The RTX Third Quarter 2023 Earnings Conference Call is being hosted by operator Latif and attended by company executives, including CEO Greg Hayes. The call is being recorded and webcasted, with a presentation available for download. The company reminds listeners of potential risks and uncertainties and asks for one question per caller during the Q&A portion. CEO Hayes acknowledges the situation in Israel and provides an update on the company's end markets, stating that air travel demand remains strong.

The company is experiencing strong growth in air travel, with global revenue passenger miles almost back to pre-pandemic levels and domestic air travel surpassing 2019 levels. The defense sector is also seeing increased spending, with recent sales of F-35 aircraft to South Korea and Patriot air and missile defense systems to Spain. There is also high demand for advanced air defense systems and munitions due to the ongoing conflict in Ukraine. Despite recent events in Washington, the company remains confident in bipartisan support for increased defense spending. The company has also provided an update on the powdered metal manufacturing quality issue at Pratt & Whitney, with efforts focused on ensuring the safety of their engines. The company has finalized the charge for this issue in the quarter.

The company has made progress in removing and inspecting the PW1100 engine, and expects no significant financial impact from safety assessments of other Pratt & Whitney powered fleets. Their focus is on maintaining trust with customers and improving their plans. The company remains confident in their future due to strong demand for their products, a record backlog, and actively managing their portfolio. The Board has approved a $10 billion accelerated share repurchase program and the company sees a significant discount between their intrinsic value and current stock price. The long-term outlook for the GTF remains strong and Pratt's franchises extend beyond it.

The V2500 and Pratt Canada both have a large number of engines still in use and strong aftermarket potential. Pratt's military business is the sole provider of engines for fifth generation fighters. Collins has a strong portfolio and opportunities for margin expansion. The newly combined Raytheon segment has established franchises and next generation technologies. The company's Board approved an $11 billion share repurchase program and plans to increase its capital return commitment to shareholders to $36-37 billion through 2025. The ASR program will be funded through a combination of short and long-term debt, and deleveraging will begin in 2024. Despite current challenges, the future of RTX looks promising and the company remains committed to delivering long-term value to shareholders.

Christopher Calio discusses the company's top priority, the powdered metal situation, and provides an update on their fleet management and recovery plans. He mentions that there is no change to the plan outlined in their September call and that their focus is on executing all elements of the plan. He also shares details on the GTF programs, specifically the PW1100, PW1500, and PW1900, and mentions that a fleet management plan will be implemented for these fleets. The financial impact is expected to be significant, but it has already been factored into the company's current contract estimates and financial outlook for Pratt.

Pratt & Whitney has developed a plan to address issues with certain early configuration parts and inspections for current configuration parts. This plan has the support of regulators and airframers and will be implemented through a service bulletin in November. Additionally, they will be accelerating certain inspections for the V2500 engine, but expect minimal impact. The F135 fleet management plan is also being reviewed, but any updates are not expected to have a significant impact. Pratt & Whitney is also working on increasing capacity and reducing turn times in their MRO shops, as well as ramping up production of new full life powdered metal parts.

The company is making investments to increase capacity and bring more shops online to support customers with MRO for GTF engines. This includes adding capacity at a Singapore engine center and partnering with more MRO shops globally. The goal is to conduct over 2,000 annual shop visits by 2025, a fivefold increase from 2019. The company is also working to accelerate the timeline for disc production in order to replace more parts with full life discs during shop visits. Fleet management plans for the most impacted fleets are nearly complete.

The financial impact of the company's plans remains consistent with previous statements and they are focused on executing these plans. In the third quarter, the company saw double-digit growth in sales and operating profit, with strong free cash flow. The growth was driven by the commercial air traffic recovery and new bookings. The company has also officially begun operating in a new three business unit structure and is working on initiatives to improve customer alignment and cost structure. The company has raised its sales outlook for the year and tightened its EPS range, taking into account a tax headwind.

