Earnings Call Transcript
RTX Corp (RTX)
Earnings Call Transcript - RTX Q4 2021
Operator, Operator
Good day, ladies and gentlemen, and welcome to the Raytheon Technologies Fourth Quarter 2021 Earnings Conference Call. My name is Lisa, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer; Neil Mitchill, Chief Financial Officer; and Jennifer Reed, Vice President of Investor Relations. This call is being carried live on the Internet, and there is a presentation available for download from Raytheon Technologies' website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding acquisitions, accounting adjustments and net non-recurring and/or significant items often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in the call are subject to risks and uncertainties. RTC's SEC filings, including its Form 8-K, 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Hayes.
Greg Hayes, CEO
All right. Thank you, Lisa, and good morning, everybody. Happy Tuesday. Okay. 2021 was an important year for Raytheon Technologies. As we laid out our strategy at the beginning of last year, and that strategy, of course, is to drive top line growth, margin expansion and robust free cash flows through 2025 and beyond, while at the same time, continuing to invest in our businesses and returning significant capital to shareholders. Our continued focus on operational excellence and program execution, along with our industry-leading technologies, positions us well to continue to capitalize on the commercial aerospace recovery and to grow our defense franchises. As you saw from our press release this morning, we delivered another solid quarter with strong full year financial results, with both top and bottom line growth and $5 billion of free cash flow. That's more than double of what we delivered in 2020 on a pro forma basis. Our performance in 2021 gives us confidence in the long-term fundamentals of our businesses and that we're on track to deliver on the 2025 targets that we outlined last May at our investor conference. Before I turn to the highlights, let me first provide some comments on the current market environment. During the quarter, commercial air traffic remained resilient despite the Omicron variant, with global available seat miles (ASMs) growing about 1% sequentially in Q4. That's reflecting a continued recovery in air traffic despite the typical seasonal trends. Here, in the U.S., passenger traffic through TSA checkpoints also remained steady at about 1.9 million passengers per day. That's up almost 125% versus the fourth quarter of 2020, a remarkable recovery. On the defense side, we're pleased to see the President signed the bipartisan Defense Authorization bill into law at $740 billion. That's about $25 billion higher than the original Presidential request. And given the global threat environment, we continue to see strong international demand for our products and services. Our focused aerospace and defense portfolio, along with our $156 billion backlog gives us confidence in our ability to grow the business in 2022 and beyond. Okay. Turning to slide two, some highlights from the fourth quarter. As I said, we delivered strong financial performance in 2021. Organic sales grew 1%, which is in line with our expectations, while adjusted EPS and free cash flow for the year were both above our initial expectations. And importantly, we saw margin expansion in all four of our businesses, with strong commercial aftermarket. Our defense backlog remained robust at over $63 billion, where RIS and RMD both ended the year with book-to-bill slightly above 1.0. In addition to several large awards earlier in the year, we also had several notable awards during the fourth quarter, including over $1.3 billion in classified bookings, plus over $670 million for the Electro-Optical Infrared awards at RIS, as well as $730 million in Standard Missile-2 production awards at RMD. We also remain focused on operational excellence and program execution to drive structural cost reduction and productivity in our operations. In 2021, we achieved about $760 million in incremental cost synergies from the RTX merger, bringing us over $1 billion since the completion of the merger in April of 2020. That meets our original merger cost synergy target two years ahead of schedule. And there's always, of course, more to come and more to do there. It's also worth noting that the Collins Aerospace team achieved over $600 million in total Rockwell Collins synergies since the acquisition in November of 2018. They're meeting their commitment a year ahead of schedule despite the significant downturn in our commercial aerospace business. We also continue to fine-tune our portfolio during the year. As you know, we completed the acquisition of SEAKR Engineering and FlightAware, which will expand and enhance our capabilities in key growth areas. And we completed the divestitures of Forcepoint. And in December, we completed the sale of RIS' Global Training and Services business. On the capital allocation front, we returned $5.3 billion to shareholders in 2021 for a total of $7.4 billion since we closed on the merger. We are well on track to the $20 billion-plus that we've committed to in the first four years after the merger. As you saw in December, our Board of Directors also authorized a $6 billion share repurchase program, positioning us to continue returning significant capital to shareholders, including at least $2.5 billion of repurchases that we expect to complete in 2022. In addition to our strong financial performance during the year, we also achieved several notable strategic and operational milestones that I'd like to highlight. Let me start with Collins Aerospace. The business completed more than 750 Lean events in 2021. By utilizing our best practices from our core operating system, the team was able to reduce labor content on the F-18 heat exchanger by over 30%, reducing costs and creating capacity to support increased demand. At Pratt, the team introduced the GTF Advantage engine, which reduces fuel consumption and CO2 emissions by a total of 17% compared to the prior generation engines. It extends the GTS lead as the most efficient power plant for the A320neo family. The engine will also be compatible with 100% sustainable aviation fuels, supporting the aviation industry's goal to significantly reduce emissions in the coming decades. At both RIS and RMD, they achieved significant program milestones in the quarter ahead of schedule. Through strong program execution in RIS, the Joint Precision Approach and Landing System program completed delivery on the first LRIP units 60 days ahead of schedule. This achievement has given the Navy the confidence to certify JPALS on the CVN carrier and two amphibious ship classes. RMD team also successfully completed the initial integration of the SPY-6 radar and the USS Jack Lucas in the quarter. This is the first time power was simultaneously applied to the entire radar system, completing a critical milestone for integration of the ship, its combat system and the SPY-6 radar. So with that, let me turn it over to Neil, and I'll come back at the end for a wrap up in Q&A.
