Neil Mitchill
Chief Financial Officer at RTX
Thank you, Jennifer. Let's turn to Slide 7. Before I get into the specifics on our '24 financial outlook, just a couple of comments on the environment as we look ahead.
So let me start with the positives. As Chris said, global RPMs are back to 2019 levels. However, they have not fully recovered with respect to long-haul international travel, particularly widebody, but that is expected to continue to be a tailwind for us going forward. On the narrow-body side, demand for new aircraft remains strong, which continues to support both OE and aftermarket growth.
Specific to the commercial OE side, with increasing commercial production rates, we expect commercial OE revenue will be up between about 10% and 15% in '24. Now, with respect to commercial aftermarket, we currently expect sales to be up over 10% in '24, and that's on top of the 23% growth we saw in '23.
Turning to defense, global defense spending remains elevated, which will continue to support our backlog ahead as our key programs remain well-funded. Across RTX, we remain laser-focused on driving operational excellence to deliver cost reduction and further margin expansion. In 2023, we achieved $295 million of incremental RTX merger cost synergies, keeping us on track to achieve our $2 billion in gross cost synergy goal by the end of 2025.
On the challenges side, there are certain pockets where inflation remains elevated, and we will see the lingering effect of the past couple of years' inflation as we deliver on our backlog. In '24, we expect to see about $1.7 billion of material and labor inflation, which we expect to be more than offset by higher pricing and the benefits from our digital transformation projects and other aggressive cost reduction initiatives across the company.
And as Chris said before, we continue to focus on executing on our GTF fleet management plans and are working relentlessly to mitigate further disruption to our customers. And of course, we're continuing to support the health of the supply chain. While we are seeing continued improvements, there are areas that remain challenged, where we are dedicating resources, including suppliers who provide structural castings and rocket motors, two critical areas that continue to pace our recovery.
And as I mentioned back in October, we continue to see headwinds due to the actions we have taken to preserve the improved funding status of our pension plans, as well as the recognition of historical asset experience. And finally, we're keeping an eye on the U.S. and global tax environment, congressional action on the fiscal year '24 budget, and of course, the broader geopolitical and macroeconomic environment. So with that backdrop, let me tell you how this translates to our financial outlook for the year on Slide 8. At the RTX level, we expect another year of solid growth and adjusted sales, segment operating profit and earnings per share, along with continued strength in free cash flow.
Before I get into the details, let me share with you a couple of key assumptions embedded in our outlook as it relates to the two dispositions we announced last year. First, with respect to the Raytheon cybersecurity business, we have assumed that this transaction will close here in the first quarter. Therefore, on a reported basis, we will see about a $1.3 billion year-over-year reduction in reported sales and about an $80 million year-over-year headwind to operating profit.
The Collins '24 outlook still includes the actuation business as we continue to work on the business disposition. So with that, starting with sales, at the RTX level, we expect full year 2024 sales of between $78 billion and $79 billion, which translates to organic growth of between 7% and 8% year-over-year. From an earnings perspective, we expect adjusted EPS of between $5.25 and $5.40, and that's up 4% to 7% year-over-year. And we expect to generate free cash flow of about $5.7 billion for the year. And despite only being up $200 million year-over-year, there is strong operational improvement.
So let me take you through the moving pieces. First, we are expecting strong segment profit growth and working capital improvement to drive $2.3 billion of improvement year-over-year. Embedded in that is about a $100 million headwind on higher capex in '24 as we continue to invest in capacity expansion, digital transformation, and operational modernization. Payments related to powdered metal impacts are expected to be a headwind of about $1.3 billion. We'll also see a net headwind of about $500 million, primarily from higher interest expense, principally from the debt we issued to fund the ASR. And finally, a headwind of about $300 million from lower pension cash recovery.
Now let me turn to our EPS walk. Starting at the segment level, operating profit growth of about 16% is expected to result in approximately $0.72 of EPS growth at the midpoint of our outlook range. With respect to pension, while markets have improved since our call in October, there will still be a headwind of about $0.36 year-over-year.
And as I just mentioned, given the increased debt outstanding, interest expense will be a $0.30 headwind. A lower average outstanding share count resulting from our recent ASR will provide a tailwind of about $0.37. And finally, our tax rate in '24 is expected to be approximately 19.5% versus the 18.5% in 2023. This, combined with higher corporate investments and digital transformation, will result in a $0.16 headwind year-over-year. All of this brings us to our outlook range of $5.25 to $5.40 per share.
