I keep reiterating, he's been a strong supporter of this conference. Seems to make it every year, so thank you for that. Neil Mitchill, Chief Financial Officer of Raytheon Technologies.
With that, I'll hand over to Greg for some opening comments and necessary disclaimers and disclosures.
Thanks, David. As long as you keep having the conference in Miami, I suspect we will continue to attend religiously.
Just before we get started, a reminder, this is being webcast, and we will have some forward-looking statements that are subject to risks and uncertainty. Form 10-K, which lays those risks and, Second on 2022 because I think it really sets the stage. Last year, we had solid organic growth, about 6%, solid bottom line growth, EPS about 12%. That was despite $2 billion of inflation, which is about twice what we had planned going into the year. Not surprisingly, we saw that inflation across supply chain. We saw that across employment costs.
For the most part, we were able to overcome it, and we were actually able to hit the guidance that we had laid out back in January of 2022. Cash flow, again, pretty strong. A little stronger even than what we expected. That was despite about a $1.6 billion cash tax payment to the government because of the R&D amortization. Good news there. I think the best news about 2022, not that we just survived it, but our backlog exiting 2022 was $175 billion. Nearly $70 billion of that on the defense side.
That really does set us up top line and bottom line growth as we go look to the next 3 years. On the commercial aero, as we entered this year, pre-pandemic levels of air traffic.
We expect by the time we exit this year, we should be almost back to full 2019 levels. Probably stronger on the domestic single aisle side, a little bit weaker on wide body, but pretty damn close to 2019. So to say the pandemic is over, may be a bit of a misnomer, but we clearly see the recovery taking hold as we go throughout the rest of this year.
You can see it especially in China, which is about 14% of the world's, RPMs, Revenue Passenger Miles. Again, very strong rebound as they've opened up the country there. On the defense side, again, I go to the backlog. We see what's happening every day in Ukraine. We see the challenges in the Indo-Pacific region.
All of those threats and the threat environment being as elevated as it is, bodes well for the technologies that we can bring to bear. I think, again, we see very solid growth this year in defense, but not just this year. It really will be a multi-year recovery in defense spending, and I think that sets us up very well. I'll turn it to Neil. He can take us through the actual 23 guidance that we gave in January just to reiterate it.
We'll come back and take the questions.
Great. Thanks, Greg, it's great to be here. No change to our RTX level guidance today. We see about 7%-9% organic sales growth. That's between $72 billion and $73 billion. Earnings per share of $4.90-$5.05. Obviously have some pension headwind in there and some tax headwind, very good operating segment growth.
We'll see operating segment profit growth at all 4 of the businesses this year, based on all the backdrop that Greg just talked about in terms of the growing backlog, the commercial aero recovery in particular. On the free cash flow side, $4.8 billion or so is our outlook as of today. Again, we've got about a half a billion dollar pension headwind.
We've got some higher capital of $200 million and higher interest in some corporate-related restructuring that we anticipate this year. All that gets us to about $4.8 billion as we look at the rest of this year.
Yeah. Great. Thanks for those comments. First thing I wanted to touch on, one of the big things on the Q4 call was the announcement that you're going to be streamlining to three segments, taking the two former Raytheon segments into one. I guess what drove this? How does that fit into your overall priorities for this year, and how does that all flow through to how you're thinking about the trajectory out to 2025?
Hey, David, it was something that we gave a lot of thought to. In fact, this was probably over a year in the making in terms of how are we going to set the company up to recognize and to realize the benefits of the merger. We've been talking for the last three years, it's been almost three years since we came together as Raytheon Technologies, about how do we take technology from the defense side and the commercial side and put them together in packages that can solve some of our customers' most difficult problems.
What we found, again, we have great technology spread across all the businesses. Because they were individual businesses with individual P&Ls and their own priorities, what we saw was that we were missing opportunities to work across the enterprise.
