Good day ladies and gentlemen and welcome to the Raytheon Technologies first quarter 2021 earnings conference call. My name is Deborah and I will be your operator today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chief Executive Officer, and Neil Mitchill, Chief Financial Officer. This call is being carried live on the internet and there is a presentation available for download from Raytheon Technologies’ website at www.rtx.com. Please note except where otherwise noted, the company will speak to results from continuing operations excluding net, non-recurring and/or significant items and acquisition accounting adjustments, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. RTC’s SEC filings, including its Forms 8-K, 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Hayes.

Okay, thank you Deborah, and good morning everyone. Before we jump in, I’d just like to take a couple of minutes to acknowledge the news that most of you saw yesterday of Dr. Kennedy’s retirement as Executive Chairman of the Board, effective June 1 of this year. As you heard me tell the story, it was just over two years ago that Dr. Kennedy called me to suggest that we merge our two companies. He could see then that by combining our talent, technologies, and capabilities, we would have the breadth and scale to meet any industry challenge in aerospace and defense. Little did either of us realize then, of course, how quickly a global pandemic would put that value proposition to the test, and yet here we stand today one year post-merger, and we’ve made substantial progress, not only in integrating the two heritage companies but also managing through an unprecedented downturn in commercial aerospace, all while identifying new technology synergies and establishing an operational rhythm that allows us to meet many of the goals sooner than what we had expected just a year ago. I want to thank Dr. Kennedy for his leadership, partnership, and stewardship throughout this merger and congratulate him on a distinguished 38-year career with Raytheon. We wish you well, Tom. I’d also like to officially welcome Neil Mitchill in his new role as Chief Financial Officer, though most of you of course already know Neil - he’s not new to the call. Toby O’Brien stepped down earlier this month and we thank him for all of his contributions as we formed Raytheon Technologies. Many on this call also know that Neil was our interim CFO at UTC prior to the merger and since then, he’s led the IR and financial planning functions. I’m very pleased to have him as our CFO and look forward to working together as we continue the integration and cost initiatives that will capture the full value of Raytheon Technologies. Lastly, I’d also like to welcome our new Head of Investor Relations, Jennifer Reed. Jennifer has led our integration team for the past year. As Vice President of Integration, she was responsible for the financial and operational planning activities related to the merger and did a wonderful job, and we’ll hear more about that later. I think that completes the HR section of the call. Let me move on to the numbers. Let’s take a look at Slide 2, please. As I mentioned, earlier this month marked the one-year anniversary of the merger’s closing, and I’m proud of the major accomplishments and progress made by our employees and business leaders, who came together from across our businesses to execute as a single team. Our ability to adjust to the unique circumstances and stay nimble in this very dynamic operating environment has served us and our investors and customers well. With that, let me take you through the performance and some highlights from the quarter. I’m pleased to say that we’ve had a really strong start to the year, and we’re seeing continued momentum with signs of economic recovery and incremental improvements in domestic aerospace markets, with international markets of course remaining challenged. As you saw from the press release this morning, we delivered strong quarterly sales, adjusted EPS, and free cash flow, all of which exceeded our expectations from earlier this year. While it is still early in the year, the rate of vaccine distribution and signs of travel recovery within key domestic markets, specifically the U.S. and China, are better than we expected just three months ago. In the U.S., daily TSA traffic has averaged about 1.4 million people a day since the beginning of April, nearly double the levels of January of this year, so we’re headed in the right direction with key metrics improving, but we continue to monitor recovery indications around the world and engage with our customers as they prepare for this recovery. On the defense side, I’m happy to say our backlog remains robust at more than $65 billion. These encouraging trends in commercial aerospace and our Q1 performance give us confidence to raise the low end of our full-year sales range by half a billion dollars to $63.9 billion, bringing our new sales range for the year to between $63.9 billion and $65.4 billion. We’re also going to raise the low end of our full-year adjusted EPS range by a dime to $3.50 - that’s up from $3.40, so the new range that we expect for the year is somewhere between $3.50 and $3.70. We’re also going to maintain our free cash flow outlook for the year of at least $4.5 billion, and Neil will give you a little color on all this later in the call. On the capital deployment front, after a better-than-expected start to earnings and cash in Q1, we’re also going to increase our share buyback plan by half a billion dollars - that will take it up to $2 billion for the year. During the first quarter, of course, we did resume our share buyback and we repurchased about $375 million of our stock, giving us a good start to our full-year commitment. You also probably saw yesterday that we increased our dividend by more than 7% to $0.51 from $0.475. Since the merger last April, we’ve already returned over $3.2 billion to shareholders between share buybacks and dividends, and we remain on track to return at least $18 billion to $20 billion to shareholders in the first four years following the merger. We also continued to execute well on our synergy programs during the quarter. We achieved nearly $200 million of incremental RTX merger synergies, bringing the total since the merger up to $440 million. Given our strong synergy capture to date and the growing opportunities that we see in the pipeline, we’re going to increase our cost synergy target by $300 million from $1 billion to $1.3 billion, and I don’t think we’re done yet. Collins importantly also achieved an incremental $40 million in acquisition cost synergies in the quarter, bringing their total acquisition-related savings to $510 million since the deal closed in November 2018. Lastly, we continued to strategically shape our portfolio with a focus on higher growth, higher technology businesses. We did close on the Forcepoint divestiture earlier this year - that brought in about $1.1 billion in gross proceeds without the tax benefit, and we’ll continue to be disciplined in M&A as we evaluate both strategic acquisitions as well as strategic divestitures. With that, let me turn it over to Neil. Mr. Mitchill?

