RTX Corporation (RTX) Earnings Call Transcript & Summary

Now introducing Thomas Kennedy, who will call the meeting to order.

Good morning, and welcome to the 2021 Annual Meeting of the Shareowners of Raytheon Technologies Corporation. I'm Tom Kennedy, Executive Chairman of the Board. I'm now calling the annual meeting to order. As discussed in our 2021 proxy statement, this meeting is being held in a virtual format only due to the public health impact of the COVID-19 pandemic. Shareowners as of the meeting record date, who entered their control number, are able to participate online by remote communication via the meeting web page. Others without a control number will be able to listen in. Joining me today are Greg Hayes, our Chief Executive Officer; Frank Jimenez, our Executive Vice President and General Counsel; and Dana Ng, our Corporate Vice President and Secretary. Also joining the meeting are the other directors currently serving on the Board. I'd like to introduce them individually. Tracy Atkinson, retired Executive Vice President of State Street Corporation; Marshall Larsen, retired Chairman, President and CEO of Goodrich Corporation; George Oliver, Chairman and CEO, Johnson Controls International; Kelly Ortberg, retired Chairman, President and CEO, Rockwell Collins; Dr. Meghan O'Sullivan, Professor at the Harvard University Kennedy School; Dinesh Paliwal, retired Chairman, President and CEO, Harman International, who serves as our Independent Lead Director; Ellen Pawlikowski, retired General, United States Air Force and former Commander, Air Force Materiel Command; Denise Ramos, retired CEO and President, ITT; Fredric Reynolds, retired Executive Vice President and Chief Financial Officer, CBS Corporation; Brian Rogers, retired Chairman, T. Rowe Price Group; James Winnefeld, retired Admiral, United States Navy and former Vice Chairman of the Joint Chiefs of Staff; Robert Work, retired Deputy Secretary of Defense, U.S. Department of Defense; and our newest director, Dr. Bernard Harris, CEO of Vesalius Ventures, who was elected to the Board on April 19 to fill the vacancy created by the resignation of Lloyd Austin in January. Greg will talk a bit more about Dr. Harris during his remarks following the presentation of the meeting proposals. Before we begin the formal agenda, I want to share a few thoughts with you. As you may have seen announced this morning, I'll be retiring as Executive Chairman of the Board of Directors for Raytheon Technologies, a role I assumed upon the close of the merger between Raytheon Company and United Technologies last April. I am pleased that Greg Hayes will be taking on the role of Chairman and CEO as of June 1, when I will transition out of my role. I spent nearly 4 decades at Raytheon, and it has been incredibly gratifying. I'm very proud to have helped to architect the historic merger, the list of the formation of Raytheon Technologies. And it has been exciting to oversee what Greg and his talented leadership team have accomplished over the last year with the merger integration, moving the business forward at a pace, amid a global pandemic. These significant strides at the offset has positioned Raytheon as the leader in forming what is truly an aerospace and defense technology powerhouse. I also want to thank the Board for their support and leadership. Thank you. And now, I'll turn it over to Greg.

Thank you very much, Tom. And as I've often relayed the story of Dr. Kennedy's initial call to me to propose the merger of United Technologies' Aerospace businesses and Raytheon, of course, my initial reaction was we were a little busy at the time. But at the end of the day, it was the absolute right thing to do, and I give Dr. Kennedy credit for having the vision to see these 2 great companies come together. So here we are today in a position of strength in our industry, with a balanced portfolio and the best technology and talent in the business. I'm truly grateful to Tom for everything you've done to support me personally and our Board over these last 12 months and, of course, the many contributions you've made over your 38-year career at Raytheon. You will be missed, but not forgotten. Thank you, Tom.

