RTX Corporation (RTX) Earnings Call Transcript & Summary

Next up, we have RTX and Chris Calio, President, CEO, and I think soon to be [indiscernible]. Chris, thanks for coming [indiscernible] conference. And I will turn over to you for forward-looking statements. And I think you have some introductory comments.

Yes. Well, thank you, David. Great to be here. Good morning, everybody. Yes, just some housekeeping upfront. David, as you mentioned, likely be making some forward-looking statements here this morning. Those are, of course, subject to the usual risks and uncertainties, so please consult our SEC filings for more information on that front. And then I won't make a bunch of intro comments. I know we've got a lot to cover, David. But just for some of you who aren't familiar with RTX, global aerospace and defense company consisting of 3 leading businesses: Raytheon, Collins Aerospace and Pratt & Whitney. Coming off a strong 2024, about $80 billion in sales. Exited the year with a $218 billion backlog, strength across all of our customer demand channels. We feel well positioned here in 2025. As many of you know, we gave out guidance at our earnings call a couple of weeks ago. No change there, $83 billion to $84 billion in sales, EPS in the range of $6 to $6.15 and free cash flow in the $7 billion to $7.5 billion range. So with that, Dave, I'll turn it over to you to run the show.

Okay. Great. So you were here a year ago. GTF was kind of the focus. How do you feel like over the course of the past year, how things have gone, what's your vision for this year, kind of high-level vision for this year and for the company looking beyond that?

Yes. Well, GTF still a focus, and we'll probably talk about that as we get into this. We just sort of step back, it really comes down to what I said upfront, which is the backlog, the $218 billion backlog, really, really strong demand. And so our #1 priority, executing on our customer commitments, ensuring that we're ramping up to meet our customer needs, make sure we're delivering those products on time and on cost. I'll tell you, the second key priority that we're focused on is continuing to innovate for growth. As you know, we're a long-cycle business. We've got to continue to innovate in this business in order to stay ahead. That's both in terms of the design of our products but also how we make our products. We're going to invest about $7.5 billion in company and customer-funded E&D this year, another $2.5 billion in CapEx. So making sure we execute on those investments, obviously, critically important. And then the last priority we continue to talk about here as a company is leveraging our breadth and scale. And what does that mean? Well, it's really just about driving productivity and efficiency in everything we do using our CORE operating system across all 3 of our businesses to be as cost competitive as possible. And it also means leveraging the technologies that we've got across all 3 of our businesses. There's a lot of commonality, David, in what we do in some of the enabling technologies. So making sure we're leveraging that across all 3 of our businesses to develop differentiated solutions for our customers. That's how I'd frame sort of the RTX priorities as we're here in 2025.

So in terms of 2025, risk and opportunities as you think about the year, I think when you had your call, tariffs were not front and center like they are today. So how you're thinking about the potential risk around tariffs? And then what are the top priorities for each of the -- your top priorities for each of the businesses?

