RTX Corporation (RTX) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to our call today. My name is [ Latif ] and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer; Chris Calio, President and Chief Operating Officer; Neil Mitchill, Chief Financial Officer; and Jennifer Reed, Vice President of Investor Relations. This call is being webcast live on the Internet, and there is a presentation available for download from RTX website at www.rtx.com. 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's 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. [Operator Instructions]. With that, I will turn the call over to Mr. Hayes.

Good morning, everyone, and thanks for joining us today. I hope everyone had a chance to read the press release we put out earlier this morning regarding the Pratt GTF fleet update. Since our Q2 call, we have literally been working around the clock to develop a GTF fleet management program to address the enhanced inspection requirement we discussed in July. In just a moment, I'll turn it over to Chris, who will give you an update on the operational impact. Neil is then going to cover the financial considerations, and I'll come back to wrap things up and take some Q&A. Let me first take a minute to just baseline everybody. There is no question that the GTF has faced challenges since its entry into service. To be clear, this latest disruption from the powdered metal contamination is frustrating, and will have a significant impact on our customers, on our partners and on RTX. Still, we are proactively managing this every day by dedicating all the resources needed to ensure that we address this issue in the best possible manner for our customers, our partners, the company and our shareowners. And you should know that we are leveraging the world-class engineering and manufacturing talent from across RTX, including our research center in order to do this. And while we recognize the significance of this issue in the near-term, it does not alter our belief that RTX remains the best positioned A&D company, with a resilient and diversified portfolio as evidenced by our $185 billion backlog. With that, let me turn it over to Chris for an operational update. Chris?

Okay. Thanks, Greg. I'm on Slide 2. Let me start by revisiting the key points that we discussed on the Q2 earnings call back in July. I'll then provide an update on the work and analysis that has been done since then, and what it means for the fleet and our customers. As you know, we announced in July an acceleration of inspections required on high-pressure turbine discs installed in certain GTF engines powering A320neo aircraft. These inspections were necessary to address the possibility that a rare condition in powdered metal could result in the formation of a crack during manufacturing. Now as a reminder, this condition was originally identified as the root cause of a V2500 HPT disk failure back in March of 2020. As a result of a subsequent investigation into this event, we took several actions. We made improvements to the powder metal production process, a new angle ultrasonic inspection was deployed, and inspection plan was established in both production and MRO. And as a further reminder, after we put these actions into place, 2 significant developments occurred that further informed our thinking. First arose out of a GTF high compressor disk fracture in December of 2022. Investigation of that event caused us to increase our assumptions on the likelihood, with GTF powder metal part having a crack at the time of manufacturing. The second, and most recent development, came from the ongoing inspection plan. Through our inspections and destructive testing, we found cracks that were larger than we had anticipated, which required us to also increase our assumption on the rate at which a crack would grow. The assessment of these findings led to the determination in July, which we announced during our Q2 earnings call, that we needed to accelerate roughly 1,200 PW1100 shop visits over the course of the next 9 to 12 months, some of which would be incremental to our existing shop visit plan. We've continued our analysis since our call in July, and have now developed a holistic fleet management plan that ensures the continued safe operation of the fleet while balancing the impact to our customers. This will result in roughly 600 to 700 incremental engine removals from 2023 through 2026. The majority of these removals occurring in 2023 and early 2024. This removal profile is driven by several key parts of the fleet management plan, and I'll walk you through them. First, HPT discs must be inspected approximately every 2,800 to 3,800 cycles. This cycle range depends on the [ thrust rating ] of the engine. Many engines that have been in operation for several years are coming up on the cycle limitation, which is the driver behind the majority of the incremental removals in 2023 and 2024. Second, the part lives of both compressor and turbine discs will be reduced to approximately 5,000 to 7,000 cycles. Again, depending on the thrust rating of the engine. And lastly, compressor disks must be inspected when access to these discs are part of the planned work scope. It is expected that this plan will be part of one or more bulletins to be released in the next 60 days, following alignment with all regulatory bodies. For clarity, parts made from powdered metal after Q3 2021, which benefit from improvements made to the powdered metal production process, are outside of the affected population and are expected to have full certified life. And importantly, as we mentioned on the Q2 call, we are still able to deliver new engines and spare parts due to the deployment of the angle scan inspection. In addition, this plan contemplates the ramp-up of production of HPT and compressor disks with full certified life. With that said, let me outline the net effect of all of this. The fleet management plan will touch roughly 3,000 engines. But as I said before, it resulted in approximately 600 to 700 incremental removals in the 2023 to 2026 timeframe, with the majority of these occurring in 2023 and early 2024. In addition, the work scopes for these shop visits will be heavier in nature to mitigate the need for future shop visits. The spike in removals in late 2023 and early 2024, will obviously put additional pressure on the fleet. As you know, we entered this situation with roughly 10% of the fleet on the ground because of high MRO turn times due to material constraints, which also results in longer times between engine removal and induction into our MRO shops. The accelerated removals for HPT disks and heavier work scopes will create more congestion in our MRO network given the backlog of engines removed from wing that are awaiting induction. Our current estimate is that, depending on the work scope, it will take between roughly 250 and 300 days on average for when these engines are removed from wing until they are returned to an operator. As a result, we now forecast an average of 350 aircraft on the ground for the GTF-powered A320 fleet from 2024 through 2026, with a peak of 600 to 650 aircraft on ground in the first half of 2024. The impacts to our customers vary. Certain operators are impacted more than others. We are working operator by operator on mitigation and support plans. As we've said, we were already in the process of adding GTF MRO capacity, and we are evaluating strategies to accelerate turn times and efficiency in our shops. In addition, we have technical experts from across RTX, including our research center, exploring a number of avenues to improve our inspection and detection capabilities. As we said on the last call, we are also continuing to finalize the powder metal analysis on the other Pratt engine programs, but continue to believe other parts in the fleet will be far less impacted. Let me turn it over to Neil to walk you through the financial impacts.

