RTX Corporation (RTX) Earnings Call Transcript & Summary

Okay. Thank you all for coming. We're going to move on with our next program. We're delighted to have RTX with us and their CFO, Neil Mitchill. Neil is going to tell us a little bit about Reg FD, make some comments, and then we'll begin the interview. Neil?

Great. Thanks, Cai. It's great to be here. Good morning, everyone. First, before I get started, just got to make the obligatory comments that I am likely to make some forward looking statements this morning. Those statements are subject to risks and uncertainties. You can look at our 10-K and SEC filings to understand those risks a little bit better. So Cai, maybe before we get started, I'll just open up with a couple of remarks. We finished last year, 2023, very strong. On an adjusted basis, our sales were over $74 billion, up 11% organically, really, really strong year. And of course that was driven by the strength in our underlying markets across really all 3 segments. We have 3 industry-leading segments in RTX: Pratt & Whitney, Collins Aerospace and the Raytheon segments. Our backlog as we ended the year was $196 billion, a record backlog for us. And our focus as we look at '24 is really on executing on that backlog. So we have a lot to do, I'd say about 60% of the backlog on the defense side will unfold over the next 2 years. And so our focus is making sure we deliver on our customer commitments, to shore up the supply chain and make sure that the suppliers can keep up with the growing pace of the OE and the aftermarket needs, as well as supporting the Raytheon business. But I think we're positioned for a really strong year as we look at our free cash flow, growing from $5.5 billion to $5.7 billion for 2024 and to $7.5 billion in 2025. With that, maybe I'll hand it back to you. We can get into some of the Q&A.

Got it. So '24 outlook, maybe talk about the outlook. Where's the growth going to come from in the 3 businesses, and what are the watch items on your radar?

Sure. So no changes today to our '24 outlook. We see sales of $78 billion to $79 billion for 2024. That's 7% to 8% organic growth, so really strong top line. We'll see that convert to some really strong segment operating profit growth as well across really all 3 businesses. We have some difficult compares. So last year, the aftermarket was up 26% at Collins and 20% at Pratt & Whitney, 23% overall. OE was up 20% overall and our defense business was up in the low single digits, but still strong, 5% organically at Raytheon. So we'll see a lot of the same drivers in 2024 as we saw back in 2023. On the commercial side, it's really going to be the aftermarket, frankly. There's still a lot of aftermarket opportunity as we look at the continuing recovery after the COVID years. The narrowbody OE growth is going to continue to be strong. Widebody, some interesting statistics there. We'll probably get into them, but still well below the 2019 levels on widebody OE production and that will generate, I think as those volumes go up, more aftermarket opportunity. On the defense side, it's really about delivering the backlog. So at Raytheon, we've got about $52 billion in the backlog today. We expect that to start rolling out, like I said, 60% of that over the next 2 years. And it's really about executing on the production contracts and getting some of the fixed price developmental programs behind us as we go through this year and next year. So those, I think, are the key drivers, Cai, as we think about '24.

Got it. So one of the questions we're asking everybody at the conference is supply chain, inflation and the availability of labor. Can you give us some more detail on how are you're doing on the supply chain? Is it stable? Is it getting better? Is it -- give us some color on that, if you could.