I'll give you two examples that were most compelling to us. One was on JADC2. JADC2 is a Joint All-Domain Command and Control. This is the military's jargon for how do you make sure that you can communicate across all the spectrum, from space to air to sea to land to ocean and underwater in a contested battle space.
It's a really difficult problem. We have folks within our RI&S segment that we're working that. We had folks within Collins and even a few within R&D. We never really could come together as a single company in terms of our approach to solving this problem. The other one I would tell you is on the FAA side too.
Again, we do all the radars for the FAA, we do avionics, we do all of this other work for FAA spread across the business units. We really saw that we were suboptimizing in terms of our ability to solve these technical customer problems. As we thought through this, how best to organize, we saw the ability to move pieces of RINS from its current home into Collins. Some pieces of it will go into R&D. Pratt pretty much stays alone.
At the end of the day, we thought we would have three big business units, Pratt & Whitney, Collins, and Raytheon, as we're going to call this new segment, all with roughly $25 to 27 billion of revenue next year. All also laser focused on specific customer needs.
Missiles, defense, and space will be in the Raytheon segment. The comms, JADC2, FAA will most likely be within the Collins segment. Pratt pretty much stays as it is. Again, the whole idea here was, how do you unlock the revenue synergies?
We think we've identified roughly $12 billion of revenue synergy opportunities that we could realize through this realignment. Today, we've only realized about $1 billion of that $12 billion. There's a big opportunity to spur growth through this realignment.
Yeah. Update on supply chain, I think probably your favorite topic. Where are things not getting better, maybe by business?
you touched on the inflation headwind you took last year, the inflation headwind you expect. Are you seeing any sort of easing on the, on the inflation front?
Yeah. I've been in the aerospace business now going on, I would say 34 years, and I've been worried about supply chain for about 33 and a half years. The first half of the year, I didn't know what the hell I was doing. I didn't really understand it. The fact is, supply chain is getting better, incrementally. We still have problem suppliers out there. We've talked all about these over the last year. I would tell you, on the whole, supply chain is getting better. Chips, specifically, we saw this as a huge problem a year ago. We were able to work deals with many of the distributors and many of the manufacturers. I would now say that chips, for the most part, are no longer an issue.
We had some casting issues at Pratt & Whitney that was holding up delivery of engines to Airbus and other customers. That issue is still out there, although yields are getting better, processes are improving. Getting better probably won't be completely solved back on contract until the end of the year. Rocket motors, bane of my existence, continue to be a problem of 2024. As I take a look, there are literally hundreds and hundreds of issues at suppliers.
You always have a problem. We had one of our suppliers recently had a fire at one of their factories, and that'll shut down a couple of production lines for a month or so.
These are just things we work through, and when you have somewhere around 13, almost 14,000 suppliers, there's always going to be a few that are problematic.
The big challenges that we saw last year with COVID, with chips, I would say that is, for the most part, behind us, and we would expect better performance even as we go through 2023 here.
Inflation and your ability to offset it with price.
Again, if you think about last year, $2 billion of inflation, we were forecasting another $2 billion of inflation this year. Of that $2 billion, about $800 million of it comes from increased employee costs. Think about across RTX, we've got about $20 billion in compensation costs, 4% raises this year, $800 million. Big number. Supply chain, about another $1.2 billion.
That is the challenge, is how do you overcome roughly $2 billion. Pricing will cover about 60% of it or so. The rest is going to come from productivity and cost reduction.
one of the things is that we have been able to do with many of our suppliers, because suppliers have been late, they have been coming back and saying, "Hey, by the way, we need price increases." We said, "There's no price increase even contemplated until you're 100% on time with 100% perfect quality." We have been able to push back a little bit on the supply chain, but the inflation is still real. Although again, as we look forward, it seems like, the employment costs, which were going through the roof last year, started to slow down a little bit.
We see raw material costs, oil, gas, all of that pressure on inflation, including all the excess government spending that we had.
