Q4 2024 Summary
Published Feb 7, 2025, 7:58 PM UTC- RTX is expected to see strong profit growth from Pratt & Whitney's aftermarket, with an anticipated $500 million drop-through, supported by the profitable GTF (Geared Turbofan) aftermarket, which is growing at a robust rate and has been profitable for several years. The upcoming GTF Advantage (GTFA) entry into service at the end of the year will further enhance margins and performance.
- Collins Aerospace is expected to achieve around 40% incremental margins and is on a path to return to pre-COVID margin levels, driven by significant cost reductions and productivity improvements. Despite lower OE volumes than anticipated, Collins has compensated for under-absorption and has significant runway for future growth and margin expansion.
- RTX is well-positioned in key defense programs, with the Air Force's increased funding for NGAD (Next Generation Air Dominance) being a significant tailwind. RTX has been developing their NGAP (Next Generation Adaptive Propulsion) solution, has undergone rigorous testing with pleasing results, and believes they have a very competitive offering. This positions Pratt & Whitney for mid-single-digit growth in the military side of their business.
- RTX anticipates negative engine margin headwinds of $150 million to $200 million at Pratt & Whitney in 2025 due to increased volumes of OE engine deliveries, which could pressure profitability.
- Supply chain constraints, particularly with rocket motors, where RTX is "falling behind" on some programs, may hinder the company's ability to deliver on its backlog and impact revenue growth.
- Declining pension income is expected to result in a $0.15 EPS headwind in 2025, with further decreases anticipated in future years, affecting overall profitability.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted Sales | FY 2025 | no prior guidance | $83B to $84B, 4% to 6% organic growth | no prior guidance |
Segment Operating Profit | FY 2025 | no prior guidance | 10% to 13% growth | no prior guidance |
Adjusted EPS | FY 2025 | no prior guidance | $6.00 to $6.15 | no prior guidance |
Free Cash Flow | FY 2025 | no prior guidance | $7B to $7.5B | no prior guidance |
Capital Expenditures (CapEx) | FY 2025 | no prior guidance | $2.5B to $2.7B | no prior guidance |
Collins Aerospace Adjusted Sales | FY 2025 | no prior guidance | Low single digits overall; mid single digits organically | no prior guidance |
Collins Aerospace Commercial Aftermarket | FY 2025 | no prior guidance | High single digits to low double digits | no prior guidance |
Collins Aerospace Adjusted Operating Profit | FY 2025 | no prior guidance | $500M to $600M | no prior guidance |
Pratt & Whitney Sales | FY 2025 | no prior guidance | High single digits | no prior guidance |
Pratt & Whitney Commercial Aftermarket | FY 2025 | no prior guidance | Low double digits | no prior guidance |
Pratt & Whitney Adjusted Operating Profit | FY 2025 | no prior guidance | $325M to $400M | no prior guidance |
Raytheon Sales | FY 2025 | no prior guidance | Mid single digits organically | no prior guidance |
Raytheon Adjusted Operating Profit | FY 2025 | no prior guidance | $150M to $225M | no prior guidance |
Powder Metal Compensation Impacts | FY 2025 | no prior guidance | $1.1B to $1.3B | no prior guidance |
Working Capital Improvement | FY 2025 | no prior guidance | ~$1.3B year-over-year | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Pratt & Whitney GTF aftermarket | Previously reported strong aftermarket growth (9%-15% increases) driven by higher volume and favorable mix in both large commercial engines and Pratt Canada. | GTF aftermarket is growing substantially due to accelerated shop visits and better pricing. Margins near double digits. | Continues to be a key growth driver, sentiment remains positive. |
Collins Aerospace margin trajectory | Margins expected to improve through higher volume, cost reductions, and strong commercial aftermarket demand across earlier quarters. | Aiming for 40% incremental margins in 2025, though not reaching 20% margin target by then. Optimistic on long-term margin potential. | Remains a focus area for future profitability, sentiment continues to be cautiously positive. |
Raytheon defense backlog and bookings | Strong global demand signaled by a growing backlog and increasing international orders (Q3 backlog at $60B, Q2 at $51B, Q1 at $53B). | Defense backlog at $63B with a 1.48 book-to-bill for the full year, reflecting robust international demand. | Continues to strengthen due to higher global defense spending, sentiment remains bullish. |
Supply chain constraints and costs | Ongoing challenges but improving flows noted in prior quarters, with embedded supplier personnel and cost mitigation efforts. | Progress in structural castings (up 12% YoY) and microelectronics lead times; still facing inflation headwinds. | Persistent but improving; sentiment improving as constraints ease. |
Productivity improvements, cost redux | Ongoing initiatives (factory automation, cost synergy actions) driving positive impacts on margins and free cash flow in prior calls. | Showed 11% organic sales growth with <2% headcount rise, leveraging data analytics to boost utilization and on-time delivery. | Ongoing gains and digital efforts; sentiment remains positive for long-term efficiency. |
Engine margin headwinds at P&W | Prior quarters mentioned higher production costs offset by favorable mix; margin under pressure from R&D spending, commercial OE ramps, etc. | Expects $150M-$200M negative engine margin headwinds as volumes rise, but aftermarket gains will offset. | Margins under pressure short-term, but long-term offset from aftermarket is positive. |
Declining pension income | Cited as a partial headwind to EPS. Previously not a major Q2 topic, but noted as a smaller offset in Q1/Q3. | About $0.15 EPS headwind from lower pension income in 2025; plans are still well-funded. | De-risking strategy continues; top-line outlook neutral, sentiment is guarded. |
Powder metal issues, disbursements | Discussed across Q1-Q3 as a key cash outflow driver and operational challenge; continuing MRO capacity increases and forging improvements. | ~$1.1B in 2024, with $1.1B-$1.3B expected in 2025; significant progress on MRO ramp for PW1100. | Still a large near-term cash and operational factor, though progress is noted. |
Material flow issues in MRO | Previously highlighted as a bottleneck slowing turnaround times; incremental progress each quarter by enhancing part availability and shop processes. | Improved flow in PW1100 shops (up 30% last year); focus on castings and forgings to further boost output. | Persistent but gradually improving; critical for reducing aircraft-on-ground. |
Increasing global defense spending | Reinforced in Q1 and Q3 with significant demand for missile defense systems and modernization programs; limited Q2 detail. | Strong international orders; backlog has 44% from overseas, aided by NATO commitments and Indo-Pacific spending. | Continues to boost Raytheon bookings; outlook remains highly positive. |
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Powder Metal Costs and GTF Cash Step-down
Q: Are we on track for the $800 million to $1 billion cash step-down in 2026 for GTF?
