Good day, ladies and gentlemen, and welcome to the GE Aerospace First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations Team. Please proceed.

Thanks, Liz. Welcome to GE Aerospace's first quarter 2025 earnings call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Rahul Ghai. Many of the statements we're making are forward-looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and website, those elements may change as the world changes. Additionally, Larry and Rahul, consistent with prior quarters, will speak to total company and corporate financial results and guidance today on a non-GAAP basis. Larry, over to you.

Blaire, thanks, and good morning, everyone. While a lot has happened since January, we at GE Aerospace remain focused on our purpose. Our team works daily to invent the future of flight, lift people up, and bring them home safely. Those last four words ring true to us, given right now there are nearly a million people in the sky with our technology underwing. This is an incredible responsibility and one that we take very seriously. With safety at our core, we're advancing our vision to be the company that defines flight for today, tomorrow, and the future. Today, we're focused on service and readiness, keeping our customers' fleets flying. For tomorrow, we're delivering the ramp and executing our $170 billion-plus backlog. And for the future, we're advancing the technology that will define the future of flight across both commercial and defense with approximately $3 billion in annual R&D spending. FLIGHT DECK, our proprietary lean operating model, is how we translate that strategy into results. Launched a year ago, we're activating FLIGHT DECK to deliver for our customers and create long-term value for our shareholders. Turning to the first quarter. GE Aerospace delivered a strong start to the year. Orders were up 12% and revenue grew 11% with double-digit growth in both Services and Equipment. Profit was up $2.1 billion, up 38% with contributions from both segments, leading to margins of 23.8%. Overall, we delivered $1.49 of EPS, up 60% year-over-year and free cash flow was $1.4 billion. In Commercial Engines & Services or CES, we're servicing and growing the industry's most extensive commercial installed base. Services strength continued with orders up 31% and revenue up 17%, driving total operating profit growth of 35% year-over-year. In Defense & Propulsion Technologies or DPT, we're improving the delivery of our leading defense programs while developing mission-critical technology. The first quarter was solid with defense units growing 5% and profit increasing 16%. My thanks go out to all of our 53,000 employees around the world for delivering once again for our customers. Moving to Slide 5. GE Aerospace supports efforts to revitalize domestic manufacturing, and it's why we're investing $1 billion in U.S. manufacturing this year and hiring over 5,000 U.S. workers. At the same time, we support promoting free and fair trade that ensures the continued strength of the U.S. Aerospace industry. Our industry has a nearly $75 billion trade surplus, the highest trade balance of any sector, and exports more than $135 billion of products each year. This is possible because the global aviation sector has long operated without tariffs on civil aircraft engines and avionics. As the U.S. Administration engages in discussions with its trade partners, we'll continue to advocate for an approach that re-establishes zero-for-zero tariffs in the aviation sector and ensures a level playing field for the U.S. Aerospace industry. In the meantime, heightened tariffs will result in additional costs for us and our supply chain. We're leveraging available programs the administration is providing businesses, such as duty drawbacks along with other strategies to optimize our operations like expanding foreign trade zones. With those actions, we expect to reduce the tariff costs to roughly $500 million. We're taking additional actions to offset this remaining impact. This includes controlling costs while maintaining investments in key priorities and pricing actions. Departures remained favorable in the quarter, up 4% in line with our expectations. Given strong orders growth over the last several quarters, our commercial services backlog has grown out to over $140 billion. We've had a lag in converting those orders to revenue given the broader supply chain dynamics. Our spare parts delinquency continues to increase, unfortunately, up over 2x year-over-year. And our internal shop visit slots are full with a healthy pipeline of engines, which have been removed but not yet inducted into our shops. So far, second-quarter departures are shaping up more or less in line with the first quarter. We're taking a more cautious approach and embedding a slower second half in our estimate, resulting in departures up low single digits for the full year. This includes a reduction in North American departures, which make up about 25% of the total. So to step back, while the broader environment is certainly uncertain, we are watching demand closely and