Raytheon Technologies Corporation (NYSE:RTX) Q4 2023 Earnings Call Transcript

Raytheon Technologies Corporation (NYSE:RTX) Q4 2023 Earnings Call Transcript January 23, 2024

Raytheon Technologies Corporation beats earnings expectations. Reported EPS is $1.29, expectations were $1.25. Raytheon Technologies Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the RTX Fourth Quarter 2023 Earnings Conference Call. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer; Chris Calio, President and Chief Operating Officer; Neil Mitchill, Chief Financial Officer and Jennifer Reed, Vice President of Investor Relations. This call is being webcast live on the internet, and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding acquisition accounting adjustments and net non-recurring and/or significant items, often referred to by management as other significant items.

The company also reminds listeners, that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. RTX SEC filings, including its forms 8-K, 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone opportunity to participate. [Operator Instructions] With that, I will now turn the call over to Mr. Hayes.

Greg Hayes: All right, thank you, and good morning, everyone. We’ve got a lot to cover today, but let me start with the news we shared last month, which I’m sure you all saw. Effective on May 2, the date of our annual share owners meeting, Chris Calio will become the new CEO of RTX. Chris’s appointment is the result of a very deliberate and thoughtful succession planning process conducted by our Board of Directors over the past three years. While I’m going to remain in my role as Executive Chairman, Chris will be taking the reins of the company. As you all know, I’ve worked with Chris for many years and I can’t think of a better person to take on this role. Chris has a deep understanding of our industry our customers’ needs, and our operation.

And most importantly, he’s an outstanding leader. Here I’d like to say that I’m honored to have led this organization for almost the last 10-years. But most importantly, I’d like to thank each and every employee, who has supported our mission over the last decade. We would not have been able to accomplish all we did if not for you. Going forward, I have the utmost confidence in Chris’s ability to lead this great company and continue to drive performance and value creation for all of our stakeholders for years to come. With that, let me turn it over to Chris to take you through an update on our end markets and the year. Chris?

Chris Calio: Well, good morning, everyone, and thank you, Greg. I’d like to start by thanking all RTX employees for their contributions last year. And I want to share how humbled I am that our board has given me the opportunity to lead this world-class team. As we move forward, our focus will continue to be on delivering our record backlog, accelerating innovation, and driving operational performance across the portfolio to meet our customer and shareholder expectations. I’d also like to acknowledge a couple of other leadership changes we’ve recently announced. First I’d like to thank Wes Kremer for his significant contributions to the company as he transitions into retirement. Over the course of his 20-year career here, Wes has led the development of some of Raytheon’s most successful programs, including LTAMs, Standard Missile 3, and a range of strategic missile defense systems that defend the homeland and our allies.

Wes has also played a critical role in restructuring the Raytheon business unit to better align with the needs of our customers. With Wes’s retirement, Phil Jasper has been appointed as President of the Raytheon business. Phil brings with him over 30-years of experience in aerospace and defense, and most recently led the Collins Mission Systems business, where he played a critical role in integrating RTX’s connected battle solutions this past year. Phil’s deep knowledge of our military customers and their priorities, and his experience leading many business transformation initiatives throughout his career, positions him well to lead Raytheon. Now, before I cover the highlights of the year, let me get into an update on our end markets. First and foremost, demand for our products and services in both commercial aerospace and defense has never been stronger.

Air travel has returned to, and in some cases surpassed, pre-pandemic levels, and the global threat environment is driving unprecedented demand, especially in air defense systems. Starting with commercial aero, we saw solid air traffic growth this past year with global revenue passenger miles back to 2019 levels and domestic air travel now 5% above 2019 levels as we exited the year. The strong recovery has helped drive significant aftermarket demand for both wide-body and narrow-body aircraft, with growth expected to continue into 2024. On the defense side, increases in global spending have led to a defense backlog which is now at $78 billion, up $9 billion from a year ago. Just this past quarter, we received a GEMT order with $2.8 billion from NATO, which is the largest GEMT contract recorded in Raytheon history.