Yes. So the supply chain has been a real problem for us for the last couple of years as has been widely discussed, I think, amongst many companies, including ourselves. I would describe it broadly as stabilizing to improving, and that's not without a lot of effort both on the part of the suppliers as well as ourselves. We still have folks at over 450 of our key suppliers today where we're working with them to try to improve their delivery to support our customer needs. But there's really a few things on the supply chain that continue to be watch items. We've talked a lot about rocket motors. I described that as improving in certain areas but still some ways to go. The Raytheon team is all over that and working with our supplier to make sure that we improve the return to recovery on on-time delivery there. And structural castings, principally impacting the Pratt & Whitney business, both large commercial engines as well as Pratt Canada, continue to be a watch item for us. But we did see nearly 38% improvement in material receipts on structural castings in 2023. We don't need to see quite as big a step-up as we get into 2024, but it's really going to be an important gating item as we continue to ramp up both on the OE side as well as the MRO side and the Pratt businesses. I'd say on microelectronics, another area that we've talked a lot about, that seems to be stabilizing. Lead times are recovering back to what we had traditionally seen, and we're starting to see catch-up within the supply base there. All of that has obviously led to a lot of inventory as we look to protect the schedule for our customers. As we look here in '24, I expect that to be an opportunity for us to bring the inventory levels down, to rightsize them. Today, we're about $1 billion higher in inventory than we were back in 2019. And I think there's a big opportunity to improve our inventory turns there. So the supply chain situation is stabilizing, but there's still a ways to go, and we're working every single day. Just on the inflation side, maybe for a minute. In the last year, we experienced about $2.3 billion ultimately in inflation within our businesses, in part on the labor side and then the rest, obviously, on the product side. This year, we're estimating about $1.7 billion, so an improvement. About $600 million of that is on the labor side, the rest is on the product side. The difference this year is we've been able to put pricing in place over the last 1.5 years across our business. And that, combined with our cost-reduction activities, are working to overcome fully that $1.7 billion of headwind that we expect this year.

And what about labor? I mean you've -- easy to get folks and have the -- is the retention rate about the same? Is it improving at all?

So retention rates have significantly improved over the last 12 months. We've seen that come back to more normalized level of attrition and retention, which is a good thing. It's still difficult to get qualified folks for specific jobs. Notably, there's a lot of classified work that we're working on to get people that have the clearances required to do these important programs as well as some of the really complex manufacturing skills that we're requiring. We've talked a lot about welders, whether it's at our -- within our shops or at our suppliers, there definitely is some shortages, but it is easing and we're seeing the retention improve. And so I think that's a good thing for us as we look to '24 and beyond.

Right. So sticking with commercial OE. So you talked about growth, I think, 10% to 15%. What are your thoughts through '25? And you mentioned the mix, widebody versus narrowbody. What's going on there?

So a couple of things. Let me start with Pratt & Whitney. We talked on the earnings call about the large commercial engine shipments going up about 20% between '23 and '24. We're continuing to work with our customer there, Airbus in particular, to ensure that we could support their delivery needs as well as balancing that with the needs of our airline customers, whether it's spare engines or it is on the materials that go into the MRO network. And I think we're well positioned there. As I think about Collins on the OE side, we're well calibrated to our OEM customer production schedules. I feel comfortable with our outlook relative to where Boeing is on their 737 production rates, and I think we're well positioned there to continue to see growth. We're coming off some difficult compares, obviously, so as we've gone for 2020 all the way up through 2023, but we still expect to see good growth on the OE side. Specific to narrowbody/widebody, just a couple of interesting facts, and I think it bodes well for how we think about getting from here to growth over the next couple of years. At Collins in particular, if you look at 2023 OE sales, we're about a little over 90% of 2019 levels on the narrowbody side. So really good recovery there. So I think as we get through '24, we'll be at or above where we were in 2019. On the widebody side, though, we're about 45% of 2019 levels of sales. And even as you get through 2025, that number just starts to tick over 60% of 2019 levels. And while that's still well below where we were in 2019, I think it gives me a lot of confidence that there's a lot of growth opportunity there. We're capacitized to produce obviously at rates that were well above where we are today. And so as the incremental volume comes, we'll get much better absorption in our factories and that will improve the margins that will support the incremental margin growth that we need to see in the Collins business over the next couple of years. The other thing about -- that I find helpful as we look forward on the OE side is we're coming off of low -- very low levels of deliveries in 2020. And therefore, we see about a 4-year average warranty period on a new system that we provide out of Collins in particular. And so as each year passes going forward, we're going to start to see more and more aircraft coming off of warranty. And that's going to support more and more aftermarket that will continue to fuel the Collins growth for the next couple of years and further support the significant op profit growth that we're expecting out of that business.

So turning to commercial aftermarket, you're up, I think, 23% last year. You're projecting 10% this year. Comment on the drivers, that sounds -- feels a little bit low given all the restraints we're going to have to OE that maybe folks need to be spending more to fix the planes that are there.

