RTX Corporation

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies second quarter 2021 earnings conference call. My name is Tabitha, 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, Chairman and Chief Executive Officer, Neal Mitchell, 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 net non-reoccurring 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 the 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 anticipated and forward-looking statements. Once a call opens for questions, we ask that you limit your round to one question per caller to give everyone the opportunity to participate. To ask questions, you'll need to press star 1 on your telephone. To remove yourself from queue, press the pound key. You may ask further questions by reinserting yourself into queue as time permits. With that, I'll turn the call over to Mr. Hayes.

Thank you, Tabitha, and good morning, everyone. I'm on slide two of the deck for those of you following along. So a couple of months ago, we held our first investor day as Raytheon Technologies. And that day, we laid out our 2025 goals to deliver strong top-line growth, margin expansion, and at least $10 billion in free cash flow by 2025, all while continuing to invest in our businesses and return significant cash to our shareholders. We continue to be confident in the future because of our strong franchises, the resilient markets in which we operate, our innovative technologies, and our relentless focus on operational excellence and cost reduction, which will drive margin expansion and strong cash flows into the future. And we continue to see encouraging trends across our market. Our confidence and our ability to achieve these targets remain strong. And as you saw at the end of May, the Department of Defense released a fiscal year 22 budget request which was generally in line with our expectations with respect to our portfolio of products and the investments we're making in differentiated technologies, including missile defense, space-based systems, next-generation propulsion, and hypersonics. Major RTX programs fared well overall as modernization funding remains at near historic highs. Requested funding for these programs is favorable to the overall DoD modernization request, when compared to last year's plan for fiscal year 22. It's also worth noting that the overall classified funding request, which supports a significant part of our intelligence and space portfolio, was also very well supported. So I'd say we're well positioned with the administration's priorities, driven by our innovative technologies and capabilities to address the evolving threat of our environment. This is demonstrated, of course, by the significant awards we received this quarter, which included over a billion dollars in classified bookings at RIS and two important franchise wins at our missile and defense business, where we were awarded almost $2 billion for the Long Range Standoff Weapon, or LRSO, and $1.3 billion for the Next Generation Interceptor. Also, we should note that the Patriot franchise remains robust, as evidenced by Switzerland becoming the 18th partner nation, to select the Patriot air defense system. At the same time, commercial air traffic demand continues to gain momentum across many of our domestic markets as global economies reopen and vaccinations increase. In the U.S., daily travelers throughout the TSA checkpoints have averaged over $2 million per day in July, and that's more than double since January of this year. That said, we are monitoring the COVID variants and the impact on travel. There's still work to do on global vaccinations and on international border reopenings. All right, with that, let's turn to slide three and just talk about Q2 for a moment if we can. As you saw from our press release, strong performance during the quarter with sales at the high end of our expectations and adjusted EPS and free cash flow exceeding those expectations that we laid out for you last quarter. Strong execution against an increasingly favorable backdrop enabled us to deliver top and bottom line growth on both a year-over-year and a sequential basis. So given our performance year-to-date and the recent trends across our end markets, we're going to raise the low end of our full year sales outlook by $500 million to a new range of $64.4 billion to $65.4 billion. And we're also going to raise and tighten our adjusted EPS outlook with a new range of $385 to $4 per share. and we're increasing our free cash flow outlook to a range of $4.5 to $5 billion for the year. I'm pleased with the strong orders we saw in the quarter, which grew our company backlog to a record $152 billion. That's a 3% increase since the first quarter. Our defense book to bill was a strong 1.12, resulting in a defense backlog of over $66 billion, and commercial backlog increased by $3.5 billion in the quarter. On the capital allocation front, we repurchased 632 million shares, bringing us to over a billion dollars in share repurchase year-to-date. And we're on track to meet our commitment of buying back at least $2 billion of shares for the year. We also continue to execute on the merger integration activities. And given our substantial progress and the robust pipeline of opportunities, we're going to raise our gross cost synergy target by another $200 million to $1.5 billion. And that $1.5 billion will be realized in the first four years following the merger. That's now 50% more than our original synergy commitment, and there's great execution by the team, but I would tell you we're not done yet. Like everything, there's always more to do. In addition to making good progress on our synergy targets, we're also making significant progress on our structural cost reduction projects, which you've heard about back in our May meeting. We have a pipeline with hundreds of opportunities, including the previously announced actions that we're working across the business. Let me just give you a couple of examples of what we are doing. Our Collins Aerostructures business has scheduled over 125 lean events this year, and they're focused on specifically reducing the tack time, labor time for the A320 NEO nacelle. We've invested in lean events such as these throughout the pandemic because they've allowed the aerostructures business to reduce nacelle manufacturing time by over 75%. Of course, our normal goal here is about an 87% learning curve. These lean events allow us to exceed that in incredible ways. At Pratt, we continue to build on the overhaul capability and drive turnaround time across our geared turbofan network. The team has made good progress this year, demonstrating a 15% turnaround time improvement over the past year, but importantly, they're on track to drive a 30% reduction by the end of this year. These improvements are the direct result of repair infrastructure development and additional productivity improvements across the network, including the application of lean principles in their shop design as well as automation. Our strong culture of operational excellence is enabled, of course, by the core operating system and significant investments in digital technology and other strategic projects. Altogether, these initiatives will save over $5 billion in costs through 2025. So you can see the market fundamentals are strong. We're laser-focused on operational excellence, and our key franchises are driving strong financial performance. So with that, let me turn it over to Neil and Jennifer to take you through Q2 and the year.

Neil? Thanks, Greg. I'm on slide four. As you could expect, I'm pleased with where we landed for the quarter. We exceeded our expectations for both adjusted earnings per share and free cash flow. Sales were $15.9 billion, which was at the high end of our outlook range, and up 10% organically versus prior year on an adjusted pro forma basis, and up 4% sequentially. Our strong performance was driven by the momentum in commercial aerospace and continued growth in defense. Adjusted earnings per share of $1.03 was ahead of our expectations, primarily driven by commercial aftermarket and contract-related settlements at Collins, but also better-than-expected performance at Pratt, RIS, and RMD. On a GAAP basis, earnings per share from continuing operations was 69 cents per share and included 34 cents of acquisition accounting adjustments and net significant and or non-recurring items. Free cash flow of $966 million exceeded our expectations primarily due to the continuation of better than expected collections and lower than expected capital expenditures. Before I hand it over to Jennifer, let me give you a little color on our synergy progress. We achieved $185 million of incremental gross cost synergies in the quarter, bringing our year-to-date savings to $390 million. And given the pace that we've realized these synergies on today, we're increasing our 2021 cost synergy target by $50 million, which brings our new target for the year to $660 million. Collins also achieved nearly $50 million of further acquisition synergies in the quarter, bringing total Rockwell Collins acquisition-related savings to nearly $560 million since the deal closed in November of 2018. And we now expect Collins to meet their $600 million acquisition synergy target in 2021, a year ahead of schedule. So great work by the Collins team on that front. So with that, I'll hand it over to Jennifer to take you through the segment results, and I'll come back and talk a bit about the outlook. Jennifer?