Conference Transcript - RTX 2026-05-29

Doug Harned, Analyst — Bernstein

Okay, why don't we get started? Good morning, I'm Doug Harned, Bernstein's Global Aerospace and Defense Analyst. I am thrilled to again have with us Chris Calio, Chairman and CEO of RTX. I think Chris may, I think Chris has a few things I think it'd be great to hear a little bit about the company overall.

Chris Calio, CEO

Yeah, great. Well, good morning, Doug. Good morning, everybody. Great, great to be here. I thought I'd take just a minute or so here just to sort of frame out RTX for those of you who maybe don't follow us as closely. For those of you who don't, RTX, a global aerospace and defense company, about $88 billion in sales last year, coming off a pretty strong first quarter demand on both sides of the commercial and defense pieces of our business. And our guidance remains on track for the year. Doug, I want to get that out up front. I think the big message around us is that we have strong conviction around the demand on both sides of our business, commercial and defense, and that we are exceptionally well positioned to take advantage of that demand. If you think about RTX, we go to market through our three business units. You've got Pratt & Whitney, which makes commercial engines and military engines. You've got Collins Aerospace, which makes high-end aircraft systems. Think avionics, mission systems, electric power, nacelle, wheel and brake, and the like. And then you've got Raytheon, of course, that makes high-end defense system franchise programs across its portfolio, things like Patriot and so forth. If you just look at our commercial business, I'll start there for a minute. Again, Collins. It is number one or number two on 70% of its product portfolio. It's got about 105 billion of out-of-warranty equipment flying around today, so just huge aftermarket tales. And it's got significant content on the fastest-growing platforms in commercial aerospace. Think A320 Neo, 737 Max, 787, A350, and the like. And then at Pratt-Whitney, Just very, very well positioned in commercial aerospace, of course. Everyone knows about the gear turbofan engine, well positioned in the narrow body segment. Got about 8,000 engines in backlog today, north of 50 million hours on that platform. It's three times larger than we thought it was going to be when we launched it about a decade ago. We've also got the V2500, which, again, is a critical platform for customers today. There's about 2,500 of those out in service today. It's a very young fleet. While it's obviously been around since the mid-'80s, today's fleet, which is about 2,500 engines, very young. About 15% haven't had a first shop visit. Those that have, about 35%, haven't had a second shop visit. So long run there as well from a commercial perspective. And then on the defense side of our business, of course, it starts with Raytheon. I think the book to bill over the last rolling 12 months has been 1.5. The demand has been exceptional in its portfolio. Again, I mentioned things like Patriot, Tomahawk, Standard Missile, things that you hear about, you read about, being critical in today's environment. And so the demand there has been exceptionally strong. Of course, you've also got defense in both the Pratt and Collins portfolios. At Brad Whitney, you're on some of the highest priority platforms within the Pentagon. Sole source on all fifth-generation fighters. You've got the F-135, Tanker, B-21. And then Collins has about a third of its portfolio in defense. Think about its mission systems business. Provides communications and connected battle space on a number of critical platforms. So both on commercial and defense, exceptionally well-positioned, Doug, as we kind of look forward over the next few years. And our focus continues to be on execution. All of that portfolio that I just described culminates in a $271 billion backlog. Again, it goes to that narrative I just talked about in terms of the very, very strong demand. So our focus is on executing on that backlog. We're in a very long cycle business. We've got to continue to innovate for growth. And we've got to continue to leverage the breadth and scale of RTX across our defense in commercial portfolio. And we really do believe that we're going to continue to drive margin expansion and strong free cash flow both this year and into the future. So with that, Doug, maybe turn it over to you, and we can get into whatever topics you want to.

Doug Harned, Analyst — Bernstein

You know, if we think back to when you were here last year, a lot's changed. A lot's changed in literally the last few months. Can you talk about how you see the macro environment today and what that means for RTX?

