RTX - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the RTX Second Quarter 2024 Earnings Conference Call. My name is Liviana. I'll be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Chris Calio, President and Chief Executive Officer; Neil Mitchill, Chief Financial Officer; and Nathan Ware, Vice President of Investor Relations. This call is being webcast live on the Internet, and there's 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 the opportunity to participate, to ask a question, you will need to press star one one on your telephone. You may ask any further questions by reinserting yourself into the queue as time permits. With that, I will now turn the call over to Mr. Calio.

Christopher Calio (CEO)

Thank you, and good morning, everyone. As you saw from our press release this morning, RTX delivered strong operational and financial performance in the second quarter as we continue to execute on our customer commitments and strategic priorities. Let me start with the highlights on slide 3. We saw another quarter of excellent top-line growth, with adjusted sales of $19.8 billion, which were up 10% organically. Adjusted EPS of $1.41 was up 9% year-over-year, driven by profit growth and margin expansion across all three segments, and free cash flow was strong at $2.2 billion. We also saw continued growth in our backlog, which ended the quarter at $206 billion, with a book-to-bill of 1.25.

There were also some notable contract wins in the quarter, including a 10-year MRO agreement to support Collins' significant content on Air Canada's 787 fleet of up to 70 aircraft, including avionics, air management, and electric power systems. Collins also received a multi-billion-dollar award for the U.S. Air Force's next generation Survivable Airborne Operations Center, and Raytheon received a $639 million award for SPY-6 radar production for the U.S. Navy. As you saw in early July, Germany placed an additional order for Patriot systems. This is on top of the $1.2 billion order they placed for multiple systems in the first quarter of the year. We also saw some positive GTF announcements at the Farnborough Air Show earlier this week, with over 700 GTF engines ordered, including options and commitments.

These include Cebu Pacific, selecting the GTF to power the carrier's order for up to 152 additional single-aisle aircraft, and Avolon selecting the GTF engine for up to 160 aircraft. So another quarter of robust orders with significant wins already secured early here in Q3 and more expected as the year progresses. We also continue to make progress on our critical initiatives, specifically regarding the GTF Fleet Management Plan. We remain on track with our financial and operational outlook, consistent with our prior comments. As of the end of Q2, we have inspected over 6,000 powder metal parts that are in the field across all programs, and the associated fallout rate remains below the 1% we had assumed, and the findings are consistent with the assumptions that underpin our fleet management plan.

At our MRO facilities, throughput of engines continues to improve, and overall capacity is expanding with the recent addition of 2 new MRO shops into the network. PW1100 MRO output increased 10% versus the first quarter. We expect this ramp to continue in the second half of the year. As it relates to the PW1100 fleet, AOGs have leveled out over the past few months and remain in line with our expectations. We've also now reached support agreements with 20 of our customers, covering roughly 65% of the impacted fleet, and the terms are in line with our assumptions. Beyond our operational performance, let me also comment on the legal and contract charges we outlined in our press release this morning, and then Neil will provide more detail in a bit.

We're nearing completion of agreements with the Department of Justice, SEC, and Department of State to resolve several legal matters. These matters primarily arose out of legacy Raytheon Company and Rockwell Collins prior to the merger and acquisition of these companies. We've already taken robust corrective actions to address the legacy gaps that led to these issues, including implementing enhanced compliance and training measures. We also took a charge related to the anticipated termination of a Raytheon fixed price development contract that was entered into before the merger. As we've been discussing the last few quarters, we've been battling through some challenges in a handful of fixed price development programs, including this one. But this specific contract is unique in terms of its scope, deliverables, and associated risk profile, which led us to pursue termination.

So we're pleased to be putting these matters behind us, and as I highlighted earlier, our operational performance was very strong in the quarter. Given this performance and the continuing strength of our end markets, we are raising our outlook for adjusted sales and EPS. We've also revised our cash outlook for the year as a result of matters I just discussed. Lastly, as you saw in May, we raised our dividend 7% and remain on track to return $36 billion-$37 billion of capital to shareowners from the merger through the end of next year. Okay, with that, let's move to slide four, and I'll spend a few minutes on our strategic priorities that will enable us to drive best-in-class performance across RTX, including meeting customer demand, continued sales growth, margin expansion across our segments, and strong cash flow generation....

Given our growing installed base and the unprecedented demand for our products, our first priority is executing on our commitments. Powered by our core operating system, our focus is on driving incremental operational improvements to ramp output and deliver on this demand. Today, we have over 4,000 core projects being worked across the company. For example, at Collins, our avionics business improved first pass yield by 2x in its fire detection product line by reconfiguring the production cell layout, creating digital tools, and upgrading equipment. And at Raytheon, the team conducted a core leadership week to identify initiatives to more than double weekly output on a key component of our AIM-9X effector. As a result, the team achieved a 90% increase in output in the quarter, and is on track to hit their full-year target by the end of Q3.

We also continue to add capacity to meet the demands of the industrial ramp-up. During the quarter, we announced a $200 million investment in our carbon brake facility in Spokane, Washington. Once complete, it will add 70,000 sq ft of manufacturing footprint to meet rapidly growing demand for our Collins brake solutions. On the defense side, we're investing in test equipment and tooling to more than double production capacity by year-end on our Coyote program, which is a low-cost kinetic effector for the counter-unmanned aircraft systems that directly address today's drone threats. In addition to creating new capacity, we continue to modernize our existing footprint as part of our Industry 4.0 initiatives. Across RTX, we have now connected 26 factories with our proprietary digital analytics technology, providing us with real-time data to boost equipment efficiency, improve quality, and yield higher output.

This represents a 30% increase in connected sites since the start of the year, and we remain on track to connect 40 factories by the end of the year. These incremental efficiency, capacity, and technology improvements are critical to meeting the needs of our customers as we operate in the strongest demand environment in our history. Let me move now to our second priority, innovating for future growth. We are executing on our cross-company technology roadmap to develop differentiated solutions in areas such as sustainability, advanced propulsion, next-generation sensing, connected battlespace, and hypersonics. This year alone, we will spend over $7.5 billion on company and customer-funded research and development to mature and introduce new capabilities to our customers and fill our product pipeline.