Domestically, we are pleased that a bipartisan funding agreement has been reached supporting increased defense spending and expect Congress will complete their work on the full-year ‘24 appropriations bill in the next several weeks. With that, let me turn to slide two, provide an update on 2023, and I’ll start with some of the highlights. We delivered $74.3 billion in adjusted sales for the full-year, up 11% organically and adjusted EPS of $5.06 was up 6% year-over-year, both of which were ahead of our outlook. And more importantly, we ended the year with $5.5 billion in free cash flow, which also exceeded our commitment. On a full-year basis, commercial aftermarket was up 23%, commercial OE was up 20%, and defense was up 4%. On the capital allocation front, we returned over $16 billion of capital to share owners for the year, including $12.9 billion of share repurchases supported by our $10 billion ASR and $3.2 billion in dividends.

We’re beginning the process of deleveraging this year to ensure we maintain a strong balance sheet, which will be in part supported by the closure of our previously announced divestitures. At the same time, we remain focused on ensuring that business continues to be positioned to achieve sustained growth. In 2023, we spent almost $10 billion in CapEx in company and customer funded R&D, while capturing $95 billion in new bookings, resulting in company-wide backlog growth of 12% in a book-to-bill of 1.28, ending the year with a record RTX backlog of $196 billion. So while there’s a lot of positive momentum in our markets and across the business, we have two matters we’ve been heavily focused on, Pratt’s powdered metal situation and Raytheon’s margins.

So let me hit these two head on and I’ll start with powdered metal. Our top priority continues to be executing on our fleet management plans, and both the financial and operational outlook remain consistent with our call last October. While we are still in the early stages, I’m going to provide a few more details on the progress we’ve made to-date. As you saw, Pratt has issued the necessary service bulletins and service instructions to operators, which are entirely consistent with our underlying financial and operational assumptions that we previously communicated. The FAA is in the process of drafting the corresponding airworthiness directives, which we expect to be issued within the next month or so. And just as a reminder, it is common practice for a fleet management plan to be communicated through multiple service bulletins and airworthiness directives to address different engine models, compliance times, or components and sections of the engine.

Continue to conduct ultrasonic angle scan inspections and powder metal parts, and our findings remain consistent with our prior analysis and assumptions. Let me now turn to our industrial plans. You’ll recall our focus is on ramping production of HPT and HPC disks to support both OE and MRO deliveries. We’ve made solid progress here as well. Continue to secure the necessary machining and inspection capacity for increased disk production. Today, all OE GTF engines being delivered to our customers final assembly lines contain disks produced from powdered metal manufactured after Q3 2021 and have full certified lives. On the GTF MRO front, we have begun installing full life disks during certain shop visits. And the number of engines receiving full life disks in MRO will increase throughout the year as we continue to ramp up production of these parts.

Our estimated wing-to-wing turnaround time remains consistent with our prior guidance. Pratt grew GTF MRO output by almost 30% year-over-year in 2023, while also making investments in additional shops, test cell capacity, and repair capability to support even more growth in 2024. With respect to the number of AOGs, we continue to expect the roughly 350 on average that we previously guided. However, we will likely see a lower peak level than previously anticipated due to the timing of the AD issuance and proactive fleet management by our customers. Additionally, our conversations with customers continue to progress. To-date, we have finalized several customer support agreements, and these have been in line with the assumptions we outlined last year.

And lastly, just a comment on the remaining Pratt & Whitney fleets. Both the financial and operational outlook remain consistent with what we discussed on our prior call. We continue to execute on those plans. I’ll now shift to Raytheon’s performance. We continue to experience profitability challenges driven by productivity headwinds within the business, primarily attributable to legacy fixed price development programs that we have previously discussed, as well as continued supply chain and operational headwinds. Let me start by providing some color around our productivity issues. And it’s important to note that we are in fact achieving productivity in several parts of Raytheon’s business, in particular on certain legacy product families where we’ve received successive awards that are creating scale in our factories and in our supply chain.

