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    RTX Corp (RTX)

    Q3 2024 Summary

    Published Jan 6, 2025, 8:15 PM UTC
    Initial Price$100.88July 1, 2024
    Final Price$124.39October 1, 2024
    Price Change$23.51
    % Change+23.30%

    What went well

    • RTX is experiencing strong free cash flow generation, with $4 billion year-to-date and expecting another strong operational fourth quarter, projecting 90% to 100% free cash flow conversion against adjusted net income in the long term.
    • The company has an exceptionally strong backlog in both defense and commercial segments, which is anticipated to drive productivity improvements and margin expansion across all three businesses.
    • RTX is investing heavily in R&D and innovation, leveraging RTX Ventures to make promising investments that will enhance their product portfolio, maintaining a fantastic product portfolio critical to the U.S. and allies for decades to come.

    What went wrong

    • Underperformance in certain business segments, particularly airborne and space systems. Christopher Calio acknowledged these areas have been more challenging and are under evaluation for strategic adjustments.
    • Challenges in balancing demands for the GTF engine between spare parts and original equipment deliveries. RTX is allocating resources between spares and MRO to support the fleet, indicating pressure on production and supply chain constraints.
    • Potential delays in strategic pivots affecting future growth. The evaluation and potential shift in strategy, especially in the space domain, may take time as these are long-cycle businesses, potentially impacting growth in the near term.

    Q&A Summary

    1. GTF Compensation Payments
      Q: Why aren't you paying more to customers affected by GTF issues?
      A: We expect to make about $1 billion in payments this year, with over $300 million made year-to-date. We're crediting customers as AOGs (Aircraft on Ground) occur and have agreements covering 75% of AOGs with 28 customers. Payments will ramp up in the fourth quarter, and we remain consistent with our financial assumptions.

    2. GTF Powdered Metal Parts Progress
      Q: How are you managing GTF deliveries and insertion of powdered metal parts?
      A: All engines delivered today have full-life powdered metal parts. We're balancing material allocation in MRO and expect to ramp up insertion of these parts as we head into 2025. Isothermal forgings are ramped up 38% year-over-year, aiding production.

    3. Collins Margin Outlook
      Q: Is the margin expansion at Collins still on track?
      A: We expect margins at Collins to grow but are monitoring OE levels and inflation. Absorption of higher volumes is crucial for better unit costs. We're taking cost reduction actions and focusing on structural improvements to drive margin expansion.

    4. Free Cash Flow Expectations
      Q: How should we think about free cash flow going forward?
      A: We're confident in achieving $4.7 billion in free cash flow this year. Longer term, we see no reason why we won't generate 90% to 100% free cash flow conversion against adjusted net income. Growth in aftermarket profit is a significant contributor to cash flow growth.

    5. Raytheon Growth Outlook
      Q: What acceleration should we expect from Raytheon into '25 and beyond?
      A: Demand at Raytheon is incredibly strong, with $16.6 billion in bookings and a backlog of $60 billion. The international backlog is up over 10 points to 44%, which will be a tailwind for growth in the coming years. Mix shift is already improving margins by over 100 basis points.

    6. Productivity Improvements
      Q: Can you add context to your views on productivity growth?
      A: We're seeing productivity improvements across the business. At Raytheon, we've achieved over $110 million in productivity benefits year-over-year, expecting about $200 million for the full year. Automation and factory improvements are driving efficiencies that will support margin expansion.

    7. Collins OE and Aftermarket
      Q: How do you view Collins' OE decline and aftermarket growth?
      A: Collins' OE sales were down due to lower narrow-body volumes and strike impacts. However, the aftermarket is up 9%, supported by continued flying of older platforms and low retirements. We expect aftermarket strength to continue as these platforms remain in service.

    8. Competitors in Defense Tech
      Q: How do you view emerging competitors like Palantir?
      A: We see them both as competition and potential partners. While we have strengths in scaling and production, we're learning from their agility and cost-effectiveness. Through RTX Ventures, we're investing in early-stage companies to access new technologies.

    9. Raytheon Airborne and Space Strategy
      Q: What's your strategy for growth in airborne and space systems?
      A: We're evaluating our portfolio, focusing on strengths like space protection, ISR, and C2. We aim to avoid low-margin fixed-price development programs and instead invest where we can offer profitable growth.

    10. Pratt Military Aftermarket Growth
      Q: How should we think about military aftermarket growth at Pratt?
      A: We saw 20% military growth at Pratt in the quarter, with aftermarket aligning with that. As the installed base grows and flight activity ramps up, we expect continued strong growth and margin improvement due to mix shifts.

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