RTX Corporation

Good day, ladies and gentlemen, and welcome to the RTX fourth quarter 2023 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 Callia, President and Chief Operating Officer, Neal 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 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 11 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.

All right, thank you, and good morning, everyone. We've got a lot to cover today, but let me start with the news we shared last month, which I'm sure you all saw. Effective on May 2nd, the date of our annual shareholders meeting, Chris Calio will become the new CEO of RTX. Chris's appointment is the result of a very deliberate and thoughtful succession planning process conducted by our board of directors over the past three years. While I'm going to remain in my role as executive chairman, Chris will be taking the reins of the company. As you all know, I've worked with Chris for many years, and I can't think of a better person to take on this role. Chris has a deep understanding of our industry, our customers' needs, and our operation. And most importantly, he's an outstanding leader. I'd like to say that I'm honored to have led this organization for almost the last 10 years. But most importantly, I'd like to thank each and every employee who has supported our mission over the last decade. We would not have been able to accomplish all we did if not for you. Going forward, I have the utmost confidence in Chris's ability to lead this great company and continue to drive performance and value creation for all of our stakeholders for years to come. With that, let me turn it over to Chris. to take you through an update on our end markets and the year.

Chris? Well, good morning, everyone, and thank you, Greg. I'd like to start by thanking all RTX employees for their contributions last year, and I want to share how humbled I am that our board has given me the opportunity to lead this world-class team. As we move forward, our focus will continue to be on delivering our record backlog, accelerating innovation, and driving operational performance across the portfolio to meet our customer and shareholder expectations. I'd also like to acknowledge a couple of other leadership changes we've recently announced. First, I'd like to thank Wes Kramer for his significant contributions to the company as he transitions into retirement. Over the course of his 20-year career here, Wes has led the development of some of Raytheon's most successful programs, including LTAMS, Standard Missile 3, and a range of strategic missile defense systems that defend the homeland and our allies. Wes has also played a critical role in restructuring the Raytheon business unit to better align with the needs of our customers. With Wes's retirement, Phil Jasper has been appointed as president of the Raytheon business. Phil brings with him over 30 years of experience in aerospace and defense, and most recently led the Collins Mission Systems business, where he played a critical role in integrating RTX's connected battle solutions this past year. Phil's deep knowledge of our military customers and their priorities, and his experience leading many business transformation initiatives throughout his career, positions him well to lead Raytheon. Now, before I cover the highlights of the year, let me get into an update on our end markets. First and foremost, demand for our products and services in both commercial aerospace and defense has never been stronger. Air travel has returned to, and in some cases surpassed, pre-pandemic levels, and the global threat environment is driving unprecedented demand, especially in air defense systems. Starting with commercial aero, we saw solid air traffic growth this past year with global revenue passenger miles back to 2019 levels and domestic air travel now 5% above 2019 levels as we exited the year. The strong recovery has helped drive significant aftermarket demand for both wide-body and narrow-body aircraft, with growth expected to continue into 2024. On the defense side, increases in global spending have led to a defense backlog which is now at $78 billion, up $9 billion from a year ago. Just this past quarter, we received a GEMT order worth $2.8 billion from NATO, which is the largest GEMT contract recorded in Raytheon history. Domestically, we're pleased that a bipartisan funding agreement has been reached supporting increased defense spending and expect Congress will complete their work on the full year 24 appropriations bill in the next several weeks. With that, let me turn to slide two, provide an update on 2023. And I'll start with some of the highlights. We delivered 74.3 billion in adjusted sales for the full year, up 11% organically. and adjusted EPS of $5.06 was up 6% year-over-year, both of which were ahead of our outlook. And more importantly, we ended the year with $5.5 billion in free cash flow, which also exceeded our commitment. On a full-year basis, commercial aftermarket was up 23%, commercial OE was up 20%, and defense was up 4%. On the capital allocation front, we returned over $16 billion of capital to shareholders for the year, including $12.9 billion of share repurchases supported by our $10 billion ASR, and $3.2 billion in dividends. We're beginning the process of deleveraging this year to ensure we maintain a strong balance sheet, which will be in part supported by the closure of our previously announced divestitures. At the same time, we remain focused on ensuring that business continues to be positioned to achieve sustained growth. In 2023, we spent almost $10 billion in CapEx and company and customer-funded R&D, while capturing $95 billion in new bookings. resulting in company-wide backlog growth of 12% and a book-to-bill of 1.28, ending the year with a record RTX backlog of 196 billion. So while there's a lot of positive momentum in our markets and across the business, we have two matters we've been heavily focused on, Pratt's powdered metal situation and Raytheon's margins. So