For example, we increased GEMT output by 50% year-over-year by using our core system to refine work instructions, increase test equipment uptime, and reduce product cycle time, all without additional capital or manpower. We also recognize productivity gains when we successfully retire technical and schedule risks on our contracts, which is more frequent in our programs in the production phase. However, those gains have been overcome by unfavorable productivity in other areas. In 2023, about 70% of this headwind came from challenges on fixed price development programs, and the remaining 30% was driven by unfavorable material costs, as well as supplier delinquencies, which have had the effect of extending the period of performance in several cases.

So what are we doing about it? Our plan to stabilize the current performance and deliver profitable growth consists of a few elements. One, we expect improvement in our fixed price development programs as we satisfy certain technical and programmatic milestones. We will also be more selective and disciplined about the work we pursue moving forward. Two, we are making modifications in our approach to winning new work. We continue to ensure that our new contracts and additional contractual lots have better protection from supplier inflation. This will take some time to play through, but we expect this will help us improve our margin profile. Three, we continue to drive improved supply chain performance and material flow. Overall, our material receipts were up 8% in 2023.

And we need to continue on that trajectory here in 2024. Four, we continue to take indirect cost actions that will help us avoid some of the headwinds we experienced in 2022 and ‘23. For instance, we optimized Raytheon’s realigned business structure by further consolidating and streamlining several of our sub business units earlier this month. This will reduce indirect costs and overhead and better position the business for profitable growth. And lastly, there will be some tailwind that comes from a mixed shift in our business as development programs and technical refreshes move into production, and the mix of our sales shifts more towards FMS and DCS. So there’s obviously a lot of work to do, but this business has a strong foundation and it starts with its product portfolio.

As I said earlier, the demand for Raytheon’s products is incredibly strong, and I’m confident that Phil and the team are focused on addressing these challenges and delivering this record backlog at the margins that we need. With that, let me turn it over to Neil to take you through our fourth quarter results.

Neil Mitchill: Thanks Chris. Turning to slide three, we finished the year strong and ahead of our expectations with solid growth in organic sales across all three segments, even as the year-over-year comparisons became more difficult. And overall segment operating profit for the year was up 18% versus 2022. We also ended the year with strong free cash flow as you heard from Chris. For the fourth quarter, we had adjusted sales of $19.8 billion, up 10% organically versus the prior year. This was primarily driven by growth in commercial aerospace, as well as growth across defense in all three segments. Adjusted earnings per share of $1.29 was a bit better than our expectations and up 2% as profit from higher commercial aftermarket at Pratt and Collins and drop through on higher defense volume was partially offset by the expected headwinds from higher interest taxes and lower pension income.

Keep in mind we dealt with about $2.3 billion of inflationary headwinds in 2023 of which about a quarter of that was in the fourth quarter, which we largely overcame through pricing and cost reduction actions. On a GAAP basis, earnings per share from continuing operations was $1.05 per share and included $0.29 of acquisition accounting adjustments, a $0.06 benefit related to a customer settlement, and $0.01 net charges associated with restructuring and other non-recurring items. And finally, we delivered free cash flow with $3.9 billion in the quarter, bringing our total free cash flow for the year to $5.5 billion, which is about $700 million ahead of our prior outlook, as powder metal related impacts have shifted and year-end collections were stronger than expected.

With that, let me hand it over to Jennifer to take you through the segment results and I’ll come back and share our thoughts on 2024 and 2025.

Jennifer Reed: Thanks, Neil. Starting with Collins on slide four. Sales were $7 billion in the quarter, up 12% on both an adjusted and organic basis driven primarily by continued strengths in commercial OE and aftermarket growth. By channel commercial aftermarket sales were up 23%, driven by a 27% increase in provisioning, a 26% increase in parts and repair, and an increase of 7% in mods and upgrades in the quarter. Commercial OE sales for the quarter were up 17% versus the prior year, driven by continued growth in both narrow body and wide body platforms. And military sales were up 1% primarily due to higher deliveries. Adjusted operating profit of $104 billion was up $190 million or 22% from the prior year with drop through on higher commercial aftermarket volume and favorable mix partially offset by lower commercial OE as drop through on OE volume was more than offset by higher production costs.