Thanks, Chris. Let's turn to Slide 3. I'll start by taking you through the expected financial implications, and how that translates to our 2023 outlook and our 2025 commitments. Based on the impact to our customers, as well as the fleet planning that Chris just discussed, the estimated gross financial impact of this fleet inspection and management plan is expected to be in the range of between $6 billion and $7 billion. Now, it's important to remember that Pratt & Whitney's net partner share is 51% of the PW1100 program. When taking that into account, we currently estimate the net pretax operating profit impact to be between $3 billion and $3.5 billion over the next several years. This cost includes estimated customer support, as well as the EAC impact for incremental cost to long-term maintenance contracts. Certain elements of these costs will be booked upfront, and the remainder will be booked over time. In the third quarter, there will be a nonrecurring sales charge of approximately $5.5 billion, resulting in a pretax operating profit impact of approximately $3 billion, which reflects Pratt's share. So with that all said, here's how we see our 2023 outlook. Taking into account the nonrecurring adjustment I just described, we now expect RTX reported sales to be lower by about $5.5 billion, or between $67.5 billion and $68.5 billion for the full year. However, there is no change to our prior adjusted sales outlook of $73 billion to $74 billion, which continues to translate to between 9% and 10% organic growth for the year. Because the Q3 charge will be excluded from our adjusted earnings per share, there is also no change to our prior adjusted EPS range of between $4.95 and $5.05. Similarly, on an adjusted basis, within the Pratt segment, we continue to expect sales to be up low to [ mid-teens ] and operating profit to be up $200 million to $275 million versus prior year. And because we already contemplated the current year cash impact of this matter in our updated outlook from Q2, we still see RTX free cash flow generation of approximately $4.3 billion, as well as $3 billion in share repurchases for the year. All right. Let me shift to how we are thinking about the impact of this to our overall 2025 commitments at this stage. Even with the recent Pratt matter, we still expect RTX top line adjusted sales growth of between a 6% and 7% CAGR from 2020 through 2025. And although we will see some modest margin pressure from the additional cost for GTF maintenance, overall, we continue to expect 550 to 650 basis points of adjusted margin expansion at the RTX level from 2020 through 2025. Shifting to free cash flow. We expect approximately $3 billion of headwind over the next several years. And while there are a number of factors that will impact the precise timing, with respect to our 2025 free cash flow commitment, we estimate a headwind of about $1.5 billion, which will reduce our previously expected $9 billion of free cash flow to approximately $7.5 billion in 2025. And finally, we're continuing to assess actions to mitigate this matter. And overall, we remain confident in the significant cash-generating capability of this great portfolio of businesses, and we are focused on driving continued cost reduction across the company, investing in the business and delivering on our capital return commitments. With that, let me turn it over to Greg to wrap things up.