The company expects an improvement in free cash flow by $500 million and is increasing its free cash flow outlook to $4.8 billion for the year. In the third quarter, the company recorded a $5.4 billion sales charge for the PW1100 powered metal matter, resulting in reported sales of $13.5 billion. Adjusted sales were $19 billion, up 12% organically. GAAP earnings per share was a loss of $0.68, while adjusted earnings per share was $1.25, up 3% from the previous year. The company received guidance from the IRS on R&D capitalization, which will result in a slightly higher effective tax rate and reduce cash tax payments.

In the third quarter, the company experienced a $0.02 headwind to adjusted earnings per share due to certain factors, and expects this to increase to $0.03 for the full year. The company also had strong free cash flow of $2.8 billion, with a $500 million benefit from the IRS's R&D capitalization guidance. The company's three business units, Collins, Pratt, and Raytheon, all saw growth in the quarter. Collins had adjusted sales of $6.7 billion, up 17%, driven by commercial OE and aftermarket growth. Pratt & Whitney's adjusted sales were $4.2 billion, up 8%, driven by higher military and commercial aftermarket sales. The company expects Collins sales to be up low to mid-teens for the full year and Pratt & Whitney's adjusted operating profit to be up $825 million to $875 million.

In the third quarter, Pratt & Whitney recorded a $5.4 billion sales charge and a $2.9 billion pretax operating profit impact, in line with expectations. Sales were up 18% on an adjusted basis, with growth in all three channels. Adjusted operating profit was up $95 million, with higher commercial aftermarket sales partially offset by other factors. Due to higher volume and better mix, Pratt now expects adjusted sales to be up mid-teens and adjusted operating profit to be up $350 million to $400 million compared to the prior year.

Raytheon had a strong quarter with sales of $6.5 billion, driven by higher volume in Naval Power programs. However, adjusted operating profit was down due to higher volume on lower margin programs and lower net program efficiencies. Bookings for the quarter were $7.4 billion, resulting in a book to bill of 1.16 and backlog of $50 billion. Despite challenges in productivity and mix, the company expects sales to continue to grow in the low to mid-single digits for the full year. For 2024, they anticipate solid growth in organic sales, segment operating profit, margin, and free cash flow.

The level of free cash flow growth will be affected by the powder metal matter and cash taxes related to R&D. While commercial air travel demand is strong, growth is expected to normalize in 2024. OE and aftermarket are expected to continue growing, and the defense side is expected to see strong demand. Inflation and pension headwind are expected to continue, but the company is focused on cost reduction and remains optimistic for the future. The three key takeaways from the discussion are the impact of the powder metal matter and cash taxes, the expected normalization of air travel demand, and the company's focus on cost reduction and optimism for the future.

The speaker discusses three main points in the paragraph. First, they believe they have a handle on the impacts of the powdered metal issue and are focused on executing plans to address it. Second, they note strong demand in their end markets and a large backlog. Finally, they mention a $10 billion ASR and open up for questions. The first question asks about potential headwinds for Pratt & Whitney margins, to which the speaker responds that there will be some impact from inspection interval costs, but it is already factored into their guidance for 2024-2025. The second question asks for more information on defense margins.

During a call discussing the quarter's results, Chris Calio and Neil Mitchill addressed concerns about the lower margins in the defense segment. Despite strong demand and a high book-to-bill ratio, the segment has faced challenges such as inflation and difficult fixed price development contracts. However, there have been some productivity gains and positive signs for the future, such as growing supplier volume and decreasing labor attrition rates. The company is focused on hitting key milestones and selling off these programs to improve margins. Neil Mitchill will provide an update on the consolidated Raytheon margin target, which is currently in the mid-20s.

Neil Mitchell, speaking on behalf of the company, confirms that they have provided a consolidated view and expects margins to be around 12% by 2025. He mentions that the mix of sales will shift towards more foreign sales in the next few years due to demand signals. The company has a large backlog of $50 billion on the defense side and is focused on executing programs as they transition to full rate production. Neil also mentions that the rate of expansion will be more weighted towards 2025. In response to a question about the challenges of managing the GTF powered A320 fleet, Neil states that the biggest risks they are monitoring include part availability and execution.