Thank you, Greg. I’m happy to be on the call today in my new capacity as CFO, and I look forward to our continued partnership as we continue to capture the full value of RTX. With that, I’m on Slide 3. Let me take you through our financial results. I’m pleased with where we landed for the quarter, exceeding expectations on our key metrics, and as we’ve mentioned previously, Q1 will be the last quarter of tough comparisons for our commercial aero businesses resulting from the onset of the pandemic last year. Q1 sales were $15.3 billion, above the midpoint of the outlook we provided in January. Adjusted EPS was $0.90 per share, ahead of our expectations, driven by better-than-expected operating profit at all four of our businesses, as well as favorability in some corporate items. On a GAAP basis, EPS from continuing operations was $0.51 per share and included $0.39 of net non-recurring and/or significant items and acquisition accounting adjustments. Free cash flow of $336 million exceeded our expectations primarily due to better-than-expected working capital timing, most notably the timing of collections across the businesses. With that, let me take you through the segment results. Starting with Collins Aerospace on Slide 4, sales were $4.4 billion in the quarter, down 32% on an adjusted basis and down 31% on an organic basis, driven primarily by the expected adverse impact of COVID-19 on the commercial aerospace industry. By channel, commercial OE sales were down 45%, again driven principally by the impact of the current environment. Commercial aftermarket sales were down 43% driven by a 39% decline in parts and repair, a 66% decline in provisioning, and a 32% decline in modifications and upgrades. Sequentially, however, commercial aftermarket sales were up 11% driven by growth in parts and repair and modifications and upgrades. Defense sales were down 3% on an adjusted basis but up 4% organically. Organic growth was driven by F-35 as well as growth in several avionics product lines. Adjusted operating profit of $332 million was down $952 million from prior year and better than our expectations for the quarter, driven by continued cost control and favorable sales mix. On a year-over-year basis, cost control as well as lower E&D and SG&A were more than offset by lower commercial aftermarket and OE sales volume. Looking ahead to the rest of the year, with a solid start in Q1 and improving trends on the commercial side, we are increasing the low end of Collins sales outlook from a prior range of down high to low single digits, to a new range of down low to mid single digits, and based on our first quarter cost containment measures and those improving trends on the commercial side, we’re also increasing the low end of Collins operating profit outlook by $75 million to a new range of down $200 million to up $25 million. Shifting to Pratt & Whitney on Slide 5, sales of $4 billion were in line with expectations. Year-over-year sales were down 24% on an adjusted basis and down 25% on an organic basis, also driven by the expected adverse impact of the current environment on the industry. Commercial OEM sales were down 40% driven by lower deliveries across most of Pratt’s large commercial engine and Pratt Canada platforms. Commercial aftermarket sales were down 35% in the quarter driven by an expected decline in shop visits, but growth in the GTF aftermarket volume was more than offset by the impact of a reduction in legacy large commercial engine shop visits of 38% and a 28% reduction in Pratt Canada shop visits. In our military business, sales were up 1% on higher F135 aftermarket, partially offset by lower volume across certain development programs. Pratt’s adjusted operating profit of $40 million was down $475 million from the prior year. Significant aftermarket volume reductions and fixed cost headwinds more than offset continued cost containment measures, including reductions in G&A and E&D. Looking ahead, with a solid start in Q1 and improving trends on the commercial side of the business here too, we are also increasing the low end of Pratt’s full-year sales outlook from a prior range of flat to up mid single digits, to a new range of up low to mid single digits, and we are increasing the low end of Pratt’s operating profit outlook by $50 million to a new range of down $75 million to up $25 million. Turning now to Slide 6, first I’ll remind everyone that the percentage of completion reset at the merger date continues to impact the comparable sales and operating profit at the legacy Raytheon businesses. With that, Raytheon Intelligence and Space sales were $3.8 billion, up 2% versus the prior year on an adjusted pro forma basis and better than our expectations for the quarter, driven by higher volume in sensing and effects, particularly airborne ISR. Operating profit in the quarter was $388 million, down $11 million year over year on an adjusted pro forma basis and a little better than expected due to higher sales volume. It’s worth noting that sequentially, the ROS at RAS improved 110 basis points to 10.3%. RAS had bookings in the quarter of $3.7 billion, resulting in a backlog of $19.2 billion. Significant bookings included approximately $1.4 billion on classified programs as well as several other notable awards. Our Q1 book to bill was 1.08, and looking ahead we remain confident in our full-year outlook for RAS with sales growing low to mid single digits and operating profit growing $125 million to $175 million versus adjusted pro forma 2020. Turning now