Yes. So I think it's important to remember what we're coming off of. I mean we saw 42% year-over-year provisioning growth at Collins. And at Collins, the provisioning is the stocking that the airlines do when they take on new aircraft. And so there clearly was a bit of restocking, I think, taking place there. So we can't assume that, that level of growth is going to recur. That said, I think 10% growth or thereabouts, we're going to see at Collins and the aftermarket is very, very substantial on top of that 26%. And as I think about the Collins total sales, about half of their sales growth this year is going to come from aftermarket, but nearly all, I'd say the majority of the profit growth this year is going to come from aftermarket as well. So it's a very rich aftermarket. We'll see how airlines perform over the course of the year. And clearly, there's a number of dynamics that will support continued need for aftermarket parts there. But as I think about Collins, it's really the difficult compares and a little bit of restocking that we expected. And well, it will moderate a little bit as we see '24 and '25 play out.

Got it. And so what about price? I mean my recollection is that most of the folks, last year's or 2 have had like double digit or high single digit. I mean if it's 10%, there doesn't seem like there's a whole lot of unit volume. Or is the price still -- environment still strong?

The price environment still is strong. And without getting into the specifics, our pricing that we put in place in the last several months is consistent with what we did a year ago, so think double-digit price increases. Not all of that drops through right away, as you know, Cai, because on the Pratt side, a lot of our aftermarket is under a long-term contract. But we are getting good pricing drop-through where we can, and the contractual provisions allow for that. And I -- and it serves as the new floor as we negotiate new contracts and new pricing arrangements going forward. So we are pushing through the pricing where we can do that to remain fair because it's real. I mean the inflation cost of the business, the supply chain costs are up quite a bit over the last couple of years.

Right. Right. You mentioned provisioning. So roughly what percent is provisioning of Collins aftermarket approximately?

Don't have the number right off the top of my head, but I'd say it's about 10%, 15% or so.

Okay, okay. Okay. And then so Pratt, you mentioned large commercial engine delivery should be up about 20%. Should we expect an increase in spare engine deliveries in -- at least in line with that to help support the AOG impact?

So as I said the other day, we will see about a 20% increase in the number of large commercial engine shipments. We shipped about 875 last year. We'll get into the exact split between OE installs and spares. But yes, we should expect to see spares. We will see the spares number grow this year as we look to support our customers. It's always a balancing act there to try to balance our -- the needs of Airbus in particular and support the OE demand, and we think we are prepared to support Airbus' needs in '24. And then the rest of those engines will go into the fleet to support our customers and provide the necessary lift given the disruptions that we're experiencing this year. Maybe just on the Pratt Canada business there, we shipped a little over 2,000 engines this year. As I think about the year-over-year growth opportunity there, the demand is really strong across all channels within Pratt Canada. I'm thinking that we'll see mid- to high teens growth year-over-year in the number of shipments at Pratt Canada as well. So that business is doing quite well. There's demand for probably a 20% increase in the aftermarket at Pratt Canada in terms of shop visits. And given the continuation of supply chain constraints there, we'll probably see certainly double-digit growth, mid-teens type growth in the number of shop visits there. So all fueling really good, profitable growth at Pratt & Whitney.

Got it. And so speaking of shop visits at Pratt, what do you expect for shop visits of large commercial engines? And given the amount of GTF MRO to accomplish, what are the bottlenecks to kind of completing these visits efficiently?