Neil Mitchill, CFO
Thanks, Greg. I'm on Slide 3. I'm pleased with how we finished the year as well as our performance in the quarter where we continue to see solid growth in organic sales, adjusted earnings per share, and free cash flow. Sales of $17 billion were in line with our expectations and were up 4% organically versus the prior year on an adjusted basis. Our performance was primarily driven by the continued recovery of domestic short-haul international air travel, partially offset by continued supply chain pressures and lower 787 OE volume. It's worth noting that the global training and services divestiture at RIS closed in early December, resulting in a sales headwind of about $100 million versus our prior outlook. Adjusted earnings per share of $1.08 was ahead of our expectations, primarily driven by commercial aftermarket strength at both Collins and Pratt, as well as favorability in our effective tax rate. On a GAAP basis, EPS from continuing operations was $0.46 per share and included $0.62 of acquisition accounting adjustments and net significant and/or non-recurring items. And finally, free cash flow of $2.2 billion was in line with our expectations and resulted in full year free cash flow of $5 billion, which was $500 million better than our expectations at the beginning of the year, primarily driven by higher net income and lower capex. With that, let me hand it over to Jennifer to take you through the segment results, and I'll come back and share our thoughts on 2022.
Jennifer Reed, Vice President of Investor Relations
Thanks, Neil. Starting with Collins Aerospace on Slide 4. Sales were $4.9 billion in the quarter, up 13% on both an adjusted and organic basis, driven primarily by the continued recovery in commercial aerospace end markets. By channel, commercial aftermarket sales were up 47%, driven by a 59% increase in parts and repair, a 52% increase in provisioning, and a 17% increase in modification and upgrades. Sequentially, commercial aftermarket sales were up 10%, driven by strength in parts and repair. Commercial OE sales were up 4% with strength in narrow-body, offsetting headwinds from lower 787 deliveries. And military sales were down 3% on another tough compare. Recall, Collins military sales were up 7% organically in the same period last year. The decline in the quarter was driven primarily by lower F-35 volume. Adjusted operating profit of $469 million was up $380 million from the prior year. Drop-through on higher commercial aftermarket sales more than offset higher E&D and SG&A expense. Shifting to Pratt & Whitney on Slide 5. Sales of $5.1 billion were up 14% on an adjusted basis and up 15% on an organic basis, driven primarily by the continued recovery of the commercial aerospace industry. Commercial OE sales were up 32% driven by higher GTF deliveries within Pratt's large commercial engine business as well as general aviation and biz jet platforms at Pratt Canada. Commercial aftermarket sales were up 28% in the quarter, with legacy large commercial engine shop visits up 30% and Pratt Canada shop visits up 37%. Sequentially, commercial aftermarket sales were up 17%. In the military business, sales were down 6% as expected on another difficult compare. Recall, Pratt's military sales were up 18% in the same period last year. The decrease in the quarter was driven by lower spare sales on legacy programs. Adjusted operating profit of $162 million was up $57 million from the prior year. Drop-through on higher commercial aftermarket sales volume more than offset lower military volume, higher SG&A, E&D and the impact of higher commercial OE volume. Turning now to Slide 6. RIS sales of $3.9 billion were down 2% versus prior year on an adjusted basis and down 1% on an organic basis, reflecting four fewer workdays in the fourth quarter of 2021 versus the prior year. Adjusted operating profit in the quarter of $400 million was up $30 million versus prior year, primarily driven by higher net program efficiencies. RIS had $3.4 billion of bookings in the quarter resulting in a book-to-bill of 0.97 and a backlog of $18 billion. In addition to the significant bookings that Greg discussed, RIS also booked $227 million for the next generation Jammer mid-band program in the quarter. RIS book-to-bill for the year was 1.01. Turning now to Slide 7. RMD sales were $3.9 billion, down 10% on an adjusted basis and down 8% on an organic basis, primarily driven by four fewer workdays in the quarter, as well as lower material receipts and expected declines in several international production contracts. Adjusted operating profit of $486 million was $93 million lower than the prior year, driven by lower net program efficiencies and lower sales volume. RMD's bookings in the quarter were approximately $3.2 billion, resulting in a book-to-bill of 0.83 and a backlog of $29 billion. In addition to the SM2 bookings Greg mentioned, RMD also booked $269 million for Evolved Seasparrow Missile Block 2. RMD's book-to-bill for the year was 1.02. Before moving on, I would also like to comment on the previously disclosed DOJ investigation into cost accounting matters, at legacy Raytheon's Company's former Integrated Defense Systems business or IDS, which is now part of RMD. As you will see in our upcoming 10-K filing, we have made progress in our internal investigation into the matter. And we now have determined that there is a probable risk of liabilities for damages, interest, and penalties. In addition to the amount recorded in the first quarter of 2021 in connection with the finalization of purchase accounting, we recorded an incremental accrual in the amount of $147 million, during the fourth quarter relating to the matter, bringing our total reserve to approximately $290 million. We still do not currently believe the resolution of this matter will result in a material adverse impact on our financial condition, and we will continue to cooperate with the government's investigation. With that, I'll turn it back to Neil to provide some color on the rest of the year.