we're operating from a position of strength. The actions we're taking combined with our robust backlog position us well to maintain our full year guidance. Shifting to Slide 6. We're focused on meeting the aftermarket and OE ramp to deliver for our customers. Demand continues to outpace supply, and we're utilizing FLIGHT DECK to tackle supply chain constraints head-on. In the first quarter, material input at our priority supplier sites was up 8% sequentially, which supported CES services revenue up 17% year-over-year. While defense units were a bright spot up 5%, total engine units were down 6% with LEAP down 13%. This was lighter than we expected from the slower start to material inputs in January and the lead times to complete new engines. We drove significant improvement in material input in February and March, giving us confidence that we will accelerate output in the second quarter. In partnership with our suppliers, we're leveraging FLIGHT DECK to deliver. Our priority suppliers continue to improve shipments against their committed targets, which increased both year-over-year and sequentially. In the first quarter, they delivered shipping more than 95% of their committed volumes. Our new technology and operations organization has hit the ground running. In March, we hosted a supplier symposium to share our near and long-term growth outlook across both Services and OE. This helps our suppliers with required transparency and stability they need to make critical investments to support the ramp in a forum for discussing key challenges in doing so. Importantly, we know these joint efforts with our suppliers work. Last quarter, we shared that a joint Kaizen with one of those priority suppliers achieved a 50% increase in output in just one week. Now, at the end of the first quarter, the same team has delivered a 3x increase quarter-over-quarter. Additionally, LEAP remains an important growth area with the fleet expected to more than double by the end of the decade. We're continuing to expand capacity to support aftermarket demand. LEAP external shop visits grew over 60% in the first quarter, demonstrating the rapid growth in the third-party network. Also, all engine shipments to Airbus now incorporate a durability kit, including the upgraded HPT blade, which was approved back in December, and enables the LEAP-1A to achieve CFM56 levels of time on wing. We're also shipping those same blades to MRO shops to support upgrades of the existing fleet. The upgraded HPT blades incorporate a simpler design, requiring less capacity, improving process yields, and ultimately supporting higher output, critical additional benefits that will support achieving the 15% to 20% growth in LEAP deliveries we expect in 2025. We're already seeing improvement in our overall output through April and remain confident we will accelerate in 2025 and longer-term. Turning to Slide 7. In the first quarter, we saw continued demand for both our Services and Products. At CES, we secured multiple agreements for our customers' growing fleets. We secured entry commitments from ANA for both our narrow-body and wide-body platforms. They selected LEAP and GEnx engines to power 13 A321neos, up to 22 737 MAXs, and 18 787-9 aircraft as part of their fleet upgrade. Additionally, we received a commitment from Malaysia Aviation Group for 60 CFM LEAP engines plus additional spares to power 30 Boeing 737 MAX aircraft. And in the wide-body segment, Korean Air announced an agreement for up to 30 Boeing 787-10s and 20 777-9s with our GEnx and GE9X engines underwing. In DPT, defense budgets are increasing globally, and customers are selecting our leading programs. We received a contract from the U.S. Air Force valued up to $5 billion that supports foreign military sales for the F110 engines, which power the F-15 and the F-16 aircraft operated by allies around the world. At the same time, we're strengthening our leadership position with continued investments. Starting with the RISE program, we recently completed a second endurance test campaign on the high-pressure turbine blades earlier in the development process than ever before. This demonstrated improved durability and fuel efficiency, key customer priorities for the future of flight. We also completed the initial ground runs for the T901 engine on a U.S. Army Black Hawk helicopter, a major milestone towards delivering a more powerful mission-ready aircraft and one that puts us on a path to a flight test. Finally, we successfully completed the Detailed Design Review for the XA102 adaptive cycle engine, working toward production of a full-scale model. This is a critical milestone supporting the U.S. Air Force's next-generation Adaptive Propulsion program. We were also pleased to see the administration's commitment to advance this important program. Our progress on advanced engines position us well with the administration's efforts to maintain military air superiority. So overall, we're focused on executing our sizable backlog while investing in the technology building blocks that will define the future of flight. Rahul, over to you.