In addition, higher R&D expenses offset by lower SG&A. Shifting to Pratt & Whitney on slide five, sales of $6.4 billion were up 14% both on an adjusted and organic basis with sales growth across all three channels. Commercial OE sales were up 20% in the quarter, driven by higher engine deliveries and favorable mix in large commercial engine and Pratt Canada businesses. Commercial aftermarket sales were up 18% in the quarter, driven by higher volume in both large commercial engine and Pratt Canada businesses. And in the military business, sales were up 4%, primarily driven by higher sustainment volume, which was partially offset by lower material inputs on production programs. Adjusted operating profit of $405 million was up $84 million from the prior year, primarily driven by drop through and higher commercial aftermarket volume and favorable commercial OE mix.

This was partially offset by higher commercial OE volume, higher production costs and unfavorable military contract adjustment in the absence of a benefit from a prior year customer contract adjustment. And finally, higher R&D expense was offset by lower SG&A. Now turning to Raytheon on slide six. Sales of $6.9 billion in the quarter were up 3% on an adjusted basis and 4% organically, primarily driven by higher volume on advanced technology and air power programs. Adjusted operating profit for the quarter of $618 million was up $48 million versus the prior year, driven primarily by higher volume and lower operating expenses partially offset by unfavorable net program efficiencies. Bookings and backlog continue to be very strong as we finish the year.

In the fourth quarter, $9.1 billion of booking resulted in a book to bill of 1.33 and an end of the year backlog of $52 billion. And for the full-year, Raytheon’s book to bill was 1.22. With that, I’ll turn it back to Neil to provide some color on 2024.

Neil Mitchill: Thank you, Jennifer. Let’s turn to slide seven. Before I get into the specifics on our ‘24 financial outlook just a couple of comments on the environment as we look ahead. So let me start with the positives. As Chris said global RPMs are back to 2019 levels. However, they have not fully recovered with respect to long-haul international travel, particularly widebody, but that is expected to continue to be a tailwind for us going forward. On the narrowbody side, demand for new aircraft remains strong, which continues to support both OE and aftermarket growth. Specific to the commercial OE side, with increasing commercial production rates, we expect commercial OE revenue will be up between about 10% and 15% in 2024.

Now, with respect to commercial aftermarket, we currently expect sales to be up over 10% in ‘24, and that’s on top of the 23% growth we saw in ‘23. Turning to defense, global defense spending remains elevated, which will continue to support our backlog ahead as our key programs remain well funded. Across RTX, we remain laser focused on driving operational excellence to deliver cost reduction and further margin expansion. In 2023, we achieved $295 million of incremental RTX merger cost synergies, keeping us on track to achieve our $2 billion in gross cost synergy goal by the end of 2025. On the challenges side, there are certain pockets where inflation remains elevated, we will see the lingering effect of the past couple of years inflation as we deliver on our backlog.

In ‘24, we expect to see about $1.7 billion of material and labor inflation, which we expect to be more than offset by higher pricing and the benefits from our digital transformation projects and other aggressive cost reduction initiatives across the company. And as Chris said before, we continue to focus on executing on our GTF fleet management plans and are working relentlessly to mitigate further disruption to our customers. And of course, we’re continuing to support the health of the supply chain. While we are seeing continued improvements, there are areas that remain challenged where we are dedicating resources, including suppliers, who provide structural castings and rocket motors. Two critical areas that continue to pace our recovery.

And as I mentioned back in October, we continue to see headwinds due to the actions we have taken to preserve the improved funded status of our pension plans, as well as the recognition of historical asset experience. And finally, we’re keeping an eye on the U.S. and global tax environment, congressional action on the fiscal year ‘24 budget, and of course the broader geopolitical and macroeconomic environment. So with that backdrop, let me tell you how this translates to our financial outlook for the year on slide eight. At the RTX level, we expect another year of solid growth and adjusted sales, segment operating profit, and earnings per share, along with continued strength and free cash flow. Before I get into the details, let me share with you a couple of key assumptions embedded in our outlook as it relates to the two dispositions we announced last year.

