RTX Corporation

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies First Quarter 2021 Earnings Conference Call. My name is Debra, and I will be your operator today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chief Executive Officer, and Neal Mitchell, Chief Financial Officer. 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 net, non-recurring, and or significant items and acquisition accounting adjustments. 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 this call are subject to risk and uncertainties. RTC's SEC filings, including its forms 8K, 10Q, and 10K, 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.

Okay, thank you, Deborah, and good morning, everyone. Before we jump in, I'd just like to take a couple of minutes to acknowledge the news that most of you saw yesterday of Dr. Kennedy's retirement as Executive Chairman of the Board, effective June 1 of this year. As you've all heard me tell the story, it was just over two years ago that Dr. Kennedy called me to suggest that we merge our two companies. He could see then that in combining their talent, technologies, and capabilities with that we would have the breadth and scale to meet any industry challenge in aerospace and defense. Little did either of us realize then, of course, how quickly a global pandemic would put that value proposition to the test. And yet here we stand today, one year post-merger, and we've made substantial progress, not only in integrating their two heritage companies, but also managing through an unprecedented downturn in commercial aerospace, all the while identifying new technology synergies and establishing an operational rhythm It allows us to meet many of the goals sooner than what we had expected just a year ago. So I want to thank Dr. Kennedy for his leadership, partnership, and stewardship throughout this merger and congratulate him on a distinguished 38-year career with Raytheon. We wish you well, Tom. I'd also like to officially welcome Neal Mitchell in his new role as Chief Financial Officer, though most of you, of course, already know Neal. He's not new to the call. Toby O'Brien stepped down earlier this month, and we thank him for all of his contributions as we formed Raytheon Technologies. Many on this call also know that Neil was our interim CFO at UTC prior to the merger, and since then he's led the IR and financial planning functions. I'm very pleased to have him as our CFO, and I look forward to working together as we continue the integration and cost initiatives that will capture the full value of the Raytheon Technologies company. Lastly, I'd also like to welcome our new head of investor relations, Jennifer Reed. Jennifer, for the past year, has led our integration team. She was vice president of integration. She was responsible for the financial and operational planning activities related to the merger and did a wonderful job. And we'll hear more about that later. So I think that completes the HR section of the call. Let me move on to the numbers. Let's take a look at slide two, please. So as I mentioned, earlier this month, it marked the one-year anniversary of the merger's closing. And I'm proud of the major accomplishments and progress made by our employees and business leaders who came together from across our businesses to execute as a single team. Our ability to adjust to the unique circumstances and stay nimble in this very dynamic operating environment has served us and our investors and customers well. With that, let me take you through the performance and some highlights from the quarter. I'm pleased to say that we've had a really strong start to the year, and we're seeing continued momentum with signs of economic recovery and incremental improvements in domestic aerospace markets, with international markets, of course, remaining challenged. As you saw from the press release this morning, we delivered strong quarterly sales, adjusted EPS, and free cash flow, all of which exceeded our expectations from earlier this year. And while it is still earlier in the year, the rate of vaccine distribution and signs of travel recovery within key domestic markets, specifically the U.S. and China, are better than what we expected just three months ago. In the U.S., daily TSA traffic has averaged about 1.4 million people a day since the beginning of April, nearly double the levels of January of this year. So we're headed in the right direction, with key metrics improving. but we continue to monitor recovery indications around the world and engage with our customers as they prepare for this recovery. On the defense side, happy to say our backlog remains robust at more than $65 billion. These encouraging trends in commercial aerospace and our Q1 performance gives us confidence to raise the low end of our full-year sales range by a half a billion dollars to $63.9 billion, bringing our new sales range for the year at 63.9 to 65.4. We're also going to raise the low end of our full-year adjusted EPS range by a dime to $3.50. That's up from $3.40. So the new range that we expect for the year, somewhere between $3.50 and $3.70. We're going to also maintain our free cash flow outlook for the year of at least $4.5 billion. And Neil will give you a little color on all this later in the call. On the capital deployment front, after a better expected start to earnings and cash in Q1, we're also going to increase our share buyback plan by a half a billion dollars. It'll take it up to $2 billion for the year. During the first quarter, of course, we did resume our share buyback, and we repurchased about $375 million of our stock, giving us a good start to our full-year commitment. You also probably saw yesterday that we increased our dividend by more than 7% yesterday to 51 cents from 47.5 cents. Since the merger last April, we've already returned over $3.2 billion to shareholders between share buyback and dividends, and we remain on track to return at least $18 to $20 billion to shareholders in the first four years following the merger. We also continue to execute well on our synergy programs during the quarter. We achieved nearly $200 million of incremental capital RTX merger synergies, bringing the total since the merger up to $440 million. And given our strong synergy capture to date and the growing opportunities that we see in the pipeline, we're going to increase our cost synergy target by $300 million from $1 billion to $1.3 billion, and I don't think we're done yet. Collins, importantly, also achieved an incremental $40 million in acquisition cost synergies in the quarter, bringing their total acquisition-related savings to $510 million since the deal closed in November of 2018. Lastly, we continue to strategically shape our portfolio with a focus on higher growth, higher technology businesses. We did close on the force point divestiture earlier this year. That brought in about $1.1 billion in gross proceeds without the tax benefit. And we'll continue to be disciplined in M&A as we evaluate both strategic acquisitions as well as strategic divestitures. And with that, let me turn it over to Neil. Mr. Mitchell.