For example, we are working on a number of hybrid electric demonstrator programs to deliver advanced propulsion technologies and enable greater fuel efficiency across all future aircraft segments. Recently, our Collins, Pratt, and Technology Research Center teams completed a significant milestone in the development of our hybrid electric demonstrator, validating the integrated system functionality of the engine, electric motor, batteries, and high voltage electric power distribution. In the quarter, we delivered the first TPY-2 radar that incorporates our proprietary gallium nitride technology. This technology is a game changer for our sensing capability, providing expanded surveillance range and supporting additional missions in the space domain and hypersonic defense. We also continue to invest in our digital transformation and AI. This year, we are adding an additional 30+ use cases that generate incremental productivity and cost savings across RTX, using advances in artificial intelligence and deep learning.

In total, we have over 200 AI use cases currently deployed across various internal functions. Our AI investments are also enabling new and improved capabilities in our products, such as predicting equipment failures and aiding human operators in executing complex tasks. These types of investments in innovation will allow us to continue to develop next-gen products and solutions well into the future. Our third priority is to fully leverage our breadth and scale across RTX to drive value for our stakeholders. Specifically, this includes creating a more efficient and competitive cost structure and managing our common supply chain. For example, over 35% of our product procurement spend is with common suppliers that support all three of our businesses, and we're using a unified RTX approach to our contracts and sourcing strategy.

It also includes harmonizing our product lifecycle and management processes, and developing integrated solutions for strategic campaigns and pursuits, such as NGAD, FLRAA, and next-generation commercial platforms. Of course, we'll also continue to review our portfolio, improve where needed, as well as target bolt-on M&A to support our RTX technology roadmap and grow our core franchises. Underlying all three of these priorities is our unwavering commitment to safety, quality, and compliance in everything that we do. It's what we and our customers expect, and a commitment we will never compromise on. Putting it all together, I'm extremely excited and confident about the future of RTX. With that, before I turn it over to Neil, I want to acknowledge a leadership update we announced last week. As you saw, Steve Timm has decided to retire after 28 years with the company.

Steve was a great partner and teammate, and I want to thank him for his leadership at Collins. We're very fortunate to have a strong bench, and are very excited that Troy Brunk is taking over as the new President of Collins. Troy has served as the president of three of the six Collins business units, is uniquely qualified for the role. Okay, let me turn it over to Neil to take you through the second quarter results in more detail. Neil?

Neil Mitchill (CFO)

Thanks, Chris. I'm on slide 5. As Chris said, operationally, we had a strong quarter and continued to make progress on key financial metrics across RTX. RTX's adjusted sales of $19.8 billion were up 8%, and on an organic basis, were up 10%. By channel, commercial OE was up 19% as we continue to support aircraft demand. Commercial aftermarket was up 14% as domestic, international, and long-haul travel continues to grow. And excluding the Raytheon Cybersecurity divestiture, defense sales were up 7% as we execute on our backlog. Segment operating profit of $2.4 billion was up 19%, with growth at all three businesses contributing to consolidated segment operating margin expansion of 100 basis points.

Adjusted earnings per share of $1.41 was up 9% from the prior year, driven by segment operating profit growth, as well as a lower share count, which was partially offset by expected headwinds from higher interest and tax expense and lower pension income. On a GAAP basis, EPS from continuing operations was $0.08 and included $0.29 of acquisition accounting adjustments, and $0.03 of restructuring and other significant non-recurring items. In addition, as it relates to the items Chris mentioned, GAAP EPS also includes a $0.68 charge related to the expected resolution of several legacy legal matters, and a $0.33 charge related to a fixed-price development contract at Raytheon. With respect to the legal matters, we are working to finalize deferred prosecution agreements and a civil settlement with the DOJ, and an administrative order with the SEC.

These agreements will cover the previously disclosed investigations of defective pricing claims for certain legacy Raytheon Company contracts, which were entered into between 2011 and 2013, and in 2017. They will also cover the previously disclosed investigations of improper payments made by Raytheon Company and its joint venture, ThalesRaytheonSystems, in connection with some Middle East contracts dating back to 2012. As a result, we recorded a pre-tax charge of $633 million in the quarter, which brings our total reserves associated with these matters to $959 million.

In addition, we recorded a pre-tax charge of $285 million related to voluntarily disclosed export controls compliance matters, primarily identified during the integration of Rockwell Collins and Raytheon Company into RTX, including matters which are expected to be addressed in a consent agreement with the Department of State. As part of the resolution of each of these three matters, we will be required to retain independent compliance monitors over the three-year term of the agreements. In total, we expect to pay about $1 billion related to these matters this year, and have incorporated that into our updated free cash flow outlook for the year. I'll take you through the other moving pieces of our outlook on the next slide.

While the financial impact of these items is above what we had previously reserved, we believe the provisions we have taken put these issues behind us financially, and we will continue to cooperate with the government and external monitors as we move forward. As it relates to the fixed-price development contract, as you know, we've been discussing the challenges we've been working through on this front for some time. In conjunction with that effort, and an anticipated termination on one of our Raytheon programs with a foreign customer, we've recorded a pre-tax charge of $575 million in the quarter. Again, we've incorporated the expected cash outflows into our revised free cash flow outlook for this year. But for the quarter, cash flow was robust, with $2.2 billion of free cash flow that was driven by strong collections across the portfolio and some lower tax payments.

We also continued our deleveraging in the second quarter and paid down another $750 million of debt, bringing our total debt repayment since the accelerated share repurchase was initiated last October to $2.7 billion. We returned $867 million of capital to shareowners, primarily through dividends during the quarter. On the portfolio front, we're also pleased that Italy has approved the sale of Collins' actuation business, and we continue to actively support the remaining efforts to complete the transaction. As you may have also seen, we have entered into an agreement to sell Collins' Hoist & Winch business for over $500 million, another great example of the portfolio pruning we are doing to focus on our core franchises. Okay, turning to page six, let me share a few details on our updated outlook for the year.

As you've seen, the first half performance across all three of our businesses has been strong, driven by end market demand and continued execution. There are, of course, a few areas we continue to monitor, including pockets of supply chain challenges, inflation, and the ongoing OE production rate uncertainty. But given the results to date, we are increasing our full-year adjusted sales outlook to between $78.75 billion and $79.5 billion, up from our prior range of $78 billion-$79 billion, and we now expect 8%-9% organic sales growth for the year, up from our prior range of 7%-8%.

