RTX Corporation

Good day, ladies and gentlemen, and welcome to the Raytheon First Quarter 2019 Earnings Conference Call. My name is Shannon, and I will be your operator for today. As a reminder, this conference has been recorded for replay purposes. I would now like to turn the call over to Ms. Kelsey DeBrian, Vice President of Investor Relations. Please proceed.

Thank you, Shannon. Good morning, everyone. Thank you for joining us today on our Second Quarter Conference Call. The results that we announced this morning, the audio feed of this call, and the slides that we'll reference are available on our website at Raytheon.com. Following this morning's call, an archive of both the audio replay and a printable version of the slides will be available in the investor relations section of our website. With me today are Tom Kennedy, our Chairman and Chief Executive Officer, and Toby O'Brien, our Chief Financial Officer. We'll start with some brief remarks by Tom and Toby and then move on to questions. Before I turn the call over to Tom, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance, and the proposed merger with UTC constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and are discussed in detail in our SEC filings. And with respect to the proposed merger and related matters in the registration statement on Form S-4 filed by UTC with the SEC on July 17, 2019. With that, I'll turn the call over to Tom.

Thank you, Kelsey. Good morning, everyone. Raytheon delivered very strong operating performance in the second quarter. Sales increased 8.1%, and our bookings, sales, operating margin, EPS, and operating cash flow all exceeded our expectations. We continue to see strong global demand for advanced solutions. Our book-to-bill ratio in the second quarter was 1.32. This drove an increase in backlog of $3.3 billion over year over year to a new record backlog of over $43 billion. Given these strong results, the opportunities we see in the second half of the year, and the strength of our domestic bookings, we are increasing our bookings outlook for the year by $1.5 billion. Our 2019 bookings performance positions us well for continued growth in the future. Also, we are increasing our outlook for sales, operating income, EPS, and operating cash flow for the year. Toby will discuss additional details about our second quarter performance and increases to guidance in a few minutes. This strong quarter with a healthy book-to-bill ratio and record backlog is clear evidence that we are making the right investments in the right innovative technologies to position the company for strong growth in the future. Additionally, I want to take a few minutes to discuss the breadth of Raytheon's franchises, and the strength of our advanced and innovative technologies that are positioning the company for this future growth. As we think about our franchises, we not only extend them by refreshing their technology, we also seek to take them internationally to broaden our markets. This has been our strategy with our combat proven Patriot franchise, where during the quarter, we continue to make progress on international opportunities. In May, we booked almost $500 million on our next phase award with Romania to purchase Patriot. Additional follow-on awards to complete the program are expected to be booked in 2020 and 2021. We continue to see the total Raytheon Romania Patriot opportunity to be around $2 billion. And in June, we booked almost $400 million on an award with the state of Qatar, a current member of the Patriot 16 country coalition, to purchase additional Patriot capabilities. In July, we received an award from Germany for over $100 million to upgrade 14 Patriot fire units to the current configuration 3+. As you can see, nations want to protect their sovereignty, and the demand signal for proven defensive systems like Patriot is strong and global. Demand for our integrated air and missile defense solutions is also driving growth in another key franchise. Over the last few months, we've added two new countries to the NASAMS family, a mid-range solution jointly manufactured by Raytheon and Konsberg. In May, we booked over $500 million to provide NASAMS for Australia. And in early July, after the quarter closed, we received a $1.8 billion award to provide Qatar with NASAMS. Qatar is the 11th country to procure NASAMS. which uses a Raytheon radar and it fires multiple interceptors, including our AMRAAM, AMRAAM Extended Range, and AIM-9X missiles. As a result, NASAMS helps us expand two more of our franchises, AMRAAM and AIM-9X. For AMRAAM, Raytheon is continuing to expand capability with the development of the AMRAAM Extended Range and expansion of capability to support land-based applications. As part of Qatar's procurement of the NASAM system, it will also be the launch customer of the AMRAAM ER surface-to-air missile, which significantly extends both the range and the market of the NASAM system. We expect a foreign military sales contract award from Qatar for AMRAAM ER next year. Given the current and projected domestic and FMS orders, we have line of sight to a production pipeline for AMRAAM for at least the next 15 years. In May, Raytheon launched an AIM-9X Sidewinder Block II missile for the first time from NASAMS and engaged and destroyed a target during a flight test supported by the Royal Norwegian Air Force. This flight test opens the door for NASAMS customers to add a vital short-range layer to their ground-based air defense to give them complementary interceptors to better engage and destroy threats. In the airborne radar market, we're innovating to extend franchises. with our Advanced Active Electronically Scanned Array, or AESA, solutions. In July, Raytheon was selected as a radar supplier for the B-52 bomber radar modernization program, displacing the incumbent and extending our airborne radar franchise. Under the contract, Raytheon will design, develop, produce, and sustain AESA radar systems for the entire U.S. Air Force B-52 fleet. With improved navigation, reliability, mapping, and detection range, the advanced radar upgrade will ensure the aircraft remains