Chris Calio, CEO

I agree, Doug, that a lot's changed. What I will say is our priorities haven't. Again, it starts with this idea of the $271 billion backlog that we have, and our customers on both sides want more product than they want it faster. You've spent the last three days talking to lots of folks in this industry, and I think the consistent message is demand is strong and we need more, whether that be engines for Airbus, Boeing, whether it be aircraft systems, Airbus, Boeing, whether it be U.S. government and our NATO allies needing more munitions and equipment faster. And so for us, it starts with execution. If you think about Raytheon, in the first quarter, we had output up 40% year-over-year on critical munitions. We've continued to go execute our fleet management plan at Pratt-Whitney, and we've continued to keep up with the rising rates with the airframers at Collins. So it just starts with us with execution. And then, of course, as I said up front, this is a long-cycle business. You know, you can't take any plays off. You can't take any cycles off. So we're continuing to invest and innovate for future growth. We're going to do about $10 billion this year in E&D, company and customer-funded, and CapEx. Part of that is continuing to drive innovation in our product portfolio. I'm sure we'll talk a lot about that today. But the other piece is making sure that we've got innovation in how we design our products, how we make our products and continue to invest in not only having the capacity we need, but the automation and the data we need to meet the rates we're going to have to achieve on both the commercial and the aerospace and the defense side, excuse me. And as I said before, Doug, it really is about leveraging our breadth and scale. You know, we're going to do over $90 billion in sales this year. Our companies continue to drive both cost synergies through our supply chain, through the application of best practices in our core operating system, which is our lean, you know, operating system. And then the continued development of technology synergies. As I'm sure, you know, you are aware, there continues to be a convergence between the commercial and the defense. Pentagon is looking to continue to drive, you know, more commercial application into defense. And with half of our business being on the commercial side, there continues to be a lot of technology synergies that we've got to continue to take advantage of. But you're right, Doug, the macro, again, on both sides, both commercial and defense, continues to be really strong. Obviously, we've had Ukraine on the defense side, and now you've got Operation Epic Fury, and so there's a lot of replenishment opportunities in defense. We were really pleased to be part of the framework agreements that the Pentagon was pushing for on critical munitions. It just shows how strong the demand is for our products, both today and in the future. And so, again, that's why the focus continues to be on execution.

Doug Harned, Analyst — Bernstein

Well, let's get into defense. So right now, we've got a proposed budget from the president of $1.5 trillion. Now, we'll see how that all goes. Obviously, there's a lot in there for you guys. But when you look at the process right now, this has got to make its way through Congress. It's complicated. You know, how are you seeing that budget process unfold, and how do you manage, given the uncertainty, and where things may ultimately come out?

Chris Calio, CEO

Well, a couple things, Doug, and you mentioned it, the base budget, the 1.15. Again, even that crossing the $1 trillion mark is significant, and I think, you know, portends for continued demand in defense both this year and in future years. I don't think that's not going to retract. I think that's only going to go forward. And whether or not you get the $350 billion in reconciliation or not, I think when you talk to members of the House Armed Services Committee, you talk to folks in Congress, there is general bipartisan support for the need for larger munitions, ramp up the things that are within the core capabilities of Raytheon in particular. Again, if you just look at the five framework agreements that we've signed with the Pentagon, you know, Tomahawk, AMRAAM, the standard missile family. I mean, these are things that are universally acknowledged as being needed, you know, both here in the U.S. And keep in mind, no matter where the budget shakes out, Doug, 30% of Raytheon's sales are international. You know, if you just look at Raytheon's backlog today, about 48% of that backlog is international today. So, again, you're going to continue to have strong demand here in the U.S., whether that's the 1.15 or the 1.5, but you're also going to continue to have strong demand internationally.

Doug Harned, Analyst — Bernstein

Well, on those framework agreements, because I think this was a really important thing. You know, we talked about it with Jim Takelett yesterday, for example. And so you each have these framework agreements on specific programs, you know, Tomahawk, SM3, AMRAAM, I think. And so those framework agreements were put together prior to the war in Iran. And since then, we've seen a lot of usage of these products. So demand is even higher. So where do you stand in terms of being able to take production up if there's even more money in the budget? Does that turn into just an extension of backlog? or can you actually, you know, say in the next three years, increase volumes further?

Chris Calio, CEO

Well, the first thing I'll say, Doug, is the framework agreements that we've signed, those aren't even in the $271 billion backlog that I've quoted a couple times here this morning. That's on top.

Doug Harned, Analyst — Bernstein

Yeah, those aren't under contract, yeah.

Chris Calio, CEO

Correct, correct. And we've been, irrespective of those framework agreements, Doug, we've been ramping significantly because of the demand in our business. And so the framework agreements, again, will be on top of that. But for us, yes, there's significant demand that comes with those, but the mindset remains the same. We've been ramping anyway. We've got 12 consecutive quarters of material growth. We've continued to drive additional second sources into our supply chain. Just in 2025 alone, Raytheon qualified 150 new suppliers. So we've been in this ramp-up mindset and mode for a while now anyway. And when you think of the framework agreements, again, I think there are a couple of underlying sort of principles that, you know, we have to sort of make clear. Well, number one, obviously, very pleased to be a partner with the Department of War on their transformation efforts. I think some of these efforts have been long overdue in bringing commercial practices into, you know, DOW procurement. I think it's something that is good for the defense industrial base and good for the country. And frankly, an area, given how large our commercial business is, we feel really well, you know, positioned to take advantage of. I would say the second thing is that these framework agreements are based on long-term demand. In our case, you know, seven-year firm demand. And the department understands that that's critical not only for the defense primes, but more importantly for the defense industrial base and our supply chain. A good half of our supply base are medium and small businesses, and they need to see that long-term demand signal in order to make the kinds of investments in people and plants and equipment and to hire labor and so forth. So that's the critical piece of this. So it's the firm, long-term demand. Second piece is the department wants us to continue to invest in capacity, and they're going to work with us on a collaborative funding approach so that they help provide us funding. sort of up front to allow us to build the capacity and achieve, you know, the returns that we need. And then the third thing I would say is they've been a partner with us on trying to drive additional folks into the supply base. They understand, as I said before, how important that's going to be. That's going to be the linchpin of all of this. Do we have a healthy enough supply base? Do we have folks that come into the supply base that have historically not been in defense to come in to help us reach these levels. Again, I think the seven-year demand that the department has put out there, I think, helps drive the types of incentives we would need in order to be able to do that. And so, as I said before, Doug, we've been ramping. We've been investing in places like Huntsville, like McKinney, like Andover because of this ramp that we've already been in. So for us, it's just continuing that pace and making sure the supply chain can