Thank you, Larry. Good morning, everyone. We started out 2025 with a strong first quarter marked by significant top-line and EPS growth. Orders were up 12% and revenue was up 11%, both led by Commercial services. Profit was $2.1 billion, up $600 million or 38%, driven by services volume, favorable mix, and price. Margin expanded 460 basis points to 23.8%. EPS of $1.49 was up 60% from profit growth, a favorable tax rate, and a lower share count from buyback actions. Free cash flow was $1.4 billion, down 14% and in line with our expectations. Working capital was a source, primarily from contract assets. Inventory increased to prepare for higher output and to tackle ongoing material availability challenges. This was partially offset by payables. Given our operational and financial strength, we continue to expect to deploy over $8 billion of cash to shareholders in 2025 through dividends and buybacks. We remain well-positioned to drive significant shareholder returns while continuing to invest in growth, innovation, and focused M&A. Looking closer at our businesses, starting with CES. In the quarter, orders were up 15% with Services up 31% while Equipment was down 13% given a tough compare. Revenue was up 14%, led by Services up 17%. Spare parts revenue was up more than 20% from higher volume and price. Internal shop visit revenue grew 11% from higher shop visit output, increased work scopes, and widebody mix. Equipment grew 9% with favorable customer mix and price offsetting unit deliveries that were down 9%. While still elevated, the spare engine ratio stepped down sequentially in line with expectations, and the LEAP life-of-program spare engine ratio remains in low double digits. Profit was $1.9 billion, up 35% from services volume, mix, and price. This more than offset inflation, increased R&D, and a year-over-year change in estimated profitability on long-term service agreements of approximately $100 million, primarily from the estimated impacts of tariffs. CES margins expanded 420 basis points to 27.5%. Overall, a very strong start for CES, largely driven by Services. Moving to DPT. Orders were flat year over year with Services up 14% while Equipment was down given the significant growth in first quarter of last year. Defense demand remains robust with a book-to-bill of 1.4x. Revenue grew 1%. Defense & Systems revenue was flat. Defense unit growth of 5% and price were offset by lower Services revenue. Propulsion & Additive Technologies grew 1%. Services volume and price offset lower internal shipments from our planned lower start in equipment sales. Profit was up 16%, driven by customer mix, productivity, and price. This was partially offset by self-funding of next-generation investments and inflation. Margins improved 160 basis points to 12.7%. Stepping back, DPT delivered a better-than-expected first quarter. Shifting to corporate cost, including eliminations, was about $70 million. This was down over 40% or approximately $55 million, mostly driven by expenses down roughly $40 million. Now moving to our guidance on Slide 11. First quarter exceeded expectations given stronger spare parts sales and services mix, which should continue. We have a robust backlog supporting our growth for several years, and we're taking actions to offset the impact from tariffs and to help us in navigating the uncertainty in the environment. Operationally, we are performing better than we expected on the January earnings call, but given the macroeconomic backdrop, we are holding our guidance across the board. Therefore, we continue to expect low double-digit revenue growth, profit of $7.8 billion to $8.2 billion, EPS of $5.10 to $5.45, and free cash flow of $6.3 billion to $6.8 billion. We're also maintaining our segment guidance. Unpacking the moving pieces. We have included the following in our guidance. Recognizing the dynamic background, we are preparing for tariffs that could persist through year end with 10% tariffs remaining in place and then reciprocal tariffs resuming after the 90-day pause. As Larry mentioned, we expect roughly $500 million of cost after our operational actions to minimize the tariff impact. From there, we expect to primarily mitigate this remaining $500 million through SG&A cost controls and price increases. We are maintaining our R&D spend for the year. Regarding the macro environment, given the ongoing uncertainty in the second half, we are adjusting some of our full-year expectations. We now expect low single-digit full-year departure growth, down from mid-single digits in January. Given the tariffs in place, we reduced spare parts and spare engine sales for the year to that region. This demand is not foregone as the customers in China still have needs for services and spare engines, but they may be delayed. We are maintaining our full year spare parts guidance of low double-digit growth given the stronger start to the year and nearly 90% of spare parts in backlog for second quarter. We expect minimal impact on internal shop visit revenue which represents roughly 60% of our total services revenue given our backlog, pent-up demand, and limited risk to shop visits pushing out. Overall, we continue to expect low double-digit to mid-teens services growth. We have not factored in a slowdown in airframer delivery schedules, further tariff escalation, or a global recession into our guidance. We remain confident in our ability to deliver another year of strong results. With that, Larry, I'll turn it back.