Neil Mitchill, CFO
Thank you, Jennifer. I'm on Slide 8. Before I get into the specifics of our '22 financial outlook, let me give you some perspective on how we are thinking about the environment as we look ahead. Let me start with the positives. Despite the impact of COVID variants, we expect the commercial aerospace recovery will continue into 2022 with continued growth in commercial aftermarket and narrow-body OE deliveries driven by further strength in domestic traffic and growth in international traffic. By the end of the year, we are assuming global RPMs recover to about 90% of 2019 levels with domestic travel recovering to be approximately in line with the 2019 levels and international travel recovering to between 75% and 80% of 2019 levels. The reopening of international borders, specifically in the Asia Pacific region and the related wide-body traffic will be a significant factor in the timing and extent of the related aftermarket recovery. Ultimately, the timing and trajectory of the overall recovery this year isn't likely to be linear and it will depend on our customers' fleet decisions and buying behavior. Looking longer term, we continue to expect commercial traffic to return to 2019 levels by the end of next year. On the defense side, we expect continued organic growth in 2022 as we deliver on our $63 billion backlog, continued bipartisan support for the fiscal 2022 defense budget, and international demand for our products and technologies. And across RTX, we remain laser-focused on driving operational excellence to deliver cost reduction and further margin expansion, including $335 million of incremental RTX merger cost synergies during 2022. And this keeps us on track to achieve $1.5 billion in gross cost synergies by Q1 of 2024. On the challenges side, we anticipate that global supply chain and inflation pressures will continue and that 787 build rates will remain low. With respect to the supply chain, we anticipate that COVID-related labor disruptions will persist through the first half of the year, but will ease through the second half of the year. And as we've discussed, a significant portion of our material spend is under long-term agreements. That said, we are assuming a level of inflationary pressure across our businesses and our outlook that will be partially offset by productivity improvements. And of course, we're continuing to monitor the US and global tax environment and the current and potentially protracted continuing resolution. So, with that backdrop, let me tell you how this translates to our financial outlook for the year. Let's turn to slide nine. At the RTX level, we expect full year 2022 sales of between $68.5 billion and $69.5 billion. This represents organic growth of between 7% and 9% year-over-year. Keep in mind, the sale of RIS' global training and services businesses puts about $1 billion of sales headwind year-over-year as well as the associated profit. From an earnings perspective, we expect adjusted EPS of $4.60 to $4.80, up 8% to 12% year-over-year. And we expect to generate free cash flow of about $6 billion. That's up about 20% versus 2021. It's important to note that this free cash flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is deferred beyond 2022, which as we've said before, the free cash flow impact of this legislation is approximately $2 billion. It's also worth noting that if the legislation is not deferred, you would see about a $0.10 EPS benefit as well from the impacts of the R&D capitalization that would have components of our US taxable income. And as Greg mentioned, we expect to buy back at least $2.5 billion of RTX shares over the year, subject to market conditions. With that, let's move to slide 10 for the segment outlooks. At Collins, we expect full year sales to be up low double-digits and adjusted operating profit to grow between $650 million and $800 million versus last year. This is primarily driven by higher narrow-body OE deliveries and growth across all three commercial aftermarket channels, supporting both narrow and wide-body aircraft. And military sales at Collins are expected to be up low single-digit for the year. Turning to Pratt & Whitney, we see full year sales growing low double-digits versus prior year, principally driven by higher OE deliveries in both Pratt's large commercial engine and Pratt Canada businesses, as well as continued growth in legacy large commercial engine and Pratt Canada shop visits. Military sales at Pratt are expected to be down mid-single-digit, driven by lower F135 production inputs partially offset by higher F135 sustainment volume. With respect to operating profit, we see Pratt's adjusted operating profit growing between $500 million and $600 million versus last year, primarily on higher aftermarket volume and partially offset by higher large commercial OE engine deliveries and lower military volumes. Turning to RIS. We expect full year sales to be down slightly versus prior year on a reported basis and to grow low single-digit on an organic basis with strength coming from classified programs and production ramps in airborne ISR and EWS. And we expect year-over-year adjusted operating profit at RIS to be flat to up $50 million, driven by higher net program efficiencies and volume. At RMD, we see sales growing low single to mid-single digits driven by growth across multiple programs and for adjusted operating profit to be up in the range of $150 million to $200 million versus prior year, driven by improved program performance and volume. It's worth mentioning that we expect both RIS and RMD to again have a book-to-bill greater than 1.0 for the year. And finally, we expect intercompany sales wins to grow in line with total company sales. I will note that we've included in our outlook some of the below-the-line items and pension in the webcast appendices. So turning now to slide 11 for our 2022 adjusted EPS walk. Starting with the segments, we expect the segments to generate about $0.83 of EPS growth at the midpoint of our outlook range. From there, pension will be a headwind, primarily due to lower CAS recovery and higher discount rates. Our tax rate in 2022 is expected to be between 18.5% and 19% versus the 15.5% in 2021, primarily due to one-time tax benefits associated with the prior year optimization of our legal entity and operating structure that we realized in the third quarter that will not repeat. This will result in a $0.19 headwind. We expect corporate expenses to be a $0.06 headwind year-over-year due to higher investment related RTX synergy projects and digital transformation initiatives that are partially offset by lower LTAM spend. And finally, lower share count, interest and other items are expected to be a $0.07 tailwind. All of this brings us to our outlook range of $4.60 to $4.80 per share. Now turning to free cash flow on slide 12. We expect strong operational growth, along with lower restructuring to contribute about $1.5 billion of free cash flow growth in 2022. These will be partially offset by expected pension headwinds and higher cash taxes to get to our free cash flow outlook of about $6 billion. Again, this outlook assumes the legislation requiring R&D capitalization for tax purposes is deferred. And lastly, before turning it back to Greg, a couple of comments on the first quarter. With respect to sales, we expect sales to be up mid-single digit organically versus prior year, driven by the continued commercial aerospace recovery and partially offset by lower defense sales driven by continuing supply chain pressures and the impact of Omicron. And again, just to remind you, the prior year included Q1 sales of about $200 million as well as the associated profit for the divested RIS services business. On the adjusted EPS side, we see low double-digit to mid-teens growth in the quarter versus prior year. And for cash, we expect to see an outflow of about $500 million in the quarter due to typical seasonal factors in the timing of collections. So with that, let me hand it back to Greg to wrap things up.
