RTX Corporation (RTX) Earnings Call Transcript & Summary

All right. So we'll start right on schedule. So hi. Good morning, everyone. I'm Kristine Liwag, Morgan Stanley's aerospace and defense analyst. Very excited to have Chris Calio, Chairman and CEO of RTX with us this morning. Chris, welcome.

Thank you. Great to be here.

So I guess let's start off. You've been CEO at RTX for about 1.5 years now. What's been the biggest surprise, either positive or negative that you've encountered so far?

Yes. Well, thank you, Kristine. It is great to be here. Maybe just 2 seconds on a little housekeeping. We may make some forward-looking statements here today. Of course, please consult our SEC filings for all of that stuff. And I'll just pick up on your question there. Again, I would tell you the resiliency of the organization, the adaptability and agility in the face of some, I call it, dynamic or unexpected circumstances, something we've been really, really pleased with. I mean everybody comes into the year with detailed plans and strategies. But we had some interesting things sort of hit this year. Everyone knows clearly about tariffs and the regulatory environment. We've had some supplier fires that have gone on, some supply chain issues, things that we have just, I think, adapted very well to. We had a strike at Pratt & Whitney for 4 weeks, so to be able to overcome that. So I feel really good about our ability to kind of fight through those things and build some momentum here in the first half of the year. I mean organic sales up 8% in the first half of the year. So build some momentum there in terms of our performance and feel really good about our demand signal. Again, we've got a $236 billion backlog. The demand is very strong, both commercial and defense. And so for us, it's really just about continuing that momentum, executing on that backlog, making sure we're getting the units to our customers when they need them at the margins that we need, and that's where our focus is. But we're really pleased to be able to have thought through some of those things this year to create some really good momentum. And I'll say, too, we're always looking in the here and now on executing on our commitments, but we're a long-cycle business, and we continue to invest for future growth. We're going to invest $10 billion this year in E&D and CapEx. Some of that's sort of new products. Some of that is making sure that we've got some of the longer-term horizon technologies that we continue to invest in and maybe spiral in. It's making sure we've got the right capacity to meet the demands of this ramp-up on both commercial aero and defense. And so we're going to continue to look even beyond this year in '26 and '27 long term because this is a long-cycle business, and we're going to continue to invest. And again, I think the teams have done a very, very good job on focusing on those things that we can control. It's execution, its supply chain, its driving cash collections, all the things that were within our control, I think we've done a really good job thus far this year.

Anything, Chris, touching base on that, the things you've seen so far, you talked about the strike, you talked about kind of the tariffs, the demand environment. What trends are you watching? And how do you think the rest of the year shapes up? I mean here we are already in September, like the year is almost over. What are you watching through year-end?

Yes. We're watching a couple of things here as we sort of come to the end of the year. I mean, clearly, there's a lot of news right now on what's going on in the market, the consumer and the consumer strength there and the labor market. I'll just tell you that the consumer has continued to be pretty resilient. Household balance sheets have continued to be pretty solid. We think that plays through to continued RPKs and then aftermarket growth. We continue to look at the regulatory landscape, obviously. I mean we're well calibrated this year in terms of the tariff exposure and the mitigation strategies and all those things we've brought to bear that I mentioned sort of upfront. But again, we'll see how that settles out here in the back half of the year and what additional actions do we need to take for '26 and beyond given where things may land. I'm certainly hopeful, I'm sure many of us are here in aerospace and defense that the civil aviation agreement will be brought back in. We've seen some green shoots there in some of these framework agreements. Hopefully, that continues sort of to penetrate many of these deals. We'll see where that lands, and then we'll react accordingly, whether that's continued movement within our footprint, within our supply chain, pricing and the like. So again, trying to see where that shakes out and then what do we need to do in response to that for '26 and beyond. And I would say maybe the third big bucket, and you won't be surprised to hear this, is just the continued supply chain health. I talked about the ramp-up in commercial and defense. It's making sure that we -- our suppliers are really, really clear about what the demand is, what we need, when we need it. Keep in mind, we've got a number of suppliers across A&D that serve a number of different programs. So we've got to continue to make sure that we've got second and third sources that we're staying ahead of the game there because otherwise, you can get hit with some constraints. And I think we're trying to look beyond and make sure that we've got the right supply chain, supply chain health. They know the demand, they know what we need and how can we help them? How can we get out into their shops with our teams, with our industrial engineers, making sure we can help with yields and quality and specifications and the like.