A: Yes, the outlook remains consistent with underlying assumptions intact. AOGs have been stable, and MRO output is key. PW1100 output was up 30% last year, and they plan for above 30% growth in 2025. On the cash side, they ended 2024 at about $1.1 billion, and expect $1.1 to $1.3 billion for 2025. They have the residual amount parked in 2026 and feel good about the profile laid out. -
Free Cash Flow Outlook Beyond 2025
Q: Will components of 2025 free cash flow normalize or reverse in 2026, apart from powder metal costs?
A: Operational free cash flow for 2025 is about $8.4 billion after adding back the $1.2 billion powder metal impact. There's a $1.3 billion working capital tailwind included, and RTX believes there's additional runway to improve working capital beyond 2025. There's also a nonrecurring international tax payment of a couple hundred million dollars in 2025. -
GTF Aftermarket Margins and Collins Incrementals
Q: Where are you booking GTF aftermarket today, and what's the right level of Collins incremental margins?
A: GTF aftermarket margins are near double digits and have been profitable for several years. They expect continued expansion as contracts age and pricing improves. Collins is expecting a 40% incremental margin in 2025, with further runway to return to pre-COVID margins in the long term. -
Segment Margin Targets Achievability
Q: Are the segment margin targets from 2021 still achievable?
A: RTX believes all margin targets are achievable in the long term. Collins shows significant margin improvement, with 150 basis points of margin expansion in the 2025 outlook. Despite headwinds, underlying fundamentals and margin runway remain strong across businesses. -
Supply Chain Constraints
Q: Where are you still seeing supply chain constraints?
A: Constraints remain in structural castings, isothermal forgings, microelectronics, and rocket motors. Structural castings were up 12% year-over-year, and Collins has improved microelectronics lead times. Rocket motors show progress on some programs but need to ramp on others. -
Conservative Aerospace OEM Guidance
Q: Is your 2025 aerospace OEM guidance conservative due to contingencies or inventory?
A: RTX took a prudent approach at Collins due to some inventory in the channel, targeting specific narrow-body systems. They expect the ramp to continue and are positioned to meet rising rates if growth accelerates. Pratt's Large Commercial Engines were up 14% in unit deliveries last year, expecting similar growth in 2025. -
Productivity Initiatives and Priorities
Q: What are your top priorities, and how are you addressing productivity?
A: The top priority is executing on a $218 billion backlog and commitments, including GTF recovery. Productivity is enhanced through the core operating system, automation, and AI investments. They aim for 11% sales growth with only 2% headcount growth. -
Alignment with New Spending Priorities
Q: How is Raytheon aligned with new spending priorities and international demand?
A: Demand remains strong with a $63 billion backlog and 1.48 book-to-bill. International demand is robust, with NATO countries increasing spending, Poland nearing 5% of GDP. This provides a tailwind for RTX. -
Status of NGAP Program
Q: What's the status of NGAP and its impact on Pratt & Whitney?
A: RTX is pleased with NGAP progress, with rigorous testing yielding positive results. Additional funding helps continue development and reduce risks. Along with the F135 Engine Core Upgrade, it contributes to mid-single-digit growth for Pratt's military business. -
Pension Headwinds and Trends
Q: Can you touch on pension headwinds in 2025 and beyond?
A: RTX expects a $0.15 EPS headwind in 2025 due to pension de-risking. Plans are well-funded at 104% funded status, and income will decline slightly each year after 2025. -
Collins Aftermarket Growth Components
Q: Can you disaggregate provisioning versus repair in Collins aftermarket growth?
A: Parts and repair are expected to be up high single digits to over 10%. Provisioning aligns with OE growth at mid-single digits, and mods and upgrades will be over 10%. -
OE Growth and Pratt's Free Cash Flow
Q: How does OE growth relate to GTF deliveries and impact on Pratt's EBIT and free cash flow?
A: Pratt's profit growth will come mainly from aftermarket with about $500 million drop-through. Negative engine margin headwind is expected to be $150 million to $200 million. GTF aftermarket is profitable and expected to grow further. -
Age of Fleet and Aftermarket Growth
Q: How does fleet age affect aftermarket growth at Collins?
A: The installed base continues to grow, with warranty expirations increasing each year, providing tailwinds. Collins has a $160 billion installed base, leading to robust aftermarket demand. -
Resuming 737 MAX Avionics Deliveries
Q: Has Boeing restarted issuing purchase orders for 737 MAX avionics equipment?
A: Yes, RTX is back working with Boeing on the ramp and continues to engage closely. -
Iron Dome Opportunity
Q: What does Iron Dome mean for RTX?
A: RTX is a major partner in Israel's Iron Dome and sees significant opportunity in the U.S.. They are ready to engage as the program takes shape and view it as core to their capabilities.