The operator introduces the participants and provides instructions for the conference call. The CEO, Greg Hayes, announces the appointment of Chris Calio as the new CEO of RTX, effective May 2. This decision was made after a thorough succession planning process conducted by the Board of Directors.

Chris will be taking over as the new leader of the company, with Greg remaining in his role as Executive Chairman. Chris has a strong understanding of the industry, customers' needs, and the company's operations, and is known for his leadership skills. Greg thanks all employees for their support over the past decade and expresses confidence in Chris's ability to continue driving performance and value creation. Chris thanks the employees and acknowledges other leadership changes, including Wes Kremer's retirement.

Wes's retirement has led to Phil Jasper being appointed as President of the Raytheon business unit, bringing with him extensive experience in the aerospace and defense industry. Demand for Raytheon's products and services in both commercial aerospace and defense has been strong, with global air travel returning to pre-pandemic levels and significant growth expected in the aftermarket. The defense backlog has also increased, with a recent $2.8 billion GEMT contract from NATO being the largest in Raytheon's history. A bipartisan funding agreement has also been reached to support increased defense spending.

In 2023, the company saw strong financial performance, with increased sales and earnings per share and exceeded their free cash flow goal. They also returned capital to shareholders and invested in future growth. However, they are currently focused on addressing two challenges: Pratt's powdered metal issue and improving Raytheon's margins. Despite these challenges, the company remains committed to their fleet management plans and has made progress in addressing these issues.

Pratt has issued service bulletins and instructions to operators, with corresponding airworthiness directives expected to be issued soon. Multiple bulletins and directives are common for fleet management plans. Ultrasonic angle scan inspections and powder metal parts continue to be conducted with consistent findings. The focus is on ramping up production of HPT and HPC disks for OE and MRO deliveries. All OE GTF engines now contain full certified life disks and MRO engines will also receive full life disks as production ramps up. Estimated turnaround time remains consistent and Pratt has seen a 30% growth in GTF MRO output in 2023 and is investing in additional shops and capabilities for 2024 growth. The expected number of AOGs remains at around 350.

The company expects a lower peak level due to the timing of AD issuance and proactive fleet management by customers. They have finalized several customer support agreements and are executing plans for remaining Pratt & Whitney fleets. Raytheon continues to experience profitability challenges, primarily due to productivity headwinds in legacy fixed price development programs and supply chain and operational issues. The company has achieved productivity gains in certain areas, but they have been outweighed by challenges in other areas, with 70% of the headwind coming from fixed price development programs and 30% from material costs and supplier delinquencies.

The company has a plan to stabilize performance and achieve profitable growth, which includes improving fixed price development programs, being more selective in pursuing new work, improving supply chain performance, taking indirect cost actions, and benefiting from a shift in business mix. The company's strong product portfolio and high demand for its products give confidence in achieving these goals.

The company had a strong finish to the year, with solid growth in organic sales across all three segments and a 18% increase in overall segment operating profit. The fourth quarter saw a 10% increase in adjusted sales, driven by growth in commercial aerospace and defense. Adjusted earnings per share were better than expected, but still faced headwinds from inflation, taxes, and pension income. On a GAAP basis, earnings per share included various adjustments. The company also delivered strong free cash flow for the year. The paragraph then transitions to discussing the results of the Collins segment on slide four.

In the quarter, sales for the company were $7 billion, up 12% on both an adjusted and organic basis. This was driven by strong performance in commercial OE and aftermarket growth. Commercial aftermarket sales were up 23%, while commercial OE sales were up 17%. Military sales also saw a slight increase. Adjusted operating profit was $104 billion, up 22% from the previous year. Pratt & Whitney also saw strong sales growth in all three channels, with sales of $6.4 billion, up 14%. Adjusted operating profit for Pratt & Whitney was $405 million, up $84 million from the previous year. This was primarily due to higher commercial aftermarket volume and favorable commercial OE mix, partially offset by higher production costs and R&D expenses.

In the fourth quarter, Raytheon saw a 3% increase in sales, driven by higher volume on advanced technology and air power programs. Adjusted operating profit also increased due to higher volume and lower expenses. Bookings and backlog were strong, with a book to bill ratio of 1.33 and an end of year backlog of $52 billion. The company's outlook for 2024 is positive, with global RPMs back to 2019 levels and strong demand for new aircraft. Commercial OE revenue is expected to increase by 10-15% and commercial aftermarket sales to increase by over 10%. Global defense spending remains high, supporting the company's backlog. RTX is focused on driving operational excellence to reduce costs and increase margins.