Maybe going back to the end market health, right? You talked about the aerospace ramp. It seems like there's strong demand in defense. Can you talk about the headwinds and tailwinds that you're seeing in the industry? You already a little bit touched on supply chain to watch. But how do you view the health of aerospace and defense? And what kind of growth do you expect to see in the next few years with your end markets?

I think when you just step back and look at our end markets, I think we're at the -- we're exceptionally well positioned at the precipice of two really strong macro trends. If you think on the commercial aero side, you've heard us talk about this before, only 1 in 5 people globally have been on an airplane. That's going to continue to drive RPK growth, which drives obviously our aftermarket business. There's the demand out there over the next 20 years for about 40,000 aircraft. That's larger than the global installed base today. And if you think about kind of how we're situated there, we've got content on some of the highest volume programs. I think Collins on 737, 787. Clearly, Pratt got a very strong GTF pipeline. V2500 continues to remain very, very strong. Kristine, that continues to be kind of a juggernaut for us, very, very young fleet still. Again, 15% haven't had a first shop visit yet, 40% haven't had a second shop visit yet. So there's still some tailwind behind that. And then the second sort of macro trend, of course, is the global defense and the threat landscape that's out there, okay? The world obviously is a very dynamic place right now. And I think we're exceptionally well positioned with our integrated air and missile defense capabilities to continue to supply the U.S. and our allies with what they need to address some of the high-end threats that you're seeing out there today. You and I were talking a little bit beforehand, at Raytheon, we've got an unbelievable, I'll call it, installed base. We don't talk about it that much in defense, but there are 250 Patriot fire units out there today. There are 19 Patriot countries, for instance. This gives us an incredible installed base to which we can build upon as the threats continue to evolve.

And maybe on the U.S. budget, we've seen this administration increase the defense budget going into the year, the expectations were cut, and we're not in a cutting environment. We're in a growth environment. What are your thoughts on RTX's position in the broader competitive landscape in light of the U.S. reconciliation bill and Golden Dome? And then you touched on this fairly large installed Patriot base. How are you thinking about the increase in NATO spending? And how is RTX positioned to capture some of the growth from our European allies?

I'll say it again, and I said it to you privately upfront, I continue to believe -- we continue to believe we're exceptionally well positioned there. If you just look at base budget plus reconciliation in the focus areas, there. Clearly, it's munition and effector ramp-up. You need replenishment of munitions; you need munitions depth. I think that's been very, very clear throughout the U.S. government and allies today. So that's #1. Second be Homeland Defense and Golden Dome for America. And you just -- again, very well positioned there, and I'm sure we can talk about that a little bit. And again, our allies continue to need our systems, our weapons, our effectors. That ramp-up is real. I mean you've talked about NATO a little bit. I mean I think you're going to find this year, almost every country is up to that 2% of GDP spend. And then, of course, with a commitment by 2035 to get to, you can debate 3.5%, 5%, whatever it may be. So the demand is going to continue to be exceptionally strong. And then again, if you look at the budget, INDOPACOM deterrence in terms of aggression there. So if you take all of those things, again, exceptionally well positioned. On the munitions ramp, think things like AMRAAM, Tomahawk, Coyote, all things that we are ramping up significantly that are right in the wheelhouse of what the U.S. government and our allies need. And then on Golden Dome for America, again, I think that's going to be a multilayered architecture, as I'm sure many of you here have been reading about. And we've got solutions, battle-proven, combat proven solutions at every one of those layers. If you think sort of further range, we've got early warning radar. We've got TPY-2 and standard missile. As you move a little bit closer, you've got Patriot and you've got LTAMDS coming on board, the Lower Tier Air and Missile Defense Sensor, again, 360-degree coverage for some of the most advanced threats that are out there today. We got through Milestone C earlier this year. So we're now into low rate production there, a lot of demand for that. You move a little bit further in, you've got NASAMS with AIM-9X, okay? And then, of course, you've got the counter-UAS, which is our Coyote system, which again is going to continue to grow in prevalence. It's been exceptionally valued in Middle East, Red Sea and other places. It's been very, very effective against those threats as have all the things at the various layers that I just mentioned. I'll also say, too, and we don't talk about it enough probably, and that's Collins. Collins has the data links and the communications, the things that have to connect the sensors and the effectors, that connected battle space that we've talked about before, that's also an additional opportunity for us above and beyond just what you think about in terms of the effectors and radars on Golden Dome for America. And then again, INDOPACOM, Tomahawk, again, very, very prevalent, standard missile, very, very prevalent, all things needed sort of for the naval customer. So I feel very, very good about long-term defense spending and the demand and positioning of our products.

