RTX Corporation

gentlemen and welcome to the rtx second quarter 2023 earnings conference call my name is latif 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 calio president and chief operating officer neil mitchell chief financial officer and Jennifer Reed, Vice President of Investor Relations. This call is being webcast live on the internet and there is a presentation available for download from RTX 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 uncertainties. RTX 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 yourself, 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. Good morning, everyone. It was another strong quarter for RTX with continued strength across all of our end markets. On the commercial aerospace side, industry-wide, we saw 1,200 new orders announced around the Paris Air Show. This is the largest number of orders in the history of the air show, as airlines look to secure production slots well into the next decade. Global commercial air traffic remains on track with our projections with a very robust summer travel season driven by incredibly strong consumer demand. This dynamic is supporting strength in the aftermarket and growth across the globe, with revenue passenger kilometers now tracking at about 95% of 2019 levels. And long haul international, which has lagged in the recovery, is showing strong growth with passenger flight hours up 18 points year over year, a good indicator of increasing demand for wide body travel. Turning to defense. We're pleased that the House Defense Appropriation Bill fully funds many of our programs, including, importantly, the F-135 engine core upgrade, which is the only engine funded for the F-35 Joint Strike Fighter. Additionally, the bill also recommends the full budget request for other KRTX programs, such as LTAMs, LRSO, hypersonics, and Standard Missile 3. Internationally, we saw the State Department approve a large sale of advanced air defense systems for Poland as it bolsters its security amid the ongoing conflict in Ukraine. This would expand our existing partnership with Poland and make Poland the first international customer for our LTM system, representing a key transition for this next generation Raytheon franchise. Before we get into details of the quarter, as you saw in our press release this morning, we are working through an issue resulting from a rare condition in powdered metal that will require Pratt & Whitney to remove some engines from service for inspection earlier than expected. I want to make just a couple of comments here at the outset. First of all, it's important to know that we understand the issue and we have begun to address it through an inspection protocol that we already have in place. That said, clearly this will have an impact on Pratt & Whitney and our customers. Chris and Neil provide additional color later in the call on how we're going to address the issue, as well as the operational and financial impacts. As you'd expect, we'll dedicate all the necessary resources to manage this. Now let's turn to slide two to go through some key highlights from the quarter. Q2 was another strong quarter of strong demand in both the commercial and defense segments of our business with $25 billion of new orders. This brings our total backlog to a record $185 billion. On the commercial side, Collins continues to convert its industry-leading portfolio into solid order strength. As I mentioned, industry-wide, there were about 1,200 new aircraft orders announced in Paris. The aggregate amount of Collins and Pratt content on those aircraft will be about $20 billion for the life of the programs. On the defense side, across the RTX businesses, we captured $13 billion in new bookings in the quarter, driving a strong book-to-bill of 1.22, and this takes our defense backlog to $73 billion. Contributing to the backlog in the second quarter were a number of significant awards. including $2 billion at Pratt & Whitney for the lot 17 of the F-135 engines and a billion and a half for 117 sustainment. The Raytheon segment was awarded its largest ever AMRAAM contract for $1.2 billion from the U.S. Air Force and international partners, including Ukraine. The AMRAAMs will work in concert with their existing NASAM batteries to help protect the Ukrainian people. Earlier this month, we executed the business realignment. We are now officially operating as three business units. Our team has done a tremendous job in a relatively short period of time, shifting roughly $3 billion of sales and thousands of employees across our portfolio to better meet the evolving needs of our customers. But of course, our transformation isn't done. We will continue to develop initiatives to better leverage our scale and breadth and to enable operational excellence and a best-in-class cost structure. Finally, as many of you saw last week, we agreed to divest Collins Actuation Business to Safran. We expect this deal to close in the second half of 2024, with proceeds from the transaction will be about $1.8 billion. With respect to our full-year outlook, we're going to raise the top line to reflect the strength we're seeing in our end markets. the new range will be $73 to $74 billion. And we're also going to bring up the bottom end of our adjusted EPS range by a nickel to $495 to $505. However, we are going to reduce our 2023 cash flow expectations by $500 million to $4.3 billion. This is primarily to reflect the developments at Pratt & Whitney that I discussed earlier. So with that, let me turn it over to Neal to walk you through our financial results in more detail.