Rahul, thank you. We're encouraged by our strong start which combined with the actions we're taking puts us well on our way to achieving our full year guide. CES is on track for another year of significant growth, and we expect continued solid performance at DPT. GE Aerospace has sustained competitive advantages. We have a diversified fleet of preferred platforms across the narrow body, widebody, and defense sectors. At the core of everything we do is safety, quality, delivery, and cost, always in that order. Our services and technology offer industry-leading operational reliability, including greater efficiency, extended time on wing, and faster turnaround times. We serve the industry's largest fleet of 70,000 engines with unrivaled customer service and flight support. This keeps us close to our customers through decades-long life cycles, building meaningful relationships and making us the partner of choice. Our talented engineering teams continue to develop breakthrough innovations to support our existing fleet and advance next-generation technologies. And FLIGHT DECK supports us in delivering results and lasting value for our customers and shareholders. These differentiators, combined with our growing backlog, will not only help us manage the near term but enable us to deliver long-term value. With that, Blaire, let's go to questions.

Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so we can get to as many people as possible. Liz, can you please open the line?

Our first question comes from Doug Harned with Bernstein.

Thank you. Good morning.

Good morning, Doug.

Larry, you talked about tariffs at the outset, and tariffs in aviation really aren't good for anybody. And you said that you're advocating a return to that zero-tariff approach. But I wonder if you can comment some on the interactions that you've had or perhaps others in the industry have had with the administration in order to advocate for that point of view for aviation. And perhaps you can say, are there any thoughts you have about how this might play out over time, scenarios that may be possible given the uncertainty right now?

Well, Doug, I think it's easier to speak to the first part of that than the second part. We have spoken to a number of people, senior people within the administration, including the President. We have been, I think, full-throated in our support of the administration's efforts to support American competitiveness and revitalize American manufacturing. We're well aligned in that regard. But it's easy to overlook the $75 billion trade surplus the sector enjoys, largely on the back of this tariff-free regime that we've had since 1979. So, all we have suggested as the administration works through a myriad of issues is that they can consider the position of strength that the country enjoys as a result of this tariff-free regime, and to consider reestablishing the same. There are a whole host of potential scenarios here, Doug, that we could take on operationally. I won't take your time to go through them. There is uncertainty. None of us, I think, know for sure how this plays out. But as Rahul walked through a moment ago, I think what we've basically assumed here is that what we're dealing with is what we'll see through the rest of the year. We've knocked down a good bit of the gross effects through the actions like duty drawbacks and foreign trade zones, but we're still staring at the better part of $0.5 billion of headwind in 2025. And in turn, that's where the cost control actions and the price actions that we've touched on here give us additional offset opportunities. But as we work those operationally, rest assured, we will continue to advocate in the best ways possible on behalf of the industry.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Good morning, Larry and Rahul. Thank you.

Thank you, Sheila.

Maybe just sticking on the tariffs topic, if that's okay, very good start to both CES and DPT, total profit beat of $250 million, even baking in the $100 million of impact from tariffs in Q1, and you talked about a $500 million net impact. How do we think about the margin cadence in Q2 and the second half as we think about those tariffs coming in?