I would expect inflation will start to moderate here in the back half of the year.
Moving over to commercial aero. First on the aftermarket. Last year, you between Pratt and Collins, you put up about 25% aftermarket growth. This year's forecasting differs a little bit by business, but, mid-teens range. Can you walk through the drivers of that, GTF, V2500, legacy engines, shop visit provision, Everything that goes into the aftermarket forecast?
Yep. I'll take that one, and then we can get Greg to pile on. Yeah, Collins, we're going to see low double digits to low teens aftermarket growth. Remember, we've seen really substantial growth there over the last year. I think you'll see higher growth levels in the beginning of the year that kinda tail down as the compares get more difficult. The key driver on the Collins side is really the reopening of China. The expansion of the wide body traffic routes. Those are the two things that we're really keeping an eye on, particularly in the Asia region of the world.
Fortunately, we've seen a pretty strong recovery there. If that remains in China, then I expect that Collins will enjoy that aftermarket demand, and that'll continue. That's the key driver there.
On the Pratt side, we expect to see 20%-25% aftermarket growth. I talked a little bit at the earnings call about, we see the V shop visits going up, call it from around 700 to the mid-800, a lot of tailwind there. We're happy to see that the GTF aftermarket is contributing positively to margin, that will help-
Mm-hmm
in some way, growing. That'll continue to grow back towards V2500 like margins over the next several years. That's going to be a key driver there. Also, you've got the Pratt Canada business, the small engine business, continue to see really strong demand for business jets. We will see the regional turboprop market pick up this year as well.
All of that will continue to drive aftermarket demand in that business in particular. We also have the military businesses within both Collins and Pratt, for example. On the F135 side, we'll see the aftermarket overtake, not overtake, but offset a little bit softer OE. We'll see military sales about flattish at Pratt.
Mm-hmm
You're seeing that shift from OE to aftermarket, so that's good.
Yeah. I would just add a couple of, just a couple of color commentary points here. One, on the V, three years ago, we thought the V was, .
Mm-hmm
Going to be petering out. Retirements have been almost nonexistent in that fleet. There's still about 6,000 engines out there, which is double the number of GTF engines in service today. That aftermarket continues to be very strong. Average time on a wing for a V is around 20,000 hours. You're getting good reliability, and we're seeing the shop visits come through, and the shop visits are, as you would expect, with a fleet as old as that, relatively profitable. The Pratt Canada piece, again, we don't talk a lot about Pratt Canada as kind of the hidden jewel within the Pratt portfolio.
To Neil's point, there are 60,000 small engines out there, that we have, for the most part, all on maintenance service agreements, where they are getting cash every hour that the airplanes are flying.
General aviation has been very, very strong. The other piece of this on the Pratt Canada side is the PT6. Now, the PT6 has been out there almost 60 years. Later this summer, we will have over 1 billion flight hours on the PT6 engines. That's an incredible legacy of durability, reliability, and customer acceptance of an engine. I gotta tell you, it is, for any of you that have, that have flown any turboprop out there, it's probably a PT6 powered engine, and that continues to drive significant aftermarket, profitable aftermarket growth at Pratt Canada.
You touch on the GTF, I'll let you take it where, wherever you want to take it, but.
Mm-hmm
Negative engine margin, what you're doing on the GTF Advantage and I guess the on-wing stuff that's out there.
What's nice is this is like the fourth question. We're finally getting to GTF. For the last five years-
Yeah.
It's always been the first question. GTF, as I said, we've got about 3,000 engines out there in service, primarily A320 family, A220, but also the Embraer E2 series aircraft. Even on the business jets on the Gulfstream G600. It's been great, but it has not been as reliable as we would like it to have been. It's not been as durable. I would tell you today, with the recent upgrades and modifications we've been working on, and we're on what I call the D configuration, right? Fourth generation of the GTF. We're getting somewhere around 10,000 hours of time on wing between overhauls, so about half of the V.