Greg Hayes, CEO
Okay. Thanks, Neil. We're on slide 13. So a lot of moving pieces as always. But I would tell you, we actually exited 2021 with really good momentum across the businesses. And we expect to make further progress on our priorities here as we enter into 2022. First and foremost, let me repeat that we're focused on keeping our employees safe, keeping our commercial customers flying and protecting the warfighter while they defend our country and allies and of course, supporting our suppliers. We're also going to continue to invest in differentiated technology and innovation to maintain our industry-leading positions, which will drive growth over the long term, and of course, to capitalize on our growing end markets. At the same time, our leadership team is making significant progress to reduce structural costs, drive operational efficiency through our core operating system and to deliver on our synergy commitments. Finally, we remain disciplined with capital allocation. We have a very strong balance sheet, along with our cash-generating capabilities supporting investments in our businesses and our commitment to returning capital to shareholders, including at least $20 billion in the first four years following the merger, as I said earlier. I'm confident in our ability to deliver both top and bottom line growth and margin expansion across our businesses this year, as we continue to leverage the growth opportunities that are in front of us. So with that, let's turn it over to Lisa, and we'll take whatever questions you might have. Thank you.
Operator, Operator
In the interest of time and to allow for broader participation, you’re asked to limit yourself to one question. The first question will come from the line of Sheila Kahyaoglu with Jefferies.
Sheila Kahyaoglu, Analyst
Hi. Good morning, Greg, Neil, Jennifer. Thank you.
Greg Hayes, CEO
Good morning.
Sheila Kahyaoglu, Analyst
So free cash flow is guided to $6 billion this year, up from $5 billion last year and 20% growth. And you have a pretty consistent cadence of free cash flow growth for your 2025 target of $10 billion despite pension headwind of 1.3. Maybe if you could get into the different buckets and different impacts as we get into that 2025 $10 billion free cash flow number.
Neil Mitchill, CFO
Thanks, Sheila. Good morning. It's Neil here. As we think about the walk from where we are today to 2025, as we've said before, the majority of that is going to come from the operating profit growth that we'll see in the segments as we continue to go through the recovery here, probably a little bit north of $7 billion. If you were to strike 2021 as a starting point, you'll see there's $1.6 billion of pension headwind. And we'll probably have somewhere in the range of $600 million to $700 million of CapEx headwind. And that will be partially offset by a couple of hundred million of corporate and other items. So, I still see a clear path to the $10 billion of free cash flow as we get into 2025 and we get through the recovery here. Feeling very good about that.
Operator, Operator
Your next question comes from the line of Robert Stallard with Vertical Research.
Robert Stallard, Analyst
Thanks so much. Good morning.
Greg Hayes, CEO
Hi, Rob.
Neil Mitchill, CFO
Good morning, Rob.
Robert Stallard, Analyst
This might be a question for Greg. I was wondering if you could maybe give us some more color on the supply chain situation. Have things got any worse since what you experienced in Q4? And then in relation to that, how are you getting all the supply chain in place for the A320 ramp that's planned for this year? Thank you.
Greg Hayes, CEO
Yes, Rob, that's a really good question. RTX, like many large companies, has faced supply disruptions. I would categorize this into two main issues. First, within our supply chain, we are experiencing labor shortages in skilled positions, particularly in castings, where we have a shortage of welders. We are working closely with our suppliers to increase supply to meet demand, but this will not happen in the first quarter. We expect a slow Q1, especially at Pratt, which will also slightly affect Collins. Additionally, there has been a slowdown in receipts on the defense side, which worsened since December compared to the end of the third quarter. There are two factors contributing to this: the Omicron variant severely impacted not only our workforce but also that of our suppliers, and we face a labor shortage which necessitates increasing wages to attract talent. We have around 13,000 product suppliers and are monitoring the supply chain daily. While fewer than 100 suppliers are a major concern, even one could cause shipment delays. We are actively managing this situation and believe we are doing well, but we will see some impact in the first quarter due to the supply chain issues.
Operator, Operator
Your next question comes from the line of David Strauss with Barclays.