Okay. Thanks, Neil. So I know we've covered a lot of ground here. But I just want to reiterate that safety is our top priority, and it's something on which we will never ever compromise. As you would expect, over the coming weeks and months, we'll continue to work closely with all of our key stakeholders, including the regulators to ensure that we support our customers through this difficult situation. To be clear, there's a lot of work ahead of us, but we'll get through this, and the long-term outlook of the GTF program remains strong. This includes a backlog that goes into the next decade and the introduction of the GTF advantage engine, the next generation of the GTF product family. You can be assured that we are dedicating all of the resources necessary across RTX to deal with this matter. Let me just conclude by saying that the future of RTX remains bright. Our businesses have leading positions on the highest growth commercial platforms, and our franchises serve the most critical defense priorities. And importantly, we remain highly confident we can deliver on our capital return commitment of $33 billion to $35 billion, from the merger date through the end of 2025. With that, let's open up for questions. [ Latif? ]

[Operator Instructions] Our first question comes from the line of Kristine Liwag of Morgan Stanley.

My first question is, what changed business today versus July? And also, can you provide more color on how you got to the pretax operating profit cost of $3 billion to $3.5 billion, and the $1.5 billion free cash flow impact in 2025, what's embedded in those numbers?

This is Chris. I'll take this one, and then I'll ask Neil to pipe in as well. I know we went through a lot of detail in the press release and the opening comments. So let me take a step back here and sort of break it down so people understand truly what's changed. At the time of our initial assessment back in Q2, there were a number of variables that were still being analyzed to develop the optimal fleet management plan. Now the overriding priority, of course, is the safety of the fleet and ensuring that it can operate safely on a continual basis. And once we establish what was required to do that, we then developed a holistic fleet management plan to optimize for customer impact, fleet support, et cetera, kind of as we said in our opening comments, it's an iterative process. And there's a number of variables and factors that you have to consider. So at the time of this assessment, we were really focused on accelerating the inspection of engines that had not yet had the enhanced angle scan inspection. That's the 1,200 engines in 2023 and early 2024 that we spoke about previously, and that remains consistent. The Pratt team continued to analyze the inspection protocol, and ultimately determined that a repetitive inspection, combined with a part life limitation on certain HPT and compressor disks was needed to ensure that we have more opportunities to detect the crack after the initial inspection. Again, safety, the fleet comes first, as Greg said. This means that even if an engine previously had an angle scan inspection, we want to look at it again in that 2,800 to 3,800 cycle range. And so that will now touches almost all of the PW1100 engines. That being said, our goal is to eliminate the need for repetitive inspections. And so Pratt now plans to replace as many HPT disks as possible during these shop visits, with disks that have full certified life. This would have the effect of avoiding another removal in that cycle range I talked about, the 2,800 to 3,800 for the repetitive inspection. In addition, to ensure that the engines achieved the maximum time on wing interval when it leaves the shop, it makes sense actually to replace the compressor disk at the same time. This is why the work scopes are heavier. It will ultimately give the engine a longer run, and be the least disruptive to the operators in the long-term. And so as we said up front, this is going to result in approximately 600 to 700 incremental shop visits between now and 2026. And by incremental, we mean above and beyond the shop visit forecast we had prior to this powdered metal issue. Now roughly 2/3 of these incremental removals will occur in 2023 and early '24. And that obviously creates pressure on a fleet in an MRO network that were already under stress. This is what leads to the sustained AOG level that I discussed upfront. So to sort of close this out, we now have a fleet management plan. Subject, of course, to regulatory approval, as we mentioned. And so the focus now turns to the operational execution of this plan. And so we are completely focused on ramping up part production on HPT and compressor disks, driving capacity throughout our MRO network, and reducing the turnaround time in our shops, so we can get these assets back to our customers as quickly as possible. So maybe with that, I'll ask Neil to jump in here to talk about how this sort of translates into the financial impact he outlined earlier.

