RTX Corporation

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies fourth quarter 2022 earnings conference call. My name is Lateef, and I will 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, Chris Caio, Chief Operating 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 acquisition, accounting adjustments, and net non-recurring and or significant items, 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 uncertainty. Raytheon Technologies 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 statement. 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. To ask a question, you will need to press star 1 1 on your telephone. 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.

Thank you, Lateef, and good morning, everyone. I hope you all had a chance to review our press release this morning. Before we get into the highlights, I'd first like to welcome Chris Callio to the call. As you know, Chris has been our Chief Operating Officer for the last year and has been responsible for our business units as well as our operations, engineering, and digital functions. Effective March 1, Chris has been elected to the position of President and Chief Operating Officer of RTX. Chris has been instrumental over this past year in driving our focus on operational excellence and delivering for our customers in a very challenging environment. So welcome, Chris. Okay, let's go to the webcast slide for slide two. We'll talk about some of the highlights for 2022. I don't have to tell anybody that 2022 was an incredibly dynamic year, but I'm pleased to say that we were able to achieve, despite facing a number of significant challenges, including transitioning out of Russia, managing record levels of inflation, as well as supply chain and labor constraints. With all that as a backdrop, we still delivered $67.1 billion in sales for the full year, which was up 6% organically, and adjusted EPS of $4.78, which was up 12% year over year. We also returned almost $6 billion of capital to shareholders, which included $2.8 billion of share repurchases. And more importantly, even with the $1.6 billion headwind from the R&D tax legislation, we generated $4.9 billion in free cash flow, which exceeded our expectations. At the same time, we've continued to position the business for sustained profitable growth. In 2022, we captured $86 billion in new bookings, resulting in backlog growth of 12%, a book-to-bill of 1.28, and a near-record backlog at the end of the year of $175 billion. Additionally, we were granted over 2,600 patents last year. This places us in the top 10 of companies in the United States for the second consecutive year. While we invested nine billion dollars in r d and capex this allowed us to bring new technologies to our market and drive further automation and digitization through each phase of our product lifestyle from design through development through manufacturing and product sustainment our investment in recent awards supports our mission to create a safer and more connected world which was especially true in 2022. our products and technologies have been instrumental in helping the people of ukraine defend itself From the Stinger, Javelin, and Excalibur to NASAMS and now Patriot air and missile defense system, we remain in lockstep with the U.S. government to ensure we can continue to support our allies. On the commercial side of the business, we saw continued advancements on our path towards leading the future of sustainable aviation with the start of development flight testing of the GTF Advantage engine. which, as you know, further enhances the GTF's position as the leader in fuel efficiency and CO2 emissions. Importantly, we also completed the first engine test run for our regional hybrid electric flight demonstrator. This system integrates a 1-megawatt electric motor, which was developed by Collins, with a highly efficient Pratt & Whitney fuel-burning engine, specifically adapted for hybrid electric operations. This new engine will reduce fuel burn and CO2 emissions by 30%, compared to today's most advanced regional turboprop aircraft. These types of investments, along with strong demand across both the commercial and defense end markets, will position us for continued growth as we head into 2023. We're particularly proud that RTX outperformed among all companies in the Russell 1000 for local US job creation in 2022. RTX leads the industry in employee giving and volunteering, which is a testament to the impact our workforce has in the communities where we work and where we live. Before I turn it over to Chris, I just want to spend a minute to talk about the status of our integration and the next steps as we evolve as a pure play aerospace and defense company. As you know, in 2020, we brought together two great companies, UTC Aerospace Business and Raytheon. With combined strength, scale, and capabilities, it makes us uniquely equipped to innovate and deliver game-changing technologies and solutions for our customers. As we approach the third anniversary of this merger, we've accomplished many of our objectives, including exceeding our original synergy commitment, and we see even more opportunities ahead. So today, we're starting the next step in our integration and evolution. Our plan is to streamline our structure to a customer-centric organization with three focus segments, Collins Aerospace, Raytheon, and Pratt & Whitney. This will better align us with our customers' needs and allow us to better collaborate on next-generation technology. There's still a lot of work to be done to make this happen, but let me turn it over to Chris to give you some of the additional details of this transformation and some additional business updates. Chris?