In 2023, we were able to achieve $295 million in cost savings from the RTX merger, putting us on track to reach our goal of $2 billion in cost synergies by the end of 2025. However, we are still facing challenges such as inflation and supply chain disruptions, and are working to mitigate these issues. Additionally, we are keeping an eye on the tax environment and other external factors. Overall, we expect another year of growth in sales, operating profit, and earnings for RTX, along with strong free cash flow. Our outlook also takes into account the two dispositions we announced last year.

In the first quarter of 2021, the Raytheon cybersecurity business is expected to close, resulting in a $1.3 billion reduction in reported sales and an $80 million headwind to operating profit. The Collins outlook for 2024 includes the actuation business, with projected sales of $78-79 billion and organic growth of 7-8%. Adjusted EPS is expected to be $5.25-5.40, up 4-7% from the previous year, with free cash flow of $5.7 billion. Operational improvements and working capital improvement are expected to drive $2.3 billion of improvement, offset by a $1.3 billion headwind from powder metal impacts, $500 million from higher interest expense, and $300 million from lower pension cash recovery. Segment operating profit growth is expected to result in $0.72 of EPS growth, while pension will still be a headwind of $0.36 year-over-year.

The company expects to see mid to high-single-digit sales growth in all three of its business segments, driven by commercial and military sales. Adjusted operating profit is expected to grow between $650 million and $725 million due to increased volume, higher pricing, and cost reduction initiatives. Sales at Pratt & Whitney are expected to be up low-double-digits, driven by higher OE deliveries and shop visits, while military sales are expected to increase in the mid-single-digits due to higher F-135 sustainment volume.

The paragraph discusses the expected growth in operating profit for Pratt and Raytheon, with an increase of $400 million to $475 million for Pratt and $100 million to $200 million for Raytheon. The increase is primarily due to commercial aftermarket drop through and military growth, but will be partially offset by higher large commercial OE deliveries and mix headwinds. The paragraph also mentions the impact of divesting the cybersecurity business and higher intercompany activity on sales eliminations. The company has also made adjustments to their 2025 financial commitments due to changes in the macro environment, but still expects Collins and Pratt to meet their growth targets.

The company is adjusting its outlook for the segment due to recent performance at Raytheon. This will result in a slightly lower growth rate for adjusted sales and operating profit. However, demand remains strong and the backlog will support significant top-line growth. The overall adjusted margin expansion and free cash flow target remain unchanged. The company is confident in its ability to generate cash and is committed to returning capital to shareholders. The presentation is then handed back to Greg to conclude.

The speaker highlights key takeaways from the day's discussion, including the challenges faced in 2023 and the strong demand in both commercial and defense markets. They express confidence in the company's future growth and focus on execution and disciplined management. The speaker also thanks employees for their hard work and opens the floor for questions, with the first one being about the GTF situation.

The speaker mentions that there have been some changes since the last update in October, including a shift in the timing of the AOG and customers accelerating removals. The peak is expected to be in Q1 and then trend downward. There has also been a shift in the timing of cash due to discussions with customers on special support. The next question is regarding the cash flow impact of the powdered metal issue, which is $300 million higher in 2020 than previously stated.

Neil Mitchill, responding to a question, explains that the impact in 2023 from powdered metal related dispersion was essentially zero due to cash flow shifting to the right. $1.3 billion was moved to 2024, with $1.5 billion remaining in the 2025 outlook and the rest spilling into early 2026. He also mentions that the timing of payments will depend on agreements with customers. Sheila Kahyaoglu then asks about Pratt's margins compared to GE's, and Neil shares that Pratt's sales will be up in the low-double-digit range with $400 million to $475 million in operating profit. Aftermarket sales will increase in the low-teens and military overalls will also see a boost.

In paragraph 19, the speaker discusses the expected increase in profit for the company in 2024. They mention that the aftermarket and OE sales will drive this increase, with the aftermarket showing more margin expansion. They also mention that military sales will be up in the mid-single-digit range. The speaker then answers a question about the offset to lower implied earnings drop through from the ‘25 guidance and mentions an updated walk between ‘23 and ‘25 on free cash flow. The second speaker also asks about the incorporation of fully life parts into the fleet by the end of ‘24.