Thanks, Chris. So let me pick up here and talk about how all of this informs our financial assessment. So importantly, we now have a fleet management plan, and combined with our historical experience, which we've applied to the estimate, now we're able to better estimate the full magnitude of the situation. So including the estimates that give rise to the full charge, as well as that, that's it's hitting us in the third quarter. Let me break that down a little bit in some more detail. So the cost really breaks down into two buckets, the first being customer support and the second being the cost to complete the actual inspections and the overhaul work scope that Chris just talked about. To break it down a little bit, put some numbers around it. Roughly 80% of the cost that we estimate here is going to be associated with customer support. So the time between taking an engine off the wing, and inducting it into our shop and then, of course, the time in our shops, is the principal driver of the disruption that we're going to cause to our customers, and really forms the basis of our estimate. So ultimately, that's going to drive the number of aircraft on the ground, the duration of the aircraft that are on the ground for. And as Chris said, we project that to be about 350 AOGs on average over the next 3 years, through 2026. So again, as Chris said, the impacts on the customers are going to vary. Certain operators are going to be more impacted than others. And we're working collaboratively with each operator on an operator-by-operator basis to put mitigation plans and support plans together. The remainder of the cost, the other 20% is primarily for the additional shop visits. And that's going to principally consist of labor and material. As we've talked about, we expect those shop visits to be heavier in nature. About 90% of those incremental shop visits are likely to be heavy now. But as I said earlier, most of this cost is going to be booked here in the third quarter. And then the balance will be booked over time. So with that, I'll it back to the Q&A.

Our next question comes from the line of Myles Walton, Wolfe Research.

Neil, just a quick follow-up on that, and then maybe one for Chris. Neil, on the buckets, is there a bucket embedded in there for the lost profitable shop visits? And where does that sit? And then, Chris, maybe, as you look to the customer base and the amount of disruption this is causing, is the customer compensation enough to stem off more significant market share erosion over the medium to longer-term through the conversations you've had so far?

This is Neil. I'll start. Yes, the range we put out there contemplates the net effect of what we see as the total impact over the course of, I'll call it, the remainder of these contracts here. So we've contemplated both the puts and takes, if you will, over the course of the work we're going to perform. Chris?

Yes. I guess the other thing I would mention, Myles, here in the second part of your question, and Greg said it right up front, which is we've obviously had some challenges on the GTF since entry into service. And we have a track record of working closely with our customers on support plans and on compensation plans. Obviously, this is a significant issue, as Greg mentioned, significant impact to our customers. But again, these are long-term customers. Customers that we have a long-standing relationship with, that are dedicated to the GTF, and we're confident that we can come to reasonable and equitable solutions with them on how to continue to support their fleet and provide them financial support as well.

The back half loaded nature of the cash impact in '25, is that primarily compensation on the back end? Or why does the cash hit actually accelerate into the further period out as opposed to being forward pulled?

I'll take that one. Yes, it principally relates to the timing of customer payments. There's a few things that are going to impact the timing of the cash flow. I'd say, first of all, the timing of the work that's performed, but that will be mostly front-end loaded. Secondly, the customer support, which will depend on each and every customer's arrangement. And then we have partner recoveries. Those will lag a bit from the outflows that will incur. And then, of course, the tax impact. So really, it is the customer support [indiscernible] that trend out into 2025.

Our next question comes from the line of Sheila Kahyaoglu from Jefferies.

Maybe if you could just -- thanks for all the cash items. Maybe if you could just help us think about half margins in 2025. In Paris, you had called out 400 to 500 -- 450 bps of expansion up the 6% base in 2022, which suggests 10% op margins or so. How does this impact GTF profitability over the life? And how should we think about operating margin relative to cash margins?

Yes. Let me start on that one. Certainly, there's going to be some impact to the GTF margins when you get out into 2025. But as we've talked about here today, the majority of this cost gets behind us in the third quarter, that will leave the residual amount hitting the GTF program over, say, it's the contract period, but say, 3 to 4 years, but some of those will extend out to actually 15 years. So we don't see it being a significant impact to GTF margins, maybe about 100 basis points, still see teens margins in the 2025 timeframe. And of course, it will be even less of an impact, Sheila, to the Pratt level margins. So no change today, as we look out to the 2025 Pratt margins, a little bit of a headwind, but I think it's manageable at this point.