Thank you, Greg. I'm happy to be on the call today in my new capacity as CFO, and I look forward to our continued partnership as we continue to capture the full value of RTX. With that, I'm on slide three. Let me take you through our financial results. I'm pleased with where we landed for the quarter, exceeding expectations on our key metrics. And as we've mentioned previously, Q1 will be the last quarter of tough compares for our commercial aero businesses, resulting from the onset of the pandemic last year. Q1 sales were $15.3 billion, above the midpoint of the outlook we provided in January. Adjusted EPS was 90 cents per share, ahead of our expectations, driven by better than expected operating profit at all four of our businesses, as well as favorability in some corporate items. On a GAAP basis, EPS from continuing operations was 51 cents per share and included 39 cents of net non-recurring and or significant items and acquisition accounting adjustments. Free cash flow of $336 million exceeded our expectations primarily due to better than expected working capital timing, most notably the timing of collections across the businesses. So with that, let me take you through the segment results. Starting with Collins Aerospace on slide four, Sales were $4.4 billion in the quarter, down 32% on an adjusted basis and down 31% on an organic basis, driven primarily by the expected adverse impact of COVID-19 on the commercial aerospace industry. By channel, commercial OE sales were down 45%, again, driven principally by the impact of the current environment. Commercial aftermarket sales were down 43%, driven by a 39% decline in parts and repair, a 66 percent decline in provisioning, and a 32 percent decline in modifications and upgrades. Sequentially, however, commercial aftermarket sales were up 11 percent, driven by growth in parts and repair and modifications and upgrades. Defense sales were down 3 percent on an adjusted basis, but up 4 percent organically. Organic growth was driven by F-35, as well as growth in several avionics product lines. Adjusted operating profit of $332 million was down $952 million from prior year and better than our expectations for the quarter, driven by continued cost control and favorable sales mix. On a year-over-year basis, cost control as well as lower E&D and SG&A were more than offset by lower commercial aftermarket NOE sales volume. Looking ahead to the rest of the year, with a solid start in Q1 and improving trends on the commercial side, we are increasing the low end of Collins sales outlook from a prior range of down high to low single digit to a new range of down mid to low single digit. And based on our first quarter cost containment measures and those improving trends on the commercial side, we're also increasing the low end of Collins operating profit outlook by $75 million to a new range of down $200 million to up $25 million. Shifting to Pratt & Whitney on slide five, Sales of $4 billion were in line with expectations. Year-over-year sales were down 24% on an adjusted basis and down 25% on an organic basis, also driven by the expected adverse impact of the current environment on the industry. Commercial OEM sales were down 40%, driven by lower deliveries across most of Pratt's large commercial engine and Pratt Canada platforms. Commercial aftermarket sales were down 35% in the quarter, driven by an expected decline in shop visits. but growth in the GTF aftermarket volume was more than offset by the impact of a reduction in legacy large commercial engine shop visits of 38% and a 28% reduction in Pratt Canada shop visits. In our military business, sales were up 1% on higher F-135 aftermarket, partially offset by lower volume across certain development programs. Pratt's adjusted operating profit of $40 million was down $475 million from the prior year, significant aftermarket volume reductions and fixed-cost headwinds more than offset continued cost containment measures, including reductions in G&A and E&D. Looking ahead, with a solid start in Q1 and improving trends on the commercial side of the business here, too, we're also increasing the low end of Pratt's full-year sales outlook from a prior range of flat to up mid-single digit to a new range of up low to mid-single digits. And we are increasing the low end of Pratt's operating profit outlook by $50 million to a new range of down $75 million to up $25 million. Turning now to slide six. First, I'll remind everyone that the percentage of completion reset at the merger date continues to impact the compares for both sales and operating profit at the legacy Raytheon businesses. With that, Raytheon intelligence and space sales were $3.8 billion, up 2% versus the prior year, on an adjusted pro forma basis, and better than our expectations for the quarter, driven by higher volume in sensing and effects, particularly airborne ISR. Operating profit in the quarter was $388 million, down $11 million year over year on an adjusted pro forma basis, and a little better than expected due to higher sales volume. It's worth noting that sequentially, the Ross at RIS improved 110 basis points to 10.3%. RIS had bookings in the quarter of $3.7 billion, resulting in a backlog of $19.2 billion. Significant bookings included approximately $1.4 billion on classified programs, as well as several other notable awards. Our Q1 book-to-bill was 1.08. And looking ahead, we remain confident in our full-year outlook for RIS, with sales growing low to mid-single-digit and operating profit growing $125 to $175 million versus adjusted pro forma 