Doug Harned, Analyst — Bernstein

keep up with us. Now, something, this has been a, this topic, as you, I think, may have seen, is we've been talking about a lot that, a lot about this over the last couple days, both from you and the missile suppliers, as well as the solid rocket motor companies and others. When you look at this framework, we're looking at growth planned out five, seven years in advance, Yet, and I think there's no question that the demand is huge. There's bipartisan support for these initiatives. However, if you were to roll forward, say, four years, I mean, appropriations are done annually. And how do you get comfortable that, you know, different administration, you know, different geopolitical situation potentially, that these investments are all going to be tied to this growth?

Chris Calio, CEO

It's been an integral part of the discussions we've had with the department, Doug. We've said if there's a change in posture at some point, then there needs to be a very strong recovery method and a protective set of terms and conditions in our definitive agreements to make sure that when we make these kinds of investments and when our supply chain makes these kinds of investments, that they're, you know, protected, if you will, from any type of portability and administration, you know, or posture. Again, that's another big part of this. I think the one thing that the department understands is that you can't have these episodic ordering patterns. I mean, there's a lot of reasons why people believe, you know, that the defense industrial base has been unable to meet, you know, the demands of the department and others, but a big part of that has just been some of the procurement patterns that have happened that allows lines to run dry, suppliers go into other more predictable industries. That's a big part of it. And I think the department has been really, really clear. We need to set these long-term firm demand signals in order to get off of that cycle of up and down ordering, because all that does is drive inconsistency in our ability to execute. And I think that has been their message from day one when they've walked in,

Doug Harned, Analyst — Bernstein

and I commend them for it. Now, one of the things that's been over the years in your ramps that has been a challenge has been motors, rocket motors. How do you see that right now? I know, you know, Raytheon itself is now doing work in this area, right? So how do you look at that part of your supplier base and how it's responding to enable you to move on these

Chris Calio, CEO

ramps? I think as a general matter, you know, Rocket Motors have been a constrained value stream, Doug. You know that. And so while we've seen, you know, some improved performance with our current suppliers, I think that is a value stream that is in need of additional investment and, you know, additional capable parties to be able to really meet the needs of the entire industry. And now we're working with a number of folks, Avio, NAMO, investments to have them continue to ramp up their capabilities here in the US because again I think there's there's a generational demand shift that's happening here and we can't get caught short by a few constrained value streams it just it just won't work so you're gonna need more players in that particular space so your your view

Doug Harned, Analyst — Bernstein

is and walking talked about this yesterday that it's good to have sort of multiple suppliers on programs in general.

Chris Calio, CEO

Across the board, Doug, I mean, we'll talk rocket motors because that's been kind of the headline constraint for many years. But if you just go through the entire supply base, we've got to continue to get additional sources into some of these key programs. There are places where we've found supply chain vulnerabilities where we've got sole source or people that are too small to fail and I think if you're going to try to get to these ramp rates, keep in mind for our framework agreements, it's anywhere from 2 to 4x the rates that we're at today. So in order to get to those rates, you're just going to need additional folks to be able to make some of those parts. Rocket Motors, surely for one, but there are others too that we've got to continue to keep a close watch on. Castings for instance is one. microelectronics is another, right? There's significant microelectronic demand in things outside of defense. We've got to make sure that we've got the capacity to serve the defense industrial base as well. So we're working with the department going through each of these constrained value streams. Where do we need to bring in additional suppliers? Who needs funding? They've obviously launched this Office of Strategic Capital, so we've introduced suppliers to that funding source because, again, we've got to get everybody synchronized at the pace that we need.

Doug Harned, Analyst — Bernstein

Now, the wars in Iran and Ukraine have sort of brought forward the need for missile defense of all types, everywhere from low-end counter-UAS things to going all the way up to what you do with SM-3 and higher end. Can you talk about how what's happened in those conflicts has shaped the way you're thinking about your portfolio in terms of missile defense?