So let me break this down into a couple of themes. I'll start with the mature engines, the legacy engines. As we look at '24, I expect we'll see about a 3%, 4% increase in the number of shop visits for large commercial engines. Now that comprises our legacy V2500, our PW4000 and PW2000 engines principally. The Vs probably see about 800 shop visits this year. On the PW4s, those will be up a little bit. I think the PW2000s will be down a little bit. Those 2 will offset. So essentially, we're going to see about a 3%, 4% increase in the number of shop visits for V2500, which obviously, is very profitable. The mix of those visits is heavier, so that comes with better content, and therefore, again, more profit on the mature commercial engine side of the business. On the GTF, we're going to see a much more significant step-up in the number of shop visits. I'm not going to put a number on it, but what we're doing there is making sure that we are well capacitized to support the number of engines that are coming off wing due to the powder metal issue that we have talked at length about. As I think about the key success factors as we deliver engines out of the MRO network, it's really going to be about material flow. So as we think about powder metal parts, the disks, we have enough forging capacity. So forging capacity is not a bottleneck for us, and we're able to, between us and our suppliers, make sure that we can forge enough disks. Where we are continuing to secure additional capacity is in the area of inspections and in terms of machining. And I think we're making a lot of solid progress there. So the MRO network is really going to be paced by the material that we can get to flow into that network to support the number of shop visits. That said, we're working other actions. I think Chris mentioned a few of them on our earnings call, to make sure that we can scope the work properly for the engines that are coming into the shop to match the nature and the extent of that work we have to do with the remaining duration for other elements of the engine that may come in later on in their life cycle. For example, we may have an engine that's flying in a fairly benign environment, and we're able to go in and do a very targeted repair that takes less than your normal MRO turnaround time to put in an inspected part rather than a new part, shorten that turnaround time, get that part back out. We'll see that engine again, but that will be on a regularly scheduled basis. So we're working to optimize the work scopes in the shops to make sure that we can counter any issues that we may encounter on the material side. The other thing we've done is we've introduced and industrialized over 1,300 repairs last year, 2 parts that are in the GTF engine. We've got a really, really skilled aftermarket network that are part of the GTF program. And so these folks are constantly developing repairs that allow us to fix parts rather than put new ones in when these engines do come in for repair. So that will also help to alleviate some of the pressure in the supply chain around material as we ramp up substantially the GTF aftermarket.

So you've been adding a lot of capacity. What -- 16?

We're at 16 and we'll be at 19 by the end of next year. So the capacity for doing overhauls is on schedule and increasing as we expected.

But not all of them come on and they're going at 100 miles an hour out of the gate. Can you give us any kind of -- what sort of is the growth rate in sort of practical capacity of maybe total hours through shop visits or some metrics that makes some sense?

Yes. So I think the way I would talk about it is that, first of all, we've got 16 shops already. So we have a lot of experience, unfortunately perhaps, in doing overhauls on this engine. So the network is very close. We share a lot of information amongst our network partners to make sure that when we add new -- whether it's new procedures or one shop comes up with a good idea, we pass that around through the network. So as we stand up new shops, these are not shops that have never -- these kinds of overhauls before. I think that you can expect that learning curve to be fairly flat. It's not going to be a steep learning curve for these new shops. We'll be able to pick up the work pretty quickly and get our capacity increased. I was down at West Palm Beach not too long ago, looking at our overhaul line there. And there's some really interesting approaches that they're taking to how we get into the compressor section of the engine, for example, turning it on its end, if you will, so we can access the parts very discretely as opposed to ripping the entire engine apart and creating more work for us to do. So I think there's a lot of creativity going on right now to develop very thoughtful and more efficient ways of going through these engines, and I expect that to continue.

Right. So simplistically, I mean, the capacity to sort of deal with engines is going up over time. And I think you said on the call that the number of AOGs, if anything, has moved to the right. Wouldn't that mean there's going to be less time waiting for induction?

So as I think about -- you're right about that. We said that the peak was going to be here in the first quarter. We still believe it will. And it did come down a little bit because the airworthiness directive is yet to be issued. And so that's given airlines a little bit more time to use the engines. They've also gotten more aggressive on pairing engines on their aircraft to create a lift with 2 engines that are not subject to a removal. So those things have allowed us to kind of bring the peak down, but now we're going to see a more sustained -- well, average aircraft on ground. The real constraint comes back to what I was talking about before. It's really about the material flow. So we're going to have these engines sitting in the parking lot. We already had some sitting in the parking lot before the powder metal issue. And really, the burn-down is going to come as the material begins to flow into the MRO network and we're able to conduct all these overhauls. The goal here is to ultimately get full-life powder metal parts into the MRO network so these overhauls, when the engines leave, they have the maximum time on wing available for the customer.