2020. Turning now to slide seven, Raytheon missile and defense sales were $3.8 billion, up 3% versus prior year on an adjusted pro forma basis, and better than expected due to higher volume across multiple mission areas. Adjusted operating profit was $496 million, also better than expected and down 43 million year-over-year on an adjusted pro forma basis due to the absence of a favorable prior-year contract settlement and the EAC reset impact that I mentioned. RMD's bookings in the quarter were approximately $2.5 billion, resulting in a backlog of $27.7 billion. Significant bookings in the quarter included an award of approximately $520 million for AMRAAM, for the U.S. Air Force, the Navy, and international customers, and an award of about $250 million to provide Patriot Engineering Services support for the U.S. Army and international customers. It's also worth noting that RMD's industry team was down-selected for the Next Generation Interceptor Award, and we expect to book that award in the second quarter for over $1 billion. Book-to-bill was .68 in the quarter, as expected, as we continue to deliver against the previously awarded multi-year production contracts. Before moving on, I'd also like to make a comment on the previously disclosed ongoing DOJ investigation into cost accounting matters at Legacy Raytheon Company's former Integrated Defense Systems business, or IDS, which is now part of RMD. As you'll see in our upcoming 10-Q filing later today, the investigation includes potential civil liability for defective pricing for three contracts entered into between 2011 and 2013 by IDS. We've provided for our best estimate related to this matter in connection with the finalization of purchase accounting during the quarter. Additionally, as part of the same investigation, we recently received a second subpoena relating to a different IDS contract from 2017. We do not currently believe the resolution of this matter will result in a material impact to our financial condition, and we will continue to cooperate fully with the government's investigation. So turning back to RMD's full year outlook, we continue to expect RMD sales to grow low to mid single digit and operating profit to grow $25 million to $75 million versus adjusted pro forma 2020. And finally, for your reference, we've included an updated outlook for each segment in the webcast appendix. With that, moving to slide eight, let me update you on how we see the current environment as we look ahead at the rest of the year. Starting with our merger synergies, as Greg said, we are increasing our gross merger cost synergy target to $1.3 billion, and that's due to higher expected synergy capture in our corporate office and segment consolidation, as well as additional opportunities we've identified in the supply chain, in footprint consolidation, and in IT. And keep in mind, that's on top of $600 million of Rockwell Collins acquisition synergies. Additionally, we continue to see the benefits of the cost actions we took last year. We're making solid progress on the structural cost reduction actions we previously announced, while at the same time working additional opportunities to drive further cost out of the business. And moving to the commercial side of the business, the shape of the commercial arrow recovery remains critical to our outlook. As Greg mentioned, we're encouraged by the pace of the vaccine distribution and we're seeing signs of increasing travel demand, particularly on many domestic routes. However, we continue to watch Europe and international border reopenings. While we've seen slightly better than expected results to start the year, particularly at Collins as customers prepare for a strong summer travel season, as well as evidence of increasing future travel demand, We still need to see this demand translate to strong sequential growth in RPMs and ASMs as we head into and through the peak summer travel season. As such, the second quarter remains a critical period in determining the recovery profile for the rest of the year. Looking longer term, we continue to expect that it will take until at least 2023 for commercial traffic to return to 2019 levels. For the defense side of our business, we continue to expect both domestic and international program growth to remain robust as evidenced by our over $65 billion defense backlog. Our strength with international customers, our innovative technologies, and our positions in high growth areas gives us confidence in our ability to grow these businesses even in the current domestic budget environment. And finally, our financial strength is underpinned by the strength of our balance sheet and supports our capital deployment commitments. Moving to slide nine, following our strong start to the year, we remain confident in our full year outlook. And as Greg mentioned, we are bringing up the low end of our sales range by $500 million and bringing up the low end of our adjusted EPS range by $0.10, with about $0.06 coming from the segments and the remainder coming from improvement in some corporate items. Now, let me just give you a little color on Q2. At the company level, we see sales in the range of $15.5 billion to $16 billion, adjusted EPS in the range of $0.90 to $0.95 per share, and we see sequential improvement in free cash flow. It's also worth mentioning that we've included an updated outlook for some of the below-the-line items and an updated pension outlook that includes the impact of the latest COVID relief bill in the webcast appendix. So with that, I'll hand it back to Greg to wrap things up.