Thank you, Greg. So we will now turn to the formal part of the meeting. In addition to the agenda and live audio of the proceedings, the meeting web page also provides shareowners with a method for submitting questions and casting votes, subject to provisions governing voting filed in the proxy statement. The order of business will be in accordance with the agenda. After the company-sponsored proposals are presented, the proponent of the single shareowner proposal set forth in the proxy statement will have the opportunity to present his proposal. After the matters to be voted upon have been presented, we will highlight some key company initiatives and the polls will close. We will then announce the preliminary voting results and adjourn the formal meeting. After which, a period of time has been set aside for Greg to address questions submitted either prior to or during the meeting. If time does not allow us to answer all the questions relevant to the business of the meeting, we will post the answers to the remaining questions on the company's website in the coming days. The inspector of election at today's meeting is Michael Barbera, who has been appointed by the Board to act in that capacity. Mr. Barbera has signed a customary oath of office, which will be an exhibit to the meeting minutes. Mr. Barbera has informed us that a quorum is represented in person or by proxy at the meeting. Because proper notice was given and a quorum is present, the meeting is duly convened to transact such business as may properly come before it. The polls are now open for voting on a total of 6 matters that will be presented for a vote at the meeting as set forth in the proxy statement and reflected on the agenda. There are 14 nominees listed in the proxy statement for election to the Board. They include: Greg, myself and all the directors I introduced earlier, other than Dr. Harris, who was elected by the Board to serve until next year's annual meeting. In addition to the director nominations, there are 4 additional items on the ballot and proxy card proposed by the Board and discussed in the proxy statement. They are as follows: the advisory vote to approve executive compensation; to vote to appoint PricewaterhouseCoopers to serve as Raytheon Technologies' independent auditor until the next annual meeting; the vote to approve the Raytheon Technologies Corporation Executive Annual Incentive Plan; and the vote to approve an amendment to the Raytheon Technologies Corporation 2018 Long-Term Incentive Plan. The election of the director nominees and other company proposals are now all placed before the meeting. We will next proceed to the shareowner proposal. Proposal #6 is the shareowner proposal to amend the proxy access bylaw. We now ask John Chevedden or his designated to introduce and discuss the proposal.

Hello. This is John Chevedden. Can you hear me okay?

Yes.

Proposal 6, improve our Catch-22 Proxy Access. Those who requested our Board of Directors to take the steps necessary to enable as many shareholders as may be needed to combine their shares to equal 3% of our stock owned continuously for 3 years in order to enable shareholder proxy access. Proxy access allows a group of shareholders to nominate a director who will compete with the management-nominated directors to see who gets the most votes. Competition is good for our Board of Directors. Currently, a strict limit of 20 shareholders must have owned $3.5 billion of Raytheon stock for an unbroken 3 years in order to nominate one candidate for the Board under our proxy access rules. A strict limit of 20 extremely deep-pocket shareholders does not allow for a diverse group of shareholders. It is disappointing that management does not support the diversity that this proposal calls for, as a practical matter is unlikely that more than 50 shareholders would participate in nominating a director using proxy access with this proposal. There is hardly any administrative difference, and 20 shareholders submitting proof of owning $3.5 billion of our stock compared to 50 shareholders submitting proof of owning $3.5 billion of our stock, and adopting this proposal which show management's commitment to diversity. This proposal is asking for so little. The beauty of good governance proposal like this proposal is that it would not result in more costs, because the mere presence of a good governance serves as a guardrail to make sure the management elects the best directors on their own. Because if management does not elect the best directors, then shareholders have a remedy with teeth to make their director nominations known to management. Our current proxy access is way out of balance. There has not been one proxy access candidate placed on the ballot of any company during the past 5 years. There have been 500 companies with a shareholder right for proxy access during these 5 years. 500 companies times 5 years equals 2,500 company years without one proxy access candidate. This means that Raytheon, under the current rules, would not expect one proxy access candidate during the next 2,500 years. This is way out of balance as far as shareholders are concerned. Plus a proxy access candidate then has a formidable challenge of getting more votes than at least one established director. This would require impressive shareholder support over an incumbent director and would be a clear indication that an incumbent director needed to be replaced. And speaking of the need to replace a director apparently, Raytheon's Governance Committee Chairman, Mr. Robert Work, needs to be replaced. It appears that the Governance Committee has done nothing in regard to the 97% shareholder approval of the 2020 civil majority vote proposal.