Our next question comes from the line of Douglas Harned of Bernstein & Company.

Yes. As you've described the issue with the impurities in this production process, this was resolved in the Q3 2021 timeframe. But a couple of things. In terms of trying to identify the affected engines, it seems that there should be a real challenge here. I found it surprising that the removals that need to be done on September 15, many of them you'd identified as single, say, the first stage disk, and others, the second stage disk. But they didn't necessarily overlap. So I guess what I'm wondering is, how -- what's the process here to identify the affected engines -- the affected disks, the affected engines, given that it can take more than a year from putting that from manufacturing the disk before it gets to Airbus final assembly? And that a lot of these engines have moved around through removals. So what's the process to getting to identify the affected ones here?

Yes, Doug, it's obviously, it's not a simple answer. But the fact is, we have traceability for each disk, whether it's a first stage, second stage or the compressors, through serial number identification. So we know exactly which disk is on which engine, and what the origin of that disk is. The first group of engines that we're going to be -- we've asked to be returned, this 137, those are disks which we did not perform an angle scanner, and we don't have a digital record to assure us in terms of what their life is. So that was where the first 137 come in. After that, what we're looking at is, given the life that Chris described, the 2,800 to 3,800 cycles, we're going to be pulling -- or the next group of engines, the next 1,000 or so, because they're coming up upon that life limit. Now again, we know exactly where those disks are. We know which operator has them, on which engine, on which aircraft. So while it seems complicated, and there's roughly 3,000 engines out there. That's actually probably the easier part of this -- this equation is tracking the individual disks. So again, it will be a process, but I don't think it's as complicated as perhaps you're making it out to be.

Okay. And just quickly, if I may. Can you comment on the incident yesterday, the Air China incident?

Yes. This is Chris, Doug. Yes, it's obviously a very recent development. And it will be part of the -- will be part of the investigation with Air China, the customer and the regulatory authorities. So don't want to get too out in front of this. But what I can say, obviously, given the context of today's call is that, the current assessment is that, we don't believe it's related to powdered metal.

Our next question comes from the line of Rob Stallard of Vertical Research.

This might be a question for Chris. In terms of your plans for the OEM ramp, on the Airbus A320 and the A220, is there any expected impact on those plans, i.e., will you be diverting new engines into the spares pool to deal with this?

Yes. Thanks, Rob. So as we said upfront, we are still able to deliver new production engines because of the enhanced ultrasonic angle scan inspections that we've put in place. Our plan currently is to continue to meet our commitments to Airbus. The best thing that we can do to help operators is, yes, continue to produce the spare engines that are in the plan to make sure we can continue to do that, and try to ramp that to the extent that we can. But it's driving the industrial ramp needed for MRO output. As you heard us say before, we're going to do everything we can to put in new HPT and HPC disks, when these come in for their shop visits. And when I say new HPT and compressor disk, new with fully certified lives. And so we've got to continue to go drive and ramp production there to ensure that we can -- when we put these engines back out to our customers, they have the longest time on wing interval possible. Obviously, good for our customers, but also good to help alleviate some of the congestion we talked about in our MRO network, to help us drive throughput.

Our next question comes from the line of Noah Poponak of Goldman Sachs.

Neil, can you just circle back to giving us the major pieces that build up to the $1.5 billion in 2025? But just given the different timing of everything, I'm still not 100% clear on that. And is there any risk in your mind to the partner recoveries, if that can be disputed at all?

Sure. Yes. Let me just reground you. So we talked about the charge being on a gross basis, $6 billion to $7 billion. That's on a 100% program level. Pratt & Whitney share is 51%, Noah. So that kind of translates to [ $3 billion to $3.5 billion ]. Think about the $6 billion to $7 billion into the two buckets, 80% being customer support, the other 20% being the labor material to do the work scope. That work scope is going to take place starting here, at the end of this year, all the way through '24 and into '25. But the predominant amount of the cash flows associated with this estimate really relate to the customer support. And so that will pick up later this year, next year, and into 2025. So that gives rise to the timing. We've talked about $0.5 billion this year, $1.5 billion in '25, $3 billion over the next 3 years. So that leaves about $1 billion in 2024. And so I think, that's just how we see this playing out, as the work is done, as the AOGs are incurred, et cetera. You bring up a good point about the partner piece. We've got really strong relationships. These are very important partners on these programs. They perform a lot of work as it relates to producing and overhauling the engine. So we're working with them, just like we're working with our customers to ensure they understand what's going on here, the timing. Typically, partner settlements, if you will, of cash, take place within about a 90-day period, we'll be working with our partners to make sure we can accommodate this. We understand the significance of it. The GTF program has decades to go. And so it's important that we keep our partners strong through this process. And it's our intention to work with them to do that.

