those deliveries come, it's post the Advantage certification.
Mm-hmm.
That'll bring additional thrust, additional fuel burn, and all the learnings from what I would call the base program since inception in 2015. We've done a significant amount of testing on the GTF Advantage. And I think our customers understand the benefits that that can bring. Clearly, they are not happy - how could they be - on the current situation on Powdered Metal. But as they think, you know, sort of forward in terms of their fleet planning, I think they see the benefits of the Advantage. So again, I view that as, you know, a positive. I think the market share that we've got today, it's on the order of about 40%. We think we can, you know, continue to maintain that.
Again, I think when you just think about the Advantage and all that we're putting into it, I think people can see that value. We got a couple of key milestones here in 2024 on our path to certification. So we need to continue to see our way through those. But again, feel really good about the engine going forward. And I think one of the questions that people have asked is about, "Well, hey, you have to maintain that market share through, you know, being really aggressive on pricing." And I think, again, we're selling the Advantage going forward here, the fuel burn, the Time on Wing, the thrust. And so continue to get pricing. We're not in the early, you know, entry phase, the launch phase.
As these programs continue to age, you continue to get better pricing. I think people see the benefit of the technology we're gonna bring.
Okay. Great. Wanna shift over to defense, the other part of your portfolio. You've had some challenges with fixed-price development programs. I think the progress on the, you know, on the Raytheon side since, since the merger has been, you know, kind of slower than expected. I guess, what have you learned from all of this in terms of how you contract and what's the,
Yeah.
You know, what's the path to improvement from here for the defense piece of the business?
Yeah. I'm sure as you're listening to all sort of the defense companies, you know.
Yeah.
Fixed-price development's the new sort of four-letter word. I would say we've certainly had our challenges. There's no question about that. And I'll talk about those in a minute. But I don't want folks to think that, you know, we are walking away from fixed-price development as a general matter. I think we just need to be smarter about it. I think when you think about our headwinds, Raytheon's headwinds in 2023, profit headwinds, maybe kinda two categories. And we talked about this on our earnings call. About 70% of that margin or profit headwind was on fixed-price development contracts. And I would characterize those as us taking on work that not necessarily within our core competency. They were priced to win, and with aggressive timelines.
That doesn't—those contracts only take up about 1% of our backlog. We think those will start to roll off and get sold in the next 12 to 18 months. But we've got some continued work to do to get those behind us. Again, the lessons learned are just as you kind of alluded to in your question, which is we've gotta get smarter around our contracting. We don't necessarily need to go and chase work that's outside of our core competency given the demand that's out there today. Again, I think there's a way, a disciplined way to go do those contracts, with the risks in front of you and the mitigations, you know, in the contract. So again, learned a lot there.
I'm sure a lot in the industry have learned, over the course of the last couple years. And we're putting, bringing those to bear in our contracting process and what we would call our passport process as we evaluate each of these sales campaigns and execute on them. And then the remaining sort of 30% in terms of headwinds, I would call that supply chain slash, you know, inflation. And when you've got on-time delivery issues, that ends up extending the period of performance on your contracts, which means you're gonna go drive more cost and have potentially negative EACs. And on that one, it kinda goes back to what we were talking about on supply chain. It's you gotta get a healthier supply chain. And we've talked about the people that we've deployed into our supply chain to help with that.
It's getting folks on long-term contracts and getting them back to back with our customers a little bit too, too often. I think we probably had pricing with our customer and didn't have the supplier locked up.
Mm-hmm.
They weren't back to back, which kinda leaves you exposed. So again, getting that process more buttoned up. Then just overall, kinda working with our customer to have other avenues for adjustment contractually given the inflationary environment. While, you know, we've all talked about inflation starting to moderate a bit, you know, it's sticky. And a lot of those prices remain high in our supply chain. We've gotta find a way to reflect that in our contractual, you know, structure. But when I just think about Raytheon, you have to think about the demand for the products, right? The demand is at truly an all-time high, unfortunately, given the situation we find ourselves in the world, but a $52 billion backlog. So the prospects for the business, the demand, the growth is there.