David Strauss, Analyst
Thanks. Good morning, everyone.
Neil Mitchill, CFO
Good morning, David.
Greg Hayes, CEO
Good morning, David.
David Strauss, Analyst
Greg, Neil, maybe could you touch on the moving pieces of the implied incremental margins at Collins and Pratt looks like Collins kind of in the mid-30s, Pratt in the mid-20s. I guess, on Collins, what you're assuming for E&D and kind of what's hitting the range that we might have expected? And then on Pratt, the negative engine margin that you're expecting in 2022 relative to 2021? Thanks.
Neil Mitchill, CFO
Thank you, David. I'll begin with Collins. You are correct about the incrementals. We're anticipating incrementals in the mid-30 percent range throughout the year. Remember, we noted a few one-time items last year that likely boosted margins by about 50 basis points. We expect strong incrementals there. Regarding our Collins outlook, we anticipate commercial original equipment sales to increase in the high teens percentage, and commercial aftermarket sales to grow around 20% or slightly higher. Military sales are expected to rise in the low single digits. For Pratt, we're also looking at incrementals in the mid-20s. We expect commercial original equipment sales to go up between 20% and 25%, and aftermarket sales to also increase between 20% and 25%. Military sales are projected to decrease in the mid-single digits. Overall, we expect significant growth at Pratt, with about 200 more engines anticipated to be shipped. Considering the AEM headwind, it's estimated to be between $100 million and $150 million. We're seeing good absorption as we ramp up production throughout 2022. As mentioned, supply chain issues at Pratt related to castings may lead to slightly lower deliveries in the first quarter, but we do expect to increase engine shipments by a couple hundred for the full year.
Operator, Operator
Your next question comes from the line of Noah Poponak with Goldman Sachs.
Noah Poponak, Analyst
Good morning everyone.
Neil Mitchill, CFO
Good morning, Noah.
Greg Hayes, CEO
Good morning, Noah.
Noah Poponak, Analyst
Could you spend another minute on sort of how you built the aerospace aftermarket forecast for the year and how you expect it to progress through the year? Obviously, when Omicron lets up, there's a huge question mark and there's a wide range of possible outcomes of where travel could be exiting the year versus starting the year. And Neil last year, you kind of framed what you were expecting for the broader ecosystem and then how you layered your own forecast on top of that and the degree of conservatism or lack thereof. So, it'd be helpful to hear that from you again today.
Neil Mitchill, CFO
Yes, Noah. Let me share my thoughts on the macro outlook. We discussed our RPM and ASM assumptions as we approach the end of the year, but I'll provide some insights on how we see that unfolding throughout the year. To begin with, I expect low single-digit sequential growth in ASM in the first quarter, moving to the mid-30s from Q1 to Q2, then mid-teens from Q2 to Q3. However, we anticipate a seasonal decline in the fourth quarter, around mid-single digit growth. Our outlook hinges significantly on the recovery of wide-body flights. Last year, approximately 75% of our aftermarket improvement and ASM growth came from domestic narrow-body efforts. This year, we predict that about 80% of our growth will stem from international long-haul, with around 60% coming specifically from long-haul routes. This will be a crucial aspect as we approach the year ahead. Considering the aftermarket sales assumptions, the comparisons are becoming increasingly challenging sequentially given last quarter's results. I would project Collins to grow in the low to mid-single digits throughout the year regarding aftermarket growth. Pratt, on the other hand, is expected to show a mid-single to high-single digit increase in the first quarter after a traditionally strong fourth quarter, moving to high single digits in the second quarter and mid-single digits for the remainder of the year. I hope this provides you with a clearer picture of our expectations. Greg, do you have anything to add?
Greg Hayes, CEO
Yes, Noah, I want to emphasize what Neil mentioned regarding our forecast for the aftermarket, which hinges on a recovery in wide-body aircraft. This recovery largely depends on the reopening of the Pacific region, particularly China. We need to see China and other countries in the Pacific Rim start to reopen to allow traffic to bounce back. It's uncertain when we will see changes in China's zero COVID policy—whether that will happen in the second, third, or fourth quarter. Currently, we expect to observe some improvements in the second quarter and hope for continued progress throughout the year, aiming to return wide-body traffic to 2019 levels by the end of 2023.
Operator, Operator
Your next question comes from the line of Peter Arment with Baird.
Peter Arment, Analyst
Yes. Good morning, Greg, Neil, Jennifer. Hey, Greg, Maybe just switching over to defense. Could you maybe just give us a little bit of some of the things you're expecting for maybe on the international side, historically, Raytheon’s had a lot of international awards, what your expectations might be for a book-to-bill and if you're seeing any kind of increased input from international countries just given the rising tension? Thanks.
Greg Hayes, CEO
Yes, Peter, it's a good question. And I think the answer is, obviously, we are seeing, I would say, opportunities for international sales. We just have to look to last week where we saw the drone attack in the UAE, which attacked some of their facilities. And of course, the tensions in Eastern Europe, the tensions in the South China Sea, all of those things are putting pressure on some of the defense spending over there. So I fully expect we're going to see some benefit from it. I would say, though, that should there be hostilities, whether it's in the Middle East or whether it's in the Asia Pacific region, you're not going to see an immediate benefit here because what you'll see is a reallocation of inventory that we already have out there with the services. But I fully expect we should see a recovery in the international defense maybe in the book-to-bill, well north of one as we move into 2022 and beyond. One of the biggest drivers, of course, will be LTAMs. And I think, again, that's probably a 2023 benefit. We'll start to see bookings then for LTAMs, which, of course, is the upgrade of the Patriot Missile Defense system. But that will be, again, a couple of years out.