to Slide 7, Raytheon missile and defense sales were $3.8 billion, up 3% versus prior on an adjusted pro forma basis and better than expected due to higher volume across multiple mission areas. Adjusted operating profit was $496 million, also better than expected and down $43 million year-over-year on an adjusted pro forma basis due to the absence of a favorable prior year contract settlement and the EAC reset impact that I mentioned. RMD’s bookings in the quarter were approximately $2.5 billion, resulting in a backlog of $27.7 billion. Significant bookings in the quarter included an award of approximately $520 million for AMRAAM for the U.S. Air Force, the Navy, and international customers, and an award of about $250 million to provide Patriot engineering services support for the U.S. Army and international customers. It’s also worth noting that RMD’s industry team was down selected for the next-generation Interceptor award, and we expect to book that award in the second quarter for over $1 billion. Book to bill was 0.68 in the quarter, as expected, as we continue to deliver against a previously awarded multi-year production contract. Before moving on, I’d also like to make a comment on the previously disclosed ongoing DoJ investigation into cost accounting matters at legacy Raytheon Company’s former integrated defense systems business, or IDS, which is now part of RMD. As you’ll see in our upcoming 10-Q filing later today, the investigation includes potential civil liability for defective pricing for three contracts entered into between 2011 and 2013 by IDS. We provided for our best estimate related to this matter in connection with the finalization of purchase accounting during the quarter. Additionally, as part of the same investigation, we recently received a second subpoena relating to a different IDS contract from 2017, and we do not currently believe the resolution of this matter will result in a material impact to our financial condition, and we will continue to cooperate fully with the government’s investigation. Turning back to RMD’s full-year outlook, we continue to expect RMD sales to grow low to mid single digits and operating profit to grow $25 million to $75 million versus adjusted pro forma 2020. Finally for your reference, we’ve included an updated outlook for each segment in the webcast appendix. With that, moving to Slide 8, let me update you on how we see the current environment as we look ahead at the rest of the year. Starting with our merger synergies, as Greg said, we are increasing our gross merger cost synergy target to $1.3 billion, and that’s due to higher expected synergy capture in our corporate office and segment consolidation, as well as additional opportunities we’ve identified in the supply chain and footprint consolidation and in IT. Keep in mind that’s on top of $600 million of Rockwell Collins acquisition synergies. Additionally, we continue to see the benefits of the cost actions we took last year. We’re making solid progress on the structural cost reduction actions we’ve previously announced while at the same time working additional opportunities to drive further costs out of the business. Moving to the commercial side of the business, the shape of the commercial aero recovery remains critical to our outlook. As Greg mentioned, we’re encouraged by the pace of the vaccine distribution and we’re seeing signs of increasing travel demand, particularly on many domestic routes; however, we continue to watch Europe and international border reopening. While we’ve seen slightly better than expected results to start the year, particularly at Collins as customers prepare for a strong summer travel season, as well as evidence of increasing future travel demand, we still need to see this demand translate to strong sequential growth in RPMs and ASMs as we head into and through the peak summer travel season. As such, the second quarter remains a critical period in determining the recovery profile for the rest of the year. Looking longer term, we continue to expect that it will take until at least 2023 for commercial traffic to return to 2019 levels. For the defense side of our business, we continue to expect both domestic and international program growth to remain robust, as evidenced by our over $65 billion defense backlog. Our strength with international customers, our innovative technologies, and our positions in high-growth areas give us confidence in our ability to grow these businesses even in the current domestic budget environment. Finally, our financial strength is underpinned by the strength of our balance sheet and supports our capital deployment commitments. Moving to Slide 9, following our strong start to the year, we remain confident in our full-year outlook, and as Greg mentioned, we are bringing up the low end of our sales range by $500 million and bringing up the low end of our adjusted EPS range by $0.10, with about $0.06 coming from the segments and the remainder coming from improvement in some corporate items. Now let me just give you a little color on Q1. At the company level, we see sales in the range of $15.5 billion to $16 billion, adjusted EPS in the range of $0.90 to $0.95 per share, and we see sequential improvement in free cash flow. It’s also worth mentioning that we’ve included an updated outlook for some of the below-the-line items and an updated pension outlook that includes the impact of the latest COVID relief bill in the webcast appendix. With that, I’ll hand it back to Greg to wrap things up.