We're also increasing our adjusted EPS outlook by $0.10 on the low end and $0.05 on the high end, putting the new range at $5.35-$5.45, up from $5.25 to $5.40. The improvement is driven primarily by lower interest in corporate expenses, higher pension income, and a lower full-year effective tax rate. We have included the corresponding updated outlook for these metrics in the appendix of our webcast slides. On free cash flow, as I mentioned earlier, we've incorporated our expected cash outflows associated with the legal and contract matters into our outlook. Partially offsetting these impacts is some improvement in current year tax payments of roughly $500 million.

All in, we have updated our free cash flow outlook to be approximately $4.7 billion, compared to our previous expectation of approximately $5.7 billion. With that, let me turn it over to Nathan to talk you through our segment results and outlooks.

Nathan Ware (VP of Investor Relations)

Thanks, Neil. Starting with Collins on slide 7. Sales were $7 billion in the quarter, up 10% on both an adjusted and organic basis, driven by strength in commercial aftermarket, commercial OE, and defense. By channel, commercial aftermarket sales were up 12%, driven by a 16% increase in parts and repair, a 15% increase in provisioning, and a 9% decrease in mods and upgrades, with mods and upgrades coming off a difficult prior year compare that benefited from the 5G mandate. Commercial OE sales for the quarter were up 10% versus the prior year, driven by growth in narrow-body, wide-body, and regional platforms. Defense sales were up 7%, primarily due to higher volume.

Adjusted operating profit of $1.15 billion was up $230 million, or 25% from the prior year, driven primarily by drop-through on higher commercial aftermarket volume, as well as higher defense and commercial OE volume. Looking ahead, on a full-year basis, we now expect Collins sales to grow high single digits on both an adjusted and organic basis, up from the prior range of mid- to high single digits, driven by continued strength in commercial air traffic and defense volume. We continue to expect operating profit growth between $650 million and $725 million versus 2023. Shifting to Pratt & Whitney on Slide 8, sales of $6.8 billion were up 19% on both an adjusted and organic basis, with sales growth across all three channels.

Commercial OE sales were up 33% in the quarter on higher engine deliveries and favorable mix in the large commercial engine business. Commercial aftermarket sales were up 15% in the quarter, driven by higher volume and favorable mix in both the large commercial engine and Pratt Canada businesses. In the military engine business, sales were up 16%, primarily driven by higher sustainment volume across the F135 and F117 platforms. Adjusted operating profit of $537 million was up $101 million versus the prior year. Drop through on higher commercial aftermarket volume and favorable mix, as well as favorable large commercial OE mix, was partially offset by headwinds from large commercial OE engine deliveries and the absence of a $60 million favorable prior year contract matter.

Drop through from higher military volume and favorable mix was more than offset by higher production costs and higher R&D and SG&A expenses. Turning to Pratt's full-year outlook, we now expect sales to grow mid-teens on an adjusted and organic basis, up from our prior range of low double digits, driven by stronger military volume and higher commercial OE. We continue to see adjusted operating profit growth between $400 million and $475 million versus 2023. Now turning to Raytheon on Slide 9. Adjusted sales of $6.6 billion in the quarter were down 2% as a result of the Cybersecurity divestiture completed in the first quarter. On an organic basis, sales were up 4%, primarily driven by higher volume on land and air defense systems, including Patriot, Counter-UAS programs, and Stinger.

Adjusted operating profit of $709 million was up $47 million versus the prior year, driven primarily by drop through on higher volume, favorable mix, and improved net productivity, partially offset by the impact of the Cybersecurity divestiture. Raytheon had $5 billion of bookings in the quarter, resulting in a backlog of $51 billion. On a rolling twelve-month basis, Raytheon's book-to-bill is 1.13. In addition to the SPY-6 award that Chris mentioned earlier, Raytheon also had $928 million of classified awards and a $393 million award from NASA to design, produce, and deliver 4 units that will provide advanced Earth observation. Looking ahead, we now expect Raytheon sales to grow by mid-single digits organically, up from the prior range of low to mid-single digits, driven by improved material flow.

As a result, we now expect Raytheon's operating profit to grow between $125 million and $200 million versus 2023, up from the prior range of between $100 million and $200 million, and this includes the impact from the Cybersecurity divestiture. With that, I'll turn it back over to Chris to wrap things up.

Christopher Calio (CEO)

Okay, thanks, Nathan. I'm on slide 10. As you've heard today, our second quarter operating results were very strong, and we're confident in our updated outlook for the full year. But to step back and just think of beyond 2024 and look at the long term for RTX, we've got the best-positioned franchise programs with the right content on the right platforms across commercial, aerospace, and defense. Our large and growing installed base will support significant commercial aftermarket growth for decades to come, and our industry-leading defense capabilities address the threats playing out across our global landscape. All right, with that, let's open the line for questions.

Operator (participant)

Thank you. Ladies and gentlemen, in interest of time and to allow for broader participation, you are asked to limit yourself to one question. To ask a question, you will need to press star one one on your telephone. The first question comes from the line of Peter Arment from Baird. Peter Arment, your line is open.

Peter Arment (Managing Director)

Hey, thanks. Good morning, Chris, Neil, Nathan.

Christopher Calio (CEO)

Good morning.

Peter Arment (Managing Director)

Hey, Chris, nice, nice results. Just I guess maybe just on the GTF fleet management plan, sounds like, you know, everything's going according to plan and remains on track. But maybe if you just peel back the onion a little bit. I know you talked about some pacing items in the past about getting, you know, full life diffs into the MRO shops and just kind of material availability. It sounds like the MRO capacity is going as planned, but maybe any kind of metrics or any color, you know, what you're seeing and any opportunities actually, where any of these metrics might, you know, still be able to come into the left, you know, before 2026? Thanks.

Christopher Calio (CEO)

Yeah. Okay, Peter. Thanks. Thanks for the question. Let me take you through where things stand. As you noted, our key assumptions around AOGs, wing during turnaround time, shop visit mix between heavy and light, and customer compensation all remain consistent. And as I noted up front, our assumptions on the inspection fallout rates and the findings are all consistent or even better than we planned. So good stability around the key assumptions. As you know, MRO output is the key enabler, and we're focused on improving the material flow, better processes in the shops, and we've added some capacity on this front. And again, we saw some good signs of progress here in the first half of the year.