Let me start first, and then Larry can chime in. We've had a strong beginning this year. The first quarter performed better than we anticipated. As we look at the year ahead, we expected a robust start, aiming for a more linear performance compared to last year. With the original equipment ramp being slightly back-end loaded, we are anticipating increased shipments in the second half of the year, as well as a lower ratio of spare engines, and a rise in corporate expenses. We projected a stronger first half, which we've observed in the first quarter. In regard to your question about the second quarter, we expect that momentum to carry on. Currently, in April, we project that GE Aerospace revenue growth will exceed what we achieved in the first quarter, with profit dollars for the second quarter expected to remain consistent or slightly increase from the first quarter, while also showing a significant year-over-year improvement. This growth will largely be driven by Services, which we predict will have similar revenue growth as in the first quarter. As I mentioned during the call, over 90% of spare parts are in our backlog, reflecting a comparable situation to January for the first quarter. However, the growth of spare parts in the second quarter may be partially countered by an increase in original equipment growth. Looking ahead to the second half of the year, there is more uncertainty due to the volatility surrounding macro trends we have discussed. As such, we have included a level of conservatism in our guidance regarding departures and complications from tariffs in China. Accordingly, we have lowered our expectations for spare engines and spare parts deliveries to China. Some of these will be redirected to other customers, but there will likely still be an impact. Additionally, we are considering a potential slowdown in departures in North America. Overall, we are maintaining a low double-digit growth target for spare parts this year, given the strong start we've had. Overall, we expect to see year-over-year profit growth in the second half, and we anticipate it will still be an excellent year for us. As we evaluate the current situation, we feel more optimistic about the year, even with the tariffs and macroeconomic uncertainties compared to our outlook in January. We will reconvene in June at the Paris Air Show to provide further updates.

Our next question comes from David Strauss with Barclays.

Thanks. Good morning, everyone.

Good morning, Dave.

Good morning, David.

So just wanted to dig in a little bit on that second half of the year assumption on departures. It looks like you're assuming basically no departure growth in the second half of the year. Is that right? And what is specifically in a flat departure scenario are you assuming for spares? And a follow-up there on shop visits. I know you talked about you've got a lot of backlog on shop visits, but how long would you think that departures can stay relatively flattish before you start to see an impact in terms of shop visits just from retirements picking up and so on. Thanks.

David, you mentioned several factors. The mid-single-digit forecast for departures we discussed in January has remained strong in the first quarter, and the latest data suggests this trend is continuing. While we sometimes focus heavily on the U.S. market dynamics, we recognize that there's been some softening in cross-border traffic from Canada and Europe to the U.S. However, departures globally are performing quite well. Rahul referred to conservatism earlier, and we're adopting a cautious stance for the second half of the year. U.S. departures may weaken, and adjustments could occur in other regions. The airlines will handle the detailed planning, but we expect that any impact from these changes will take time to show. Historically, downturns have taken two to four quarters, sometimes longer, to impact our activities significantly. That’s why we're emphasizing the robustness of our spare parts order book, with 90% already secured for the second quarter. The engines currently off-wing, whether in our shops or awaiting services or delivery, will carry us well into the fall. Although we are not pleased with the existing delinquencies and aim to improve customer service, they do highlight the foundational strength of our backlog and our potential to fulfill orders for the remainder of the year. There’s uncertainty ahead, and we're proceeding with caution while monitoring the situation closely.

Our next question comes from Gautam Khanna with TD Cowen.

Good morning, guys.

Good morning, Gautam.

Good morning.

I was wondering if you could elaborate on your pricing strategy and how it might differ from normal years. Are you going to wait until kind of mid-year to enact spare price increases? What's different as you approach pricing to offset the tariffs this year?