The challenge over the next five years is to get the reliability from where it is today to V2500-like reliability. Again, we have put in place a number of fixes to the combustor, to the number three turbine blade, to other parts of the engine where we've seen reliability issues.
We're still not where we need to be. As a result of that, our customers are not particularly happy with the fact that we can't get engines to them in time because of the large number that are coming in for all of these retrofits. That will be a challenge for us all year long, I think is again, V2500 shop visits are great.
GTF shop visits are also increasing this year, and that's going to be a challenge to make sure that we can keep the airplanes in the air with the engines going through the shop as often as they have been. It remains a challenge. The good news is, last year, we finally crossed the break-even threshold on GTF aftermarket profitability. We're still losing a little over $1 million in negative engine margin. Again, we've come down a learning curve over the last, I guess it's been 8 years now, roughly an 87% learning curve. With pandemic, I think we took a step back up.
We're still trying to inch our way back down, but negative engine margin will continue to be an issue at Pratt for a number of years.
On the new equipment side on commercial aero, you've forecasted low to mid-teens growth. How do you frame that in the context of, what you're getting out of the manufacturers in terms of build rates? I mean, we've had, since you reported, we've had a number of other companies report, and it seems like expectations are still kind of all over the place in terms of manufacturer build rates.
Yeah, look, right now I would tell you the numbers that Neil just laid out are pretty much in line with what Boeing and Airbus have told us in terms of what the build rates are going to be. There is still a bit of a wait and see here. I know Boeing has come out. They're at about 31 on the 737 today. There's an aspiration to get to 38 by the end of the year. We can certainly support that. On the Airbus side, I think last year they were at 45 on the A320 family a month. Next year they say they're going to 65.
They didn't give a specific number on the for 2023. Somewhere in that, 50, mid-50 range, we'll be able to support that. Again, the challenges that we see out of supply chain, I would tell you all the airline or aircraft manufacturers see it in spades, right? I mean, it is everywhere. There is still challenges out there in supply chain that. Boeing and Airbus are working through. I would tell you the forecast that we have put forth for the year in terms of growth, support kind of a middle of the range in terms of what the air aircraft OEMs are forecasting.
That's fair.
Yeah.
Over to the defense side you touched on at the beginning the big backlog you had over one times book-to-bill in defense last year. I guess the question is when do we see it come through? When does it translate to the kind of growth we're all anticipating?
Well, look, book-to-bill at RMD last year was, like, 1.37, right?
Right. Yeah.
Really strong. That was across the board from AMRAAMs to Patriots to NASAMS, everything. As you would expect, though, if you order a Patriot air defense system today, you'll see it probably 2 and a half years from now. NASAMS, again, while it's in current production, I think we've got 6 of those on order for Ukraine.
They won't see those until starting this summer, probably through next year. This backlog is going to play out over the next two or three years. The fact is that, there's still a lot more to come. With all of the money that's been allocated to the defense of Ukraine, which is roughly $45 billion, we've only seen a little less than $2 billion of actual contracts at Raytheon.
I think if you go across the whole defense industrial base, that number is about $7.5 billion. There is still a significant amount of demand that has to be contracted to fill in for all of the commitments that we have made to Ukraine.
Again, Patriot are a part of that. NASAMS are a part of that. Javelin, Stinger, Excalibur, guided munitions, those are all still on to come in terms of replacing what has been consumed or been pledged to Ukraine. I would think this is going to play out over the next 2, 3, 4 years. And that doesn't even count what we're seeing in terms of growth in the INDO-PACOM theater, where we know there's huge demand for SM-6 missiles, anti-ship missiles.
This is kind of the standard load for any one of the destroyers that are out there. We know that, and, I mean, you've probably seen all the reporting. We've probably got about seven days worth of munitions currently in the fleet, which doesn't bode well for a long war in the INDO-PACOM theater. There is still demand that's going to be coming, as it relates to many of those things, SM-6 probably being the biggest opportunity for us.