And diving into more defense on Raytheon Defense, you're looking to scale on key programs. You've highlighted a few of them like LTAMDS, GEM-T, Coyote. How should we think about the progress in that ramp? And how are you managing capacity so that you can accelerate that backlog and convert it into revenue faster?

Yes. You said it, Kristine, it all starts with the backlog. At Raytheon, it's about almost $64 billion in terms of the backlog. It's up significantly since the end of 2023, again, driven by the global threats that are out there today. We are laser-focused on the ramp. And you're going to see some meaningful output increases this year on some key programs. GEM-T, AMRAAM, Coyote. We think we're going to double production on all three of those programs here in 2025 and continue to invest in capacity on a number of our other programs. I mean, since 2020, we've invested about $1 billion of our own money in capacity increases. This year alone, another $300 million for places like Andover, McKinney, Texas; Camden, Arkansas, all the places that we need to continue to ramp up to meet the demands of our customers and deliver this backlog as quickly as we can. Again, I think the U.S. government, the administration, DoD have been really leaning forward here and trying to help industry ramp faster in terms of what can you do to take your volumes up faster to get solutions out to the customers as quickly as you possibly can. That's looking at supply chain, where do we need second and third sources and helping in that way, critical minerals where we need help in places like that, testing protocols, how do we become more efficient in our testing to help drive throughput. So really trying to partner with the administration on how do we drive munitions production faster. And again, it also comes down to productivity in our own shops. We've talked about our core operating system. I'll just give you an example on AMRAAM. We're going to triple guidance section production on AMRAAM at Tucson this year. And that's been a function of really just diving in with our core operating system, trying to figure out what are the bottlenecks, how do we relieve those bottlenecks. And it's an integrated program team type of approach. It's engineering, its supply chain, it's operations. It's getting on the factory floor to eliminate those bottlenecks to drive up output, and we're doing that on every one of our major programs.

Great. And in the battlefield today, we've seen regional conflicts arise, and we've seen some shift from precision and capabilities you've historically provided versus the growth of some of these good enough solutions from private companies that have emerged in the past few years. So I guess there's a few questions embedded in here. So please bear with me, Chris. So there has been a lot of buzz about these defense tech emerging companies entering into the market. Where do you see their role in the industry versus yours? And where in your portfolio are you concerned about potentially losing market share? Where do you see opportunities to partner? And where do you see some formidable moats in your business?