Mr. Chevedden, this...

Wrapping up, this proposal will even receive more votes than the 2020 management pay proposal, and Mr. Work has apparently sat on this 97% approval. Please vote against Mr. Work. And please vote yes, improve our Catch-22 Proxy Access, proposal 6.

For the reasons stated in the proxy statement, the Board has recommended to vote against this proposal. At this point, I'd like to turn the meeting over to our CEO, Greg Hayes, to provide an update on some key company initiatives, and then we'll close the polls and announce the preliminary voting results.

Thank you, Tom, and good morning, everyone. It's important to recall just a year ago, these 2 great companies came together in a merger of equals. And we have much to be proud of over this past year. Of course, a time of unprecedented challenges and change our teams have and continue to navigate COVID-19, commercial aviation disruptions and a number of other global adversities. Through our 2020 merger of equals, we've successfully created one of the largest A&D companies in the world and exceeded all key financial measures in our post-merger operating plan. The strength of our defense business helped to offset the impact of COVID-19 pandemic had on our commercial aerospace businesses. Balance truly does work. Our commercial aerospace businesses also took significant actions to rightsize their businesses last year, while meeting their commitments and focusing on future growth opportunities. And our financial strength allowed us to confirm our commitment to return significant capital to shareowners. Making good on that promise, our Board this morning approved a 7% increase in our quarterly dividend. What I'd really crystallized during this last year for our company, the nation and our world is that a company's responsibilities extend far beyond its business operations. In charting a new course as Raytheon Technologies, we are working to play a direct role in changing the world for the better. We've leveraged the best of our legacy companies to define our new company, one that creates long-term sustainable shareowner value, while driving positive outcomes for our customers, the industry, the economy, our employees and society. With our scale and resources, we have both the ability and the responsibility to have an enduring impact on the world. Our focus on the environment, social and governance practices is embedded in our strategy supporting our corporate responsibility efforts. That said, we're always engaged with our stakeholders, listening to learn and understand. We welcome these diverse viewpoints and perspectives that make us smarter and stronger. We always reserve the right to get smarter. And as we continue to shape our new company's practices and disclosures, we benefit from shareowner input like yours. Today, I'd like to just offer 2 views of our company. One is a view to the lens of a responsible corporation, and the second is through the lens of a leader in aerospace and defense. And let me start there. As I said before, 2020 was indeed a tumultuous year, a year that tested us as a new company. The pandemic forced us to rethink everything about our operations while taking many difficult but necessary measures. We focused on the need of our employees, continuing to report to work to keep them safe as well as the more than 100,000 employees who were forced to work remotely. While daunting, the pioneering spirit of our businesses held true. Collins Aerospace accelerated the development of biometrics for airport and touchless solutions to aircraft to create a more contactless and safer passenger experience. Pratt & Whitney accelerated upgrades to the geared turbofan engine, and we shifted resources across the business to keep production lines rolling. As we work to do this, we also continue to see strong success in the sales in our defense markets across our businesses. We ended 2020 with a year-end defense backlog of more than $67 billion. We also delivered on our merger synergies and continued to meet customer commitments. We have a strong balance sheet that enables us to continue investing in our future and to continuing execute -- to continue to execute on our missions. It's our job to connect the world through commercial aerospace and defend democracy amongst all of our allies, and we're doing just that. Our talent, technologies and vision give me every reason to believe we will emerge stronger than ever from this pandemic. That brings me to the second lens of company performance. As described in our proxy statement, our corporate responsibility mission focuses on 3 areas: environment, health and safety; social impact; and governance. On EH&S, we have a history of excellence, and we'll continue to strive to protect the health and safety of our employees. And as we've demonstrated through the COVID-19, protecting our employees remains our top priority. We also have a responsibility to our planet, and our commitment to worldwide environmental sustainability is ongoing. We have made great strides in reducing our greenhouse gas emissions, water consumption and solid waste. By 2025, we'll see a further 10% reduction in greenhouse gases and water consumption as well as waste sent to landfill and incineration and a 100% wastewater and energy best management practice. The second focus of our corporate responsibility effort is social impact. And building on community, the measure of business success must include community growth. To that end, we're putting our money where our mouth is by launching a 10-year $500 million corporate social responsibility initiative called Connect Up. You can see the details of this on our website. But it's really all about creating connections, the kinds that can solve society's biggest challenges. This is a 10-year commitment to advocate equitable opportunities in STEM education, career development and community well-being. Both United Technologies and Raytheon had long-standing commitments to advance diversity, recognizing the value of unique viewpoints, experiences and background. In 2020, we reaffirmed our commitment to racial justice and DE&I with a renewed commitment to an inclusive, equitable workplace. What we value as a company is respect, trust and empathy, treating everyone with fairness and respect. To accelerate our commitments with action, last year, we elevated our DE&I organization and established a Chief Diversity Officer who reports directly to me. Together with our leadership team and employees, our DE&I team has developed a multiyear action plan to create meaningful and measurable progress to advance DE&I across the company and through the future. Thirdly and lastly, our focus is corporate responsibility. And our strong corporate governance practices are designed to maintain high standards of oversight, accountability, integrity and ethics that go beyond legal and regulatory requirements. Our Board members are engaged and supportive of our ESG and corporate responsibility efforts. We believe that a Board composed of directors with diverse backgrounds and perspectives is critical to the long-term success of RTX in creating long-term shareowner value. To that end, I'm pleased to welcome Dr. Bernard A. Harris Jr. to the Board. Dr. Harris is a veteran astronaut and a business leader with a significant accomplishment in space exploration as well as education and health care. And we look forward to working with Dr. Harris, and I'm confident that his experience will add tremendous value across our portfolio for our customers, shareowners and employees. Looking ahead, Raytheon Technologies is positioned for success. We're optimistic for the future, driven by technology, innovation and collaboration. We will continue to define the future of aerospace and defense. In closing, I want to thank the 180,000 Raytheon Technologies employees for overcoming a year like no other. Together, we will adapt, lead and thrive as we always have, to deliver for our customers, our colleagues, our shareowners and our communities. Thank you for your support of Raytheon Technologies. Tom, back to you.