let me hit these two head-on, and I'll start with powdered metal. Our top priority continues to be executed on our fleet management plans, and both the financial and operational outlook remain consistent with our call last October. While we are still in the early stages, let me provide a few more details on the progress we've made to date. As you saw, Prada has issued the necessary service bulletins and service instructions to operators, which are entirely consistent with our underlying financial and operational assumptions that we previously communicated. The FAA is in the process of drafting the corresponding earworthiness directives which we expect to be issued within the next month or so. And just as a reminder, it is common practice for a fleet management plan to be communicated through multiple service bulletins and airworthiness directives to address different engine models, compliance times, or components and sections of the engine. Continue to conduct ultrasonic angle scan inspections on powdered metal parts, and our findings remain consistent with our prior analysis and assumptions. Let me now turn to our industrial plans. You'll recall our focus is on ramping production of HPT and HPC disks to support both OE and MRO deliveries. We've made solid progress here as well. Continue to secure the necessary machining and inspection capacity for increased disk production. Today, all OE GTF engines being delivered to our customers' final assembly lines contain disks produced from powdered metal manufactured after Q3 2021 and have full certified lives. On the GTF MRO front, We have begun installing full-life disks during certain shop visits, and the number of engines receiving full-life disks in MRO will increase throughout the year as we continue to ramp up production of these parts. Our estimated wing-to-wing turnaround time remains consistent with our prior guidance. Pratt grew GTF MRO output by almost 30% year-over-year in 2023, while also making investments in additional shops, test cell capacity, and repair capability to support even more growth in 2024. With respect to the number of AOGs, we continue to expect the roughly 350 on average that we previously guided. However, we will likely see a lower peak level than previously anticipated due to the timing of the AD issuance and proactive fleet management by our customers. Additionally, our conversations with customers continue to progress. To date, we have finalized several customer support agreements, and these have been in line with the assumptions we outlined last year. And lastly, just a comment on the remaining Pratt Whitney fleets. Both the financial and operational outlook remain consistent with what we discussed on our prior call. We continue to execute on those plans. I'll now shift to Raytheon's performance. We continue to experience profitability challenges driven by productivity headwinds within the business, primarily attributable to legacy fixed price development programs that we have previously discussed, as well as continued supply chain and operational headwinds. Let me start by providing some color around our productivity issues. And it's important to note that we are in fact achieving productivity in several parts of Raytheon's business, in particular on certain legacy product families where we've received successive awards that are creating scale in our factories and in our supply chain. For example, we increased GEMT output by 50% year over year by using our core system to refine work instructions, increase test equipment uptime, and reduce product cycle time, all without additional capital or manpower. We also recognize productivity gains when we successfully retire technical and schedule risks on our contracts, which is more frequent in our programs in the production phase. However, those gains have been overcome by unfavorable productivity in other areas. In 2023, about 70% of this headwind came from challenges on fixed-price development programs, and the remaining 30% was driven by unfavorable material costs as well as supplier delinquencies, which have had the effect of extending the period of performance in several cases. So what are we doing about it? Our plan to stabilize the current performance and deliver profitable growth consists of a few elements. One, we expect improvement in our fixed price development programs as we satisfy certain technical and programmatic milestones. We will also be more selective and disciplined about the work we pursue moving forward. Two, we are making modifications in our approach to winning new work. We continue to ensure that our new contracts and additional contractual lots have better protection from supplier inflation. This will take some time to play through, but we expect this will help us improve our margin profile. Three, we continue to drive improved supply chain performance and material flow. Overall, our material receipts were up 8% in 2023, and we need to continue on that trajectory here in 2024. Four, we continue to take indirect cost actions that will help us avoid some of the headwinds we experienced in 2022 and 23. For instance, we optimized Raytheon's realigned business structure by further consolidating and streamlining several of our sub-business units earlier this month. This will reduce indirect costs and overhead and better position the business for profitable growth. And lastly, there will be some tailwind that comes from a mixed shift in our business. As development programs and technical refreshes move into production, and the mix of our sales shifts more towards FMS and DCS. So there's obviously a lot of work to do. but this business has a strong foundation and it starts with its product portfolio. As I said earlier, the demand for Raytheon's products is incredibly strong and I'm confident that Phil and the team are focused on addressing these challenges and delivering this record backlog at the margins that we need. With that, let me turn it over to Neil to take you through our fourth quarter results.