RTX Corp Q3 FY2024 earnings call

• RTX delivered strong third quarter performance with 8% organic sales growth, 100 basis points of segment margin expansion, and $2 billion free cash flow. Completed accelerated share repurchase program, returning $10.3 billion of capital. Backlog ended the quarter at a record $221 billion with a book-to-bill of 1.8.
• Raytheon booked a record $16.6 billion of awards, driven by global demand for integrated air and missile defense capabilities. Pratt was awarded $1.3 billion contract for F135 engine core upgrade. Collins received $470 million sustainment contract from FAA.
• Progress on strategic priorities: GTF fleet management plan on track, inspections of powdered metal parts progressing, MRO facilities throughput improving; innovating for future growth with 14 cross technology road maps, e.g., hybrid electric propulsion and hypersonic missile applications; leveraging breadth and scale to simplify digital footprint, harmonize processes, and drive supply chain efficiencies, expecting 10%-15% cost savings on common metals.

Collins

• Sales in the quarter were $7.1 billion, up 6% on adjusted and organic basis, driven by strength in commercial aftermarket and defense, partially offset by lower commercial OE volume. Commercial aftermarket sales were up 9%, defense sales up 14%, and commercial OE sales down 8% for the quarter. Full-year outlook: expected to grow high-single digits on adjusted and organic basis, likely at low end of range, with lower commercial OE volume partially offset by higher defense volume, and operating profit outlook updated to grow between $575 million and $650 million versus 2023.

Pratt & Whitney

• Sales of $7.2 billion were up 14% on adjusted and organic basis, with commercial OE sales up 9%, commercial aftermarket sales up 13%, and military engines sales up 20%. Adjusted operating profit of $597 million was up $184 million versus prior year. Full-year outlook: expected to grow mid-teens on adjusted and organic basis, likely towards higher end of range, driven by stronger military volume and favorable mix in large commercial engines, and adjusted operating profit outlook updated to grow between $475 million and $525 million versus 2023.

Raytheon

• Sales of $6.4 billion in the quarter were down 1% on adjusted basis but up 5% organically, driven by higher volume on land and air defense systems and advanced technology programs, partially offset by lower volume on air and space defense systems. Adjusted operating profit of $661 million was up $91 million versus prior year. Quarter orders were $16.6 billion, resulting in a backlog of $60 billion and a book-to-bill of 2.6. Full-year outlook: expected to grow mid-single digits organically, and operating profit outlook updated to grow between $200 million and $250 million versus 2023, including impact of cybersecurity divestiture.

• Adjusted sales outlook raised to between $79.25 billion and $79.75 billion, up from prior range of $78.75 billion to $79.5 billion, with 8%-9% organic sales growth expected for full year.
• Adjusted EPS outlook raised to $5.50 to $5.58, up from $5.35 to $5.45.
• Free cash flow outlook remains on track to achieve approximately $4.7 billion.
• 2025 outlook: expected solid organic sales growth, segment margin expansion, and significant free cash flow generation, with analysis of aircraft production rates, commercial aftermarket growth, and U.S. defense spending scenarios ongoing.

• Uncertainty around aircraft production rates.
• Profile of commercial aftermarket growth.
• Likelihood of an extended continuing resolution for U.S. defense spending.
• Supply chain and inflation challenges, including forward deploying people to suppliers, second sourcing arrangements, and customer pricing initiatives needed to mitigate.

Q: How do you manage the competing demands of the spares pool versus the Airbus line in the third quarter and how confident are you in hitting the delivery targets for the fourth quarter?

A: Chris Calio said they've continued to ramp deliveries of both OE and spares, with year-to-date aggregate deliveries up about 16% and 7% sequentially, well above 2019 volume, and are aligned with Airbus for fourth quarter deliveries, laser-focused on helping them make deliveries.

Q: What's the type of acceleration we should all think about into '25 and beyond for Raytheon? And how quickly does the mix shift impart into a significant mix shift in sales in '25 and '26?

A: Chris Calio said demand is strong, with rolling 12 month book-to-bill almost 1.5 and $60 billion backlog, supply chain is getting healthier, capacity is being built out, and mix shift will materialize and be tailwind to growth in coming years. Neil Mitchill added the benefit of mix already showing up, with over 100 basis points of margin improvement in the quarter attributed to mix alone.

Q: Just to level set us on maybe free cash flow kind of the cadence when you think about it going forward. How do we think about that for '25?

A: Neil Mitchill said in '24, confident in $4.7 billion free cash flow, see no reason why the business won't generate 90%-100% free cash flow conversion against adjusted net income, with underlying demand strong, and big piece of cash flow growth from aftermarket profit growth.