I mean, output was up 10% from Q1 to Q2, and first half output on the 1100 is up over 30% versus the first half in 2023. So continue to drive some output there, which is helpful. The key enabler, of course, on the MRO output is material. You had mentioned that, you know, up front. We're continuing to see some progress on structural castings. Structural castings are up about 5% sequentially and 14% year-over-year, so good progress there. And then on forgings, the powder metal parts. We continue to drive output there, you know, as well. Isothermal forgings were up almost 100% year-over-year, and we continue to add additional capacity for inspection and machining. For example, we've nearly doubled our sonic inspection capacity for the year.

So again, driving on all the key enablers, Peter, to try to get this fleet in as healthy a shape, you know, as we possibly can. I'll also just note, sort of unrelated to the fleet management plans, you know, continue to drive OE output, you know, as well. OE deliveries were up, you know, sequentially up 30% in the first half on a year-over-year basis, despite sort of grinding through some of the supply chain frustrations. And we're also pleased with the additions to the GTF backlog that were announced at Farnborough recently. So again, focusing on what we can control on the fleet management plan and, and continuing to drive both supply chain and new orders into the backlog.

Peter Arment (Managing Director)

Appreciate all the details. Thanks, Chris.

Operator (participant)

Thank you. Our next question coming from the line of Robert Stallard from Vertical Research. Robert Stallard, your line is open.

Robert Stallard (Partner)

Thanks so much. Good morning.

Christopher Calio (CEO)

Good morning, Rob.

Neil Mitchill (CFO)

Hey, Rob.

Robert Stallard (Partner)

Chris, following on the GTF theme, I was wondering if you could comment on what the situation is with Airbus and their recent forecast cut, because they've clearly not been getting as many new engines as they anticipated. So those engines instead go into the spare engine pool. Thank you.

Christopher Calio (CEO)

Yep. Thanks, Rob. So again, you heard me say just a minute ago to Peter, that our OE deliveries are up sequentially and up first half of the year, 30% on a year-over-year basis. We're not necessarily where we need to be with Airbus, but again, we're seeing, you know, strong growth sequentially and year-over-year. And our outlook reflects our assessment of kind of where Airbus, you know, needs support from us, and we're aligned on, you know, what they need. You alluded to the fact that we're balancing both OE and spare engine and material, and that's true, and we need to do that for the support of the fleet. But again, I continue to be, you know, encouraged by what we continue to drive in terms of production and getting Airbus what they need.

I think in the back half, we're going to continue to balance the OE spare engine and MRO needs, but I think we'll be in a position to get Airbus what they need.

Operator (participant)

Thank you. And our next question coming from the line of Myles Walton from Wolfe Research. Myles Walton, your line is open.

Myles Walton (Managing Director)

Thanks. Good morning. Chris or Neil, I'm not sure which. On the defense side, on Raytheon, could you maybe dig a little bit into what are the problem programs still remaining? Maybe a percentage of revenue, if that's where you want to handle it, or backlog. And then specifically to this decision to sort of proactively, you know, cut losses and terminate the contract, not an easy decision. But are there other contracts where you could extinguish similarly, or would that cause customer distress? And lastly, was there a cash impact, too? Thanks.

Christopher Calio (CEO)

Yeah, thanks, Myles. I'll start, and then Neil can certainly chime in. Certainly not an easy decision, but we've been alluding to the fact that we've had a significant classified program out there that was, what we would say, not in our wheelhouse, meaning that the work that we had taken on, and this contract was, you know, pre-formation of RTX, was not within our core competency. And we struggled with that, and we struggled to get to the right, you know, technical solutions, and ultimately came to a point where we just didn't think it was productive anymore to continue to go down this path.

Ultimately decided it was in the best interest, you know, of us and the customer to just kind of do a reset here and allow us to go, you know, focus our resources on some of the other programs, you know, that we've got. You had mentioned a handful of other, I'll call them classified development, you know, fixed-price development programs, that we've been talking about. I will say those are much different in terms of risk profile than the one we took action on here. Those have some important milestones here in 2024 and in 2025, but we feel like we've got a much better handle on those than the one we're talking about here, and feel like we understand the risks much better there and what needs to be done to get them to closure.

Neil Mitchill (CFO)

Just to add, Myles, in terms of the cash flow impact. So, you know, as I sit here today, there's really just a few changes that we've made to our 2024 outlook. The first is about $1 billion related to the legal matters. Place held about $500 million related to the contract matter that Chris just was talking about. And offsetting that is about $500 million of improvement that we've seen operationally in our tax payments due to some planning that we've done. So net net, that's $1 billion, and I would expect that that mostly sits in the fourth quarter of this year. It'll depend on when we get the final resolutions with the government agencies, but that's trending towards, you know, certainly late September or early in the fourth quarter.

Myles Walton (Managing Director)

Okay. Thanks for the color.

Neil Mitchill (CFO)

Yep.

Operator (participant)

Thank you. And our next question coming from the line of Sheila Kahyaoglu from Jefferies. Sheila, your line is open.

Sheila Kahyaoglu (Managing Director)

Good morning, guys, and thank you.

Christopher Calio (CEO)

Good morning, Sheila.

Sheila Kahyaoglu (Managing Director)

So, Neil, maybe another one for you. Just, you know, you're going to do about $7.2 billion of net income this year on an adjusted basis and generate $470 million of cash. Some of that is one-time items with the DOJ, the powder metal and tax. So how do we think about that gap closing on net income, the cash flow, and then just on the DOJ, can you elaborate a little bit more how we think about that, the outcomes of it, and the cash impact outside of 2024?

Neil Mitchill (CFO)

Sure. Let me start with free cash flow. You just heard me talk about sort of the changes that we rolled into our outlook for the year. As I think about the absolute value of the $4.7 billion, remember, that includes a couple of non-recurring items that are pretty substantial. And if you adjust for those things, you kind of get to a $7 billion-$7.5 billion, maybe even higher level of free cash flow that is operational. So I think as we look forward, Sheila, and we get the powder metal, you know, payments behind us this year and next year, just a little color, so far, we're a little less than $200 million into our $1.3 billion in powder metal outflows this year. We expect that to obviously ramp up.