First, with respect to the Raytheon cybersecurity business, we have assumed that this transaction will close here in the first quarter. Therefore, on a reported basis, we will see about a $1.3 billion year-over-year reduction in reported sales, and about an $80 million year-over-year headwind to operating profit. The Collins ‘24 outlook still includes the actuation business as we continue to work on the business disposition. So with that, starting with sales at the RTX level, we expect full-year 2024 sales of between $78 billion and $79 billion, which translates to organic growth of between 7% and 8% year-over-year. From an earnings perspective, we expect adjusted EPS of between $5.25 and $5.40, and that’s up 4% to 7% year-over-year. And we expect to generate free cash flow of about $5.7 billion for the year.

And despite only being up $200 million year-over-year, there were strong operational improvement. So let me take you through the moving pieces. First, we’re expecting strong segment profit growth and working capital improvement to drive $2.3 billion of improvement year-over-year. Embedded in that is about a $100 million headwind on higher CapEx in ‘24 as we continue to invest in capacity expansion, digital transformation, and operational modernization. Payments related to powder metal impacts are expected still be a headwind of about $1.3 billion. We’ll also see a net headwind of about $500 million, primarily from higher interest expense principally from the debt we issued to fund the ASR. And finally a headwind of about $300 million from lower pension cash recovery.

Now let me turn to our EPS walk, starting at the segment level, operating profit growth of about 16% is expected to result in approximately $0.72 of EPS growth at the midpoint of our outlook range. With respect to pension while markets have improved since our call in October there will still be a headwind of about $0.36 year-over-year. And as I just mentioned, given the increased debt outstanding, interest expense will be a $0.30 headwind. A lower average outstanding share count resulting from our recent ASR will provide a tailwind of about $0.37. And finally, our tax rate in ‘24 is expected to be approximately 19.5% versus the 18.5% in 2023. This combined with higher corporate investments in digital transformation will result in a $0.16 headwind year-over-year.

All of this brings us to our outlook range 5.25 to 5.40 per share. Okay with that let’s go to slide nine, to get into our outlook by segment where we expect continued organic sales and earnings growth across all three businesses. Starting with Collins we expect full-year sales to be up mid to high-single-digits on both an adjusted and organic basis, primarily driven by both widebody and narrowbody commercial or reproduction ramps and continued commercial aftermarket. Military sales at Collins are expected to be up low to mid-single-digits for the year. With respect to Collins adjusted operating profit, we expected to grow between $650 million and $725 million versus last year. This is primarily driven by drop through on higher volume across all three channels, as well as higher pricing and the benefit from continued costs reduction initiatives.

Turning to Pratt & Whitney, we expect full-year sales to be up low-double-digits on an adjusted and organic basis versus prior year driven by higher OE deliveries in Pratt’s large commercial engine and Pratt Canada businesses, as well as continued growth in shop visits across legacy large commercial engines, GTF, and Pratt Canada. Military sales at Pratt are expected to be up mid-single-digits driven by higher F-135 sustainment volume as heavy overhauls continue to ramp. As a result, we expect Pratt’s adjusted operating profit to grow between $400 million and $475 million versus last year primarily on commercial aftermarket drop through and military growth, which will be partially offset by higher large commercial OE deliveries. And at Raytheon, on our organic basis, we expect sales to grow low to mid-single-digits versus 2023, as we deliver our backlog and continue to see supply chain improvement.

Adjusted operating profit at Raytheon is expected to be up between $100 million and $200 million versus prior year driven by drop through on higher volume and improvement in productivity, which will be partially offset by mix headwinds. Keep in mind we’ll see about $80 million of year-over-year headwind from the divestiture of the cybersecurity business this year. And to wrap up our outlook at the RTX level, higher intercompany activity will increase sales eliminations by about 10% year-over-year. And we’ve included an outlook for some of the below the line items and pension in the webcast appendices. Finally, let me make a few comments on our 2025 financial commitments. As you know, there have been some significant changes in the macro environment since we first established these long-term targets, impacts ranging from Russian sanctions, elevated inflation, issues with labor availability, and of course the associated disruptions throughout the supply chain.