Okay, thanks Neil. No surprise here - as we think about our 2021 priorities, first and foremost it’s going to be to continue to support our employees, customers, suppliers, and communities, all the while continuing to invest in new technology and innovation to drive industry leadership for the long term. I am confident in the outlook for our company. RTX is well positioned to deliver strong sales, earnings growth, and cash flow for not just this but for the foreseeable future. Before we get to Q&A, just a note. We are going to have an investor day coming up on May 18 where you’ll get a chance to hear from our business unit leaders as well as on our transformation initiatives from Mike Dumais. I look forward to sharing a lot of information also on our revenue synergies and our long-term growth strategies with you at that meeting. With that, let’s turn it over to Q&A. Deborah?

The first question comes from Carter Copeland with Melius Research.

Gentlemen.

Hey Carter.

Greg, I’m going to resist the urge to ask a numerical question and instead ask you about.

I’m good with numbers, Carter.

I know, I know - I’m going to take you away from there. In light of Toby’s departure and Tom’s announced retirement, and we’re on a year into the merger, this is the biggest integration in the history of aerospace and defense mergers and you’ve been obviously trying to do a lot of that virtually. With respect to what still needs to be done and what has yet to be accomplished, where do things stand in that regard and where do you want them to go? Have things surprised you along the way that have led to any change relative to where the plan was? Just anything you can give us to help us understand where that is in its process, aside from cost synergies and some of the numerical pieces but more the integration of the two companies culturally.

Yes Carter, it’s something that we have spent a lot of time on over these past 12 months. We’re fortunate I’ve got Jen Reed sitting here with me, who has been leading that integration effort. I would tell you we’ve realized over $400 million of cost synergies, but there is a lot of work yet to do. We’ve done many of the hard things in terms of reducing staff and making sure the policies are consistent, but again, we’re not done with that. I think the biggest opportunities we still have are on the digital front, where we have a lot of work to do to reduce the number of data centers. We’ve just made a big investment to try and reduce the data centers from more than 30 to less than a dozen. We’re also working on what we call the digital thread - that is, how do you connect everything from product development through operations, supply chain, and sustainment. Lastly, I would tell you it is rolling out our common operating system. You’ll hear more about this in May, but we do need a common operating system. We have 178 manufacturing facilities around the world, and we have work to do to consolidate those yet. We’re making good progress, but it is going to take us some time. It will take us a full four years to realize the $1.3 billion of synergy savings. We made good progress on identifying savings related to procurement, both product and non-product, and cost reductions. All of those things are on track, but I would just remind you it’s too early to declare victory. Just like Collins has got over $500 million of synergies on their way to $600 million, there’s still work to do there. We’re not going to declare victory.

Did you find anything in the process that has, I guess, surprised you? I’m just thinking about some of the charges in the legacy Raytheon defense segments and the comments you made around the DoJ subpoena regarding the pricing. Are these things surprising to you?

Well look, first of all just to be clear, these are contracts from 2011 through 2013, so there are always surprises like that out there when the DoJ suggested that we defectively priced some contracts. We’ve been doing an investigation, we’ve been working with the DoJ, and I think we appropriately provided for those exposures, as Neil mentioned. I wouldn’t call that a big surprise. What I would tell you, people think about the culture, and it was not that different between the aerospace businesses at legacy UTC and the defense business at Raytheon. The fact is many of our customers on the defense side were the same, and the cultures were the same. I think again that has been a pleasant surprise in terms of how easily we have been able to integrate the two businesses culturally, and that process will continue, but I would tell you it is going remarkably well for what is probably the largest aerospace and defense merger ever.

Great, thanks for the color, Greg.

Your next question comes from the line of Robert Spingarn with Credit Suisse.

Hi, good morning Greg, Neil, Jennifer. Neil, for you, you’re essentially guiding to EPS around $0.90 in each quarter this year, at least if I think about what you’ve said for Q2 against Q1. Why isn’t there more improvement from the first half to the second, especially given the buyback and maybe even a slightly lower tax rate? You mentioned Q2 is going to be key for assessing the pace of the recovery, so could you elaborate a little bit on what you’re expecting, or is this just a conservative second half guide?

No, I don’t think it’s that. I believe we still have three quarters ahead of us, so I need you to keep that in mind as we look at the rest of the year. We did notice some promising growth in March during the first quarter at Collins and Pratt, particularly some pre-buy activities for the airlines ahead of the summer travel season. Let me provide you with more details about Q2 specifically. We anticipate segment operating profit growth of about $0.03 to $0.07 for Q2 when considering it sequentially. We are facing some challenges on the corporate side. In the first quarter, we benefited from reduced corporate expenses, particularly in interest, due to better-than-expected cash flow, which will help lower our interest for the year, along with being more efficient with our synergy investment spending. However, that spending on synergy investments will ramp up in the second quarter, leading to a headwind of around $0.02 to $0.03 in this area. Regarding the second half of the year, we will have to wait and see, but certainly, our plan anticipates a very strong summer travel season, which is why I think Q2 will be so crucial.

And then just on the cash flow cadence throughout the year, you touched on it there, but if you could just go into perhaps a little bit more detail.