Our next question comes from the line of Peter Arment of Baird.

Could you provide a little more kind of color around the comment that you made in the press release, just regarding other models in the fleet that you currently don't think there's going to be a major impact, but maybe you just could provide a little more detail on that.

Yes. Sure, Peter. This is Chris. Obviously, a lot of questions on the other GTF model. So maybe I'll start there. So analysis on the PW1500 and 1900 engines will be done around the end of this month. Now each of these programs will have a fleet management plan, inspection intervals and the like. But we believe they will largely fit inside the existing shop visit profiles that are already in our forecast over the next few years. So manageable. V2500, obviously, there's been some questions there, given the HPT event that frankly instigated this entire thing. That analysis will also be completed towards the end of the month. But keep in mind, the V has already a very aggressive fleet management plan in place, and it has for some time. We've almost inspected roughly half of the fleet with the angle scan inspection in MRO. So again, we expect that to be manageable. And then there are others, product families, product lines that have powdered metal. But again, we believe we can manage those within existing shop visit plans based on much different utilization profiles, part geometry, stress levels and such when compared to the PW1100.

Our next question comes from the line of Ron Epstein of Bank of America.

A lot has already been asked. But maybe just a bigger picture. Ultimately, how did this happen? I mean, a quality escape of kind of this magnitude. Perhaps we're making engines for a long time. And I mean, like what's the lesson learned here? And how won't this happen again? And that kind of thing.

Ron, that is the, I would say, the $64,000 question, and we have been obviously searching for root cause since the March 2020 V2500 incident. What we know is back in late 2015, we brought online additional capacity at HMI, where we make the powdered metal. We added an additional tower, and we started ramping up production because of the additional capacity required for the GTF. During that ramp-up process, we somehow were rather introduced a contaminant into the powder. But it wasn't a contaminant that we'd never seen before. These are microscopic elements that got incorporated into the powder. And our inspection techniques up into that point did not or could not detect these, I would say, microscopic, I'll call them, occlusions, or they're not even cracks yet. They're simply a contaminant in the powder that grows into a crack. And we've been making powdered metal parts for 50-some years. And we have always known that contaminated powder is a potential issue in terms of life of the part. And we designed the Sonic inspection, which I think you guys have seen down in Columbus, Georgia, that Sonic inspection was always done to ensure that any occlusion or potential crack could be detected before the disk was released into service. In this case, because of the size of the occlusion or the contamination, the original scan, and I don't want to get too technical, it was orthogonal, which is essentially north to south, did not pick up on some of these microscopic inclusions. Subsequently, after the V2500 incident, we determined that we needed to introduce the angle scan, such that we could pick up these anomalies during the inspection process. And that's why we're confident as we go through the inspection regime and replacement over the next couple of years. The angle scan will give us confidence that the fleet is still safe to fly. But if you want to go to root cause, it is ultimately a manufacturing escape at our powder metal facility. And that, again, we have corrected it. We have done about -- I think, the last count, there have been 9 changes to the process to ensure the purity of the powder. We've got all -- again, these additional inspections. You're never going to have perfect powder but between the inspection process, and what we have done at HMI, I'm confident now that the things that we are building today, the disks that we are manufacturing down in Columbus will indeed have, as Chris said, a full life, which is significantly in excess of this 2,800 to 3,800 hours that we can expect over the next couple of years.

Got it. And then maybe just one real quick follow-on. Is there any spillover into the military engines? Or is that just a completely separate fabrication process?