So Gautam, we are approaching this with two main components. We plan to implement our usual catalog price increases late in the summer. Our strategy remains unchanged, aiming for mid to high single-digit increases on spare parts during that time, consistent with our January expectations. This generally translates to mid-single digit increases at the overall services level after accounting for revenue share partners. While the pricing benefit on remaining service contracts is less significant compared to spare parts, our overall expectations are stable. Regarding tariffs, we anticipate a temporary surcharge to recover current costs. We're working to counterbalance this through the measures Larry mentioned earlier. We're also planning to implement some SG&A cost control actions, and any remaining costs may be passed on through a tariff surcharge, with the hope that this won't be a long-term situation and can be retracted once the tariffs are lifted. That's our current perspective.

Our next question comes from Ken Herbert with RBC Capital Markets.

Yes. Hi, good morning, everybody.

Good morning, Ken.

Hi, Larry or Rahul, I just wanted to see, in the first quarter, really strong spare parts purchasing. Can you comment if you expected or saw any pre-buys there, specifically in China or elsewhere, perhaps maybe ahead of the tariffs or other factors? And as part of that over 20% growth, can you give any granularity on maybe wide-body versus narrow-body dynamics were specifically LEAP versus CFM56?

So Ken, there were no pre-buys. Typically, we don't see that in January, and we anticipated that. Going back to the first quarter earnings call, we mentioned that 90% was in the backlog, and we are in a similar situation now in the second quarter, as we've noted a few times. So still no pre-buys. Departures were up 4%, which is consistent with the first quarter. This level is maintaining even in the second quarter, through April and into the forward schedules we see for May. This trend is clearly continuing. Regarding the wide-body and narrow-body categories, as well as LEAP versus CFM56, LEAP is growing faster as expected, with more than 30% growth in shop visits. Within that, we anticipate the external channel will account for around 15% of our total shop-visit revenue this year, compared to about 10% last year. This indicates that the external channel is gaining traction, contributing to the growth in LEAP spare parts revenue. For CFM56, we still expect mid-single-digit growth in shop visits, which will support CFM56 revenue. Clearly, LEAP is experiencing faster growth compared to CFM56 on a percentage basis. While LEAP is driving a higher percentage growth in narrow-body and wide-body categories, we're also seeing good growth in the wide-body segment, particularly with GE90 and nx as they engage in heavier work scopes.

Our next question comes from Myles Walton with Wolfe Research.

Thanks. Good morning.

Good morning, Myles.

Good morning, Myles.

Rahul, maybe for you. The equipment gross margins in the quarter was another quarter of positive gross margins, I think, 12%, even better than the 8% you had last quarter despite a lower spare engine ratio. I'm just curious, is there anything structural going on with respect to the razor/razorblade model and making money maybe on new equipment? Or is there something else under the surface you could give some color to?

Yes, Myles, there are a couple of points to consider. First, the figure you mentioned is at the overall GE Aerospace level compared to CES, so that’s important to remember. As we indicated, defense is experiencing higher revenue growth with a 5% increase in units, which positively impacts our margin profile since those units are profitable. However, within CES, our original equipment volume was slightly lower, and while the spare engine ratio decreased sequentially, it remains elevated and is expected to continue declining as the year progresses, in line with our initial projections. There’s nothing unusual about that. Additionally, there has been no significant change to the razor/razorblade model overall. It's worth noting that widebody platforms have become profitable for the original equipment business, which is also contributing positively.

Our next question comes from Noah Poponak with Goldman Sachs.

Hi, good morning, everyone.

Hi, Noah, good morning.

A few questions on cash flow and its deployment. To what extent was the quarter ahead of the free cash plan? And if it was, how much of that is pure outperformance versus quarterly timing? And then I wanted to ask on the duty drawback, how long does it take to recover? And what does that mean for cash flow? And then in terms of its deployment, how does the current environment change your thinking in terms of being more aggressive or more conservative on capital deployment?