Neal? Thanks, Greg. Let's look at Q2 results on slide three. As Greg noted, we had another solid quarter with sales of $18.3 billion, up a strong 13% organically versus the prior year, with growth across all four of our segments. Adjusted earnings per share of $1.29 was up 11% year over year, with strong adjusted segment operating profit growth of 26%, partially offset by lower pension income and a higher effective tax rate. On a GAAP basis, earnings per share from continuing operations was $0.90 per share and included $0.26 of acquisition accounting adjustments, an $0.08 charge related to an airline customer insolvency, and $0.05 of restructuring and segment and portfolio transformation costs. Free cash flow of $193 million was generally in line with what we discussed when we were together in Paris last month. And finally, on the capital allocation front, We repurchased $596 million in shares, putting us at about $1.2 billion year to date, on track for $3 billion in share repurchases for the full year. So let's turn to slide four to get into the Q2 segment results. Beginning with RMD, sales were $4 billion in the quarter, up 12% on an adjusted basis and 13% organically, primarily driven by higher volume from air power, advanced technology, and land warfare and air defense programs. Adjusted operating profit of $427 million was up 79 million versus the prior year, driven by favorable net program efficiencies and dropped through on higher volume, partially offset by unfavorable mix resulting from early stage production programs. RMD had $3.6 billion of bookings in the quarter, resulting in a book to bill of 0.92 and a backlog of $35 billion. In addition to the AMRAAM award that Greg mentioned earlier, RMD also received a $265 million award for Javelin and a $251 million award for AIM-9X missiles. Year to date, RMD has a book to bill of 1.17. Shifting to RINS on slide five. Sales of $3.7 billion were up 2% versus the prior year on an adjusted and organic basis. This was driven by higher revenue from sensing and effects, as well as cyber and services programs, which was partially offset by lower sales from command, control, and communications programs. Adjusted operating profit in the quarter of $297 million was down $18 million versus prior year, primarily due to unfavorable mix and higher operating expenses, which more than offset improved productivity and dropped through on higher volume. However, as I mentioned in June, we still saw unfavorable productivity in the quarter due to a handful of fixed-price development programs. In the quarter, RINS had $3.1 billion of bookings, resulting in a book-to-bill of 0.96 and a backlog of $17 billion. Bookings in Q2 at RINS included about $1.1 billion in classified awards and $322 million for federal and civil cyber defense services. And on a year-to-date basis, RANS has a book-to-bill of 1.15. Turning to Collins on slide six. Sales were $5.9 billion in the quarter, up 17% on an adjusted and organic basis, driven primarily by strong demand across commercial aerospace and markets, which resulted in higher flight hours and higher OE production rates. By channel, commercial aftermarket sales were up 29%, driven by a 68% increase in provisioning and a 28% increase in parts and repair, while modifications and upgrades were up 9% organically in the quarter. Sequentially, commercial aftermarket sales were up 7%. On the commercial OE side, commercial OE sales were up 14% versus the prior year, which included growth in wide-body, narrow-body, and business jets. and military sales were up 5% due to higher development volume. Adjusted operating profit of $837 million was up 220 million or 36% from the prior year with drop through on higher sales volume and favorable mix, which more than offset higher production costs as well as higher R&D and SG&A expenses. Turning to Pratt & Whitney on slide seven, sales of $5.7 billion were up 15% on an adjusted and organic basis with sales growth across the commercial segments partially offset by lower military volume. Commercial aftermarket sales were up 26% in the quarter due to higher shop visit volume and content in both large commercial engine and Pratt & Whitney Canada businesses. Commercial OE sales were up 22% in the quarter on higher engine deliveries and favorable mix. And in the military business, sales were down 3%. The decline in sales was driven by the timing of the F-135 production contract award in the prior year, which was partially offset by higher F-135 sustainment volume this year. Adjusted operating profit of $436 million was up $133 million from prior year, with drop through on higher commercial aftermarket sales and favorable large commercial OEM mix partially offset by higher production costs and higher R&D expenses. Note that both this quarter and the prior year quarter had a similar-sized contract benefit of roughly $60 million. With that, before we get into the updated outlook for 2023, let me turn it over to Chris to give some additional color on the Pratt fleet.