And we continue to take incremental actions to further reduce costs, realign our business units, increasing pricing, and investing in productivity improvements to combat these headwinds. Other factors underlying our long-term assumptions however have been also positive, such as the pace of the commercial air recovery and demand for our defense products and services. All that said despite those puts and takes we continue to expect Collins and Pratt to be within the sales and operating profit 2020 to 2025 growth targets we discussed last year at our Investor Day. However, because of the recent performance at Raytheon, we are recalibrating our outlook for this segment. When taking into account divestitures, we now expect the 2020 to 2025 annual growth rate for adjusted sales to be between 3% and 3.5% that’s down slightly from our previous expectation of 3.5% to 4.5% for the same period and driven largely by the initiatives we talked about upfront it will take some time to convert over the next couple of years.

As you know, demand remains strong and our robust backlog will continue to support significant top-line growth going forward. Similarly, with respect to Raytheon’s adjusted operating profit growth, given the continued productivity challenges we described, we now see Raytheon’s 2020 to 2025 annual growth rate to be between 1% and 2.5%, which is down from our prior outlook of between 5.5% to 7.5%. As a result of this segment change, we now see the RTX level adjusted sales annual growth rate from 2020 through 2025 to be between 5.5% and 6% on an organic basis, that’s down slightly from our prior outlook of between 6% and 7%. And taking into account the adjustment to Raytheon’s operating profit outlook, we now see overall RTX adjusted margin expansion to be between 500 and 550 basis points between 2020 and 2025.

And that’s down from our prior outlook of between 550 and 650 basis points. However, importantly, there is no change to our RTX 2025 free cash flow target of $7.5 billion, as we remain confident in the significant cash generating capability of our businesses and we are continuing to drive structural cost reduction and working capital improvements as we invest in the business and deliver on our commitment to return $36 billion to $37 billion of capital to share owners with the date of the merger through ‘25. So with that, I’ll hand it back to Greg to wrap things up.

Greg Hayes: Okay, thanks, Neil. On slide 10, let me just wrap this up. I know we’ve covered a lot of ground today, but I know there’s some key takeaways that everybody should focus on here. Obviously, 2023 was a challenging year. The earnings performance of our Raytheon business obviously was disappointing, as was the Pratt powder metal issue. But importantly, demand remains strong across both of our commercial and defense markets. 11% organic growth in 2023 is just the beginning. With the strength of our $196 billion backlog, we’re confident that we’ll continue to see strong organic sales and earnings growth, along with accelerated free cash flow generation over the coming years. I believe we have the best positioned A&D portfolio, industry-leading franchises, and robust demand for our products and technologies.

This positions us well for the future. Secondly, we’re intensely focused on execution to support our customers and to drive operational performance improvement. We’re clearly going to face challenges this year with the continued ramp of the supply chain and the impact of higher costs. But everyone at RTX is working tirelessly to overcome these obstacles and ensure that we deliver on our commitments. Lastly, we’re staying disciplined and managing the business to continue investing in differentiated technologies and innovation, strengthening our balance sheet all while continuing to return significant capital to our share owners. I want to close again by thanking all the RTX employees, who have been working diligently every single day over the last year to deliver on our mission to create a safer, more connected world.

With that, let’s go ahead and open it up for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Robert Stallard of Vertical Research. Please go ahead, Robert.

Robert Stallard: Thanks so much. Good morning.

Chris Calio: Good morning.

Greg Hayes: Good morning, Rob.

Robert Stallard: Chris, inevitably a first question on the GTF situation. It does sound like some things have moved since your update in October. And I think you mentioned that the scheduling of the AOG looks like it’s going to be slightly different profile and also there could be a related cash impact of that? So I don’t know if you could give us some more color on that to development?

Chris Calio: Yes, you bet Rob and good morning. So we did say here this morning that we do expect the peak to continue to be here in Q1 in terms of AOGs and then tread downward thereafter. Again, we think that peak is going to come down a bit since our initial assessment, because really two reasons. One, timing of the AED has shifted a bit to the right. And then two, customers took some proactive fleet planning and decided to, in some cases, accelerate some of their removals. They were doing their fleet planning for the year. They were pairing engines and doing all those things to make them more efficient. So again, peak here in Q1, trend downward after that and then it’ll be more of a steady state as we talked about in our October and September guides on the matter.

