BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - RTX CORP

Explicit Guidance:

• 2026 Full Year: Sales of $97–$97.5 billion (up 10–11% organically); Adjusted EPS of $7.65–$7.75; Free cash flow (FCF) of $9–$9.2 billion. No changes to prior outlook.
• 2027 Directional Outlook: Anticipates continued top-line and bottom-line growth, operational margin expansion across all segments, and FCF expansion.
• FCF Conversion Target: Long-term expectation for FCF generation to remain between 90% and 100% of adjusted net income.
• Segment Margin Targets:
  • Collins Aerospace: Return to 19–20% margin range over the next several years.
  • Pratt & Whitney: Target low-to-mid-teens margins long-term.
  • Raytheon: Exceeding 12.8% margin midpoint for 2026, with potential for upward movement due to scale efficiencies in munitions production.

Business-Segment Outlook:

• Pratt & Whitney (Commercial):
  • Aftermarket: Shop visits sold out through 2027; V2500 legacy engine overhauls expected to remain stable (~800 visits/year) with increasing content as engines undergo heavier overhauls in coming years.
  • GTF Engine: AOG (Aircraft on Ground) levels expected to trend downward through Q5 and into 2027.
  • Production: Increased output to Airbus expected through 2026 and 2027; balancing material allocation between OEM, MRO, and spare pools as fleet grows.
  • Headwinds: Loss of $0.30–$0.35 EPS benefit from IEPA refunds (non-recurring) and a $100 million pension cash headwind in 2027.
• Collins Aerospace:
  • Growth Drivers: Driven by growing out-of-warranty installed base ($105+ billion); higher content on fuel-efficient platforms vs. legacy.
  • Margin Expansion: Structural cost reduction initiatives compounding over the next several years; improved absorption of fixed overhead from OE ramp.
• Raytheon:
  • Defense Contracts: 10-year visibility on critical munitions demand (Tomahawk, AMRAAM, SM-6/SM-3) with binding contracts protecting downside risk.
  • International Backlog: 52% of Raytheon's backlog (excluding munitions framework agreements) is international; significant momentum in Europe, Middle East, and Asia-Pacific.
  • Revenue Recognition: Cost-to-cost basis; collaborative funding makes the arrangement cash-flow neutral until the production phase begins.
  • Margin Impact: Munitions contracts expected to be margin-accretive over the long term as scale and efficiencies drive up from current mid-12% levels.

Market and Competitive Outlook:

• Demand Trends: Incredibly strong demand globally reflected in a $340 billion backlog.
• Commercial Aerospace: Resilient consumer demand supporting airline capacity; OE ramp clear for narrow-body aircraft, business jets, and general aviation.
• Supply Chain: Focus on securing capacity and alternative sources for rocket motors, castings, and microelectronics to support 10-year munitions production ramp.
• M&A Strategy: Potential for "pruning" existing portfolio and acquiring bolt-on technologies, though core focus is on existing portfolio expansion.

Macro / Industry Outlook:

• Economic Environment: Acknowledges macro "noise" but emphasizes focus on controllable execution.
• Airlines: Monitoring jet fuel prices and consumer behavior; no changes observed in Q4 customer buying behavior or airline capacity decisions.
• Defense Funding: Operating confidently through potential continuing resolutions, backed by 85%+ of next year's expected Raytheon sales being fully funded.
• Interest Rates: Rising rate environment creating a ~$0.30–$0.35 EPS headwind for pension income recognition.

Strategic Initiatives:

• Capacity Expansion: Investing to capacitize supply chain for 10-year munitions production ramp; targeting full-rate production around 2030.
• Supply Chain Diversification: Onboarded 3 new suppliers for rocket motors in the next couple of years; added 150 new suppliers last year for castings.
• Investment Levels: Capital expenditures expected to exceed $10 billion in 2026, with continued higher investments in 2027 to support growth.
• Working Capital: Expecting a working capital build in 2027 to support organic growth and backlog delivery.
• One-time Items: $500 million tailwind from Powder Metal payment curve completion (2026 to 2027); $350 million IEPA refund benefit in 2026 ($50M in Q4) will not repeat in 2027.

Risks and Headwinds to Outlook:

• Macro Sensitivity: Commercial aftermarket growth is indexed to revenue passenger kilometers (RPKs); potential for difficult year-over-year compares if airline capacity trims.
• Non-Recurring Items: Loss of IEPA refund benefits ($0.25 EPS) and pension income impacts in 2027 could weigh on adjusted EPS growth despite operational margin expansion.
• Supply Chain Execution: Critical need to secure alternative sources for sole-supply components (castings, microelectronics) to avoid bottlenecks during high-volume production.
• Contract Terms: While munitions contracts protect against downside funding changes, execution relies on continued customer demand and government funding continuity.

Management Tone on the Future:

• Confidence Level: High confidence in 2027 outlook; described as "really confident in the business, the momentum and the backlog."
• Execution Focus: Emphasis is squarely on execution and getting products out the door; management states they "feel really good" about the direction.
• Full Potential: Management explicitly states they are "not at our full financial potential" regarding margins, citing structural runway for improvement at Collins, Pratt, and Raytheon.
• Guidance Change: No changes to current guidance, reiterating strong momentum from previous quarters.

Miscellaneous:

• Cash Allocation Priorities: 1. R&D and capital investment; 2. Dividend growth; 3. Debt reduction (accelerated to share purchase); 4. M&A/bolt-on acquisitions.
• GTF Fleet: Expected to grow substantially over the next decade, driving continued spare engine volume growth even as spare ratios normalize.