Sure. Our cash flow tends to be stronger in the latter part of the year as we ramp up and deliver. In the first quarter, our free cash flow exceeded expectations by around $600 million, primarily due to improved working capital. To break it down, about $300 million came from better-than-anticipated customer collections, with some customers paying early at the end of the quarter. We also saw a couple hundred million dollars in improved timing of disbursements and an additional $100 million from better inventory performance. While we still have a way to go to achieve our full-year target of a $400 million improvement in working capital, we've made good progress. Looking ahead to the second quarter, I expect to see noticeable sequential growth, likely at least doubling, with further growth in the second half of the year as sales increase and collections, which typically seasonally ramp up, continue to improve.

Thank you.

You’re welcome.

Your next question comes from the line of John Raviv with Citi.

Hey John.

Good morning everyone. Regarding the DoJ items, can you clarify the estimates we will see in the 10-Q? They are not material, and you do not expect the second subpoena to be material either. Additionally, could you provide any insight into the connections or themes among these items? For example, are they all related to FMS or linked to a specific person, team, or incentive structure? Lastly, do you have any comments on how those settlements will impact the ongoing business related to the referenced contracts from '11 to '13 and the '17 item? Thank you.

John, I appreciate the question. I'm not sure we can provide a definitive answer. I will mention that this is an ongoing investigation by the Department of Justice. We have initiated our own inquiry and are sharing our findings with the DOJ as we uncover them. I want to emphasize that we do not believe the dollar amounts will be significant at this time. These are older contracts where it was claimed that we improperly priced some agreements. I can’t go into much more detail, but we believe there is potential liability for defective pricing, and we have accounted for that this quarter. We will continue to collaborate with the DOJ to reach a resolution. I must note that these investigations require time. We are still conducting some work, but we do not anticipate any lasting impact on our businesses due to these investigations. We believe these were isolated incidents that should not have happened, but they did, and we are working to resolve them and move forward.

Okay, thank you Greg for that. I’ll stick to the one.

Your next question comes from the line of Ron Epstein with Bank of America.

Hey, good morning guys. Just maybe on Pratt, I think in the hearing on Thursday on F-35, Pratt was mentioned 39 times, so I guess the question is this. How are you guys remedying the issues that the Air Force has with the F135 engine, and do you fear that all this rhetoric around the engine could offer an entrée for GE to try to get a second engine in there, because they’ve been raising their rhetoric on that, at least they have been with the investment community.

Well Ron, it’s nice to be mentioned 39 times; all publicity is good in some respects. However, the issues we faced, which Matthew Bromberg, our Military Engine Business President, explained well, are significant. We’ve managed to produce and deliver engines effectively, ending the year on contract with around 50 engines at the F-35 final assembly line. Unfortunately, our performance at the sustainment center was lacking, as we did not allocate enough test equipment and personnel to handle the volumes entering the shop. As a result, there are about 20 aircraft currently without serviceable engines. One possible solution, as Matthew pointed out last week, would be to take some engines from the final assembly line and transfer them to the sustainment center, resolving the issue quickly. However, the procurement funding is different from maintenance funding, making this transition complicated. We are committed to collaborating with our customer and the JPO to provide the necessary equipment for servicing the engines to get back to contract performance levels by the end of the year. We have a lot of work ahead, but we were caught off guard by the hours flown and the scope of the required work. Despite this, we will catch up. Regarding the potential for GE to build the F-136 engine, I can't fully answer that. However, I can say it would be a multi-billion dollar, multi-year endeavor to reintroduce that engine, and given the cost challenges, it seems unlikely that any services will invest in a second engine when our engine is performing well and meeting reliability and fuel burn targets. The F-35 issue isn't about capability but rather the sustainment cost, which we are also focused on addressing with the JPO and Lockheed to reduce, as that will ultimately be the larger expense compared to the initial procurement.

Great, thanks guys.

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Good morning guys, thank you. Maybe I’ll ask one on Collins. Decrementals are still in the 40% range. What are the moving pieces of that, and how do we think about the trajectory of margin improvement in that business, just given commercial OE start-stops on 787 and the Max?

Thanks Sheila, I’ll take that one. You saw the decrementals today - 47% at Collins, slightly better than what we were seeing last year, so that’s good. The cost containment actions that we’ve implemented are taking hold and continuing. As you think about the rest of the year, we continue to see the incrementals being very strong, probably in the 75% range if you’d average Q2 to Q4, but as you look at Q2, they should be in excess of 100% because you’ll recall that last year, Q2 was our deepest quarter. I’m happy with what the team’s doing there in terms of maintaining that cost control around E&D, SG&A in the factories. They took some difficult steps last year, as you know, and as we started the year, the Collins team has done a nice job of containing the growth in those costs. We will see a little bit of that come back in the second half of the year as Collins as we reinstate merits and furloughs are reduced and volume picks up, but it should be a really good story for the back three quarters of the year.

Neil, can you just comment on what’s going on with the Max and the 787, what kind of rates you expect for the year?

Sure, so starting with the 787, we are aligned with the Boeing production schedule, so you can think about that being around five ship sets per month. On 737, also aligned with Boeing. I think they’re out there with 161 deliveries expected for the year. As we’ve talked about, Sheila, we have produced and delivered a fair amount of that, a third to a half of that, so the uptick in the 737 OE deliveries will start in the back half of the year.