Defense margins, can you talk about what's been challenging there? How much of it has just been supply chain, inflation, not the ability to price through? How much of it is mix and how things get better from here?
Yeah, let me start there. When we look at last year, the biggest issue we had was supply chain that, really hurt our ability to drive productivity. The two things were related. It's a little bit of a different story between each of our two defense businesses. On the RINS side, we definitely had some supply chain constraints. We also had a handful of programs that we've been working through, development programs, fixed price. Many of them date back to 2015 kind of timeframe. That exacerbated, I would say, the absence of productivity.
We had taken some charges throughout the year, pretty much in each quarter. We still have a little bit of ways to go there, probably another year to 18 months to get through those contracts, but that was certainly a drag.
At RMD, it really was the supply chain. we talked about middle of the year, the kit fill rates being at really low levels. That caused a lot of inefficiencies and disruption in the factories. Typically, we would see $200 million of productivity a year between these two businesses. Last year, we saw about $90 million of negative productivity. Year-over-year, about a $258 million headwind. As we look to 2023, we think we will see additional productivity. I will tell you that I expect that productivity to be more back end loaded. We could see a bit more of a headwind here in the Q1 in RINS in particular.
I think as the material flows, and getting back to one of your earlier questions, we talked earlier about an 8% material year-over-year increase at RMD. here in the Q1, we're probably going to see about half that rate of year-over-year growth, which was planned. We've so far seen that level of activity. Again, that'll kind of improve over the course of the year as the supply chain recovers.
As I sit here today, it really is about regaining our flow of materials through the factories and making sure that we're able to generate the productivity that we're used to, which comes in the form of higher volume production activity as opposed to a lot of development activity that we've been doing, getting to your mix question, which has also been a factor.
In R&D in particular, we've been upgrading a lot of our legacy equipment. While it still has names that go back, sometimes 30 years, a lot of that equipment got new upgrades over the last year. That had the added effect of putting some pressure into the supply chain as the designs have changed and lead times expanded on us at the same time.
I am confident in what we have in the forecast for this year. We still have a ways to go, but we are starting to see that, slowly improve as the year unfolds, so far.
Dave, the only thing I would add to that is, we blame everything on supply chain because it's easy. The fact is, I'd say we missed some of the big changes that were happening in the marketplace around lead times and around raw material availability, and we were late to recognize some of those expanded lead times. We didn't get things out PO as quickly as we can. We had designs that were not completely mature that we were releasing into the supply chain that had to have parts reworked. There was a host of, I would say, internal issues on top of just supply chain performance.
I would say, Chris Calio and Wes Kramer have made some changes, operationally and with some of the personnel of that organization, because we really need to get on top of this. I would tell you, Collins did a great job with supply chain last year. They had the same challenges. They got on top of it a little bit more quickly. RMD, we did not make the same progress. We weren't as proactive. Again, I think those issues which caused some of this drama last year, will be behind us just because I think we've got the right people now in place to execute on this.
Capital deployment, did $6 billion last year, guide to that level again this year. You have the $20 billion target, which seems like you'll easily achieve, but you also have this R&D drag, amortization drag that you weren't expecting, so you have to potentially finance some of this. How are you thinking about that? Just to layer on here, M&A, you've talked about the potential for further portfolio shaping in the past. Leave it at that.
All right. Let's talk about capital allocation. There's a thousand things to say there. Let's just start with the dividend, right? Dividend is about a $3.2 billion call on cash. Dividend is sacrosanct in my mind, and we will continue to raise the dividend in line with earnings for the next several years. Share buyback is kind of the fill-in, but we see about three point this year, $2.8 billion last year.
Since the merger, by the end of the year, we'll be just under nineteen and a half billion dollars return to shareholders. Pretty damn close, and with dividend payment in the Q1, we'll more than exceed the $20 billion target that we had laid out. We're not done.