Okay, with that, let's go to Slide 9 to get into our outlook buy segment, where we expect continued organic sales and earnings growth across all three businesses. Starting with Collins, we expect full year sales to be up mid- to high-single-digits on both an adjusted and organic basis, primarily driven by both wide-body and narrow-body commercial OE production ramps and continued commercial aftermarket.
Military sales at Collins are expected to be up low- to mid-single-digits for the year. With respect to Collins' adjusted operating profit, we expect it to grow between $650 million and $725 million versus last year. This is primarily driven by drop-through on higher volume across all three channels, as well as higher pricing and the benefit from continued cost reduction initiatives.
Turning to Pratt & Whitney, we expect full year sales to be up low double-digits on an adjusted and organic basis versus prior year, driven by higher OE deliveries in both Pratt's large commercial engine and Pratt Canada businesses, as well as continued growth in shop visits across legacy large commercial engines, GTF, and Pratt Canada.
Military sales at Pratt are expected to be up mid single-digits driven by higher F135 sustainment volume as heavy overhauls continue to ramp. As a result, we expect Pratt's adjusted operating profit to grow between $400 million and $475 million versus last year, primarily on commercial aftermarket drop-through and military growth, which will be partially offset by higher large commercial OE deliveries.
And at Raytheon, on an organic basis, we expect sales to grow low- to mid-single-digits versus 2023 as we deliver our backlog and continue to see supply chain improvement. Adjusted operating profit at Raytheon is expected to be up between $100 million and $200 million versus prior year, driven by drop-through on higher volume and improvement in productivity, which will be partially offset by mix headwinds. Keep in mind, we'll see about $80 million of year-over-year headwind from the divestiture of the cybersecurity business this year.
And to wrap-up our outlook, at the RTX level, higher intercompany activity will increase sales eliminations by about 10% year-over-year, and we've included an outlook for some of the below-the-line items and pension in the webcast dependencies.
Finally, let me make a few comments on our 2025 financial commitments. As you know, there have been some significant changes in the macro-environment since we first established these long-term targets, impacts ranging from Russian sanctions, elevated inflation, issues with labor availability and, of course, the associated disruptions throughout the supply chain. And we continue to take incremental actions to further reduce costs, realign our business units, increasing pricing and investing in productivity improvements to combat these headwinds.
Other factors underlying our long-term assumptions, however, have been also positive such as the pace of the commercial aero recovery and demand for our defense products and services. All that said, despite those puts and takes, we continue to expect Collins and Pratt to be within the sales and operating profit 2020 to 2025 growth targets we discussed last year at our Investor Day. However, because of the recent performance at Raytheon, we are recalibrating our outlook for this segment. When taking into account divestitures, we now expect the 2020 to 2025 annual growth rate for adjusted sales to be between 3% and 3.5%, that's down slightly from our previous expectation of 3.5% to 4.5% for the same period and driven largely by the initiatives we talked about upfront that will take some time to convert over the next couple of years.
As you know, demand remains strong, and our robust backlog will continue to support significant top-line growth going forward. Similarly, with respect to Raytheon's adjusted operating profit growth, given the continued productivity challenges we described, we now see Raytheon's 2020 to 2025 annual growth rate to be between 1% and 2.5%, which is down from our prior outlook of between 5.5% to 7.5%. As a result of this segment change, we now see the RTX level adjusted sales, annual growth rate from 2020 through 2025 to be between 5.5% and 6% on an organic basis. That's down slightly from our prior outlook of between 6% and 7%.
And taking into account the adjustment to Raytheon's operating profit outlook, we now see overall RTX adjusted margin expansion to be between 500 basis points and 550 basis points between 2020 and 2025, and that's down from our prior outlook of between 550 basis points and 650 basis points. However, importantly there is no change to our RTX 2025 free cash flow target of $7.5 billion as we remain confident in the significant cash-generating capability of our businesses, and we are continuing to drive structural cost reduction and working capital improvements as we invest in the business and deliver on our commitment to return $36 billion to $37 billion of capital to shareowners from the date of the merger through '25.
So with that, I'll hand it back to Greg to wrap things up.