Thank you, Greg. With all the proposals having been formally placed before the meeting, the polls are now closed for voting. Mr. Barbera, may we please have the preliminary voting results?

Mr. Chairman, the preliminary voting results are as follows: each of the director nominees has been elected to the Board with the majority of the votes cast. With regard to the advisory vote to approve the compensation of the senior executives named in the proxy statement, the proposal was approved, having received 91% of the votes in favor. The appointment of PricewaterhouseCoopers to serve as independent auditor has been approved with 95% of the votes in cast in favor. The vote to approve the Raytheon Technologies Corporation Executive Annual Incentive Plan, as described in the proxy statement, has been approved with 96% of the votes in favor. The amendment to the Raytheon Technologies Corporation 2018 Long-Term Incentive Plan, as described in the proxy statement, has been approved with 95% of the votes in favor. Lastly, the shareowner proposal to amend the proxy access bylaw has received a vote of 31% in favor and has thus failed to pass. My certificate as inspector of election will be executed and delivered to the Corporate Secretary.

Thank you, Michael. Please note that these are all preliminary voting results. The final votes will be certified by the inspector of election and reported on the Form 8-K that Raytheon Technologies will file in the coming days with the Securities and Exchange Commission. There being no other business properly before the meeting, the 2021 Annual Meeting of the Shareowners is now adjourned. I would now like to turn the microphone over to Frank Jimenez, who will make some preliminary remarks before Greg proceeds to respond to questions submitted by shareowners. Frank?