Thank you.

Your next question comes from the line of Seth Seifman with JP Morgan.

Thanks very much, good morning. Maybe just to follow up on Sheila’s last question, the guidance for Collins would seem to imply kind of this continuation of the mid-7s margin that we saw in the first quarter, but there’s potential for an era recovery and continued efforts on efficiencies, and so why wouldn’t we see that margin expand off of that level as we move through the year?

Yes, thanks Seth, I’ll take that. You’re right - as you think about the guide for the rest of the year for Collins, particularly given some of the strength we saw here in the first quarter, those margins are contained in that range; however, I will say we’re being really smart about the timing of when we spend our E&D and when we reinstate some of the discretionary spending. Those will be natural offsets to what we expect to see in terms of aftermarket growth, but as that aftermarket growth comes, I would expect if it’s better than our plan, then you’ll see it drop through.

Okay, and then just on that, I think you mentioned the sequential aftermarket growth in the quarter, 11%. Can you talk about what pieces of the aftermarket are showing the most strength right now and where you expect that at Collins for the remainder of the year?

Sure, yes. It’s coming from the two places you’d expect it - parts and repair, and mods and upgrades. Provisioning is lagging a little bit, but again that tracks more closely to the commercial OE deliveries, so I’m not surprised to see that. But we are seeing, I’ll call it cautiously encouraging signs as we exited March and started April on the repair intake in particular.

Great, thanks very much.

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Hi, good morning everybody. Neil, could you just add a little more color to that last question there, just with all of these questions about how the guidance implies some flattish things through the year despite some signposts for improvement, with the aftermarket being the shorter cycle lever? How did you tackle how to decide what to include for the aerospace aftermarket, given the signposts are positive but it is still uncertain? Then could you also tackle what happened with your pension cash flow inputs? It looks like those changed less than maybe we thought, based on how the inputs were revised there.

Sure. Let me try to build upon the aftermarket. As I think about the year and we think about the recent IOTA data on RPMs, January and February were a little bit of a slow start. That definitely picked up in March. When I think about the change in the RPM forecast that we and the industry are looking at today, I think we’re pretty well aligned. It looks a little bit different today than it did three months ago. Clearly the domestic routes, U.S. and China in particular, are much stronger, so that’s helping us; but on the international side, it’s a little slower than we thought. On the ASK or ASM side, the available seat miles, those are tracking pretty consistently with what we saw in January, or thought we would see in January. I think the thinking that we’ve had as we look at the rest of the year, and there’s still a long way to go, is that we really need to see those ASMs and corresponding RPMs increase here in the second quarter, and we’re thinking about a 40% sequential growth in RPMs from Q1 21 to Q2 and then again Q2 to Q3, and then corresponding on the ASM side think about 25% to 30% sequential growth between Q1 and Q2, and Q2 and Q3. If we see that kind of growth, then we will likely see a stronger second half, but I think at this point it’s just too early to call that. That’s how I’m thinking about that a little bit more.

If I could just interject there really quickly, just to make sure I have it correctly, your guidance does not imply those types of sequential moves, or really close, so am I hearing you correctly that the signposts are saying that could be what happens, but just given how much uncertainty there still is with the virus and the vaccine rollout and restrictions to travel, you’re feeling the need to keep the guidance fairly conservative in case things are more volatile than that?

Yes, you understood that correctly, Noah. There's still a lot that needs to go well in the latter half of the year, specifically in the next eight months. While we’re optimistic due to the vaccine rollout and what we've observed in China, it's important to note that 40% of Collins’ aftermarket consists of wide-body aircraft, and that market has significantly declined and is not recovering as quickly as we anticipated. The domestic markets are performing better, but international markets are struggling. Overall, we remain confident in our full-year guidance. If the recovery accelerates and we start to see an improvement in travel to Europe, especially during the summer, our numbers could improve, positively impacting our bottom line. We recognized that there could be upside potential in both revenue and profits, but it’s still April. When we meet again in May, we’ll provide more insights and you'll have the opportunity to speak with Steve Timm and Chris Calio about their market observations. By the end of the second quarter, we should have a clearer perspective. For now, we are optimistic yet cautious.

Sensible, okay.

Yes, and let me take the pension question too. Thanks for bringing it up. Yes, we did put out some new numbers there. As you know, the relief bill that was passed reduced pension funding. We currently don’t see the need to do any domestic funding in the near term as a result of that bill. You’ll recall that we pre-funded $800 million in 2020 that would have been our 2021 contribution, so there’s nothing in ’21 that changed as a result of the bill. However, looking forward, we do get a little bit of improvement, so we’ll have to fund a little bit less into our pension plans. We’ll get a little bit less on the CAS recovery - it’s about $75 million next year and, I think, $50 million in 2023, so good news. The last thing I’ll add is we got a little bit of a P&L benefit here in Q1 as we’ve rolled this lower CAS cost into our forward pricing. Probably about 70 basis points of margin improvement at the RMD segment is where it really showed up. Going forward for the rest of the year, I don’t expect to see much more of that, and we’ve rolled that into our forward pricing.