You heard us talk about doubling the number of customers that we've got agreements with and about 2/3 of the fleet under agreement. So I would expect third and fourth quarter kind of to be split pretty evenly with respect to the rest of the payments this year. But if you look at the underlying operations, you can see that there's real strong, organic, sustainable cash flow, and I think that's what we'll be, you know, looking to see sustain itself over time. Now, in particular, there's some working capital improvement. I've talked about like $1.1 billion of improvement year-over-year and arriving at our $4.7 billion. Obviously, inventory was a use of cash in the first half. We expect that to turn around in the second half, which is typical for our business.

We've got a little bit of headwind from the OE production rates that we've contemplated in that, but we're seeing stronger collections on the customer side, so that balances for the rest of this year. So that's how I would characterize the free cash flow situation today. As it relates to the DOJ and the outcomes, you know, I think we feel very certain about the amount of cash impact that's gonna happen this year. As we talked about in our prepared remarks, you know, we've reached agreements in principle. There's some work to do to get that finalized with the various government agencies. That could take a few months, but when it happens, that'll get filed and be available publicly, and then shortly thereafter, we'll be required to make the payments associated with that.

There's very little that lingers beyond that. I'd say it's in the, you know, $50 million a year kind of range, following 2024, so it's manageable. Those costs will include some residual payments on the global trade-related consent agreement, as well as some internal costs that we'll obviously invest in to continue to improve our processes as we support the monitor activities. So, you know, I would leave it at that for now, with those items.

Sheila Kahyaoglu (Managing Director)

Cool. Thank you.

Neil Mitchill (CFO)

Yeah, thank you.

Operator (participant)

Thank you. Our next question coming from the line of Doug Harned from Bernstein. Doug Harned, your line is open.

Douglas Harned (Managing Director)

Thank you. Good morning.

Neil Mitchill (CFO)

Morning, Doug. Doug?

Douglas Harned (Managing Director)

You know, when you know what what we've you know what you've talked about and what what we've heard as well is that you know your shop on the GTF that a lot of the shop visit times you've brought that down significantly the time time in the shop which is great. And so presumably this is with improved parts availability that's allowed you to do that. And I know in Q1 you did divert resources away from V2500 work in order to better enable you to provide GTF parts. And so two things on this. I guess first and where do you stand now on V2500 MRO? Is that kind of back to normal? And then second even though those shop visit times seem to have come down significantly everything we've seen is that induction wait times are still quite long.

Perhaps, you know, if you could address those two issues, it would be really helpful.

Neil Mitchill (CFO)

Doug, let me start on the V2500, then I'll hand it over to Chris to talk a little bit about the GTF induction times and turnaround times. On the V2500, on a first-half basis, we're at about 369 inductions to date. So we had talked about 800 on a full-year basis, and we expect that we still expect that to continue. I guess the good news there is that, you know, with that acceleration, not only are we seeing an increase in the number of shop visits in the second half of the year, we're also seeing more work scope. So these are heavier overhauls, and all of that will contribute to the second half growth that we'll expect to see coming from Pratt & Whitney, particularly in the aftermarket.

So the second half story for Pratt's, you know, operating outlook is really focused around what we call the mature commercial engines, the V2500 being the biggest part of that. So that's where we sit today on that front. Chris, maybe a couple comments on GTF.

Christopher Calio (CEO)

Yeah. Yeah, and before I do that, Doug, I'll just say on the V, I mean, obviously our customers are relying heavily on that, given the other stress in the fleet. So we're heavily focused on making sure that, you know, V inductions, turnaround times and whatnot, that the support is there for the customer base. On the GTF MRO, you're right. In the shop, when we've got material flowing, when we've got material in the right positions in Gate 2 and Gate 3, we are seeing significant reduction in shop turnaround time, both our shops and our partners, which is really encouraging. The induction times are really a function of what we would call the parking lot.

So there are a lot of engines that came off-wing, obviously, when the, when the AD hit, and people did some of that proactively. So we are still working through a large parking lot of engines that you know need to get inducted, you know, into the shop. But again, we're encouraged by what we're seeing when the material is there, which is why we're so heavily focused on making sure the supply chain is healthy. You heard me talk about structural castings, isothermal forgings. These are the things that are gonna be the biggest unlock for us as we take the AOG numbers down and support our customers.

Douglas Harned (Managing Director)

Very good. Thank you.

Operator (participant)

Thank you. Our next question coming from the lineup, Ron Epstein from Bank of America. Ron, your line is open.

Samantha Stiroh (Analyst)

Hi, good morning. This is Samantha Stiroh on for Ron Epstein. I was wondering if you could talk a little bit about Collins, particularly interiors, kind of what they're doing and what your expectations are there. Thank you.

Christopher Calio (CEO)

Good morning, Samantha. How are you doing? Let me start there. I mean, we're seeing, you know, significant improvement in the interiors business, and frankly, the second half story for Collins is gonna rely substantially on the aftermarket uptick there, in mods and upgrades. You know, the one thing I would say about the Collins portfolio of businesses is we've seen really strong performance across all the segments, the sub-SBU segments there, and many of them are at or above, and frankly, above where we were in 2019. Interiors is the one place where we're still lagging.

So, we're encouraged by the orders we are seeing there, and we do expect that to translate to substantial growth in the second half of this year that's gonna be driving a substantial part of Collins' aftermarket year-over-year.

Operator (participant)

Thank you. Our next question coming from the lineup, Seth Seifman from JP Morgan. Seth, your line is open.

Seth Seifman (Executive Director)

Hey, thanks very much, and good morning.

Christopher Calio (CEO)

Morning.

Seth Seifman (Executive Director)

Chris and Neil, I wonder if you could address the free cash flow target for next year. Kinda talk about whether you feel like that still stands, areas of risk, areas of opportunity, and kinda your level of confidence.

Christopher Calio (CEO)

Yeah, thanks for the question. You know, right now, Seth, we don't see a reason to change the outlook. The fundamental business drivers remain strong on both the commercial and defense sides. Our end markets have proven pretty resilient, and demand remains strong, as we said up front. I think like everybody else, there are several items that we're tracking that have 2025 implications. Think OE rates, gotta continue to see the strength, you know, in the aftermarket. That's a big part of the cash, you know, walk in 2025. And of course, the supply chain. I mean, you just heard me talk about the sequential improvements and the stability we're seeing, but that's gotta continue, you know, to ramp.