No, thanks. A lot to unpack there. Let me start with, and I say this jokingly, but it's the truth. I mean, when I hear about defense tech, well, we are defense tech. We have some of the most advanced and effective systems in the world. There are, for instance, 35 systems of Raytheon today operating incredibly effectively in global conflicts around the world. So -- and we continue to invest heavily in technology to make sure that we're continuing to evolve our products, upgrade them, adapt to things that we are -- the customer is seeing in these conflicts so we can overcome some of the other emerging threats and developments that are happening out there. So I would just put us in the defense tech category, though I know others might say, hey, you're too big for that. I really believe our product portfolio warrants it. And if you think about sort of the evolving nature of conflict, we strongly believe you're going to continue to need solutions across a range of complexity to deal with different missions and different threats that are out there. Clearly, and I mentioned it upfront, we've got a very, very strong position in some of those most advanced anti-threat type of systems. I talked about the 250 Patriot fire units we have out there today. LTAMDS now coming into production, which can tie into the Patriot system. So just, again, a number of very sophisticated solutions at each layer of Integrated Air & Missile Defense, which we believe will continue to be prevalent into the future. And then again, I'll move down a little bit and just say -- and you and I talked about this a little bit upfront, Kristine, half of our business is commercial aerospace. And there are things like that we make on the commercial side of our business, commercial systems like avionics, mission systems, smaller engines that are going to continue to be needed for some of these other smaller platforms that you're reading about from other defense tech companies. So again, a real opportunity for us. And I'll mention Collins once again. I mean they're a preeminent communications company, assured networks in very contested environments. This is what they do exceptionally well. And I'll also tell you, there's been a lot of discussion around the space layer and how that will be more prevalent as we move forward. Again, Raytheon has some exceptional missile warning, missile tracking capabilities and other solutions for the space layer. So we feel like we are covered from all of the ranges in that spectrum of products and needs and then lastly, what I'll say is, as many of you know, we launched an RTX Ventures fund a couple of years ago. We've made about 20 or so investments there. So again, it's not just investing, it's finding ways to partner with some of those portfolio companies on whether it be testing or demo programs and the like some real cutting-edge sort of defense tech. And maybe the last thing I'll say is we're always looking for ways to partner with others if it makes sense, if it will continue to bring value to our product portfolio. We announced one earlier on our MTS, Multi-Spectral System with Shield AI, for instance. So are there opportunities where people have existing capabilities today that we can marry with our product portfolio to level up their performance out in the field, and we're going to continue to look for those.

Maybe shifting now to commercial aerospace. What are you seeing for commercial aftermarket the rest of the year and going into 2026? And what have you been hearing about the OE ramp for Boeing and Airbus? What rates are you expecting? And what can you support? And lastly, how is the GTF trending at Pratt?

Okay. So we'll start with aftermarket. Yes, so a very strong first half in our aftermarket, up 18% year-over-year. If you looked at Collins, they had a very strong book-to-bill across all their channels, parts, repair, mods and upgrades. Again, Pratt, a very strong book-to-bill in commercial aftermarket as well. Everyone knows about the GTF and what we're doing there from a shop visit perspective and how we're continuing to try to grow margins in the GTF aftermarket. But again, there's other legacy platforms there like the V2500 that continue to have very, very strong demand. And of course, Pratt & Whitney Canada, which we probably don't talk enough about the premier small engine company in the world, #1 or #2 in virtually every one of its segments with exceptional aftermarket sort of positioning and growth. So again, I felt very good about the performance in the first half of the year. And I think long term, given our installed base, we're going to continue to see structural strength there. On the OE side, everyone here knows, I think Boeing has done obviously an excellent job continuing to ramp and build rate on 737, 787. I won't get into rates. That's for them to discuss, but I'll say that we're working exceptionally hard to make sure that we can flex to meet whatever they need as they continue to grow. Obviously, Boeing's success is our success as it relates to some of the platforms that Collins is on, we want to make sure that we're supporting them and our supply chain is in the right place that we're overcoming, again some of these challenges I mentioned earlier, supplier fires and the like to make sure that we're delivering for them so that they can deliver on their ramp. And I think we've done a good job of that so far. And then, maybe Pratt on engine deliveries, we have the 4-week strike this year, which was obviously disruptive, I feel like we had a very good recovery plan, we are on that plan, and we want to continue our focus on making sure that Airbus has what it needs to meet its commitments for the end of the year. And we feel good about ability to do that. And again, I'll just go back longer term, structural strength, I think those rates are going to continue to climb, the demand is there, the backlogs for Boeing and Airbus continued to be there and we are big part of that. And then you asked about the Advantage, as we announced earlier this year, the Advantage received its engine certification, which is fantastic. It is now going through its aircraft certification testing sort of with Airbus and it's going through that process as we speak. As everyone knows here, the Advantage, again, an upgraded hot section, improved time on wing performance, obviously, improved fuel efficiency. And the other piece of this, of course, is that we're taking the hot section improvements from the GTF Advantage, kitting those, and we're going to start putting those into MRO shop visits next year on the existing platform today. So driving the time on-wing benefits from the Advantage into the existing fleet today, making sure we're leveraging the investment we made in the Advantage to benefit the entire fleet.