Neil Mitchill, CFO
Greg, maybe if I could just pile on a little bit, too. We do see some international Gem T awards at RMD. And as we look at the $29 billion backlog of RMD and the sales outlook that we put out there, which is low single-digit to mid-single-digit, think 3% to 4% or so year-over-year at RMD. We're confident that we have the backlog to continue to grow as we get through 2022.
Operator, Operator
Your next question comes from the line of Ron Epstein with Bank of America.
Ron Epstein, Analyst
Hey, good morning. So, I guess, a question for both of you. A key part of the story is operational improvement as we walk out over the next couple of years, right? That's going to be a big cash flow driver. And a big part of that is GTF. So, a question we've been fielding from investors and maybe you can give us some perspective on this, how can we feel better about the long-term contracts you've put in place to do maintenance on the GTF family of engines, where it seems like time on weighing and the hot section maybe hasn't has performed like we were hoping it would at first. Meaning, how can we feel good that those contracts are priced right be it that they're kind of long-term in nature?
Greg Hayes, CEO
Let me take a shot at it, Ron, then I'll turn it over to the former CFO at Pratt to answer the actual contract question. Maybe just to put it in perspective, to-date, on the GTF program, we have had more than 12 million flight hours on that. In the last 12 months, dispatch reliability has been 99.96%. So, I know that we had a lot of teething problems back in 2016 and 2017, and we talked ad nauseam about all of those teething problems. And obviously, it impacted some of our time on wing, impacted some of those maintenance support contracts. But given where we are from a reliability standpoint today, those programs will start to generate positive cash flow coming up as the first full shop visits happen in the next year and beyond. And I actually feel pretty good about where we are on those contracts given the robustness of the current engine. Of course, in 2023, we're going to be delivering the advantage engine, which gives again better fuel burn and we think even more durability, which, again, will only benefit those aftermarket contracts.
Neil Mitchill, CFO
Yes. Thanks, Greg, I'll just add that the average age of those airplanes is still under three. There's plenty of time. These are long-term contracts. We've made significant improvements. You mentioned the durability improvements, and we are factoring that in, obviously, as we look at those contracts. And I would tell you that as we perform warranty-type work under these contracts today, we've been reasonably conservative in our outlook and our bookings on that. So, we are confident that we're able to see the improvement fall through to the bottom line as those major overhauls begin. And we're also confident that we're able to demonstrate significant efficiencies and fuel savings that come from that engine, and we're seeing that in the campaign activity that we're engaged in currently with the engine. So, feel well-positioned with the product and the GTF advantage, I think, only gets us in a better place as we go forward.
Ron Epstein, Analyst
Great. Thank you.
Operator, Operator
Your next question comes from the line of Myles Walton with UBS.
Myles Walton, Analyst
Thanks. Morning. Hey Greg, I was wondering if you could comment on the F-35 engine program progress through the course of 2021. And if you get to a better point towards the end in terms of resolving some of the issues that have been raised over the last 18 months, and importantly, as sort of the NDAA starts building momentum potentially towards opening the door to ATP and GE being second source in the later part of the decade?
Greg Hayes, CEO
It's a great question, Myles. I want to highlight a few points. Firstly, we made significant progress on OEM deliveries last year and were under contract for F135 deliveries as we concluded the year. Additionally, we made solid advancements in our support for overhauls, completing about 80 power module overhauls last year, which is double what we achieved in 2020. This number is expected to double again this year. Overall, we feel optimistic about the engine's current performance. As everyone familiar with the program knows, there's a need for more power and improved fuel efficiency from that engine. The services have two options to consider: one is to upgrade the existing engine, referred to as the EEP program, which is an improved version of the F135, and the other is to pursue a completely new engine, which would be the adaptive engine currently being tested by both GE and Pratt. Those new engines, however, are still years away, likely not available until late this decade. From a risk perspective, for a single-engine fighter, upgrading the current engine appears to be the most cost-effective and low-risk solution, and that’s what we're discussing with the customer. We believe this option is significantly less expensive than developing adaptive engines, which are primarily focused on the sixth-generation fighter, expected to be introduced at the end of this decade. We have options and are in discussions with the customer. Our primary focus is to ensure that the engines currently in the field continue to operate effectively, so we are supporting our teams around the world to achieve this while also pushing forward with OEM production as the program evolves.
Myles Walton, Analyst
Thanks Greg.
Operator, Operator
Your next question comes from the line of Mike Maugeri with Wolfe Research.
Mike Maugeri, Analyst
Hey, good morning. Thank you. Neil, on your cash flow guide, can you break your bridge between 2021 and 2022 down a bit further? Specifically, I’m curious to understand the $1.4 billion figure for operational growth in CapEx. If you can add some more color around working capital as well? Thank you.