Chris Calio, CEO

Yeah, I think when you start with Ukraine, you moved up, you know, Operation Epic Fury, the need for integrated air and missile defense has never been more important. And when you look at the core of what Raytheon does, it's radars and effectors, right? So if you think about Patriot, you know, NASAMs, we've got our LTAMs, you know, that's now in production, Doug, which is sort of that next generation of radar, which, you know, 360 degree view. So, A, you need the sensing capability, which we have. And then, of course, you need the effectors, you know, as well to go along with that. So think about GEMT, AMRAAM, and I mentioned some of the others that are part of the framework agreements. All a part of high-end integrated air and missile defense that both the U.S. and our allies have just generational demand for right now. But the other piece of this, and you kind of referenced it, is the proliferation of UAS, drone, and whatnot. And so we continue to develop solutions for that piece of the layered defense as well. We've got our coyote system, which has been exceptionally, you know, well-performing in the field, both, you know, Red Sea and here in Operation Epic Fury. We continue to develop a non-kinetic version of the Coyote Dug that can go out on a mission, use high-power microwave to address a swarm, come back, be recharged, be able to go out and do another mission. So at each layer of that integrated air and missile defense, we've got proven capabilities, in-production capabilities that are ramping.

Doug Harned, Analyst — Bernstein

And, you know, when you go to that sort of lower tier counter UAS portion, when you have Coyote, you have Lids, you have, I mean, this is an area a lot of people at this conference are talking a lot about it. It's so much in the headlines. How large can that business be for you? And then second, there are tons of new entrants trying to work into this space. What advantage is you relative to some of these new players?

Chris Calio, CEO

Well, the first thing I'll say, Doug, is the, I'll call them the higher-end systems, the things that are part of our framework agreement. I think it's generally well acknowledged that they've been exceptionally effective both in this conflict and they're going to continue to be necessary for the high-end conflict in the future. And I think the framework agreements bear that out. You're going to need those long-range precision strikes that just have exceptionally high success rates. And so I think that's something that's just going to continue to persist. On the sort of lower end, the UAS and drone and counter drone, you're right. There are a lot of folks that are in this space. We're not chasing the commoditized sort of low end. Again, what our Coyote system is able to do in a more cost-effective manner is take out a number of those platforms that our adversaries have developed and have been doing it exceptionally well. If you ask what separates us from others, we've got a long history of making systems that have very, very high success rates. It's one thing to have a lower-cost platform, but if your success rate is in the 30% or 40%, I'm not sure that that's going to do us much good. You're going to need to have the level of success and precision across each layer, and that's something that we've got a strong track record of being able to do. I'll also say, Doug, there's other pieces of our business as people are developing unmanned platforms that we can potentially be taking advantage of. A lot of those platforms are going to need engines, they're going to need mission systems, they're going to need avionics, they're going to have potentially effectors hanging off of them. So there are other parts of our business that will actually be able to be a platform agnostic supplier to many of those platforms, but the Raytheon piece, again, is focused on our lids and our coyote system and some other things that we're doing in classified environments like directed energy applications.

Doug Harned, Analyst — Bernstein

Yeah. You know, switching gears a little bit within Raytheon, over the last few years, you had to rework your space strategy. Where does that stand now? How are you looking at that part of your business?

Chris Calio, CEO

Well, if you think of Raytheon's historical space businesses, you've had the mission control. You've had the sensing and the payloads that we make for sensing. Those continue to be very solid businesses. But as you're starting to see this trend of conflict moving to space, and you hear about this as part of Golden Dome as well, I would just say our space effects portfolio will continue to be a very fast-growing piece of the portfolio. It's classified in nature. There's not too, too much that we can get into here, but we consider it to be a core capability and have substantial capabilities in that area.

Doug Harned, Analyst — Bernstein

But this is different than it was a few years ago when you were trying – at one point when you were trying to do integrated satellites. It's more of a focus, I'm assuming, on the –

Chris Calio, CEO

Yeah, our strategy on that had shifted a little bit to say, look, again, we're going to be a tier one supplier to folks that are going to be like an all-up integrator. That's not necessarily our core capability, and it was just a pivot sort of away from that, and so that business is stabilized as a result. But there's this other piece of our space strategy, which is the space effects and defense, that I think is going to be, again, a very fast-growing segment.

Doug Harned, Analyst — Bernstein

Now, within Raytheon, if we go back a few years, you know, you've had challenges reaching your margin targets there, and I know there were fixed price development programs that were an issue. But here we are. You got last quarter 12% margins. I mean, are you at the turning point here where you can move those margins up to sort of this 12%, 13% level? I mean, given you've got a lot of mature production ahead of you. You've got export sales. Are we going to see that upshift soon?