Thank you, Tom. Statements made earlier and during the question-and-answer period may contain forward-looking statements, which include projections or other statements about future events based on current expectations and assumptions. Actual results may differ materially from these forward-looking statements because of a variety of risks and uncertainties, which are discussed today or described in our filings with the Securities and Exchange Commission, including our Forms 10-K and 10-Q. We do not undertake any duty to update forward-looking statements. Questions submitted by shareowners either before or during the meeting will be answered generally in the order submitted and as time allows. Similar questions will be grouped together and addressed in a single answer. In some cases, Greg may call it upon me or others to provide a response. We will only address questions relevant to the business of the annual meeting. Also, we will be announcing our first quarter financial results tomorrow morning and conducting an earnings call. Please go to the Investors section of our website for more details.

So Greg, here is our first question. What steps are being taken to improve the performance and investor return of Raytheon stock? Who is making sure this issue is addressed in a timely and efficient manner? And when will we see positive results.

Thank you, Frank. Raytheon Technologies remains committed to returning significant capital over the long term to our shareowners. Since the date of the merger, we've returned $3.2 billion in the form of dividends and share buyback. And we will remain well on track to return $18 billion to $20 billion through the first 4 years of the merger. As I noted earlier, today, we announced a 7% increase in our quarterly dividend starting in Q2, increasing the dividend from $0.475 to $0.51 per share. On the business side, we're confident that commercial aerospace will recover, and we are confident that we're already seeing positive signs from airlines on future bookings as vaccine distribution is exceeding expectations domestically. Our foundational defense franchises, coupled with commercial aerospace recovery and key technology synergies, will provide long-term shareowner value.

Thank you, Greg. Our next question is about the U.S. Space Force being the first new military service in more than 70 years following the establishment of the U.S. Air Force in 1947. Does our Board have members with experience in the network to influence the company's position with this newer customer?

Thank you, Frank. A great question. And as I mentioned earlier, Dr. Bernard Harris joins our Board today. Dr. Harris is a former NASA astronaut, which further enhances the Board that already had great depth relative to space technologies and national security. Other directors possessing highly relevant backgrounds and experience include our Chairman, Tom Kennedy, former CEO of Raytheon; Marshall Larsen, the former CEO of Goodrich Corporation; Kelly Ortberg, the former Chairman and CEO of Rockwell Collins; Ellen Pawlikowski, the former U.S. Air Force General; Admiral James Winnefeld, the former Vice Chair of the Joint Chiefs of Staff; and Robert Work, our former Deputy Secretary of Defense. I would say overall, we are well positioned to partner with the U.S. government to create new capabilities for the U.S. Space Force, keeping in mind that we're no stranger to defense and our government customer with decades of established relationships. Frank, what's the next question?

Greg, has there been any consideration for all employee profit sharing?

So the company is consistently and continually evaluating our compensation and benefits programs to ensure that they remain market competitive and are effective at attracting and retaining the highest caliber of talent. At this time, the company is not considering implementing a profit-sharing program. But we do have, of course, a 401(k) program, which ties our employees' portions with that of the company.

Our next question, Greg, is why do we have so many members of the Board?

So the question is why is the Board at its current size? We believe that as the Board does, that we have the exact right mix of experience and skills. Please keep in mind that the current Board structure and composition reflect the terms of the merger agreement that are in place for 2 years following the merger, that is until April of 2022. All of the continuing legacy Raytheon and UTC directors as of the time of the merger were up for reelection this year, with the exception of General Lloyd Austin, who resigned on January 22 to serve as our U.S. Secretary of Defense. The Board has now added Dr. Harris, a highly distinguished Independent Director to bring the number of directors back to what was contemplated in the merger agreement.

Thank you, Greg. The next question, actually, we've received several questions on this topic. It relates to climate change and the company's environmental impact and work with customers. Anything you'd like to share along those lines?