And I think the trends in commercial aerospace ramp, that's pretty clear. It's just going up. So going to Collins. When you think about the labor absorption rate, inflation absorption as volumes goes up, how do we think about margins at Collins? And what actions are you taking to improve the cost basis today? What have you taken before? And ultimately, what do you have to see for Collins margins to get to 20%?

Well, let's start with this. If you just step back and look at the Collins business, it's got a fantastic business base from which to work, okay? It's got a $170 billion installed base flying around today. Over $100 billion of that is out of warranty. So again, long aftermarket stream, that's going to continue to grow. It's got 2x the content on the newer platforms versus the legacy platforms. And as we just talked about, that ramp is going to continue to grow. So just a fantastic base from which to work in terms of their positioning in commercial aero. If you think about the continued margin expansion at Collins, clearly comes down to commercial aftermarket continuing to grow. And again, with the positions that we have in the out of warranty installed base, we feel good about that. You mentioned commercial OE sort of absorption benefits. As you know, we are capacitized for much more than the rates today. Obviously, if you look at some of the 2019 rates, we were at higher rates on some of those programs. So we have the capacity. And as that volume continues to grow, that will help with the cost absorption, which will be a tailwind as well. And then I would just say, lastly, from a cost discipline perspective, it's just continuing to look at spans and layers, the infrastructure and structure of SG&A and making sure that we're doing work that is done across a number of Collins businesses and product lines in the best cost locations. As you continue to grow, you've always got to balance the need for having our businesses forward deployed and having their own things with, hey, how do we centralize the common things that we do to just drive the economies of scale and the cost benefits associated with that. And so that's a big part of what Collins is looking at and continue to roll that out.

Now maybe shifting to Pratt. You've talked about how the second half of the year would be when we'd see AOGs come down. I mean we're now in September. Can you talk about the trends you're seeing for AOGs for the GTF? And also, what are the remaining constraints today in that supply chain?

So I'll start like I always do when we talk about this with just sort of reaffirming both the technical and financial outlook that we've talked about before. Again, the fallout rate has actually been better than -- improved than we had anticipated when we started this fleet management program. So that's great. AOGs have stabilized, but clearly, we have more work to do there, Kristine. Do I wish that we were further along down the path here? I absolutely do. It's a process. And as I said before, the big piece of that is our MRO output. And we're forecasting this year for MRO to be up 30% year-over-year. That's significant, especially given the fact that we're doing heavier work scopes within the engine. I mean that's -- it's a remarkable sort of growth trajectory, but we need more. And that will be a big function of, again, supply chain health. We've got the brick-and-mortar in the shops to be able to do this. It really is the health of the material flow through those shops so we can continue to turn engines as quickly as we can. Again, we've seen very good growth in structural castings. We've seen good growth within our value stream on forgings, right, the powder metal parts, but we need to continue to see more. Again, we anticipate that the AOGs are going to come down here. It's moved out a little bit, obviously, because we've had the strike and some other things that come down here as we exit the year. And that's where our team's focus is, that's where my focus is making sure that we get our customers the lift that they need so that they're prepared to take advantage of the demand that continues to be out there from an RPK perspective. But a ton of energy clearly here, and we need to continue to push MRO output, and I believe we'll be able to do so.

Thanks for the update. On free cash flow, the midpoint of the 2025 outlook, adding back the $1.2 billion powdered metal remediation, you're around $8.5 billion for 2025. How do we think about this free cash flow growing beyond 2025, especially the tailwinds that you've talked about in commercial aerospace, the tailwinds in defense and unwind of working capital...