Neil Mitchill, CFO
Yeah, sure. So a couple of comments there. The first thing is if you look at our segment profit guide at the midpoint, that's about $1.4 billion. So think about that being the major driver of that piece of our cash flow walk. And you'll see from our guidance about $400 million or so of capital expenditure headwind year-over-year. So the net of that. That would imply a few hundred million dollars of working capital improvement. I think that remains to be determined as we see the year play out. So that will either turn into higher segment profit. As we get later into the year, if we are able to achieve the higher end of our range, and in particular, given the supply chain issues, we could see a little bit of working capital pressure as we bring inventory in a little bit sooner. And again, the timing of that profit recognition and the timing of collections will all play out in the fourth quarter. But I would characterize those as the three key elements of that piece of our cash walk.
Mike Maugeri, Analyst
Thank you.
Neil Mitchill, CFO
You’re welcome.
Operator, Operator
Your next question comes from the line of Kristine Liwag with Morgan Stanley.
Kristine Liwag, Analyst
Hey, good morning, everyone.
Neil Mitchill, CFO
Hey, Kristine.
Greg Hayes, CEO
Hey, Kristine.
Kristine Liwag, Analyst
Greg, Neil, Jennifer, if we continue to see raw material and labor inflation at elevated levels for longer, how should we think about potential impact on margins? How much will you be able to pass-through with your contracts? And how much would the businesses have to absorb?
Greg Hayes, CEO
So let me start here. First of all, we have seen inflation, obviously, I think, like everybody else. It has been higher than what we expected, I would say, towards the end of last year. As we think about 2022, we've probably got about $150 million of, I would say, price pressure from unexpected inflation in the supply chain. Now typically, we enter the year, and we'll see about $200 million or so of pricing pressure that we go out and we work to alleviate. I mean, the whole goal here is to keep input costs flat year-over-year. So we go out, we work cost reduction. This year, we got a little more work to do. That $150 million of inflation impact is baked into the guidance that Neil took you all through before. And it's something we're keeping an eye on. The labor inflation, obviously, is also a little trouble. We're seeing it in our own shops. The good news is most of that, we can price it on the government side and pass that along to our customers. But again, there will be pressure. And what we have to do, of course, is figure out ways to continue to reduce costs. That's why we've got the core operating system to let us go out and find efficiencies in the factories so that we can get productivity to offset the continued pressure on wages. But again, our hope here is that we're going to see inflation start to slow down here by the back half of this year. And we'll have to keep an eye on it. And again, I think it's everybody's concern across the country right now when you see 7% inflation, that's a big headline. And we've got to keep after it.
Kristine Liwag, Analyst
Thank you for the color, guys.
Greg Hayes, CEO
Thanks, Kristine.
Operator, Operator
Your next question comes from the line of Robert Spingarn with Melius Research.
Robert Spingarn, Analyst
Greg, last week, Secretary of the Air Force, Frank Kendall, was talking about hypersonic strategy and suggesting that maybe because our targets are different than China is we need to rethink the strategy, boost glide versus air breathing. And I wanted to ask you your thoughts on this and how this might change the dynamic between Lockheed on the Boost Glide side and Raytheon on the cruise missile side?
Greg Hayes, CEO
Yes, that's a great question, and it's something we are all contemplating at the moment. I would say there are several different markets involved here. The Boost Glide market is certainly noteworthy, especially after the Chinese showcased that capability. Additionally, we've demonstrated our ability to launch air-breathing technologies, which include the hypersonic missile we tested late last year. I believe both of these technologies will receive funding moving forward. However, the most crucial aspect is the development of defensive systems against hypersonics. These initiatives represent the biggest opportunities for us, whether it involves directed energy or anti-hypersonic glide vehicles that we are currently developing. Significant funding is being allocated to this area, but unfortunately, much of it is classified, and we can’t disclose specifics about those technologies. I can say that any defense strategy will involve a layered approach, utilizing both ground-based and ship-based effectors, possibly including directed energy. We will continue collaborating with the Air Force this year, and we anticipate some exciting opportunities as the year progresses.
Robert Spingarn, Analyst
Okay. And just a quick one for Neil, if I'm still here. Neil, I was wondering if you could clarify, maybe I didn't catch it. If there's a full year CR, what would the sensitivity be in the guidance?
Neil Mitchill, CFO
That's a good question. I didn't put that out there. But couple of pieces here. First, that will expire or set to expire February 18 of this quarter. It will see a lot of impacts through the first quarter, if that were to extend through March 31, maybe $50 million to $100 million, $150 million of sales. If it were to persist through the full year, I would see probably between $500 million and $600 million of sales headwind. So I think that underscores the importance of us getting the continuing resolution behind the country. But, yes, that's how I would size it up looking at it today. And I would say that would be relatively evenly spread across our businesses, frankly. Each one of them will have some headwind as it relates to a continuing resolution that persists through the year.
Robert Spingarn, Analyst
Okay. Thanks so much.
Neil Mitchill, CFO
You bet.
Operator, Operator
Your next question comes from the line of Cai von Rumohr with Cowen.
Cai von Rumohr, Analyst
Yes. Thanks so much. So there's a fair amount of debate on the profile of recovery in deliveries and production of the 737 and the 787. Could you tell us approximately where your rates are today and the type of profile you're looking for in 2022 and what you've baked into your 2022 guide?