But simplistically, if the material flow is more or less what you expected, not that it's getting better, but basically, the number of engines coming at you is basically a little lower or more pushed out, I would think that the time for induction is down. And I think, what, out of the 250 to 300, it's like 100 to 150, so like a major portion is that. And if you get that down, there's fewer AOG days to pay, and the $3 billion number might have some opportunity.

Yes. I think -- listen, I think it's still a lot of time in the parking lot and still very early in our process. So I would like to see a few more reps here on how the MRO network is performing before we say there's a big opportunity there. Right now, we would say we're still pretty balanced when we look at the flow of material, with the flow of engines. But trust me, we're doing everything we can to improve that turnaround time, bring that time in the parking lot and in the shop down over the next 6 to 12 months.

Great. So if we turn to Raytheon, the entire defense industry has had a lot of challenges here in 2023. What do you expect going forward, particularly on the fixed price development programs? What programs are involved for you guys? What milestones can we track? And when are these programs going to be over and behind us?

So there's a lot there. Let me start with just a couple of comments on the Raytheon business. We've been talking about these issues in our business for some time now. I think we are probably one of the earliest to talk about some of the pressures. And a lot of those pressures, fixed price development programs aside, and I'll get back to that in a minute, are really the result of significant supply chain constraints, significant microelectronic delays during the last couple of years and the compounding effect of labor shortages, both in the supply chain and then the impact that has had in our own shops, all of that extending the period of performance. And so that has caught up to us. So inflation, supply chain, labor has really plagued the Raytheon business. And frankly, it hurt our other defense businesses within Pratt and Collins as well. In the past, we've been able to overcome those kinds of headwinds with additional forms of productivity, whether it's reducing the time to produce something, bundling our purchases with our suppliers to get a lower price. But in this inflationary environment, with these headwinds, we have not been able to do that. And so that's why we've adjusted our outlook both for '24 and for '25 for the Raytheon business. On the fixed price development programs, we talked about this a little on the earnings call. Unfortunately, there's just a handful -- I guess fortunately is another way to think about it. There's just a handful of programs. It's really a couple of them that we have been dealing with over the last 1.5 years that have continued to plague us with difficult technical challenges. And in one case, I think we signed up for some work that, frankly, we were not well equipped to do. I can say that those couple of contracts represent less than 1% of our backlog and that about 90% of that will be burned down by the end of next year. So we are getting through those technical hurdles. We're adding additional subject matter experts. Of course, that brings on a little bit additional cost. But I think that, that is worth it because in the long run, the way to get these things behind us is to burn down the technical risk and deliver the capability to the customer. In some cases, we're having conversations with our customers to think about how to renegotiate what we've promised to deliver, give them the capability that they need, however, do that in a manner that allows us to either do it more quickly and certainly at a lesser financial burden than it currently has on us. So we're not out of the woods on a couple of those fixed price development programs. They are classified so I can't really get into more detail. But I can say the tail on them gets us largely through them by the end of next year. And I think a lot of lessons learned coming out of this. We're being a lot more disciplined about the work we do take on in terms of the technical specifications. We're also being a lot more disciplined about the way in which we contract to take on that work. So making sure that we have proper back-to-back protections with our supply chain in terms of making sure the costs that they give to us, we can flow to the customer and vice versa. We're also thinking long and hard about fixed price contracts, when it makes sense to enter in a fixed price contract because some of the stuff we do is incredibly difficult, and we need to make sure that the contract affords the right protections and specificity around what we're signing up to do when we're going to do that. And in this inflationary environment, which I think is going to continue to persist, I would rather trade predictability for the opportunity for a lot of upside, and frankly, to protect ourselves on the downside. So we're thinking a lot about that as we enter into new contracts going forward.

What you're talking about is like similar to Northrop said the same thing, they have the issue on the B-21. But are there still programs that were bid on a fixed price basis before everyone got religion that we aren't seeing today, but you guys really worry about or you feel that's pretty clean and relegated to these guys?