How far into the future did it take down the domestic funding?

It’s pretty far out. I would say for the next three to five years right now, and of course that depends on a lot of other assumptions that could change. But all things equal, for the next several years at least.

Okay, thank you.

Your next question comes from Myles Walton with UBS.

Thanks, good morning. I was wondering if I could pick up where we left off on RMD - it outperformed on margins, and Neil, thanks for the clarity on the pension contribution there, but still I think it was running hot, and obviously no change to the full year. Then maybe talk about the bookings trends there, which obviously look lighter, and when you think that could turn around and give more confidence to at least stability in the segment from a revenue perspective run rate.

Sure, no problem. Yes, as you saw, 13.1% RMD margins in the quarter, we were very happy with that, as I mentioned just a minute ago. Think about 70 basis points of that as a pension tailwind that won’t repeat. We also had about 40 basis points, I’d say, of international mix, some acceleration of award timing that came through with the CFR liquidation. That helped RMD here in the first quarter. If you kind of adjust for those two items, you’ll see continued margin progression, again as the productivity improves through the year, so we’re still seeing that margin growth that we would expect absent those couple of items.

And I’m sorry, bookings trends?

The bookings trends, yes. You know, listen - a year ago, and in the past 18 months RMS has had some significant multi-year buys, so as we burned down the backlog there, our book to bill is a little bit lower. But later this year, we do expect next-generation Interceptor - we talked about that, that will be over a billion-dollar booking that we’ll book here in the second quarter, LRSO and some other international Patriot awards that are forthcoming later in the year. So all in all, I still expect on a full-year basis a book to bill of about 1.0 for RMD and RIS, for that matter.

Okay, all right. Thank you.

Your next question comes from the line of Peter Arment with Baird.

Hey Greg, good sequential improvement from Pratt & Whitney on the large engine inductions. How are you thinking about, at least planning or visibility-wise in the second half or at least as we move forward on the recovery, and then also maybe you could just highlight how Pratt Canada is doing, just given that we’re seeing a resurgence in biz jet flying activity. Thanks.

Yes, Peter. In the first quarter, we had about 118 Vs into the shop, which was right on plan, and we anticipate this will increase as domestic travel recovers. Currently, only around 60% of the V fleet is operational, but we expect it to return, especially when compared to the GTF powered fleet that is operating in the high 80s. There is a slight lag in demand, but we expect significant sequential improvement. We won't reach 1,000 engines this year, likely not for two more years on the V, but we are clearly trending that way as the demand for more lift in domestic markets grows, which is encouraging. Regarding the rest of the aftermarket, Pratt Canada is seeing good traction, with business jet flight hours significantly increasing and translating into higher aftermarket activity. However, most of the engines out there operate on a power-by-the-hour basis, so we don't recognize revenue or costs until the engines return. Flight hours and aftermarket are both up, but the revenue impact is less pronounced due to contract terms. One area that remains challenging for Pratt Canada is the regional marketplace, with PW100 and PW150 engines for regional transport showing a slower recovery. We expect improvement next year, but there won't be a significant uptick this year. Business jet and helicopter engine deliveries are strong; it's primarily the regional market that is presenting challenges for Pratt Canada.

Appreciate the color.

Peter, it’s Neil. Just to go back on the Pratt shop visits, we still expect Q2 to Q4 shop visit growth in the 25% to 30% range, so all that’s holding, as Greg mentioned - you know, good start to the first quarter, and then we’ll see that back half growth. The other point I would throw out there is we’re watching Europe obviously, but the majority of that V fleet and our planning around those shop visits, I’d say 80% or more, 85% or more is not in the Europe region, so feel pretty good about that outlook.

Appreciate those comments, thanks Neil.

Your next question comes from the line of David Strauss with Barclays.

Thanks, good morning. I think you mentioned that the Collins aftermarket was up 11% sequentially. I would imagine January and February weren’t very good. Can you talk about what you saw in March in terms of how quickly the airlines can turn it back on, and then maybe also what you’re seeing in April?

David, I don’t know that we want to get into month-by-month compares. I would say that directionally, that is absolutely correct. January and February were a little scary because, again, we saw an uptick in China in the virus and the U.S. was going through the last wave, and so air traffic was not picking up as fast as what we had expected it to. That all turned around in March. With the vaccine rollout, with China getting the pandemic under control, things got remarkably better, and what surprised us a little bit was typically when we see a recovery in RPMs, it’s usually three to six months before we see a recovery in demand for parts and repair, but in this case, because you’ve got so many parked aircraft out there - think about 11,000 out of 30,000 around the world are parked today, and yet demand is coming back very quickly in the U.S. and in China. The airlines are actually being proactive in getting the aircraft ready for service in the summer selling season, and that’s really what drove March, what’s driving April, and I think which will benefit the second quarter as the airlines are not waiting to see the RPMs. They see it in their advanced bookings and they know they need the lift. This is a very different kind of recovery than what we have seen in the past.