No. It's -- so to be clear, Ron, we make powdered metal parts for almost all of the engines that are out there, including the JSF, the F135. The difference in the F135, as you know, of course, is this interval cycle is much, much shorter than what we'd expect out of commercial engine. So again, we've been working with the customer on the military side, the JPO to keep them all informed. We don't see any [ lifing ] issue today on the F135. But again, this extends even to the [ small ] engines up in Canada. And as Chris said, we've got a fleet management plan in place for the V. We'll have one in place for the 1100 -- or for the 1500, 1900 soon. But the preponderance of the impact is going to be on the GTF fleet because of the size of the fleet.

Our next question comes from the line of Ken Herbert of RBC Capital Markets.

Maybe Chris or Neil. I wanted to start off first, I wanted to see, implied in the charge, what's the expected improvement in sort of turnaround time in the shops or sort of material lead times? As you think about that 250 to 300 day wing to wing turnaround time, I know there's significant delays today. I wondered, how much improvement is embedded in that estimate? And then second, it sounds like, clearly, you're looking at expanded work scopes. What's the risk that, as you start to continue to dig into these engines, you find other issues you have to potentially address around cracked combustors, warm blades, [indiscernible] other areas that might even push the scope a little further than what you've identified?

Ken, this is Chris. I'll start with the second part first, which is these shop visits that we were going to be doing anyway. We're going to be heavier shop visits. As you know, we're in the midst of the Block D upgrade. So a lot of things were already being expected, and we're going to be upgraded anyway. So again, we're now going to be hopefully doing the HPT disk and the compressor disks. So we feel confident in adding these to the work scope, that we know what those will look like and how long they'll take to get through the shops. And that kind of goes to your first question. One of the single biggest opportunities we have right now is to take those numbers that we articulated upfront, and drive them down. Now that's going to take, in large measure, 2 things. One, as we talked about in Paris, we're continuing to add shops and capacity to our MRO network. So how quickly can those shops come online, and come down the learning curve. But perhaps most importantly is material flow. We've had material constraints that have really led to these elevated turn times. You've heard us talk about structural castings in the past, and the need for us to have balanced the allocation of structural castings between OE production and MRO. So we've got to continue to see material flow at a higher clip so that we can take down these turnaround times. But that is something we are laser-focused on, as I said, sort of upfront and ability to take these turn times down from those 300 or so, wing-to-wing, to a smaller number. And that's just, again, going to be laser-focused on efficiency in our shops and material flow.

Our next question comes from the line of Seth Seifman of JPMorgan.

I wanted to ask a little bit about next year and as we think about this year. Starting off with the $4.3 billion cash flow forecast, there's now $500 million headwind from additional costs associated with GTF, mainly customer comp. So think about some of the puts and takes there, including in the context of the cash return commitment, which probably implies giving back at least kind of $6 billion of cash next year. So I wonder if you could address some of the puts and takes around cash flow next year? And then also, Greg, are you committed to remaining investment grade?

Seth, that's an easy one. Absolutely. Look, we -- again, we take our credit rating very seriously. At the same time, we recognize, we've got a commitment out there for the capital return, which we are laser-focused on. The fact is we're not going to give guidance on cash flow for next year, other than to say your math is directionally correct. We're going to do $3 billion of share buyback this year, a little more than $3 billion of dividends. This is in no way going to impair our ability to pay a dividend, or to continue with the share buyback program that we have already laid out. So again, the balance sheet remains very strong. And if you think about $3 billion of cash over 3 years on our balance sheet. While it's not insignificant, it is certainly something we can handle within the financial confines that we operate in from a credit rating standpoint.

Okay. And then maybe just to follow up. I don't know if you guys saw MTU's press release this morning. But the content of it kind of implies that, they learned about all of this, this morning. And we're about as surprised as most of the rest of us at the magnitude of this, which is, I think, much different than what you guys discussed in July. Why doesn't it seem like there's more coordination with the partners? And maybe to push a little harder on Noah's question, is there a scope for the partners to come back to you, and say, well, this was a Pratt. I know there are revenue -- risk revenue sharing partners, but this was a Pratt issue.