So I think -- it's my job to always worry about things. And so we're making sure that we're looking into our backlog and understanding what's there. Like I said earlier, 60% of that backlog burns out over the next 2 years. Some of it has a longer tail on it. That's mostly the international stuff, which is priced at better margins. As you think about the level of takedown that we had in our outlook for the business, we've tried to calibrate that to what the current margins are that are sitting in the backlog, taking into account all of the inflationary pressures, the latest supply chain numbers that we have. We're not taking credit for a lot of productivity going forward. For 2024, we've assumed net-zero productivity. For 2025, we've assumed $100 million of productivity. In the past, this business generated $300 million or $400 million or $500 million a year of productivity. So I don't -- again, I don't think we're out of the woods, Cai, but we did take into consideration what we've seen and recognizing that in this environment, it's unlikely that we'll be able to overcome sort of these structural inflationary and fixed price contract headwinds with the kinds of productivity that we once were able to do.

Right. But if we turn to the other side, demand, I mean, like everybody wants their defense system, everybody wants missions. Talk to us about like the book-to-bill outlook for this year, particularly foreign customers in particular have been strong.

So yes, you're right, Cai. Demand is not an issue for the Raytheon business. We've seen incredible bookings over the last several years. And we expect that to continue. I expect the book-to-bill to be well over 1.0, approaching 1.1 or even higher this year, again, depending on the international ordering timeframe. So another good strong year of bookings. As you think about where is that going to come from, well, there's clearly the restocking efforts that are going on, and there are clearly a lot of demand for air defense systems. So GEM-T, AMRAAM, SPY -- SM-6. On the defense systems, it's more Patriot, it's NASAMS, it's SPY-6. And as we look to the end of this year and early next year, we expect to see LTAMDS, the next generation of Patriot, enter the marketplace. So across the board, we're seeing really strong demand. We see about 1/3 of our backlog today is from international customers, and I expect that to continue to grow over the coming months and years as well. As we think a little bit longer term in this business, we see defense spending probably in the 3% to 4% per year growth globally. I think that, that will be weighted towards a higher percentage internationally as the foreign customers continue to stock up on munitions as well as these important air defense systems. And as it relates to the Raytheon business in particular, as that mix shifts to international customers, we should see margins improve commensurate with where this business historically was. And I think it would not be unreasonable to see this business 12% or better as we get out of this trough of fixed price contracts we're in today and out of this inflationary environment with better contracting and a stronger mix of international customers.

So that could happen, I assume, not '25 but more '26-ish?

It's going to be not '25 because if you look at our outlook between here and '25, we're in the 10% to 10.5% range. But as these international orders start to come through the income statement, then you'd see the weighted margin go up.

Got it. So basically, talk to us about Collins and the margins. I think you're executing well. But I think you talked about, what is it, 30% incremental margins and then they're going to 40%. How come they're going up?

Well, it goes back to what I said a little bit ago, Cai. The business at Collins has really good aftermarket margins. And so as more and more engines -- not engines, more and more aircraft come off of warranty, that aftermarket growth is going to fuel the profit growth. And if you look at '24 in particular, like I said, half the revenue growth coming from the aftermarket, the majority of the profit growth. So you get really good drop-through. So volume and aftermarket in particular are going to be the 2 biggest drivers over the next 2 years for Collins' margin improvement. The other thing going on that we've talked about for some time now is that Collins has been going through, I'd say, a number of integration activities for the last several years. And there's been a fair number -- fair amount of investment associated with that, whether it's reducing the number of digital platforms, consolidating footprint, consolidating the supply chain, all of those things require investment. And so as we go through the next 1.5 years, what we're going to see is we're going to see that spending curtail, and we're going to see the savings from those investments start to show up as well. So that would -- coupled with the volume growth, is going to drive those incremental margins that you're seeing. So I think in this year's outlook, you'll see somewhere around high 30s, near 40% incrementals. Next year, it would be around 45%. And again, it's going to be that aftermarket growth dropping through. Even as the OE increases over the next several years, the margins there is obviously much lower than what we see on the aftermarket side.

Right, right. So working capital, I mean, talk to us about free cash flow. When you did the walk, I think on the Q4 call, it looks like you're assuming like $2 billion-plus in working capital. Well, that's a very big number given the sales growth you're looking at. How are you going to get there?