Okay, and I wanted to ask about the legacy Raytheon businesses and the margin expectation there. Those businesses were around 13% on average blended together pre the accounting adjustments and all of that. Is there anything structurally in terms of anything different about how we should think about where those margins can get to as you’re able to start booking EACs again?

Yes, let me give you a couple of thoughts. First of all, we’ve got to keep in mind that as we implement all these synergies, which are great, they do come with a give-back to our customer, which is great because it also makes us more competitive, so that’s a factor that you’ve got to think about in the margins. But both those businesses are laser-focused on driving productivity and cost reduction throughout their businesses. We do see the opportunity for margin expansion. It’s going to be a great question for Wes and Roy at our upcoming investor day in May, where they’ll talk a little bit more about that. We’ve talked about the EAC reset. We do expect that issue to be largely behind us as we exit the year, so you could see a little bit more margin expansion throughout this year. But these are great businesses as we get into longer-term production contracts. On the RMD side in particular, you’ll see margin expansion there, but you do have a replenishing of some of the programs, so we’ve had the Patriot missile program, a very good program for us that will get replaced with the LTAMDS in the future, so there will be a little bit of a mix shift as the margin sort of transitions between those early LRIP contracts when you get into late ’23 and ’24, and we get out of the more mature programs that we’ve been in today. A lot of potential there.

All right, thanks very much, Neil and Greg.

Your next question comes from the line of Robert Stallard with Vertical Research.

Thanks very much, good morning. I just wanted to follow up on Peter’s question about Pratt & Whitney and the other side of the engine portfolio there. I was wondering if you could tell us what you’ve been seeing on some of the older aircraft variants, engine variants that are out there and how freight has perhaps been helping those older aircraft out. Thank you.

Yes, considering Pratt's installed base of over 11,000 engines, approximately 10% of that consists of freighters, specifically the older PW4000s used in the 94-inch 767s and 747s. This segment has actually been a pleasant surprise, as freighter traffic has significantly increased year over year due to the rise of e-commerce and global supply chain demands. When we look at the aftermarket for Pratt, it's not all negative. The demand for freighter traffic is strong. Additionally, we are beginning to see some retirements of older engines, though not a large number this year, which aligns with our expectations, particularly concerning the 112-inch engines used in 777s. We noted that JAL retired their fleet slightly earlier than anticipated; however, the engines will likely continue to be utilized in another capacity, probably in freighter configurations. The older engines still represent a significant part of the aftermarket, making up about 25%. Moreover, it's worth noting that cargo traffic has increased considerably compared to pre-pandemic levels, positively influencing the shop visits at Pratt in 2021.

And a quick follow-up, if I may, this may be a tough question, but how sustainable do you think this freight demand is likely to be?

Look, as I look at how sustainable is e-commerce and this trend towards global supply chains, I think this is here to stay. The fact is global supply chains are stretched thin today, and freighters are the most efficient way to get parts from Point A to Point B, so I think this is not just a temporary phenomenon.

Deborah, we’ll take one more question, please. Thank you.

Your final question comes from the line of Cai Von Rumohr with Cowen.

Yes, thanks so much. At our conference in February, Toby talked about 15% to 30% growth in commercial aftermarket at Collins over Q2 to Q4. That kind of seems like it fits with your full year guide, but it implies that commercial aftermarket moves up from the first quarter by something like $250 million, if there’s an orderly build. Could you give us some more color on maybe the margin headwinds we look at, because you had this huge profit gain at Collins on basically lower volume sequentially from Q4 to Q1, and as Seth brought out, your guide for the rest of the year assumes basically not much margin improvement at all sequentially, and yet you should have very strong growth in your more lucrative part of your business.

Thanks Cai. Just a couple thoughts here. As I think about the sequential growth in commercial aftermarket, Collins commercial aftermarket for the rest of the year, it’s a little bit lower than what we talked about in the first quarter, and that’s because we’ve de-risked that a bit by the performance we’ve seen. Think about 5% in Q1 to Q2, maybe 10% Q2 to Q3, and another 5% or 8% in Q3 to Q4 in terms of growth. In terms of thinking about the strength that you saw in the first quarter, a lot of really good work on the cost containment, E&D and SG&A combined about $60 million of improvement, and that will come back because the team is phasing that investment during the year because we’re trying to be very prudent about the discretionary element of our spending until we see the recovery take a strong hold. That’s what I can share with you there. Appreciate the question.

Thanks so much.

You bet.

I would now like to turn the conference back over to Mr. Hayes for closing remarks.

Okay, thank you everyone for listening in today. I know it’s a busy earnings day out there, but appreciate everybody’s time. Jennifer, Neil, and the whole IR team will be available all day today to answer your questions, and we look forward to seeing you or talking to you on May 18. Take care. Bye bye.

This does conclude today’s conference call. Thank you for participating. You may now disconnect your lines.