Yes, I'll take the first part, Seth. So I haven't seen the MTU press this morning. But I will tell you that we've been having ongoing discussions with MTU. And so I would just say that those discussions have been very transparent over the course of the last several months, as we grapple with this issue. And they're obviously a very sophisticated partner an MRO shop. So again, I'd be -- I'm surprised to hear that they would be surprised by this. That being said, the magnitude is significant, especially for somebody of MTU's size. And so as Neil pointed out upfront, we're going to have to work collaboratively with them on a path forward. But I think Neil made a great point upfront. This program has a very large backlog. We've got the GTF advantage on track. And this is going to go on for decades. The strength of this partnership is critical, and I think all of our partners feel that way.

And just to be clear, too, I mean, this manufacturing issue that we're facing is not the first manufacturing defect that we faced on the GTF introduction to service back in 2015. Several of the partners have had escapes that have been -- where the cost has been shared. This is well established in terms of the partnership arrangement. So while, again, to Chris's point, this is a big deal for the partners, we believe it's all manageable, given the size and scope of the GTF program.

What I will say to -- in fairness to MTU, we certainly have had a lot of discussions with them on the technical aspects of this. What it means in MRO, iterations of our fleet management plan, all of the elements that have gone into this. But again, we have been -- we, at this table, have been trying to figure out and grapple with the range and the number and the impact. And while I assume that MTU could probably maybe directionally get there, we have had more detailed conversations with them on that piece of it in the near-term here. But in terms of the overall issue, the technical piece, the MRO piece and the like, they're very well versed.

Our next question comes from the line of Matt Akers of Wells Fargo.

I wonder if you could touch on just the timing of the Block D upgrades rollout, and the GTF advantage, and how some of that might be impacted by the additional work going to the shops with this work.

Yes, this is Chris. The Block D, to the extent it was a part of the work scope, pre-powdered metal will continue to be a part of the work scope, even with the addition of the HPT disk and compressor disk replacement. So no change to that. And I think, Shane talked about the GTF advantage and the timeline at our Investor Day in Paris back in June, and no change to that. We're still very excited about what we think it's going to bring to the program.

Our final question comes from the line of Cai von Rumohr of TD Cowen.

Yes. So you've indicated that the cycle targets have come down, 2,800 to 3,000 for inspections, 5,000 to 7,000 for part life. A, what were those targets before? And b, given they've been reduced, and they can presumably are reduced over the life of the engine, how should we think about the cash flow impact beyond '25? Does it just drop to year 0 because you're through the compensation? Or how do we think about it notionally?

Yes. So this is Chris, Cai. I mean, I'll start with the first part there. The 2,800 to 3,800, again, depending on the thrust rating of the engine, were the inspection intervals. And then the part life limitations were, again, dependent on thrust rating, the 5,000 to 7,000. But as we said upfront, our plan is to replace in MRO as many of these with full certified life disks so that we actually don't have to do the repetitive inspection. And so the 5,000 to 7,000 part life won't actually be a limiting factor as you look forward in terms of the time on wing for these engines.

And Cai, maybe just a comment on the cash flow. We've talked about the $3 billion really between now and the end of 2025. I think that's the preponderance of the cash flow that we're talking about in terms of the headwind. If I just step back, the strength of the GTF program over the next 5, 10 years remains there. The backlog is strong. The aftermarket will continue, and we don't see a long-term negative cash impact dragging on past the completion of these accelerated inspection. So as you get past 2025, we remain confident in the cash flow-generating capability of the program.

Okay. Cai, thanks for that question. And thanks, everybody, for listening in. I just want to make maybe just a couple of final points. This is obviously a difficult and disappointing situation for our customers, for our partners, and for Pratt & Whitney, and our shareowners. Having said that, and as I said upfront, we're laser-focused on addressing this in the most [ expeditious ] and financially sound way forward. Again, we believe we have the issue bound with the charge that we're going to take. But I'd just remind everybody, the GTF program will be here for decades to come. We do not have a fundamental design issue. And I know there was concerns 7 years ago when we introduced the GTF, with the gear architecture. It wasn't going to be robust, et cetera. I think, we have put all those critics to rest at this point. However, we have to get through this inspection process. We have to get through the ramp-up on the MRO facilities, as Chris has laid out. A lot of work ahead of us over these next couple of years. But I'm confident the team is focused and will deliver. So thank you all for listening. Jennifer and her team will be available, obviously, all day to take whatever other questions you have. Thank you.

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