Chris Calio, CEO

Well, we're really pleased with the margin trajectory we've seen over the last couple of years with Raytheon. Again, it has started with being able to meet our milestones and deliver the product, and that goes back to the continued focus on our supply chain. I mentioned the 12 quarters in a row of material growth. We forward deployed hundreds of people into our supply chain to enable that kind of growth. So that gave us absolutely the stability that we needed to continue to deliver. We also worked through some development programs, REDD programs, got on the other side of those, Doug, as well, and those are largely now sort of sold off and through the development cycle. And then you mentioned it. Much of what's gone into our backlog over the last couple years would be core products, those radars and effectors, part of that integrated air and missile defense core capability that makes Raytheon who it is. And so, yes, those are ripe for continued, you know, increases in productivity. I also mentioned that 48% of our backlog is international. Those, generally speaking, tend to have, you know, higher margins. And so, again, really pleased with the margin trajectory. We're, of course, not capping this business at 12%. I think, you know, as you think about the framework agreements and some of the efficiencies that can be brought to bear there, we think those are really, really good, you know, potential business as well. So, again, please where the margins are, and we're not stopping there.

Doug Harned, Analyst — Bernstein

Okay, great. Let's go over to Pratt. Now, another topic that's been right at the front over the last couple days here has been on the aftermarket. So let's take the V2500, which is a very attractive, high-margin program for you guys. With the high fuel prices out there today, there are a lot of airlines, I will say, developing market LCCs, things like that, that are having real challenges from a cash standpoint. So far, have you seen any impact on your aftermarket demand, given some of those pressures that you're seeing?

Chris Calio, CEO

We had a strong Q1 in Pratt's aftermarket, Doug, up 19%. 19%. When you start to sort of dig into that, again, continued strength in the V2500, and then the GTF as well. As you know, we're working through the fleet management plan. So that MRO is going to continue to grow throughout the year. And as we've entered here into Q2, and we are looking at this, as you might imagine, by geography, by customer, by program, the demand has continued to be good. We have not seen any change in buying patterns. We've not seen any change in airline behavior. And so, again, for us, it's really just about making sure that we've got the supply chain necessary to continue to meet this demand. The GTF, as I said before, is going to continue to grow just because we're continuing to work through that fleet management plan. We're making some very good progress there. And because of the GTF plan that we're working through, the v2500 becomes an even more important part of the airline's fleet operating plans and so that that demand has continued to to be strong as well and then when you get into some of our more legacy products think you know pw 2000 pw 4000 things like that um they've also continued you know the demand has continued to be to be very good and so we just haven't seen any back off at this point

Doug Harned, Analyst — Bernstein

Now, do you worry at all, if this extends, you know, how do you deal with an airline that comes to you and says, we flat out have no cash. You were going to induct our RV. We can't do it. We have no money. What's the process to deal with those kinds of situations? Should we start to see any of that?

Chris Calio, CEO

Well, first of all, we've got a really rigorous process, Doug, around evaluating all of our customers and any risk that's there. But generally speaking, we've got a long history of working with our customers on ensuring that we can continue our long-term partnership. And so, again, those go in ebbs and flows, but we've got a track record of being able to work with our customers. In certain cases, you can restructure a deal. You can defer certain things. There are ways that we can make it sort of a win-win situation. And in the unlikely event or the unfortunate event that something happens within our airlines, I mean, generally speaking, the assets can be redeployed in other places. The demand is pretty strong. We've never been in a situation where we haven't been able to redeploy assets.

Doug Harned, Analyst — Bernstein

Now, on the GTF, so the PW1100, there still are a lot of AOGs. Now, some of those are inflated because you have spirit. There's some airline-specific issues. But can you take us through how you're progressing on bringing down those AOGs and kind of what that path is now?

Chris Calio, CEO

So as many of you know, we continue to execute on the fleet management plan that we've announced a couple years ago on the 1100 and the 1500. the the financial and technical outlook remains intact it with with what we've said and again a big piece of that was the fallout rate from our inspections that's been exactly if not better than we thought it was going to be Doug so really pleased you know about that the AOG situation continues to improve again we we were down 15 percent in the first quarter since the end of 2025. And we continue to see that downward trajectory here continue in the second quarter. Now, a lot of that is on the back of our continued growth in MRO output. It was up 23% year over year in the first quarter. That was on the back of 26% growth in 2025. So really, really good output in our 21 MRO, GTF MRO shops that we've got out there. And a big part of that has been the reductions in turnaround time. Turnaround time was down 20% in the first quarter, and that was on much heavier work scopes, nine points heavier, in fact. So continuing to see good material flow into our MRO shops, castings were up 10% year-over-year, forgings were up 18% year-over-year. So as long as that material flow continues, as we've seen, and our shops continue to come down the learning curve and turnaround time continues to come down you know we expect to see that the aog situation

Doug Harned, Analyst — Bernstein

continue to improve markedly so you're i'm assuming that uh and we've talked about this before but i'm assuming that so you're still on that path in terms of sort of the three to three and a half billion dollars which is the provision you took back in 2023 you're still on that trajectory you

Chris Calio, CEO

You know, we are to be there. We are. And again, our focus is on making sure that we get the assets back in the hands of our customers, which is why we've been so focused on the MRO output, Doug. And again, it's been it's been bearing fruit. You're seeing that show up in the fleet health.