Yes. Well, again, I think well positioned as we head in here in 2025. If you look at the commercial pieces of our business at Pratt and Collins, commercial OE up from that mid-single-digit range as we continue to ramp up to meet the demands of our airframer. Continued strong demand in the commercial aftermarket space. Obviously, we've had significant growth over the last 2 years, see continued growth this year in that 10% range. On the defense side, again, at Raytheon, exited the year with a $63 billion backlog, a 1.48 book-to-bill. And if you just think about the visibility into our sales this year, about 85% of Raytheon sales are in the backlog today. So very, very clear demand signal to our supply chain. So feel good there. On tariffs, look, I'll just say like everyone else, it's a fluid situation. I would say it's not in our guidance today, or it's not incorporated in our guidance today. I would say that some of the things that have been communicated, we've put in the category of manageable, and there are others that we'll just need to stay close to and track as they develop, whether they be timing, what exemptions, the application, will there be some settlements like we've seen over the course of the last couple of weeks. So obviously, we've got to keep our eye on that. But I will tell you, we've spent a lot of time over the last couple of years creating a healthier and more resilient supply chain across the world, qualifying new suppliers, dual sources, sometimes triple sources in constrained areas. I'll also tell you, we've got very strong partnerships all over the globe where we do work to serve those local markets. So again, I think those are both things that sort of help us, whether it's sort of the uncertainty that you see sort of out there. But I would just say if you just step back, irrespective of sort of what's happening around us, just really strong fundamentals at each of the businesses. And you asked about the priorities. If you think of Collins, again, strong positions on some of the fastest-growing platforms out there. They've got $160 billion of installed equipment flying around out there today, about $100 billion of it out of warranty. So very strong aftermarket sales. So for Collins, it's really about driving that structural cost reduction throughout its business to drive margin expansion and just being prepared for the ramp-up that's happening, clearly, Boeing ramping, Airbus ramping. At Pratt, again, the priority, and you referenced it upfront, is the GTF, executing on the GTF fleet management plan, continuing to drive GTF margins, aftermarket margins where we need them to be. And again, making sure that we continue to support our military customer, F135 sustainment continues to grow and maintaining our leading position at Pratt & Whitney Canada. And then again, at Raytheon, it's all about delivering on the backlog. It's about the supply chain, ensuring that we've got the supply chain and the capacity in place that we need. We've seen 7 straight quarters of material receipts growth at Raytheon, which is again, a tailwind for us, good progress there. And we continue to add capacity to meet the needs of the ramp in our customer. Last year, we invested about $300 million in capacity expansion, another $200 million-plus on tap this year. And we've seen some very good results there. If you just think of our Coyote counter-UAS system, we entered 2024 at a rate of 20 a month. We exited close to 100 a month. So again, continuing to ramp the needs -- to meet the needs of our customers is really the issue of Raytheon. It's got a tremendous backlog right now. That backlog has become tailwind for us in terms of the mix shift. David, it's more international than it's ever been. So again, just delivering on that backlog is where the focus is.

So you touched on your expectations on the commercial aero side for OE and aftermarket demand. How do you balance the 2 in terms of shipping to OE, shipping the aftermarket? And what are you seeing out of your customers in terms of Boeing and Airbus in terms of how the ramps are going for them and the demand pull from them?

I think for us, it's about controlling what you can control. And so I said before, making sure that our supply chain is healthy and we've got the capacity to meet the ramp whatever it may be, right? So again, if you think about the supply chain side, we've continued to see sort of stabilization in our supply chain, which is good. Year-over-year growth in some of our constrained value streams like structural castings, for instance. So that's good. On the capacity side, again, Collins is -- has got capacity. It's not even at 2019 levels. So more volume there, frankly, begets sort of a cost tailwind for us with the absorption. So we've got the capacity to meet the ramp there. And at Pratt, they're actually well above 2019 production levels. To your point, at Pratt, it's about balancing OE and aftermarket. By aftermarket really just means support of the GTF fleet right now as we're executing on the fleet management plan. So that's a constant dialogue we have with our customers and with Airbus, how do we make sure we get Airbus what they need, when they need it, but also make sure there are MRO shops who are executing on the fleet management plan. And as you know, MRO output is the key to that plan, have the material flow that they need to be able to have the output increases we need. As I said before, we saw a 30% year-over-year MRO output on the PW1100 last year at Pratt. And we need to see a continued growth at that level, which means you're going to need material flow to do that. So that's just a constant balance there, David. But again, I feel like we've got the demand well calibrated. We've got the capacity and supply chain headed in the right direction.

Going into a little bit more detail around the defense side [indiscernible] mix. But what -- I mean we're getting a lot of mixed signals out of the new administration, whether it be budget, DOGE, all that. So your thoughts there? There's a lot of talk about Iron Dome. Obviously, that would seem to play to your strengths. And you talked about international getting stronger. What are you seeing there in terms of demand? And I think last year, the defense -- Raytheon defense was 1.5 book-to-bill. I mean what do you think about the potential for above 1x book-to-bill this year?