You mentioned a little bit on cash being pushed out. Again, that was the dynamic time as we’re going through and having discussions with our customers on special support. We’ve made some progress on special support. I think we’ve talked about that upfront. We’ve signed several agreements with our customers, some important customers with large fleets. But the timing of that cash just simply moved out from the second-half of ‘23 into ‘24. Same total aggregate amount from 6 to 7, but the timing moved a little bit to the right for the reasons I talked about.

Robert Stallard: Thanks, Chris.

Chris Calio: Thank you.

Operator: Thank you. Our next question comes from the line of Cai Von Rumohr of Cowen. Your question, please, Cai.

Cai Von Rumohr: Yes, thanks so much. So your cash flow hit from the powdered metal issue is $300 million higher in ‘20 than you said. Can you tell us how big was the impact in ‘23 and are we still going to be at $3 billion and therefore there’s a plus of $300 million pickup in ‘25? Thanks.

Neil Mitchill: Hey, Cai. Good morning, it’s Neil. Yes, and I’ll take that one. So, you know, as Chris was just talking about when we closed out ‘23, for a variety of reasons, the cash flows shifted to the right. So the impact in ‘23 for powdered metal related dispersion was essentially zero. So we moved about half of that into 2024, that’s the $1.3 billion that you’re seeing. Still holding a $1.5 billion in our ‘25 outlook. And then we see the rest spilling into early 2026. So we’ll continue to work, obviously, the agreements with our customers, and that will drive the ultimate timing of the payments, but you can see our assumptions that we’ve laid out there.

Cai Von Rumohr: Thank you very much.

Neil Mitchill: You’re welcome.

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

Sheila Kahyaoglu: Good morning, everyone. I can’t help, but compare and contrast given GE just reported this morning and they’re talking about margins being flattish in aerospace based on OE mix and LEAP services mix? So, you know, just looking at Pratt, can you talk about the dynamics there given GTF volumes are growing, early GTF shops as it’s climbed higher? So what drives margins 100 basis points higher? What’s embedded into the guide? Neil, you gave great color on the revenue assumption. Can you give some assumptions on maybe the aftermarket specifics on the margins as well as the military overalls increasing? Is that beneficial?

Neil Mitchill: Sure, thanks Sheila. Let me share a couple of other details that we didn’t get into in the prepared remarks. So we did talk about the overall sales of Pratt being up in the low-double-digit range, you know, $400 million to $475 million of operating profit. The aftermarket sales are going to be up sort of low-teens. So the drop through on the aftermarket is going to be the principal driver of the year-over-year profit increase. We talked a lot about expanding the margins on our, you know, both our legacy and GTF aftermarket as we increase the volumes there. And so some of that will start to show up in ‘24 and that’s a driver of drop through. On the OE side, we think the sales are going to be up in the mid-teens range.

The good news there, as we look at engine productions, which think about that as up about 20%, we’ll see about a headwind of maybe $125 million associated with that higher volume. So we’re getting much better absorption as the volumes return back to levels that we had seen pre-pandemic and that we’ve been capacitized to. So I think that’s another place that we’re going to get some margin expansion. And then again, I’m not sure we got into this, but military will be up in the mid-single-digit range. I’d say again, we had 5% growth on the top line there. And of course, that comes with good drop through too, you know, as we get into 2024. So that’s the Pratt story as we look into 2024, just a little more color there.

Sheila Kahyaoglu: Great. Thank you.

Neil Mitchill: You’re welcome.

Operator: Thank you. Our next question comes from the line of Myles Walton of Wolfe Research. Your question, please, Myles?

Myles Walton: Thanks, good morning. I was wondering, maybe Neil, if you can comment on the offset to the lower implied earnings drop through from the ‘25 guidance? What was the offset to allow you to maintain the cash flow there? And maybe Chris, what by the end of, say, ‘24 would you have achieved in terms of incorporation of fully life parts into the fleet? Just as a metric, maybe we can sort of monitor by it? Thanks.