The main focus for Pratt & Whitney is increasing MRO output to support customers and reduce penalties. This includes expanding capacity and material flow, with investments already made in key process steps. The target of 19 MRO shops by 2025 remains the same, but the company has accelerated its efforts to meet this goal.

The speaker, Chris, discusses investments they have made and accelerated in order to increase throughput in MRO shops. He also mentions the 35-day turnaround times on project visits and the learning curve involved. The questioner asks about the powdered metal issue on certain engines and Chris explains that while there will be some inspections and life limits, they are manageable and will not significantly impact their shop visit forecast.

The speaker discusses the company's progress with generating cash flow and mentions that they have generated $1.6 billion year-to-date and are on track to reach $4.8 billion for the year. They also mention the drivers of cash flow for each segment and the impact of GTF payments on next year's cash flow. The speaker then addresses the timing of announcing a $10 billion ASR and why it was announced at this time.

The company is confident in achieving its operating profit targets and expects to improve its working capital by $2 billion in the fourth quarter. This improvement will come from inventory reduction, advances in defense contracts, and normal business disbursements. The company expects free cash flow growth in 2024 and will provide more details in January. The board has approved an accelerated share repurchase program, as the company is confident in its financial position and sees this as an opportunity to buy back stock at a discount to intrinsic value.

The speaker discusses the lessons learned from the recent incident involving powered metal and how it has led to systemic changes in manufacturing processes and inspection techniques. These changes have been applied to all engine programs to ensure safety and prevent similar incidents in the future.

The company has responded to the powdered metal situation by developing comprehensive fleet management plans that include enhanced inspections and life limits on parts. They have also leveraged outside resources and expertise, such as a product safety review committee, to improve their processes and culture. Going forward, they will continue to invest in automation, machine learning, and modernization to ensure the safety and efficiency of their operations.

The speaker, Seth Seifman of J.P. Morgan, asks a question about the company's cash and stock repurchase plans. The company's representatives respond, stating that they are comfortable with their 2025 free cash flow target and that changes in interest expenses and R&D impact will offset each other. The next question comes from Kristine Liwag of Morgan Stanley, who asks about the White House's request for supplemental spending on national security, specifically mentioning investments in the defense industrial base and equipment for Ukraine and air and missile defense for Israel.

Gregory J. Hayes, CEO of Raytheon Defense, discusses the potential impact of the company's portfolio on the $100 billion plus request for Ukraine defense. He expects a significant increase in orders for NACAM systems, Amram munitions, and Patriot air defense systems. Other weapons systems, such as the Coyote, will also benefit from this restocking. The company anticipates a rise in revenue over the next 24 to 36 months, in addition to an increase in DOD top line for replenishing war stocks and the Pacific fleet.

The company expects to see a $500 million benefit from section 174, which includes the recovery of overpayments from previous years. This may result in a slight headwind next year, but will be factored into future estimated tax payments. Overall, this will account for about 40% of what was previously deferred and amortized.

The speaker is discussing the projected financial impact of the GTF project, which is estimated to bring in $1.7 billion in free cash flow by 2026. They also mention the goal of reducing turnaround times for project visits and improving MRO output to further increase profits. The speaker emphasizes the organization's focus on efficiency and continuous improvement in order to meet these goals.

The company plans to install new full life discs in the first quarter and perform maintenance on the engines in the second quarter. If there are any issues with the ramp up, the engines will still be inspected and brought back for a re-inspection later on. The company is currently discussing the impact and timing of the next set of engines that need to come off-wing with individual customers. The majority of the additional shop visits will occur in 2023 and early 2024.

The speaker discusses ongoing conversations with customers regarding safety risks and fleet management plans. Customers are not happy with the impact on their fleets, but understand the need for safety measures. Some customers will be more affected than others.

The company is having difficult conversations with each customer individually to tailor their support packages, as some customers are more impacted than others. These conversations will continue into next year as customers understand the impact on their flights and network. The company's CEO thanks the listeners and invites them to contact the IR team for further questions. The conference call is now concluded.

This summary was generated with AI and may contain some inaccuracies.