Doug Harned, Analyst — Bernstein

Well, you're also I mean, you're delivering also a pretty high number of spare engines to to bring these off the ground. You know, certainly, like Airbus has commented, you know, I know there's been back and forth on deliveries, sort of deliveries for on-wing aircraft versus in the aftermarket. Can you talk a little bit about that, how you think about that balance?

Chris Calio, CEO

The focus in 26, to be very clear, is on MRO output. We have a significant step up in MRO output. That is going to be the key linchpin to the continued fleet health. um we've been in a in a situation over the last couple years where we've had to to be thoughtful about how we balance material that goes to our our oe you know side of the business and to the aftermarket as i said up front you know we've got a commitment to our customers to get them back their assets since we've got to be again every day every week thoughtful about whether material goes to our shops for a shop visit or towards the oe on the oe front we're going to be up this year We're going to deliver more engines to Airbus this year than we did, you know, in the last year. And as we continue to see the AOG situation improve, I expect that we'll continue to get aligned with Airbus on the volumes that they're going to need going forward.

Doug Harned, Analyst — Bernstein

Yeah. Okay. So when you look at this rising demand, GTF, rising demand for aftermarket, for OE, and you look in your supply chain, you sort of are, you don't always see these two things grow at the same time. When you do, are there areas in that supply chain that you're particularly worried about that need to ensure they can deliver on both parts of this demand?

Chris Calio, CEO

It's a really good point, Doug, because we are ramping deliveries. You're seeing it both at Airbus. And, of course, on the Collins side, you're seeing it at Boeing as well. But meanwhile, the demand for aftermarket continues to be very strong. So to your point, you've got both of these things growing at the same time, and you're ramping at both of the airframers. And so much like on the defense side of our business, the supply chain is critical to enabling all of that ramp. I mentioned up front castings. Castings, both at Pratt and Collins, continues to be a watch area. And we saw castings, structural castings at Pratt, up 10% a year over in the first quarter. But you're always, you know, seeing things arise here and there that interrupt your flow. And so we've got to continue to maintain that maniacal focus, you know, on the supply chain. And sometimes that does require us to make some trades depending on is there an airline that's in a particular situation and they need, you know, a spare engine to come out of the shop? Is that where the material should go? Our program teams are making those trades each and every day. But I think as we continue to mature, as we continue to see the supply chain continue to grow, those trades will happen less and less, and we'll be able to meet the needs of both.

Doug Harned, Analyst — Bernstein

Now, you have a relatively new facility in Asheville you're building out, which is doing sort of coatings, castings. I mean, what are your objectives with that effort? How does that fit into your whole supply chain view?

Chris Calio, CEO

Yeah, we opened Asheville a few years ago as our turbine airfoil center of excellence. It's a key part of both the GTF and the F-135 turbine airfoils. It's in a critical part of the engine, high margin part, high performance part. We've also launched an ability to do some of those castings ourselves, Doug. That's something that we had a historical capability of doing and have since outsourced to others. That's been a constrained value stream, and we want to be able to sort of re-energize our efforts around being able to do some of that. It won't replace and fulfill all of our needs, but again, given the demand both on OE and aftermarket, we felt it was a strategic decision we needed to make to be able to provide some additional capacity for the needs on both the defense and the commercial side of our business.

Doug Harned, Analyst — Bernstein

Because that's not an easy part of the supply chain. Is this something that you look at as an ability to kind of flex if you have issues, that you can bring some of that online?

Chris Calio, CEO

You're right, Doug. It's a reason why it's been a constrained value stream. There are only a few players that will do it. It is a very difficult process, but it's something that we've had historical experience, you know, doing. And we've been working through that over the last couple of years, making sure that before we go, you know, live, that we get the yields where we need them, you know, to be. So it's economical and it makes sense. And, yes, it's just an area where we've seen long-term constraints and we need additional supply. And we just, again, made the strategic decision to bring that in and try to vertically integrate a little bit to give us more options.

Doug Harned, Analyst — Bernstein

Now, you mentioned the F-135. So, you know, we're looking at, you know, flat production going forward, 156 a year. However, you know, there's a lot of sustainment need out there. And how are you looking at the sustainment portion on that engine, as well as any impact you're seeing from the high op tempo based on current conflict?

