BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - RTX CORP

Financial Performance:

• 2024 annual sales guidance maintained between $97.0B and $97.5B, representing 10–11% organic growth.
• Adjusted earnings per share (EPS) guidance unchanged at $7.65–$7.75.
• Free cash flow (FCF) guidance held at $9.0B–$9.2B.
• Backlog stands at $340B globally, reflecting strong cross-segment demand.
• Operating margins expected to expand across all three segments in 2027, driven by OE ramp and aftermarket stability.
• 2025 outlook includes a non-recurring $500M tailwind from the completion of Pratt & Whitney powdered metal obligations.
• 2026 will see no repeat of the $350M IEPA refund benefit, offset by a $100M cash pension headwind and $50M benefit from the $50M residual refund, netting roughly break-even cash flow impact.

Guidance and Future Outlook:

• Management reaffirmed confidence in top-line, bottom-line, and FCF growth through 2027.
• Segment operational margins expected to improve, with no specific 2027 numerical guidance provided (to be announced in January).
• Long-term margin targets: Collins Aerospace (19–20%), Pratt & Whitney (low-to-mid teens), Raytheon (above 12%, driven by international mix and munitions).
• Munitions framework agreements converted to binding contracts provide 10-year revenue visibility.
• FCF generation capability expected to remain 90–100% of adjusted net income long-term.
• Capital expenditure anticipated to increase in 2027 to support supply chain capacity and munitions production.

Business Segments and Product Lines:

• Pratt & Whitney: Geared Turbofan (GTF) aftermarket shop visits sold out through 2027; MRO output up >35% in Q3; V2500 base remains stable with ~800 shop visits annually.
• Collins Aerospace: Installed base valued at over $105B; revenue correlated to revenue passenger kilometers (RPKs); new products on fuel-efficient platforms offer double the content of legacy systems.
• Raytheon: 80% of 2027 sales already in backlog, with >85% fully funded; $9B in international awards booked in Q3 (2.5x YoY increase); international backlog constitutes 52% (excluding new munitions frameworks).
• New Products/Agreements: Significant progress on Tomahawk, AMRAAM, SM6, and SM3 contracts; Coyote counter-UAS and Patriot radar systems driving international traction.

Market and Competitive Landscape:

• Defense demand described as "incredibly strong" and "very clear," underpinned by high backlog and funding security.
• Commercial aerospace demand resilient despite macro noise; airlines continuing robust consumer spending.
• International defense market growing significantly, with traction in Europe, Middle East, and Asia-Pacific for standard missiles and radar systems.
• Supply chain bottlenecks identified in rocket motors, castings, and microelectronics; mitigated via onboarding of new suppliers (e.g., 3 new rocket motor suppliers, 150 new suppliers added by Raytheon last year).

Risks and Challenges:

• Working capital build expected in 2027 to support backlog delivery and inventory management.
• Margin headwinds in 2027 from non-recurring IEPA refund termination and rising interest rates impacting pension income (~$0.30–$0.35 EPS headwind).
• Potential macro risks regarding airline fuel prices and consumer behavior, though no changes observed in Q4 yet.
• Supply chain constraints on raw materials and components, requiring aggressive capacity expansion and supplier diversification.
• Complexity in balancing OE, MRO, and spare engine production at Pratt & Whitney.

Management Commentary and Tone:

• Tone is highly confident, emphasizing "execution" and "momentum" over external macro noise.
• Management expressed strong belief in the resilience of the installed base and the durability of the defense backlog.
• CFO Neil Mitchell highlighted the strategic shift from framework agreements to binding contracts to secure supply chain investment.
• Emphasis placed on "not being at full financial potential" yet, with significant room for margin expansion.

Analyst Questions and Answers:

• Working Capital: Acknowledged build required to support growth, but linked to visible backlog and supply chain planning.
• Munitions Production: Clarified revenue recognition will be cost-to-cost; cash flow neutral until production phase due to collaborative funding agreements.
• Commercial Ramps: Aligned with OEMs (Boeing/Airbus); expecting increased GTF output to Airbus in 2026-2027, with spare parts volume growing as fleet ages.
• Supply Chain: Identified specific milestones for securing alternate sources in rocket motors and castings to handle 10-year production ramps.
• Capital Allocation: Priorities are 1) R&D/CapEx (>$10B this year), 2) Dividend growth, 3) Debt reduction, followed by selective M&A/Bolt-on acquisitions.

Other Key Points:

• Q3 commercial aftermarket sales grew 16% organically, demonstrating resilience despite lower RPKs.
• AOG (Aircraft on Ground) levels expected to trend down through 2027 as MRO output increases.
• Raytheon's international bookings are 2.5x higher YoY, excluding new munitions frameworks.
• Management confirmed no changes to the full-year outlook despite Q3 performance upgrades.