Yes. Well, again, I think the threat landscape out there today, which everyone is well aware of, is driving sort of unprecedented demand in our defense channels. Again, I know there's a lot of noise out there, but we just sort of step back. I think there's bipartisan support for a strong defense and a strong defense industrial base. And I think there's general alignment around sort of a peace-through-strength narrative and the need to project power globally, which, again, I think our businesses and our product portfolio well aligned to meet those needs. So if you think about the U.S., significant replenishment opportunity in need given all the support we've been giving to our international partners. And on the international side, you kind of referenced it, David. I mean, look, it used to be that we were trying to get our NATO partners up to that 2% spend. You're now seeing, I think, a real thrust behind numbers, even higher than that, and especially given what's been going on recently. And again, I think our product portfolio well suited to meet the needs of today. Just think about the integrated air and missile defense that's required in today's environment, think Patriot, think NASAMS, Coyote, our counter-UAS system. In addition, just sort of the need to have naval deterrence. So our standard missile family, Tomahawk, SPY-6, again, all things that are going to be critical to the U.S. and its allies. And on Iron Dome, yes, I would say that's clearly an opportunity. That's something, again, integrated air and missile defense. That is core to who we are. I just named the key products that sort of make that up. We're working with the government agencies on what that RFP sort of looks like and what we can provide. I think it's also important for us to sort of put together a proposal that says, "Hey, here are the things, the capabilities that we have today that we could stitch together that could provide a more near-term solution." And so kind of working both tracks there but certainly something that, I think, plays to our strengths.

And how are you thinking about book-to-bill on the defense side this year?

Well, as you just said, we had -- I mean if you just go back the last couple of years given Ukraine, given the Red Sea, given Israel, the demand has been just unprecedented. I mean, as you said, we had exited the year at an almost 1.5 book-to-bill. I think demand is still going to be strong. I mean we haven't given a number, but it should be in that 1.0 range. Again, I think the threat landscape supports that, and the international demand supports that.

So you've talked in the -- I mean CORE came up -- your operating system came up, I think, back -- came up originally back at your Investor Day in 2021. So can you talk about how kind of CORE enabled the good results we saw in '24 and how it could contribute to what you're expecting in 2025 and beyond?

It's interesting. I think when we talk about CORE, and it's our operating system, I think sometimes people get the impression, it's sort of like a bumper sticker as I refer to it. And really, when you really dig in and if you get into our businesses and get into our sites, I think you'll come away with the conclusion, it's really an operating mindset about driving efficiency, driving out waste, getting to the root cause of bottlenecks and eliminating them. And I can give you a number of examples, but perhaps, the simplest and most straightforward one, and we talked about it on our call, is that we had 11% organic sales growth last year and headcount grew by 2%. That's real productivity. And you see it across the company. It's in our factories, it's in our functions. It's across the board. And I will tell you, again, we've had a tremendous inflation headwind over the last couple of years. And CORE and the incremental initiatives and benefits that we continue to see from CORE, both in terms of our quality signature and cost of poor quality, getting better yields out of our factories and so forth, it has been key to help mitigating that. And eventually, when we get to, I would call it, a more normalized sort of inflationary environment, I think you'll start to see it contribute to margin expansion. But today, as we're ramping up, I mean, it's critical to us ramping our powdered metal part production at Pratt, which had a significant increase in 2024. It's critical to the 30% year-over-year output we've seen at MRO. It's critical to getting our inventory in the right position, improving our quality signature across the board. And again, I'll use the baseball analogy. There's a lot of singles and doubles, and we've got to continue to add those up, and you'll start to see the incremental benefits. But it's something that is truly fundamental to who we are as a business. You go into our factories, you'll see it at work. And so it's just going to -- it's going to continue to be critical to us as we meet the needs of the ramp and our customers.

I wanted to move over to GTF. So I want to break it up into 2 parts. I guess the first question on GTF Advantage. We just had Howmet in here. Obviously, they're playing a big role on that. They talked about middle of this year. So a status update on GTFA and how -- once you get that out there in the market, how that changes kind of the trajectory of the GTF in terms of durability.