I would tell you, as we think about cash over the next several years growing from, just under $5 billion this year to around $9 billion by 2025, we'll have opportunities to continue to increase the dividend and increase share buyback. I don't think there is much in the way of M&A out there today. There may be, and again, we've done some small pull times like SEAKR and Blue Canyon Technologies, but for the most part, given the regulatory environment in Washington, I think any type of deal, difficult to do.
Having said that, there are probably some pieces of the portfolio within the four walls of RTX that we feel are not optimal in terms of long-term growth. We'll be doing some of those potential divestitures over the course of this year and next.
Again, We've been talking about it for three years, and we haven't done anything, quite frankly, because the market has been so bad. With the recovery in commercial aerospace, I think there's a better opportunity today to monetize some of these assets and find a better home for a couple of the businesses. Hopefully, by the time we get to June, we'll do an investor day at the Paris Air Show. We'll be able to shed some more light on that.
You mentioned the cash flow improvement from $5 billion to $9 billion. Can you help us? I mean, it's a big lift. You've got a pension headwind in there. You get some relief on R&D amortization over time. A lot of it is driven by underlying growth in the business. What? I mean, is it $5 billion, $7 billion, $9 billion? How do we get comfortable? What does that path look like, and how do we get comfortable with it? Save the best for last.
Yeah. No, sorry. Let me start. I'll give you the walk. Let's talk about $5 billion-ish of free cash flow at 2022. We'll have $5 billion of after-tax profit growth between 2022 and 2025, and $1 billion, unfortunately, of pension headwind in the form of lower CAS recoveries. We also have about a half a billion dollars of increased capital as we continue to invest, for the near and the long term. That's sort of the big pieces of the walk. If you look at that $5 billion of after-tax profit growth, 80% of that or so is going to come from Pratt & Collins. Of that piece, up 75% of that is going to be driven by aftermarket.
As you think about where are we going to be in 2025 as it relates to a commercial aero recovery, we think we're fully recovered by then, probably still have a little bit of recovery left in the wide body. We'll see. It's a little bit further out there.
The way that it's going to happen it's going to be related to that air traffic getting back to those historic levels and then continuing to grow in the mid-single-digit range that we're all used to pre-pandemic. As you think about how that's going to happen, I think that's going to be relatively correlated to this continued recovery and the delivery of new aircraft that we all see in the rates from the OEMs that we've been talking a lot about.
Those are the things we're watching, over the next, months and years as we execute those plans. I, I feel confident in that ability if we get the RPKs and we get the OE deliveries out there as anticipated.
Do you need working capital help to get to that number?
we're going to be very strategic with the working capital deployment here. I don't think we need a lot of working capital help to get to that number. It's in the hundreds of millions of dollars kind of range.
Yeah, I mean, the R&D amortization was also beneficial in 2022. That's about $1 billion of outflow at 25-
Yeah, exactly.
With additional interest and all.
Right. That's the difference between.
Versus the $1.6 billion. You pick up about $600 million in the amortization.
That's right. Yes. Exactly.
Okay. All right, the audience participation portion of the program. I know Greg likes it, so.
Good for us.
Yeah. If you could please participate, we would appreciate. We made it easy this year with the keypads right in front. Can we start the clock on the first question, please? Next question, please.
Preview distribution.
You're welcome to comment. Next question. Through cycle EPS growth. Okay, next question, please.
I already know the answer to this one.
Yeah.
three and four.
Closer than
Yeah, it's actually closer.
Next question, please. What multiple? That's good. Next question, please. Everything.
Wow.
Here it is. I think we have a last one on the new question for this year. Might be late to the party, but who knows?
Pretty even.
All right. Thank you very much. Thanks, Greg.
Thank you, David.
Thank you.
Yeah. Good to see you.
Yeah, I'm going to come over to your meeting.
Yeah, see you.
In a bit.