Yes. Let me just start with '25. You kind of zipped beyond that. And I'm like, oh, let's talk about. Look, we still feel very good about the $7 billion to $7.5 billion that we put out there for the year. Again, that will be a function of continuing to meet the demands of OE and commercial aftermarket. There are some defense delivery milestones. And then there are some other sort of larger advanced payments from some of our larger international orders also need to continue to liquidate inventory but feel good about where we are for the full year. I'm not going to give too much specificity on '26 and beyond, but maybe just focus kind of where you were going, Kristine, on sort of the fundamentals of the business. Again, very strong installed base, as you heard me talk about before, significant demand, RPK growth. OE is growing, demand in defense. All of these underpin we consider to be our potential to drive free cash flow growth as we move forward. There's no reason why this business, given those fundamentals that I just outlined, shouldn't be a 90% plus free cash flow to net income. It has all the fundamentals to be able to do that, again, strong installed base, strong products plus demand and our focus on execution through our core operating system, all of those things together give us the confidence I just mentioned.

Great. And looking at capital allocation, I was looking at your capital return to shareholders, and you're on track to hit your target of $37 billion in capital return to shareholders by year-end this year. When you look at the balance sheet, leverage has come down, it's in a pretty healthy place. Free cash flow is positive, and you've got the tailwinds that you've highlighted. Can you discuss how you think about capital allocation in 2026 and beyond? And do you plan to have another share repurchase plan soon or some sort of accelerated plan like you did a few years ago?

Well, I'll start with where you started, Kristine, which is on the $37 billion. We feel really good about the progress made towards that and where we are there, especially given the fact that, that was a commitment that was about 4 years ago. So we feel really good in terms of what we've done year-over-year to be on the right trajectory to make that a reality for sure. If we step back and just think about capital allocation for us, the priority, and you mentioned it will be on continuing to pay down the debt, further strengthening our balance sheet. We had a couple of divestitures this year that will help us in that regard, be some tailwind there. And then again, as we look forward, it will be kind of the same and similar playbook that we've used sort of previously at RTX. The focus will be on returning capital to shareholders, in particular, prioritizing and growing our dividend, which we've done consistently. And then everything else after that is sort of opportunistic based upon what our other opportunities are.

Great. So we probably have time to take one or two questions from the audience. If you want to ask a question, raise your hand, we'll bring a mic to you. Mark?

So RTX, commercial defense organization. I think one of the themes we're hearing out of D.C. is they want the defense contracting environment to be a bit more commercial. So maybe talk about how you think that can evolve, especially given the paradigm that missiles and munition demand is off the charts.

Yes. Great question. And again, I'll kind of reiterate what I said upfront. I really commend the administration for pushing that exactly as you just mentioned, Mark, how do we bring a more commercial mindset to contracting in order to, again, raise output as quickly as we can. I would say one of the unique things about RTX, and I said it upfront, is half of our business is commercial aerospace. So we know how to take a look at a market, assess risk, decide where we allocate capital based on sort of the volumes that are potentially out there. So we've been having discussions with the administration about just that. How do we take some of the perhaps creative contracting that we've done market-based on our commercial side and bring some of those principles over to the defense side. And I think the administration in turn, has been pushing us on like, hey, look, are there things around TINA and a TINA like type of paradigm that could be helpful. What other things do you guys use on your commercial business in terms of improving yields and throughput and timing? And how can you bring that over to the defense side of your business? So again, I feel like there's a significant amount of synergy, obviously, between our commercial and defense industrially, and we're continuing to bring those principles over to defense. So I view it as a real opportunity, Mark, as the administration continues to push us in that direction because we have a lot of muscle memory within the organization about how to do that.

Great. more questions? All right. Last one for me, Chris. What are you most excited about? You've talked about so many different elements in your portfolio regarding all the tailwinds in your end markets. But where are you spending the most of your time and where are you most excited as you look out the next few years?

Just really excited, and I said it upfront, Kristine, about the opportunity in front of this business. If you think about the macro trends I mentioned upfront on both commercial and defense, we have the right product portfolio. We've got the right execution mindset with our core operating system and the continued commitment to investing in next-generation products and services that I really truly believe as those macro forces continue to reveal themselves and propagate that we are just exceptionally well positioned to take advantage of those going forward. And so our commitment to our customers is head down and focus on execution. The backlog, it's at $236 billion today. So for us, it's all about execution and delivering on those commitments, and we're really excited about it.

Well, wonderful. Well, thank you very much, Chris. This concludes our session on RTX. Thank you very much.

Thank you, Kristine.