Sure, we can address those points in reverse order, Noah. As Rahul mentioned earlier, we expect to exceed $8 billion in total returns in 2025 through dividends and a $7 billion buyback. Given the positive outlook shared this morning, we aim to be strategic and take advantage of opportunities. We also have about $3 billion remaining in buyback authorization after we utilize the planned $7 billion for this year, giving us some flexibility. Regarding the duty drawback, we typically see that cycle take around four to five months, but we will need to monitor how things develop in the current environment, so that timeframe serves as a reasonable planning assumption.

And Noah, in the first quarter, our cash performance was in line with expectations. We anticipated maintaining our current levels, and working capital was positive during the quarter. While our inventory build was slightly down year-over-year due to the timing of cash tax payments and some employee liabilities, there was nothing unusual or unexpected. Looking ahead to the second quarter, we foresee strong cash performance, with an expectation for a sequential increase from the first quarter and over 100% conversion for the second quarter.

Our next question comes from Scott Deuschle with Deutsche Bank.

Hi, good morning.

Good morning, Scott.

Good morning, Scott.

Rahul, in your last Investor Day deck, you had this chart that showed price increases on both LEAP OE and LTSA contracts. And I think it compared pricing from prior to 2018 to pricing in 2022 and 2023. And the step-up was something to the tune of 100%, I think. I guess, can you characterize how much of that 100% increase in price you see at this point in the income statement versus how much is still just sitting in the backlog and remaining to be seen? Thank you.

Yes, Scott, you're correct. Let me break that down. First, the shop visit prices are indeed increasing. This change is primarily due to the conclusion of promotional pricing that followed our launch period. Between 2019 and 2021, we experienced a very different situation as we were at the early stages of our launch. Since moving beyond that period, LEAP shop visit pricing has risen. However, as you noted, the impact of these price increases takes time to reflect in our financial results due to contract timing and delays in aircraft deliveries, which prolongs the cycle. Although we are raising prices for shop visits and the portfolio is expanding at higher prices, this increase has not yet appeared in our financial results. It will take another couple of years for this to materialize, and the contracts we have recently signed will soon come into effect.

Our next question comes from Seth Seifman with JPMorgan.

Hi, thanks very much. Good morning.

Good morning, Seth.

I have a follow-up question regarding the drawbacks. How do you view the supply chain? Do suppliers handle everything on their own, or does any of it come through you? Additionally, considering that some suppliers may not be well-capitalized, will you need to support them? On the other hand, with the inventory levels you have, is there a possibility to reduce orders at this time? Lastly, how are you planning to manage the supply chain in light of the tariffs?

Well, Seth, I would say big picture, there's a tremendous amount of work going on with the new tech and ops organization to strengthen our overall working relationship with the supply base, large and small. I appreciate your comment about our current inventory levels. I don't think we're looking to make an adjustment here given some of the uncertainty because we know with the backlog that we are challenged to deliver both OE and aftermarket. For the rest of this decade, we're going to need that inventory, and we want to strengthen the supply base, and we're going to be looking to find ways in which we can do that amid this uncertainty. Clearly, for the suppliers with whom we've got firm fixed contracts, that additional burden will be borne by them. We'll work through where appropriate, right, adjustments in our overall arrangements with them. Clearly, we've got some bigger suppliers. We've got our partnership with Safran as well, where it's a different dynamic. So there are a lot of moving pieces here, and that's probably why we wanted to take the step that we did this morning to include a good bit of that as best we know it today into the forward guide, right? Again, to Doug's earlier question, we'll be advocating for a position which we believe to be very much aligned with the President's trade agenda. But to the extent that things don't change to the extent that reciprocal tariffs kick in, in the back half, we want to make sure we're ready, hand in hand with our suppliers, large and small, in addition to taking the cost and price actions that we referenced. But it's a fluid situation. I think that's part of what I expect we'll be talking about through the course of the spring and summer here, not the least of which is at Paris, as we work our way through this, along with everybody else.