Chris Calio, CEO

I want to start off any discussion on the F-135 with just how incredibly capable a piece of machinery it has been. I think if you asked any of the operators, they would tell you it's just a phenomenal engine. And I think the one thing that gets a little bit underreported is that, you know, our mean time between overhaul, meaning, like, how long you can run it before you have to take it off for maintenance, is 2x the spec. And that's while we are 2x above the spec on power and thermal management because of other parts of the platform that are drawing power off the engine. So it's really just been phenomenal, both from a performance perspective but also from a durability perspective. And you're right, Doug. It'll be relatively, you know, flat from an OE standpoint this year, but sustainment was already going to be on a very significant, you know, track. We're going to start getting into the more scheduled visits, and I think the op-tempo is going to continue to put demand into what was already sort of a high-demand program.

Doug Harned, Analyst — Bernstein

Well, if we look farther forward and you're looking at a next narrow body, How are you thinking about the engine you would like to provide for something, the next narrow body?

Chris Calio, CEO

Whenever we talk about the next generation of engine, again, I feel compelled to talk about that you need to take care of your customers today in order to enable tomorrow. And so, number one, our focus is on the fleet management plan and making sure that we get the GTF assets back into our customers' hands. And then, two, we've still got 8,000 GTF engines in backlog today.

Doug Harned, Analyst — Bernstein

Well, and also you have the GTFA.

Chris Calio, CEO

And, of course, we've just now certified the GTF Advantage, which will provide additional, you know, fuel burn benefits and additional thrust, but really will extend the time on wing by 2x, the original, you know, GTF engine. So that's where our focus is today, and there's a lot of runway just on today's program. I mean, if you just think about it, Airbus has sold out into the next decade. So that's sort of priority one. But when you think about what it may look like toward the back end of next decade on a next generation sort of platform, in our view, it'll be a ducted architecture with a gear. And a gear is something that we've had over, you know, on the 1100, 50 million hours worth of experience with the gear, more than 10 years into production. And we consider our GTF advantage to be the perfect architecture for the next generation single L. We'll continue to provide additional technology upgrades to that architecture, whether that be a next generation fan drive gear system, whether that be an upgraded combustor, whether we use advanced materials in the core that can withstand greater heat to be able to extend the life in the time on wing. Those are all things that we are investing in today. The one thing I will also mention when we think about a next generation engine application is we've got to be thoughtful about the time on wing and the durability. We're going to continue to push to get fuel efficiency, but you've got to balance that with how long the engines are able to stay on wing and the durability. If you talk to any of our airlines today, they will tell you they don't want one or the other. They want both. And so as we think about when the technology will be mature and ready, I want to make sure we're ready both from a fuel burn perspective, but also from a time-on-wing perspective. And again, so the technology has to be ready, time-on-wing has to be ready when it comes out of the box. And then last but not least, again, the manufacturing readiness. When we launched the GTF, we not only launched a new centerline design, but we took the ramp in terms of deliveries up right from the get-go. And again, the next time we do this, I want to make sure that our manufacturing readiness levels match the technology readiness level so we can meet the ramp while also meeting the performance requirements.

Doug Harned, Analyst — Bernstein

Yeah, and I'd argue when you talk about those two things, everyone I talk to, durability is the first one, you know, across the board.

Chris Calio, CEO

I think you're right. I think we're going to need to continue to drive efficiency in the engines, especially given what's happening in the world today. I think that's something that, you know, a Boeing or Airbus or whomever when they launch is going to want to see a sort of a step change in fuel efficiency. But it's got to come with the time on wing, Doug. I couldn't agree with you more, which is why, again, I think this is a multi-year process to be able to prepare to be able to do that.

Doug Harned, Analyst — Bernstein

So if we jump over to Collins, you know, this has had steady revenue and earnings growth over the last few years. But, again, I'm going to go back to the current environment out there, the macro environment. I remember this, the Collins, what was Rockwell Collins, back during the global financial crisis. And, you know, you saw the aftermarket get pressured a lot in some areas that are more discretionary, things like avionics upgrades, interiors. When you look at Collins today, which is obviously broader than just what Rockwell Collins was, how do you see risks there given the environment?