Neil Mitchill, CFO
Thanks, Cai. Good morning. I want to share a couple of thoughts. I don't want to get ahead of Airbus and Boeing, but regarding the 737, we ended the year with monthly rates in the high teens. We are aligned with Boeing on increasing that to 31 in the second half of the year. We expect growth in the second half and a gradual increase through the first half. For the 787, as we mentioned in the last call, we were shipping very little, if anything, and ended the year with a low single-digit monthly shipset rate. We anticipate maintaining that rate throughout 2022. Given the inventory in the channel, a good estimate would be around two per month for the entire year of 2022.
Cai von Rumohr, Analyst
Thank you very much.
Neil Mitchill, CFO
You’re welcome.
Operator, Operator
Your next question comes from the line of Seth Seifman with JPMorgan.
Seth Seifman, Analyst
Hey. Thanks very much and good morning.
Greg Hayes, CEO
Hi, Seth.
Neil Mitchill, CFO
Hi, Seth.
Seth Seifman, Analyst
I guess, Neil, when you spoke, I think, back in November and kind of talked about the outlook for the segments for the year, did that change very much? I'm thinking specifically about the progression of the aftermarket recovery? Did that change very much as a result of the emergence of Omicron? And, I guess, is there any kind of information or new information kind of underlying a level of confidence that you have about the international travel recovery this year?
Neil Mitchill, CFO
Yes. Let me start with the first point. A couple of things have definitely changed since early November. The first was the Omicron variant, which emerged quickly. We hope it will dissipate just as quickly. However, we've taken that into account for our first quarter projections. Looking at today's outlook compared to a few months ago, we anticipate a somewhat slower recovery in the first quarter than previously expected, but we believe it will align with our projections for the second quarter and beyond. We'll see how that unfolds. As I mentioned last year, much depends on airlines preparing for the summer travel season. We expect to see an increase in their activity regarding provisioning and parts in March and April, which ties into your second question about the support for the reopening of international borders. We've seen some international borders reopen in the fourth quarter, particularly in Europe, which is encouraging. As Greg mentioned earlier, realizing our outlined expectations hinges on the Asia Pacific region opening up and the full return of long-haul routes as we approach the end of the year. We'll have to wait and see, but we expect an uptick around March and April that would influence the ranges we're predicting for Collins in particular.
Seth Seifman, Analyst
Great. Thanks Neil.
Neil Mitchill, CFO
Welcome.
Operator, Operator
Your next question comes from the line of Matt Akers with Wells Fargo.
Matt Akers, Analyst
Hey good morning, guys. I was wondering if you could just comment on the new Ashville facility. And I guess, specifically, how far are we sort of through the investment there? And how do you think of sort of the ramp-up of production at that facility?
Neil Mitchill, CFO
Make great progress there in Asheville. The building is up. And when I was looking at it the other day, actually I have visibility to that via webcam. And it's in great shape, so we're on track. Some of the CapEx favorability that we saw here in 2021 is the deferral of some of that spend into 2022. But I'd say, we're on-track there to stand up that facility and get the production going as we had planned to do. So it's really in good shape.
Matt Akers, Analyst
Great. Thanks.
Neil Mitchill, CFO
Welcome.
Operator, Operator
Your next question comes from the line of Doug Harned with Bernstein.
Doug Harned, Analyst
Good morning. Thank you.
Neil Mitchill, CFO
Good morning.
Doug Harned, Analyst
I'd like to revisit the geared turbofan and the outlook for the aftermarket. You've been supplying your turbofans for about six years now. Reflecting on the initial design stages, one of the major benefits was anticipated to be fewer stages, leading to lower maintenance costs. The expectation was that this could result in increased margins in the aftermarket moving forward. Do you still maintain this perspective? If so, when do you expect the aftermarket margins for the GTF to reach the levels we've seen with the V2500?
Greg Hayes, CEO
Doug, that's an interesting question. When we first designed the GTF, we had several priorities, one of which was fuel efficiency, achieving a 15% improvement over the V2500. We accomplished that. However, during the initial delivery years, we faced some challenges with the engine's robustness, particularly regarding the combustor, especially in challenging environments like India. This situation affected the aftermarket, as we had to bring back engines for combustor updates often within a year or two after delivery. Currently, the combustors are lasting at least 10,000 hours, which is positive news, and we're beginning to see that reflected in the aftermarket contracts. As mentioned earlier, the average age of these GTFs is around three years, so we haven't seen significant overhaul activity yet, but that should change in the next two or three years. Consequently, we expect to see margins improve in the aftermarket as heavier overhauls begin. While it may take time for the GTF's profitability to match that of the V2500, we are confident it will. Keep in mind, the V2500 has been around for 30 years and is a highly durable engine. It will take time to increase the number of GTF engines on the market to realize the efficiencies in the aftermarket. Nonetheless, it's a solid design that offers good fuel efficiency and has fewer moving parts, about 1,500 fewer blades than competing engines, which should lead to long-term cost reductions.
Doug Harned, Analyst
Very good. Thank you.
Operator, Operator
This does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Greg Hayes for closing remarks.
Greg Hayes, CEO
Thank you, Lisa, and thanks everybody for listening in today. Again, a lot of moving pieces, but we have high confidence in the outlook that Neil and Jennifer took you through. Look forward to hearing from many of you in the coming days and weeks. Jennifer and the team will be, of course, available all day today and tomorrow to take whatever follow-up questions you might have. Have a wonderful day and stay healthy. Thank you.
Operator, Operator
This concludes today's conference. You may now disconnect.