But again, still feel like the 2025, you know, cash goal here is achievable based on everything we see today, both within our four walls and the macro environment.

Seth Seifman (Executive Director)

Thank you very much.

Operator (participant)

Thank you. Our next question coming from the lineup, Kristine Liwag from Morgan Stanley. Kristine Liwag, your line is open.

Kristine Liwag (Executive Director)

Hey, good morning, Chris, Neil, and Nathan. Maybe back on Pratt, you know, you guys have highlighted that isothermal forgings are getting better. You're seeing doubled capacity increases in sonic inspections, which are all good. But, you know, structural castings, you know, continue to be an issue. Can you provide more color on why structural casting continues to linger? And then also, I mean, look, this historically has been one of the bottlenecks for previous aerospace ramp-ups. So I guess, you know, how is your approach different this time around to mitigate risk? And any color you could provide of the underlying tightness would be helpful.

Christopher Calio (CEO)

Sure, thanks, Kristine. And you're right, you know, structural castings has been a habitual sort of constrained, you know, value stream, even since the beginning of the ramp-up, you know, back in the 2016, 2017 timeframe. While we've seen, you know, some improvement here, I mentioned up 5% sequentially, it needs to be higher than that in order to continue to meet the demands of both, you know, OE to the airframers, spare engines, and MRO. So again, while we're seeing sort of positive incremental improvement, it needs to continue to grow. And the reason it's constrained is because there are, you know, very few people that do this, and a lot of us in the industry rely on the same players, and so we're all ramping up around the same time.

To your point about what we're doing, you know, differently, I would say we're really working hard on making sure that our demand signal is crystal clear, that people know what we need, both from an OE but also an MRO perspective. And then getting on LTAs, you know, as quickly as we can so that we can, you know, make sure that, again, supply chain knows what we need, when we need it, and, and that they can go make the necessary investments to deliver.

Kristine Liwag (Executive Director)

Great, thank you.

Christopher Calio (CEO)

One thing I would add there, too, is that, you know, we've forward deployed a lot of our own people to these suppliers, to help sort through the assessments that are required around the inspection criteria. As you know, these are, you know, parts that are built to extremely tight tolerances, and it's important to have our engineering teams working collaboratively with the supply base, to make sure that we can, you know, clear those items as they come through the production process. And that's been something that I think we've put a lot of effort into over the last, you know, couple of years, frankly, but we've, you know, ramped that up recently.

Kristine Liwag (Executive Director)

Great. Thank you.

Operator (participant)

Thank you. Our next question coming from the lineup, Cai von Rumohr from TD Cowen. Cai von Rumohr, your line is open.

Cai von Rumohr (Managing Director)

Thanks so much. So—

Christopher Calio (CEO)

Morning.

Cai von Rumohr (Managing Director)

Operations look good at Pratt and Collins in the quarter. Sales beat, margins beat, and you've increased sales for the year, but you basically didn't touch profit guides for Pratt or Collins. Is that conservative, or are you assuming, I mean, it looks like in Collins, the margins are the same, or basically a little bit lighter in the second half than the second quarter? Give us some color on that, if you could.

Christopher Calio (CEO)

Hi, Cai. Thanks for the comments. Overall, you know, we're pleased with the first half results as you kind of outlined there, and we've updated our full-year guide to reflect that, you know, strong top line growth. When we think about, you know, the segments and what's going on there, there are some headwinds. We've got some higher product costs, primarily in the defense pieces of Pratt and Collins. We've got a little bit of under absorption with some of the lower OE rates, and we've seen some higher, you know, E&D. Now, we have offset some of those headwinds with some below-the-line items, such as, you know, corporate spending, you know, reductions and tightening.

So there are a few, you know, moving pieces here, but we've got good momentum as we enter the second half of the year, and we're confident in the updated outlook.

Neil Mitchill (CFO)

Yeah. Thanks, Chris. Let me add a little bit, Cai, in terms of the top line, maybe some perspective on the moving pieces. You know, you saw that we took up our sales $750 million at the low end, $500 million at the high end. So think about the midpoint, obviously $625 million. If you break that down, I would put, you know, $500 million of that is within the Pratt & Whitney business. There's really two pieces of that. About $400 million of that, 80%, is in the military business. We saw really strong material inputs, particularly supporting the F135 and F117 aftermarket. We dropped that through, and the rest is slightly higher OE.

You saw the numbers we had in the first and second quarter, and so we're seeing good mix, and we're letting that flow through to the full year as well. As Chris mentioned, you know, the profit side of Pratt, we're seeing higher production costs, again, particularly in the military side of the business, as we burn down the, you know, F135 contract and a little bit of higher R&D spending, supporting the continued certification of the GTF Advantage, and obviously the powder metal-related things. At Collins, you know, we also took that guide up a little bit. You know, see high single digit, you know, think 7%-8%, higher end of the range that we were at before.

That's about $100 million of sales, and, as I think about that, you know, it's a, it's $200 million, maybe 3 points lower on the commercial OE side. We've taken, you know, our rates down on the, on the Boeing side in particular. But offsetting that, or more than offsetting that is, you know, the aftermarket and the military side of Collins as well. So about a 1-point increase on the commercial aftermarket, 2 points on defense. You know, just to kind of round it out, at Raytheon, you know, we now see, you know, solid flat, if you will, organically up mid-single digits. It's about $50 million. There's slightly higher eliminations at the corporate level.

You know, we're gonna kinda hold as a placeholder what we saw in the second quarter for the rest of the year, a lot more intercompany activity between Collins and Pratt and Collins and Raytheon there. So again, you know, we're early. We're encouraged by the first half results on the profit side. But certainly on the top end, we're seeing a trend towards the top end of our prior ranges, taking them up slightly here. And of course, if there's more, you'll see that in the results. Want to kind of see another quarter play out.

Cai von Rumohr (Managing Director)

Terrific. Thank you very much.

Neil Mitchill (CFO)

You're welcome.

Operator (participant)

Thank you. Our next question coming from the line of Jason Gursky from Citi. Jason Gursky, your line is open.