Chris Calio, CEO

Well, I think you've got to go back to what I said earlier. When you look at the Collins out-of-warranty installed base, it's $105 billion, and those out-of-warranty, you know, flight hours are continuing to grow as things come off warranty. So you've got just an incredible installed base there, Doug, that's going to continue to drive long aftermarket tails for years and years to come. If you're thinking about sort of the current situation, I think you've got to step back and break down sort of the Collins aftermarket into some of its pieces. Two-thirds of the Collins aftermarket would be in parts and repair. So that's sort of like, you know, break-fix things that you're going to have to do. And the remainder is made up of provisioning and mods and upgrades. Generally speaking, provisioning follows OE deliveries, and OE deliveries are continuing to ramp. You know, the good news this week on Boeing, being able to go to rate 47 and then wanting to move to rate 52. And so provisioning, generally speaking, follows that trajectory. And then you get to the mods and upgrades. And to your point, Doug, you see some upgrades in avionics, maybe in some of our interiors business and whatnot. And so that's something we're looking at really carefully, that if this were to extend and if there were to be more strain on operators, could that be a place where you might start to see some deferral in pushing things out? But again, I think the one thing that the airlines learned coming out of COVID is they don't want to underestimate the recovery and they don't want to be out of step when it happens. So that's why deferring a shop visit on the engine side can be, you know, a very dangerous proposition because you don't know when you're going to get back in the line. Same with deferring a mod and upgrade. And if you think about seating in particular, you know, many of the airlines are now, you know, getting pricing because of the differentiation they're driving in the passenger experience and the cabin experience. And so, and seating is a very big part of that. So again, I think the airlines today are looking at this like, hey, look, long-term, RPKs are still going to be strong, and we've got to be in a position to take advantage of that when it does.

Doug Harned, Analyst — Bernstein

Some good news on the OE side here is now we, as you said, finally have that 737 rate going up. That's great for, certainly, for the integrated flight deck. You've got 787 going up. You provide a vast majority of the systems on that. However, However, in total, this OE demand is a little bit dilutive to margins. So how should we think about margin trajectory, given that this portion should grow more? That's good for operating leverage with that OE work. But at the same time, it could be dilutive overall. What does this mean for the margin outlook?

Chris Calio, CEO

Well, when you think about Collins margins, I'll kind of talk about it in three areas. One, again, I'll go back to the installed base in the out-of-warranty equipment. That's going to continue to grow, and as you know, the aftermarket at Collins, very high margin. Second piece, and you just referenced it, Doug, as these OE rates are going up, there's going to be some operating leverage there. We have been building at much higher rates in the past. We have the capacity. There's going to be that absorption benefit that comes from higher rates. So while the margins in OE are a little bit less, of course, than the aftermarket, again, there's going to be an absorption benefit that comes with these higher rates because we've been capacitized for them for some time now. And then, again, the third bucket is the continued drive to take out structural cost within Collins. You started to see some of that play through in the first quarter. I think they're taking some really smart actions on how to consolidate certain operations, how to attack spans and layers and drive cost out of the business and to just be more efficient. I mean, if you just step back for a minute, RTX-wide, you know, we had about, what, 10%, 11% organic sales growth and pretty much flat headcount. And so that's something that each one of our businesses is driving towards. You just got to be more efficient, more productive, and I think Collins is leading the pack there.

Doug Harned, Analyst — Bernstein

So a while back, your goal was to have 19% margins at Collins. Where are you now on that path? Should we still be looking forward to that kind of a margin level?

Chris Calio, CEO

Yeah, I think across each one of our businesses, there's margin runway, Doug. And I think with Collins as well. I think we've continued to grow margins even in the face of tariff headwind last year. We're going to continue to grow margins this year. and again, we're on that trajectory. That goes for each one of our businesses. You talked about Raytheon early on in that still in that 11, 11.5% range, there's room to grow there. Clearly at Pratt, as the GTF aftermarket continues to grow and become more profitable, that'll be a big driver. And we didn't even really talk about Pratt Canada today, which is the best small engine business in the world with 70,000 engines in service and all the aftermarket they're going to bring to bear. And then Collins. Again, the three buckets I just talked about, we think we can continue to drive margins in that business as well.

Doug Harned, Analyst — Bernstein

Now, if we pull this all together, you've guided to $8.25 to $8.75 billion in free cash flow this year. How should we think about that in two ways? One is, are there some levers here that can provide upside to that? And then second, can you give us a sense of where that may go beyond 2026?

Chris Calio, CEO

Yeah. Well, again, we had a really strong, you know, free cash flow performance in 25, Doug, right up at that $7.9 billion. This year, feel comfortable with the guidance, you know, that we've, you know, provided. And I just think if you look long term at our ability to generate free cash flow, we've got all of the structural pieces in place to be, you know, again, 90 to 100 percent of, you know, as free cash flow. I think that's what this company is structured to do. When you think about the positions we have on the fastest-growing platforms, when you think about the aftermarket content that we have across Pratt and Collins, and when you think about the franchise programs at Raytheon, it's got the ability to continue to drive to those cash levels.

Doug Harned, Analyst — Bernstein

Well, great. Well, we're out of time here, but, Chris, thank you very much for this. This was great. Thank you. Appreciate it. Thanks, everybody.