mission-ready through 2050 and beyond. Technology is the backbone of Raytheon, and we had many accomplishments in the quarter that highlighted our capabilities. For example, during the quarter, we announced that IIS is working with the U.S. military's V-22 Joint Program Office to test a new artificial intelligence tool to provide prognostics to better determine when repairs are needed for the multi-mode radar installed on the US Air Force CV-22 Ospreys. By using performance data we are already collecting on CV-22 radars, an AI tool can tell us exactly when the radar may need to be repaired or replaced, keeping the plane in service longer and saving money for the government. Raytheon and the Air Force are working on this pilot program with benefits expected as early as 2020. In June, our Stormbreaker weapon completed operational testing moving it closer to initial operational capability and bringing this new capability to our domestic and international markets. This smart weapon is packed with innovative technology and has a tri-mode seeker and data link with embedded machine learning. As a result, the seeker can detect, classify, and track targets even in adverse weather conditions from standoff ranges and can eliminate a wide range of targets with fewer aircraft, reducing the pilot's time in harm's way. And in May, Raytheon successfully completed technical testing at White Sands Missile Range in support of the sense off for the US Army's lower tier air and missile defense sensor. The two week missile defense demonstration highlighted Raytheon's readiness to deliver mission critical LTAM's capability to the US Army. Our clean sheet approach and decades long investments in gallium nitride technology allowed us to demonstrate and deliver a mature solution that will meet the Army's initial operational capability. Our solution also showcased advanced capabilities and ease of maintenance and sustainment to the soldiers. Earlier this month, we submitted a written proposal on LTAMS addressing the Army's key evaluation criteria, and we are confident that we have the right advanced solution for our customer. In July, we completed a successful test of our solid rocket motor for deep strike, Raytheon's offering for the U.S. Army's Precision Strike Missile, or PRISM, program. PRISM will replace the ATACOM's missile. Whether it be from our record backlog, breadth of franchises that we continue to refresh and take internationally, or innovative technology solutions for our customers, the company is focused and firing on all cylinders. Our competitive win rates for Raytheon are around 70%, up from 50% a few years ago. We have a strong outlook for our business for the next five years, 10 years, and beyond. In addition, we are also optimistic about the strength of the defense market, both domestically and internationally. For the US defense market, the DOD budget environment continues to be strong, with modernization accounts demonstrating healthy growth over the last few years. And internationally, the dynamic and unpredictable geopolitical environment continues to generate strong demand for advanced solutions across the regions of Europe, MENA, and Asia Pacific. We begin the second half with continued confidence in our growth outlook and operating performance. And it is from this position of strength and strong outlook that we agreed to combine with United Technologies Aerospace Businesses in a merger of equals transaction. It was a little over a year ago when we also had a strong outlook for Raytheon and the defense market that I approached Greg Hayes. I did so because I was excited about what Raytheon and UTC could accomplish together by combining our technology to both further strengthen our current franchises and create new ones. Given the growth in the DoD research and development spending and the broad shift to new technologies to provide solutions to counter peer threats, in 2018 and 2019, the growth rates for the R&D accounts were higher than the growth rates of the base budget and overall modernization accounts. This growth trend is expected to continue in 2020 and beyond to support the National Defense Strategy and plays to the strengths of the combined company and is well aligned to the NDS priorities. By combining our technologies with UTC's complementary technologies, we can go after and win an increased number of these franchise opportunities. These revenue synergy opportunities from our combined technologies will turn into franchises and continue to be value generators for decades to come. positioning the combined company to increase market share and outgrow the aerospace and defense markets. There are numerous examples of these revenue synergies, including improved directed weapons by having an enhanced power source, opportunities to incorporate our new expeditionary landing system on military aircraft by changing software in a cockpit, using air traffic control experience to better position us to participate in upcoming air traffic control modernization competitions, and using engine signature management technology to better position us on a multibillion-dollar franchise opportunity. These are the few of the many revenue synergy examples that we expect to achieve as a combined company. The bottom line is we can start creating these revenue synergies immediately, on day one of becoming a combined company. These potential revenue synergies from our complementary technologies are sizable and in the multi-billions of dollars. In short, we are convinced of the merits of the transaction with UTC and are confident about the benefits it will bring to our shareholders, customers, and employees. Let me close by thanking all the members of the Raytheon team worldwide. They are the ones who are developing the solutions to grow our franchises, meeting customer needs and delivering the performance that gives us such a strong outlook. Thank you for helping us continue to create the trusted, innovative solutions we're known for around the world, and for helping us meet our commitments to our customers and shareholders. With that, I'll turn the call over to Toby. Thanks, Tom.