To add a couple of points to what Larry mentioned, we have gained significant insights over the past month as we started implementing the offsetting actions and identifying programs that can help mitigate the overall impact. We are sharing this information with our suppliers to keep them informed, and we anticipate learning from them as we document these findings. Additionally, regarding the duty drawbacks, they are eligible to claim these for all our exports, and we will ensure they receive the necessary documentation and support to take advantage of that program.

Our next question comes from Jason Gursky with Citi.

Hi, good morning, everybody.

Good morning, Jason.

I would like to ask a broader question regarding the defense sector. Recently, we have seen a series of executive orders from the White House, including one concerning the potential rewriting of Federal Acquisition Regulations. I am interested in understanding the impact this may have on the industrial base. The administration is presenting this initiative as a way to eliminate unnecessary bureaucracy and accelerate the acquisition process. However, I am curious if this approach could lead to negative consequences that we should be aware of as we examine this potential rewrite of FAR.

Yes, Jason, I'm not sure if I fully understand your concern, but there are a couple of points I'm aware of that we can discuss further if needed. One aspect is the Federal Management System reform aimed at enhancing the efficiency and effectiveness of our exports to our allies. At GE Aerospace, we are fortunate to have several highly capable programs with strong international demand, such as the Black Hawk, Apache, F-16, and soon the F-15EX. These improvements enable us to deliver our products to our allies, which is a significant benefit that supports our growth and that of the wider industry. The second point involves enhancements in acquisition processes to clarify requirements, which helps eliminate bureaucratic obstacles that also benefit us. Additionally, there are some other matters related to loss programs, but we don't have much exposure in that area, so it doesn't directly affect us. Nevertheless, ensuring the industry is held accountable for its performance is important.

Our next question comes from Ron Epstein with Bank of America.

Hi, and good morning, guys. Maybe a little different angle on the tariff question. How are you all thinking about rare earths and some of the rare metals that you need either directly in what you do or what your suppliers need given some of the changing rules in China? I mean do you have it inventoried? Or do you have alternative ways to source it? How are you thinking about that?

Ron, as you would imagine, we've been thinking about that a lot. And I'm sure everybody else in the space has. Between alternate sources and inventory positions, both our own and with our supplier partners, we don't currently see any real issues here. There are some things that we'll continue to work through. We'll see how this is resolved from a trade negotiation perspective. But that's not high on our worry list at the moment.

Our next question comes from Scott Mikus with Melius Research.

Good morning.

Good morning, Scott.

Hi, Larry, I just wanted to ask a quick question on the pricing dynamics. So pricing in the aftermarket has been very healthy in the past several years, but now airlines are seeing softening demand for travel. The departures at least seem to be holding up for now. So I'm just wondering how are you thinking about balancing the price increases to offset tariffs and inflation while avoiding demand destruction so engines aren't seeing premature retirements?

Scott, there's clearly a balancing act here. I think what we've always tried to do is really adhere to a handful of principles with respect to making sure we share in the value that we create are compensated for the risks that we take on, and obviously deliver adequate returns on the investments, the long-term, long-cycle investments that we make. I think Rahul talked about how we're going about some of the longer-term actions, both around some of the new programs like LEAP, how we're approaching the CLP, the spare parts pricing later this year, and the surcharges, the hopefully temporary surcharges vis-a-vis the tariffs. So all of that's in play. And again, we need to balance that out in the right way, given the competing priorities here. But I think we're optimistic that we can do that smartly, fairly constructively with our customers around the world and do so in a way that doesn't, as you say, disrupt demand?

Liz, I think we will wrap it up there. Larry, any final comments?

Blaire, thank you. Just to close, our customers and the flying public are counting on us, we know that, and we're confident in our ability to deliver. The GE Aerospace team is up to that challenge. We continue to increase our deliveries of services and products, keeping safety and quality top of mind, while developing the technologies for the future. We appreciate your time today and your interest in GE Aerospace.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.