Jason Gursky (Analyst)

Great. Thank you, and good morning, everybody, and Nathan, welcome to the call. Hey, Chris, I know—I recognize that you're, you know, executing on the existing engine platforms, but I'm wondering if you wouldn't spend a few minutes talking about the future. News flow coming out of Farnborough suggests, you know, maybe Rolls is gonna get back into the narrow-body market. GE made some comments this week on its earnings call that, you know, customer interest in the RISE continues to grow. And then I think somebody at Pratt at Farnborough suggested that your next generation GTF might be 25% more fuel efficient. Not clear to me whether that was relative to the existing GTF or it was a comment about the overall existing fleet.

But I'm wondering if you could just kind of paint a picture for us on, you know, what the next generation of engines is gonna look like from your perspective, whether customers are kind of starting to have more conversations with you all about that, and what the potential timing of a new engine on the narrow-body side might be? Thanks.

Christopher Calio (CEO)

Yeah. Thank you, Jason. As you might imagine, having been to Farnborough this week, there was a lot of conversation around the future of narrow-body on sustainability and on when those platforms, you know, will be launched and get into service. I will just—I'll kind of maybe break this into sort of near, medium, and then longer term. Near and medium, our focus, and you'll sort of alluded to this, is on the GTF Advantage. Right now, we're about 90%+ of the way through that testing, gotten some good results out of our environmental and durability, and so we're continuing down that certification path. As you know, another 1% of fuel burn, 4% thrust, but a more durable and reliable, you know, engine. So that's the near term.

As we think about sort of the medium, longer term, I will tell you we're evaluating and investing in a number of key enabling technologies for insertion into future GTF configurations, think composite fan blades, advanced materials like CMCs, planetary gear system, and then you just referenced hybrid electric. Some of those numbers that were coming out of Farnborough are what I would call hybrid electric or electric applications. When you think about that for the narrow-body, I'd view that as more of a, an assist, if you will, around sort of corner points of the flight envelope. Lower platforms, smaller platforms, the hybrid electric will do more work, and we continue to invest there and have made some really strong strides in some of our, you know, demonstrator programs.

So again, we've said this before, the GTF architecture continues to have runway. And so these are all the enabling technologies that we continue to invest in, that we think we're going to be able to insert in that for the next-generation single aisle. I'll also, you know, make the point that many of us in the industry are focused on fuel efficiency, and rightly so. I will tell you that we're also really focused on durability and reliability. As we continue to go push efficiency gains in the engine, there's always going to be trade-offs, and we've got to make sure that those trades make sense, which is why we continue to invest in things like advanced coatings and other advanced, you know, manufacturing techniques that can help with the, the durability, you know, of the engines.

If you talk to operators today, the number one thing that they want, in addition to, you know, sustainability and fuel efficiency, is time on wing. We've got to make sure that as we're driving efficiency, and rightly so, that we're also focused on the durability of the engines and the time on wing. That's frankly how—that's what the customers need, and that's what we need for our business model.

Operator (participant)

Thank you. And our next question coming from the line of Matt Akers from Wells Fargo. Matt Akers, your line is open.

Matthew Akers (Analyst)

Yeah. Hey, guys. Good morning. Thanks for the question. I wanted to see if you could touch on divestitures a little bit. You've been pretty active there. Could you talk about just kind of what inning we're in there, what's left to divest? And specifically, are you able to give the revenue and EBIT contribution from the Hoist & Winch deal?

Neil Mitchill (CFO)

Good morning, Matt. This is Neil. You know, we're really happy, obviously, with some of the transactions that we've announced recently, and Hoist & Winch in particular. Not going to be able to give you the numbers today, but once that transaction's closed, we'll get that out there in the right forum. But you know, got good value there. We expect to close that in the fourth quarter. As it relates to the actuation business at Collins, you know, we were pleased to see the Italian approval in the last quarter. You know, we're continuing to support Safran in the efforts that are required to close that transaction. Again, you know, nothing that we see we can't get through here, but it's going to take a little bit of time. Some regulatory hurdles still remain there.

But, you know, there's other things we're looking at. We're always looking at the portfolio. You know, as Chris and I have talked about, you know, you know, we're targeting bolt-on type M&A that fits into our technology roadmaps where it's appropriate. We want to be opportunistic there, but we also want to be thoughtful and careful. And then we're always looking at the portfolio from a pruning perspective. Nothing to announce today, but I can tell you that, you know, we're, we're going through a rigorous process, as we always do every year, and there'll probably be a handful of others that we, we come up with. We've talked about some of them in the past, but again, nothing to say today.

Christopher Calio (CEO)

Yeah, and maybe just to add to that, Matt. You know, we do have a robust and rigorous process to take a hard look at the portfolio every year. And while there are businesses that might be solid performers, we want to make sure that they fit into the criteria long term within RTX, namely technology differentiation and strong aftermarket tails, right? So continuing to look at the portfolio, you know, through that, through that prism. I'll also, you know, remind you that we've set up an RTX Ventures. We've been making investments in early-stage, you know, companies, keeping our eye on some of those trends, both commercial and defense. And so those may yield some opportunities as well for bolt-ons that fit into, again, our criteria.

Matthew Akers (Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next question coming from the line of David Strauss from Barclays. David Strauss, your line is open.

David Strauss (Managing Director)

Thanks. Good morning, everyone.

Neil Mitchill (CFO)

Morning, David.

Christopher Calio (CEO)

David-

David Strauss (Managing Director)

Onto Neil, your comments on Collins and the Boeing OE rate, you said, "took them down." I didn't know if that meant you actually have reduced the rate at which you're building on the MAX and 787, or you're just going up more slowly. Maybe if you could clarify that, and you know, if possible, talk about where you are exactly on the MAX and 787. Thanks.

Neil Mitchill (CFO)

Sure, David. You know, listen, I'm not going to get into specific rates, per se, but I'll tell you that, obviously, we started the year with a more aggressive outlook in terms of what that rate ramp would look like. What I would tell you is that we're, you know, in the low 30s in the first half of the year, and we do expect the rate to ramp up, as the year goes on. So it's not a flat rate assumption, but I'd say it's a calculated increase. And you know, you'll be able to hear from Boeing next week, I think. I'm sure they'll have something to say about their rates. I'd say today we're aligned with the airframers, but we're monitoring it just like everybody else.