Yes. So we're very pleased with where we are in terms of the testing and certification process on the Advantage. As you sort of alluded to, we're looking here at sort of a middle of the year, sort of certification. Just to remind folks, it's an additional 1% fuel burn, 4% thrust, engine runs cooler should really help us in terms of time on wing. Time on wing, of course, as you know, David, is the name of the game when it comes to our fleet management agreements. And the GTF Advantage, with the additional testing that we've done, 3x the testing versus our base program, and the changes that we put into the hot section, should really be an engine that stays on wing much longer for our customers, will be more durable and be higher performance. There's going to be a sort of a cutover, David, over a period of a couple of years. We want to make sure industrially that we can both support the ramp. So that means we'll be producing both configurations, if you will, for a period of time before we ultimately cut over to the GTF Advantage. But I'll tell you one thing that is an opportunity for us as we've gone through testing is seeing some of the benefits in testing in the Advantage that we think we could kit and deploy into what we call the base program, the existing fielded product today to continue to drive time on wing. If you just think about the GTF program today, we're cutting in a number of enhancements here in 2025 that will improve durability and enhance hot section durability and time on wing. So continuing to invest in that base program is something that clearly we're committed to. And I think the GTF Advantage in the testing has given us a path to continue to do that.

So when you say it's going to transition over a couple of years, so you're talking about you'll produce GTFA alongside the current base version for a couple of -- and that -- is that constrained just by the ability of your suppliers to ramp up or...

I think we've all learned over the course of the last couple of years that supply chain stability is paramount. And so to be able to do this cutover in a responsible way to make sure we can continue to meet the demands of our airframers and the material we need in the aftermarket, it's the responsible thing to do. But ultimately, the GTF Advantage will cut over and be the configuration of record going forward. Now of course, as I said, we're going to have this installed base that's out there that's sort of pre-GTF Advantage. And so taking the improvements from the Advantage, bringing it back in again as a kit that you could put in during an MRO visit, I think, is a real opportunity for us.

Okay. And then the other part of the GTF question on powder metal, the progress that's been made already, what you're expecting for '25, how it plays out in the '26, is this behind us for the most part in 2026?

Yes. So as we've said on our call, the GTF fleet management plan is -- as we've been talking about before, no changes to the guidance that we've given there. I will tell you that the underlying inspections and testing, all consistent with the assumptions. That's obviously the underpinning of the fleet management plan. So that ends up being consistent. That's great news. The AOG levels have stabilized, and we've got to go -- continue to bring those down over the back half of this year and have them decrease on a steady, sustainable level. And the most critical, enabling part of that is MRO output, which I mentioned before. 30% year-over-year output in 2024, need a similar level here in 2025. And the key enabler for that is material flow. I've talked about the structural castings before. So again, stabilization there. The powdered metal, the forgings, significant increase in 2024, and we'll need to continue to see that in 2025 as we insert more and more full-life powdered metal parts into MRO shop visits. But again, it's the material flow. Once we get material into our MRO shops, we can -- our turnaround times are really quite strong. And we've used, frankly, our CORE operating system to compress Gate 1 and Gate 3, right, and then the assembly and test pieces of that value chain. It's the material accumulation, getting the material in place, which is that Gate 2, which is a huge enabler for us. And that's going to continue to be the focus here as we bring down the AOG levels.

And the main constraint there is powder metal.

Again, you're talking about shop visits, then you need all the parts. I would say powdered metal is something that we continue to ramp because not only is it going into every new and spare engine that's being delivered, but we're incorporating more and more of those into MRO. And so the greater that we can continue to drive the output there, the higher percentage are going to get those in MRO, which is going to just increase time on wing going forward.

And you still feel like, for the most part, this is behind in 2026?

Look, I think that we're not going to wake up on January 1, 2027, and have the entire fleet cleared. But we anticipate being in a much, much more manageable position as a fleet and be able to support our customers and Airbus the way they would expect.