So the principal way that we're going to get there is manage our inventory. It really comes down to that. As we've been looking at our inventory levels, we have protected our customers' delivery schedules given all the supply chain constraints that we've seen. And as I said, the inventory has grown by $1 billion. So about half of that working capital improvement will come this year as we simply seek to maintain our inventory levels relatively flat to last year. And then as we get into next year, we've also experienced some advances, particularly on the defense side, international advances, and we'll burn those advances down this year. And then as we replenish those orders in the future, we'll see more advances coming in next year. So that will give us additional working capital benefit in 2025. So those are the real 2 pieces. Now you say we've been talking about inventory reduction for a while. I think the last couple of years certainly been a little bit of an anomaly with the supply chain constraints and a lot of uncertainty around where the volumes were going. I think we have a much better handle on that. As I look back to projections we were making back in 2021 around the recovery, I think we've pinned the commercial recovery pretty well. And so now we are laser-focused on driving optimization of the inventory. It's one of our top goals of the year, to align better our sales inventory and ops planning with our financial forecasting and our cash flows and the demand profiles coming in from our customers. So we're looking at inventory turns, we're looking at supplier overdue, and we're trying to better match our inputs of material to where the supply chain is calibrated in terms of, I'll call it the slowest part in the bill of material. So a lot of work going on, starting now, looking out multiple years at a time so that we can get better synchronization of our demand and our inventory inputs over the next couple of years.

So if you look at cash flow in terms of risks and opportunity, I mean, just sitting on the outside, it looks like inventory is -- could be a challenge, but it looks kind of like maybe the GTF fleet plan could be an opportunity. Is that correct? What are the risks and opportunities in the cash flow?

So to me, as I look at the risks and opportunities, powder metal aside, and I'll come back to that in a second, I really think this is about the volume and our projections around the economy, frankly. And today, we're seeing continued strong demand for commercial air traffic. And if that continues, coupled with the expected growth on the defense side, it comes with good, robust regular cash flows -- predictable cash flows, that I think the volatility, if there's going to be any, is really about do we get the volume on the sales and profit side on the aftermarket because that's the biggest driver. Working capital will also be a challenge for us if that volume doesn't come. But if the volume is here, I think we're going to be well positioned to deliver the working capital improvement. On the powder metal side, our outlook today is the same as it was 3 weeks ago. Nothing's changed. We still see about a $3 billion cash impact, $1.3 billion this year, $1.5 billion next year and the rest in 2026. I think it's too early to call that an opportunity. I mean, clearly, we're going to work with our customers to get support agreements in place. We've talked about that. And those cash flows will marry, if you will, up with the number of AOGs or the number of days. And so will it flux a little bit? Possibly. I still feel comfortable with the totality of that $3 billion estimate.

Got it. So capital allocation, to wrap up, you committed $36 billion to $37 billion through '25. Talk to us about your path going forward. I mean you've done the ASR. What about M&A? How should we think about deployment?

Sure. So a couple of things on capital deployment. The first is we remain very committed to our dividend, and so that will continue this year and through next year and in the foreseeable future, growing with earnings. And I think if you just look at -- we've delivered $29.4 billion of capital to shareowners since the merger. Our commitment is $36 billion to $37 billion. The dividend alone almost gets you all the way there. There'll be a couple of hundred million dollars of, I'll call it, ancillary buyback that we do in the course of the business over the next couple of years. But by and large, this is going to come down to continuing our commitment to the dividend, and that's how we'll return cash over the next couple of years. On the M&A front, we like the portfolio we have, but we're always looking at the portfolio to make sure that all the pieces of it fit. And that process is always ongoing. We have a couple of dispositions that are announced and on the horizon. Right now, we're not in the market, obviously, for any large M&A. It would be bolt-on type M&A that would augment the technologies we already have. We have a technology roadmap of 13 critical technologies, and we're looking for things that might fit to augment that both in the near and the medium to long term, where it's appropriate. But we do like the portfolio we have, but we always remain opportunistic.

Terrific. I think we're up at the hour. But thank you, that was terrific.