RTX Corporation

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies fourth quarter 2020 earnings conference call. My name is Norma, and I'll be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chief Executive Officer, Toby O'Brien, Chief Financial Officer, Neal Mitchell, Corporate Vice President, and Financial Planning Analysis and 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.rts.com. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding net non-recurring and non- or significant items and acquisition accounting adjustments, often referred to by management as other significant items. The company also reminds listeners that earnings and cash flow expectations and other forward-looking statements provided in this call are subject to risks and uncertainties. RTC's SEC filings include its forms 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'll turn the call over to Mr. Hayes.

Okay, thank you, Norma, and good morning, everyone. Welcome to 2021. So for those of you following along in the webcast, we're going to start on slide two. Just taking a look back on 2020, as painful as it was, it's obviously one of the most challenging years for our company, for the commercial aerospace industry at large, and for everyone around the globe. But importantly, it was also a transformational year for us as we created an industry-leading aerospace and defense company. I'm really proud of the way our team managed through the pandemic and continue to support our customers, our suppliers, and our communities without missing a beat. In many areas, we were able to accelerate our progress, and we found new ways to increase our productivity that will be a part of how we operate going forward. So let me go over some of the highlights from 2020. And we'll start with the portfolio transformation and integration. We obviously achieved two significant milestones this year by completing the separation of Otis and Carrier as standalone public companies, as well as the merger that same day on April 3rd with Raytheon Company to form Raytheon Technologies. This was a culmination of a multi-year effort to transform the company into an innovative and focused and leading aerospace and defense company that will define the future of the industry. In connection with this transformation, we also completed the divestiture of several businesses, including the sale of Forcepoint that closed earlier this month. All of that resulted in net proceeds of over $3 billion, further strengthening our financial position. We continue to strengthen our portfolio with strategic bolt-on acquisitions, and we'll continue to evaluate other non-core divestitures this year. In December, we completed the acquisition of Blue Canyon Technologies, which will now enable us to deliver a broader range of solutions to support our customers' space missions. And we'll, of course, remain disciplined on M&A. Looking at our performance, we continue to execute on the integration of both the merger as well as the Rockwell Collins acquisitions. So we achieved about $240 million of gross synergies from the merger, and that's well above our initial target of $200 million. And at Collins, we achieved about $170 million of incremental cost synergies, again, above our target for the year of $150 million. So since the acquisition of Collins in November of 2018, we have seen about $470 million of synergies, well on our way to the $600 million that we had committed to. On cash, we exceeded our cash conservation commitments and fully executed on our cost reduction plans with early and decisive actions that we announced in May of last year. For the full year, we achieved about $4.7 billion of cash conservation, as well as more than $2 billion in cost reduction. And of course, we'll continue to take other structural cost reduction actions, which we'll cover in more detail in a little bit. So despite the continued economic environment in the quarter, we finished the year with better than expected sales, earnings, and free cash flow. Free cash flow was significantly better at $747 million in the quarter, and that was driven by exceeding our cash conservation actions as well as strong collections across the portfolio. And that $747 million is after making $800 million of discretionary pension contributions in December. So for the full year, former free cash flow was $2.3 billion, which we see growing to at least $4.5 billion in 2021. And Toby will take you through the full year outlook later in the call. The aggressive short and long-term cost reduction actions that we've taken have enabled us to emerge from 2020 as a stronger company with a better cost structure and stronger free cash flow generating capabilities. To be clear, When the commercial aerospace markets rebound, I'm confident in our ability to get back to the levels of cash flow contemplated before the pandemic. Also, with the strength of our cash flows and our confidence in the recovery, we remain committed to returning $18 to $20 billion of capital to our shareholders in the four years following the merger. As you saw back in December, our board authorized a new $5 billion share buyback program that And in 2021, we plan to opportunistically buy back at least $1.5 billion of shares. And we remain fully committed to our dividend and growing our dividend as earnings recover. Over the past year, our defense businesses remained resilient. Our defense backlog ended the year at over $67 billion, and our key defense franchises are well-funded and aligned with the National Defense Strategy, positioning us for further growth this year and the following. Turning to our segments, let me share just a few highlights for the year. Let me start with Collins. So Collins partnered with airline customers to develop some innovative solutions, including touchless airport kiosks, aircraft fixtures, and antiviral surface coatings and enhanced air filtration systems to make air travel even safer and healthier. At Pratt, the geared turbofan fleet reached over 7.5 million revenue hours. and fleet utilization continuing to improve as we exited the year, demonstrating the value proposition of this unique engine technology for our customers. Importantly, dispatch reliability improved to 99.97% for the fleet. At Raytheon Intelligence and Space, the team had $4.3 billion of classified bookings in high technology areas that will drive growth well into the future. And finally, at Raytheon Missiles and Defense, the team delivered a historic flight test where, for the first time ever, an SM-3 Block IIA missile launched at sea, successfully intercepted and destroyed an intercontinental ballistic missile target outside of the Earth's atmosphere. Truly extraordinary technology. So with that, let me turn it over to Toby to have him walk you through our financial forums for the quarter.

Toby? Okay, thanks, Greg. Moving on to slide three. Let me first give you an update on some of the key actions we have taken to right-size the cost structure of our organization. First, as Greg highlighted, we overdrove the cost reduction and cash conservation commitments we set early last year, and we'll see continued benefits from those actions in 2021 and beyond. Next, on the synergy front, excellent momentum there as we exceeded both our RTX and Collins targets in 2020 with a significant increase anticipated in 2021. We also announced a number of other cost reductions that are more structural in nature. To start, we previously took the difficult action to reduce commercial headcount at Collins and Pratt by 15,000 and to eliminate 4,000 contractor roles. We have recently reduced commercial headcount at Collins by another 1,500 bringing the total to 16,500, and contractors by another 500, bringing the total to approximately 4,500 contractors as we continue to position the business for strength as the industry recovers, reducing our total commercial arrowhead count now by approximately 20%. And as you've heard, we announced Pratt's investment in a new airfoil facility and that we are shifting some production of circuit cards to our Circuit Card Center of Excellence. and we're not just looking at the commercial side of our business for cost reduction. At RIS, we're undertaking an initiative to consolidate manufacturing that will yield footprint consolidation of 280,000 square feet and savings of $160 million over a 10-year period. Initial planning is underway, and the project will be complete by mid-2025. Additionally, we are taking aggressive steps to reduce our office footprint by up to 25% over the next several years, with a 1.6 million square foot reduction expected by the end of this year. And as always, we are continuously looking for other opportunities to permanently reduce costs to position us for even better long-term profitability. Moving on to slide four, let me take you through our fourth quarter results where our performance was better than expected. Adjusted sales were $16.6 billion. with all four segments contributing to about $1.6 billion of sequential growth. Adjusted EPS was 74 cents, better than expected, primarily driven by a lower effective tax rate, as well as higher than expected commercial volume at Pratt & Collins that was partially offset by an EAC adjustment at RIS and some latter timing of awards at RMD. On a GAAP basis, EPS from continuing operations was $0.10 per share and included $0.64 of net nonrecurring and or significant items and acquisition accounting adjustments. Free cash flow of $747 million was better than expected and included $800 million of discretionary pension contributions, as well as approximately $360 million of merger costs, restructuring, and tax payments on divestitures. The better-than-expected cash flow was driven primarily by exceeding our cash conservation actions, including inventory reductions at Collins, as well as stronger collections across all of our businesses. With that, I'll hand it over to Neil to take you through the segment results, and I'll come back and share some perspectives on the year ahead. Neil?