All right. Thank you, Greg. It's great to join today's call, and I'm looking forward to engaging more with everybody. I'm starting here on slide three. Over the past year, I've been focused with our team on driving operational performance and program execution, as well as identifying ways to improve our cost position and to ensure alignment between our investments and our strategic priorities. As Greg noted, our merger integration is nearly complete, having realized gross cost synergies of $1.4 billion. And so we are now in the process of realigning RTX into three business units. Let me give you some additional color around our thinking on this. At its core, this move is about enabling us to better coordinate with our customers and aligning with their needs, and collaborating more effectively across our businesses, all of which is feedback we've received from our customers. All of this will ultimately enhance performance, make us even more competitive, and allow us to capture additional revenue synergies in areas such as connected battle space. For example, just this past year, we were awarded a phase of the JADC2 effort known as TITAN. where RIS and Collins are working together to deliver this cutting-edge solution to ensure our joint forces have one common operating picture of the battle space. Additionally, this realignment will allow us to better leverage our scale so we can optimize our footprint, improve resource allocation, and reduce costs for both RTX and our customers. Now, we don't have a number for you today in terms of cost savings, as we are in the early stages of that analysis, but we do believe there are additional material opportunities to be realized. In connection with this reorganization, Roy Azevedo, President of RIS Business, informed us of his plan to retire. Roy will, however, stay on as an advisor over the next several months to help us with this important transformation. Sean Murrell, currently the CFO of RIS, has been named Acting President of RIS, effective February 1st. While organizational changes like this are never easy, we have demonstrated our ability to successfully execute on these types of initiatives in the past. and many members of the team involved in this process have experienced more recent portfolio and merger transformations. The exact timing of this change isn't final yet. The current plan is to make it effective during the second half of the year. Until then, we'll manage the business under our current structure. We'll provide updates on our progress over the coming months. Before I turn it over to Neil to discuss our results for the quarter and the outlook for the year, I want to turn to slide four to share some of our critical assumptions for 2023. in the areas where we're focused to ensure we execute on our commitments. As Greg mentioned earlier, customer demand for our products and services continues to grow. In commercial aerospace, we expect global air traffic to fully recover to 2019 levels as we exit 2023, with continued strength in the U.S. and Europe. This is pretty consistent from what we're all hearing from the airlines. And like everyone else, we're keeping a close eye on China, which historically has represented about 14% of global air traffic. Our working assumption today is that China's lifting of COVID restrictions continues to be manageable and its traffic levels will remain robust. We also assume traffic in other parts of the world remain resilient. We are therefore expecting commercial aftermarket revenue growth across our aerospace businesses to approach 20% in 2023. Commercial production rates are also quickly accelerating. We expect commercial aircraft volumes will be up around 20% year over year. On the defense side, our backlog is expected to continue to grow given the heightened and increasingly complex threat environment. In the U.S., we continue to see strong bipartisan support as evidenced by the adoption of the Defense Authorization Bill and the Omnibus Appropriations Bill with a budget of 858 billion, which is up about 10% from 2022. And overseas, the EU is targeting a 70 billion euro increase in defense spending over the next three years, And Japan will increase their defense budget by 26% this year. Given our current backlog and its continued strength in demand, we remain extremely focused on execution. And I see four key actions that will position us to be successful on this front. One, we continue to grow production capacity to deliver on this backlog as we move through 2023 and 2024. For example, we've made investments in key strategic locations like Asheville, North Carolina for turbine airfoils, McKinney, Texas for RF and EOIR products, and Bangalore, India to expand the Collins India manufacturing strategy. Second, we of course need a skilled workforce to execute our development and production programs. Labor availability remains a constraint, but we've made some progress across RTX and Q4 through reduced attrition and other strategic retention and recruiting initiatives. Third, we need to continue restoring health within our supply chain. We've actively maintained a physical presence at close to 400 supplier sites. We've continued to qualify additional suppliers on key programs, We've secured sources of supply for critical commodities. While we are broadly beginning to see our supply chain improve, it is not yet at the levels we need. We are assuming a recovery as we move into the back half of the year. And lastly, we are taking a number of actions to deal with the elevated levels of inflation that everyone's experiencing. For perspective, we are expecting roughly $2 billion of labor in material inflation in 2023. We are targeting to more than offset this headwind through higher pricing and aggressive cost reduction actions across all RTX. Now, some of these actions are in the category of blocking and tackling, such as continual process improvement, and some are more strategic in nature, such as driving productivity through increasing the amount of connected equipment and automated factory hours. There's no doubt we've got a lot of work in front of us, but I think we all believe we've got the right actions identified, and more importantly, the right team in place to do it. So with that, let me turn it over to Neil to look at our financial results, and I'll look for 23. Well, thank you, Chris.