Okay. So you've obviously given '25 guidance. High level, how are you thinking about the growth potential, maybe by business, thinking beyond 2025 and the margin [indiscernible] business thinking beyond 2025?

Yes. I think the one thing we've been focused on with our businesses -- we've been going through our longer-range sort of planning cycle, is what is the full potential of each of our businesses just from in terms of a margin rate. Again, I think if you just look back at the history of each of our businesses, there is margin rate expansion opportunities in all 3. And if you look at some of the businesses, there's an opportunity to go beyond where we were sort of pre-COVID. And again, it's not about just getting to pre-COVID. It's looking at the attributes and fundamentals of each business and saying, what can that business achieve, what should it achieve. So if you think about Collins, Collins has, as I mentioned before, a huge installed base. It's got twice the content on new aircraft than it did on prior generations. So it's got a very, very strong set of positions across the fastest-growing platforms. So for Collins, it's about driving structural cost reduction. As you know, Collins has been created over a number of very large acquisitions. There continues to be opportunity to drive structural cost reduction in that business to provide the kind of margin expansion that I know they expect and we expect. And again, I think the aftermarket tails in that business will drive a lot of strength in that story. At Pratt, it's again about the GTF fleet management plan and making sure we get our GTF aftermarket margins higher, faster. And you've got an incredibly strong military engine business there. F135 sustainment is going to continue to ramp. You have the leading small engine business in Pratt & Whitney Canada, with 66,000 engines in service, #1 or #2 in all of its key segments. So it's maintaining our strength in those and getting the GTF back to where it needs to be. And then at Raytheon, again, it comes down to executing on that backlog. I will tell you the backlog today is much stronger from a quality perspective than it was pre-COVID. I would say we've -- we burned through some of our troubled programs, got those into a better position. And a composition of the backlog today is really those elements that are in our wheelhouse as a business. Again, integrated air and missile defense, radars, effectors, things that historically we've been able to drive productivity through and deliver for our customers. And so it will be about the supply chain there and execution because the backlog is there.

Capital allocation. So you've had this $36 billion to $37 billion target out there. You're close to being done with that. Obviously, a year or so ago, you did the big ASR. As GTF kind of gets behind, you're going to generate -- it looks like you'll generate significantly more cash. How are you thinking about capital deployment from here in terms of potential M&A? You've done some divestitures but potential M&A and then getting back to share repo in a big way.

I think you'll see a consistent sort of position in our capital allocation strategy. I think we continue to be committed to the dividend first and foremost, and that should grow with earnings. On the M&A side, we really like the businesses that we have in place today. We'll be opportunistic obviously, but we don't think we need to do anything big given the backlog we have, given the positions we have. We're going to continue to look at the portfolio. There may be pruning opportunities. We've announced some of that over the last couple of years. I think we'll get our actuation divestiture done here in 2025. But I put that in sort of the pruning category. We really like the way the businesses are put together and their positions on the right platforms. And I think on share buyback, to your point, we did the ASR. So -- and feeling good about the commitment we made about the $36 billion to $37 billion by the end of this year being on the high end of that range. Once we get our debt levels down to more sort of pre-ASR levels, I think you'll see share buyback, again, be more of a standard part of our playbook.

Can we pull up the audience questions, please? You have key pads in front of you. If you could use those, we'd appreciate the responses. We collate everything and compare across all the companies that are here, and we'll publish those results once the conference is over. Okay. Next question, please. That's, for sure, better than it was last year. Yes, it's good? Next question?

For those of you at home who can't see this, it's like taking a test and getting your grade right away.

Yes. But you're on the hot seat, the uncomfortable seat.

Yes. Very comfortable.

Yes. I think we have one more. I think 2 more. We don't want the people at home knowing what we're asking. They need to come to the conference.

They need to -- exactly.

Next one, last one. There you go. Execute on the backlog. Chris, thank you. Appreciate your time. Thanks for coming.

Yes. Thank you, David. Appreciate the participation, everybody.