On the Airbus front, Chris talked about it already. Same thing, we're aligned there with the Airbus team on output, there is always a desire to increase those rates, but we're doing the best we can to balance between the airline customers and the OEMs here. But I'd say from an outlook perspective, we're reasonably well calibrated, barring some change that we're not aware of right now.

David Strauss (Managing Director)

Thanks very much.

Christopher Calio (CEO)

You're welcome.

Operator (participant)

Thank you. Our next question coming from the line of Robert Spingarn from Melius Research. Robert, your line is open.

Scott Mikus (Director)

Thank you. This is Scott Mikus for Rob Spingarn. Neil or Chris, in the past, you've mentioned that you don't exactly like the business model, where the engine OEMs go through a heavy development cycle, lose cash on the OE sales, and then have to recoup your investment in the aftermarket. So I'm just wondering, with the general misalignment of profit drivers between the airframers and the engine OEMs, that can create tension when allocating scarce resources. On a future clean sheet aircraft program, is there going to be a broader industry discussion to better align those profit drivers between the airframers and engine OEMs?

Christopher Calio (CEO)

Thanks for the question, Scott, and it's a good question. Yes, the short answer is yes. There's gonna need to be a discussion around aligning our business model. And I believe that's not only in the interests of—I'll speak, you know, from the engine side, from the Pratt team, but also from the airframer team. When you are, you've got different incentives in terms of, you know, how you make your money, it does just drive a tension, and then ultimately, sometimes the customer is the one that's sort of caught, you know, in between there. And so, again, I think the more that we can align our business models, the better it will be, you know, for the OEMs and for the customer base.

You're right, the opportunity to do that is gonna be on the next platform. We're already obviously entrenched in the current platforms, but I think we're both seeing this, at times, misalignment play out, and I think with the new platforms, it gives us a chance, with a clean sheet of paper, to sketch out how do we get better aligned and better serve our customers.

Scott Mikus (Director)

Thanks. I'll stick with one.

Operator (participant)

Thank you. Our next question coming from the line of Noah Poponak from Goldman Sachs. Noah, your line is open.

Noah Poponak (Managing Director)

Hey, good morning, guys.

Christopher Calio (CEO)

Hey, Noah.

Robert Stallard (Partner)

Hey, Noah.

Noah Poponak (Managing Director)

With regard to the GTF powder metal process, is it possible to put numbers around, you know, of the number of engines that will need to come off-wing? How many—what percentage, even if a range, have come off-wing? And of that, how many have actually fully gone through the full fix process versus, are waiting in line to do so?

Christopher Calio (CEO)

Thanks, Noah. So let me just step back and give you sort of the powder metal sort of ramp up and insertion, you know, background here. So as we've talked about before, since late last year, everything coming off the line going to the OEMs had the full life powder metal parts. Now, all spare engines, you know, have those as well. MRO was always a, I'll call it, a phased ramp-up. And so we'll start to see this ramp up here in the second half of the year, and it's gonna continue to accelerate into 2025 and into 2026. Again, we've put a lot of emphasis on isothermal forging production.

As I said up front, we put a lot of demand into the system, as you might imagine, given, you know, what's happened with, with the fleet, and we've seen some, some solid progress. We need to continue to see some, some more ramp up. And as we said before, when a shop—well, excuse me, when an engine comes into the shop for a visit, we do an evaluation based on the work scope it needs, where it operates, when it was naturally gonna see another shop visit, to determine whether or not, you know, insertion of those parts makes sense. Again, we're trying to get the longest time on wing that we can and, and make sure that we allocate these, you know, these resources, you know, appropriately.

And so that's those are all the things that go into the decision as to which engines get the full life parts and which, we can do an inspection and do all the other things in the engine, because it was already slated to come back in advance of, you know, the time limits that we've established. So there's a lot of moving pieces here, but suffice it to say, it's gonna be a continued ramp back half of this year, 2025 and 2026, on powder metal production and insertion in MRO.

Noah Poponak (Managing Director)

Okay. As you're going through incremental customer negotiations, are you finding yourself able to change assumptions, either are better or worse based on what you've experienced thus far? Or is it more kind of the assumptions remain similar because the output has been in line?

Christopher Calio (CEO)

The assumptions remain similar, Noah, but I'll tell you, you know, each customer negotiation is different based upon where they operate and how they operate. And so the agreements are tailored, you know, to those, I would say, airline-specific, you know, you know, metrics and criteria. But we're using the same, I'll call it, key assumptions that we outlined upfront across the board.

Noah Poponak (Managing Director)

Okay, thank you.

Operator (participant)

Thank you. Final question coming from the line of Scott Deuschle from Deutsche Bank. Scott, your line is open.

Scott Deuschle (Director)

Hey, good morning. Thanks for taking my question.

Christopher Calio (CEO)

Good morning, Scott.

Scott Deuschle (Director)

Hey, Chris, are you, are you seeing progress with the FAA in terms of getting some of wide-body first-class seats certified? And then, I'm sorry if I missed it, but are you, are you seeing momentum on ramping up output on the 787 heat exchanger? Thanks.

Christopher Calio (CEO)

Yeah. Thanks, Scott. So yes, we on the seating, you know, question, we continue to work our way through the certification there. These are actually a lot more complex than I think people understand, and the certification requirements, you know, are a relatively high bar, but we think we have our arms around what we need to do there to get these certified and ultimately, you know, into the hands of the airframers and the airlines. On the heat exchanger, I'll just remind everyone that that was a part that we had to move as a result of the conflict in Russia, Ukraine, you know, out of Russia, and then, you know, set up another source, you know, here and set up a separate, you know, supply chain.

That has taken some time, but we're starting to ramp up there to the rates, you know, that we need to support what we think, you know, Boeing's, you know, demand is.

Scott Deuschle (Director)

Thank you.

Christopher Calio (CEO)

Thank you.

Operator (participant)

Thank you. With that, I will now turn the call back over to the RTX team.

Nathan Ware (VP of Investor Relations)

All right. Thanks, Liviana. That concludes today's call. You know, as always, I and the investor relations team will be available for follow-up questions. Really appreciate everyone joining today, and have a good day.

Christopher Calio (CEO)

Have a good day, everybody.

Operator (participant)

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