That's the really positive thing. And so for us, it's just about tightening up some of our processes around supply chain and around contracting. And we really believe that we'll continue to drive margins clearly above where they are today. We don't look at the 2025 commitments as the max that business can do. We think it's got runway beyond that.
So you've talked a lot about your CORE operating.
Yep.
System. I think it, you know, came. It's come up for a while.
Yes.
What exactly is that? What, what have you done in terms of removing costs, improving efficiencies?
Yep.
How much more runway do you have left with it?
Yep. So CORE, Customer-Oriented Results and Excellence. It's our business operating system, as I said upfront. It's a set of lean, continuous improvement tools that we use in every phase of our business, from the capture phase to the design phase to the manufacturing phase through the aftermarket cycle. We talked before about if and I think even if you looked at our June investor day, we had each of our business stand up and talk about examples about where it's being used. And if you think about its benefit to us since the merger, you know, we've reduced roughly, you know, commodity suppliers by almost 1,300. We've taken out about 16% of footprint in our network. And there's a significant amount of continued opportunity in front of us, David.
We've got, you know, 25 million hours of assembly and tests that we do all across the network. How do we take hours and days, you know, out of that process? We've got 14,000 product suppliers, as I talked to you about before. So how do we continue to leverage our core resources, to make them more efficient? If you go into our shops where this is, in particularly, alive each and every day, it's about singles and doubles, to use a baseball analogy, right? It's getting a little bit more productive, a little bit more efficient each and every day. And there's sort of a saying that we use, which is creativity over capital.
How do we continue to get better with the resources that we have instead of coming forth saying, "Hey, we need, you know, a new set of tooling or equipment"? How do we become more efficient with what we've got using our CORE operating system to drive that, you know, productivity and efficiency? So again, feel like we've got a lot of runway there. The CORE operating system is really kind of a unification of the ACE system that we had at United Technologies that we've talked about.
Yeah.
Six Sigma at Raytheon. So a lot of, I would say, you know, overlap. We've taken a best-of-the-best approach, and we're driving it hard down into our network. One other data point that I'll give you is, you know, we've got something like 170 or so OE sites across the company, all three business units. 60 of those sites combine for or account for, I should say, roughly 70%-75% of our manufacturing hours and our cost. And so we are deploying dedicated teams to those sites. And they all have their own, you know, annual productivity sort of plans. But how can we go get another, you know, 0.1%, 0.5%, you know, better with the CORE operating system? So again, focusing our resources on those sites that really move the needle for us.
Portfolio and capital allocation.
Yep.
I mean, you been a lot of things happening there with the big ASR, a couple of divestitures you've announced.
Yep.
They're still pending. So what are the asks as we think about the go-forward, what are kind of the next moves? What are your capital allocation priorities from here?
Let's talk portfolio first. I, I again, as I said upfront, we really like the, the pieces that we've got today. We think they fit really well. And if you think about our business, long-cycle business, scale and breadth truly are our competitive Advantage. So like the portfolio, like the three business units and the size that they're in, feel like we're very complementary from a technology perspective, from a manufacturing perspective. So our focus is not on what I would call big portfolio moves. Feel like we've got the portfolio we need. There's always gonna be pruning that we would do, as you might imagine, David. You referenced a couple of those, some divestitures that we're doing. So we're always we've always got a, a portfolio assessment process that's ongoing, whether it be product lines, whether it be, you know, sub-business units that we're thinking about. Do they fit?
Do they have a long aftermarket tail? Do they have differentiated technologies? If not, maybe it's better in somebody else's hands. We'll continue to look for opportunities out there for sort of bolt-on technologies that may be sort of accretive to the portfolio today. But we'll be disciplined around that. If you think about the shareholder, you know, returns, which I think you alluded to as well, no change to the approach we've taken there. We upped the capital return commitment to $36 billion-$37 billion through 2025. And we're well on our way satisfying that. And no change to the dividend approach. That'll grow, you know, with profit growth.
I feel like this business can generate significant, you know, cash that we can continue to reinvest in the business, in technology to continue to build, you know, franchises for the future.
Great. So with that, can we pull up the audience response system?
It's really comfortable for those of us up here going through this process.
The hot seat.
Yeah. It's great.
Real-time feedback.