The company is expecting a $2 billion increase in profit in 2023, mostly from operational growth and working capital improvements. However, there are also some headwinds, such as lower segment operating profit, CapEx, and the impact of powdered metal. Looking ahead to 2025, there are some changes, including lower operating profit but also improvements in taxes and working capital. The company has committed to incorporating full life powder metal parts into their OE customers' final assembly lines starting this year.

The OE engines have the latest build standard, allowing for maximum time on wing for customers. Full life parts will be incorporated into spare engines to maximize time on wing. MRO will begin incorporating full life parts in Q2, but it started earlier. Not all shop visits will have full life parts, but the parts will be inspected and put back into service until the next inspection interval. Pratt is working to match up parts and engines to minimize incremental visits. MRO will ramp up throughout the year, but the outlook remains the same.

Peter Arment of Baird asked Chris Calio about the headwinds facing Raytheon, specifically regarding the fixed price development programs. Calio explained that about 70% of the productivity issues were in these programs, which were contracts that may have been outside of their core capabilities and had difficult specifications. In order to address these issues, Raytheon is adding subject matter experts and having discussions with customers to potentially restructure or alter the requirements for a better financial outcome. These conversations are ongoing.

The speaker discusses their plans for the next few years, including powering through current projects, meeting contractual requirements, and improving their ability to execute. They also mention financial projections, including a potential profit increase of $100-200 million in 2024 due to improved productivity. However, they note that it may take some time for their business to reach its full potential in terms of margins.

Noah Poponak asks Neil Mitchill about the starting point and implied margin for the new $500 million to $550 million multi-year outlook for RTX. Mitchill confirms that the segment operating margin for 2020 is $8.2 and the implied margin for 2025 is $13.2 to $13.7. The drivers for this growth include aftermarket sales, better absorption, and cost reduction initiatives at Pratt and Collins. Mitchill also clarifies that the margin assumption at the RTX level is the same as before the recalibration. Poponak then confirms that the free cash flow projections for this year and next year assume a positive change of $1 billion in working capital each year.

The company plans to keep inventory flat in 2024 and expects improvements in inventory and customer advances in 2025. They are working closely with customers who may be financially impacted by AOGs and are offering compensation to support them.

The speaker acknowledges that compensation can provide some relief for customers affected by engine removals, but it won't fully make up for the disruption. They are working to come up with a fair compensation plan and communicate with customers regularly. They have a track record of resolving difficult problems with customers and are confident they can do it again. The turnaround time for engine induction remains consistent, but they are aggressively pursuing work scopes to reduce in-shop time. They have also industrialized repairs on the GTF.

In 2024, there will be a significant increase in production of full-life discs. The bottleneck to ramping up production is the need for the powdered metal value stream to step up, which includes increasing forging, inspection, and machining capacity. The company is confident in meeting Airbus's requirements but must continue to focus on quality and maintenance to ensure success.

The speaker discusses the company's plans to increase the number of full life parts in their MRO and meets commitments with Airbus. They also mention the positive outlook for Collins, with an expected increase in aftermarket and OE sales, driven by widebody and interiors. The company expects high-single-digit to low-double-digit growth and 40% incrementals.

The widebody OE side of Collins has thinner margins, but it sets up for good long-term projections as it comes off warranty and converts to aftermarket. The interior business is growing, but it won't reach 2019 levels until 2026. There is potential for growth in the interiors business as there is a shift from narrow body to wide body. The team is focused on transforming the cost footprint in the interiors business. Some airlines are requesting retrofits and upgrades for their widebody fleets, but it is a long process and won't have a significant impact until 2025 and 2026.

Seth Seifman of JP Morgan asks about the growth outlook for Collins, specifically in relation to OE production rates and the aftermarket. He also asks about the potential for upside and the impact of the military business. Greg Hayes responds by stating that the defense business in Collins was flat in 2023 due to inflation and supply chain issues, but is expected to see healthy growth in 2024. He also mentions the strategic positioning of the business and the strong aftermarket potential.

The speaker discusses the recent surge in aftermarket sales and predicts that growth will moderate in the future. They also mention that Collins is well positioned in the defense business and has plans for structural cost reduction. Another speaker adds that there are plans to move engineering and manufacturing to more cost-effective locations, which will support margin expansion. The call ends with a reminder that the investor relations team is available to answer any further questions.

This summary was generated with AI and may contain some inaccuracies.