It's a great question. And it's something, of course, that is part of the -- our social responsibility as it relates to environmental impact. As you all know, both UTC and Raytheon historically took a metrics-based, goals-driven approach to environmental impact measures, setting multiyear goals and related disclosure. We recently added to the RTX website new disclosure that addresses our environmental sustainability performance and goals on an integrated basis. On our website, you'll see that we disclosed historical performance for the combined company since 2015 on greenhouse gas emissions, water consumption and hazardous waste. I would just note, since 2015, the integrated companies reduced greenhouse gas emissions by 18% cumulatively. We've eliminated 696,000 metric tons of carbon dioxide equivalent emissions, and this is comparable to the energy used in approximately 80,000 homes a year. Clearly, corporate -- environmental sustainability is on our priority list. What else do we have, Frank?

Greg, we've received several questions both before the meeting and during the meeting about executive pay, primarily the ratio of top executives' compensation to the average employees' salary.

So there is a robust discussion on our philosophy around executive compensation included in our proxy statement. I would tell you that the company has committed to compensating all of our employees fairly and competitively to ensure that we have a productive, engaged workforce. All factors such as experience, tenure and performance contribute to employee pay. We target employee pay to be commensurate with the competitive market for an individual's role and responsibilities. For a little more information, I'd refer you to the CEO pay ratio in the proxy statement, which begins on Page 91.

Thanks, Greg. We've also gotten a question about how much we paid our auditors in 2020 and in 2019.

So in 2020, I believe that the total amount paid to PricewaterhouseCoopers was $68,856,000, roughly $69 million. Now keep in mind that much of this work was done, not just for the audit, but for all of the work associated with the spins of our Carrier and Otis business last year. The total audit fees were, in fact, only $38 million.

Thank you, Greg. Now I'd like to address, Tom. Tom, I'm sure many of our shareowners are curious to hear more about your retirement. Is there anything else you'd like to say before we conclude?

Yes. Thanks, Frank. Yes, as I said at the beginning of the meeting, it's been a tremendous career, over 38 years with this company. And I've been extremely gratified by all the work. And I think outside of the work, it's really the people I have the opportunity to work with over those years, inside and outside the company, our customers, our shareholders, our employees, and also our great Board of Directors. But I tell you the truth, I really feel like my work is complete. I am extremely pleased at the way the 2 legacy companies have come together so seamlessly. I mean it's -- we had a lot of concern about that initially because it's always hard to put 2 major corporations together. But it's come across almost fluidly, and I'm very, very happy about that and despite the fact that we did it in the middle of a major pandemic. And I think that just shows the resiliency of the company, the resiliency of the people in the company to overcome major obstacles. I think it was just outstanding. So bottom line is we've exceeded our expectations in terms of progress in the integration into one company. And we've largely accomplished what we set out to do. And so I feel comfortable in the transition to Greg as Chairman. I think it's the -- it was always in the plan along and then now is the time to go do it. And so I just wanted to thank everyone, our shareholders, our employees, our Board of Directors and above all, our customers who we serve to ensure that the safety, whether that's commercial or whether it's defense. And -- but that's the bottom line, Frank.

Well, thank you, Tom, and thank you, Greg. This marks the end of the period we set aside for questions. Those questions submitted that are germane to the purpose of the meeting, we will answer in writing posted on the company's Investor Relations website in the coming days. Back to you, Greg.

Okay. Thank you, Frank. As noted earlier, all questions to which we've not provided will be addressed, of course, as Frank just said. I just want to again thank and congratulate Dr. Tom Kennedy on his 38 years with Raytheon and his leadership over these past 12 months as the Executive Chairman of Raytheon Technologies. We wish you health and well-being in retirement, Tom. I want to thank everybody for listening in today, and look forward to talking to people tomorrow at our first quarter earnings release. Thank you very much. Be safe, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.