CNBC Transcript: United Applied sciences Company (NYSE:UTX) Chairman and CEO Greg Hayes and Raytheon Firm (NYSE:RTN) Chairman and CEO Tom Kennedy Converse with CNBC’s “Squawk on the Road” At present
Picture supply: CNBC Video Screenshot
WHEN: At the moment, Monday, June 10, 2019
WHERE: CNBC’s “Squawk on the Road”
The next is the unofficial transcript of a CNBC interview with United Applied sciences Chairman and CEO Greg Hayes and Raytheon Chairman and CEO Tom Kennedy on CNBC’s “Squawk on the Road” (M-F 9AM – 11AM) at the moment, Monday, June 10th. The next is a hyperlink to video from the interview on CNBC.com:
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CARL QUINTANILLA: We’re going to speak to Hayes and Kennedy, in a minute. Talking of Raytheon UTX, although, the President did point out that deal as nicely. Take a pay attention.
PRESIDENT TRUMP: Once I hear United and I hear Raytheon–which is one other unimaginable firm, the missile methods they make are incredible–when I hear they’re merging, does that take away extra competitors? It turns into one massive fats lovely firm. However I’ve to barter, which means america has to purchase issues. And does that make it much less aggressive? As a result of it’s so already very much less – it’s already not aggressive.
JIM CRAMER: You realize what, we occur to should have the individuals right here who may have the ability to reply that query. We now have United Applied sciences’ Greg Hayes and Tom Kennedy from Raytheon. That is an all-stock merger, probably the most thrilling issues, I do know Greg is aware of it — it’s simply loopy – however that is going to be a behemoth, valued at greater than $100 billion, so I’m simply going to go proper there. Greg, you simply heard the President, he likes the thought of mixture however he’s frightened about competitors. Will it make issues much less aggressive?
GREG HAYES: Completely not. I feel—once more, we’re wanting ahead to speaking to the President later at present. I feel as soon as he understands the advantages of this merger, when it comes to what will do to scale back prices to the federal government, what it will do to enhance the know-how of the U.S. authorities and our protection profile, and what it will do for jobs on this nation, I feel he’s going to be supportive as he has been for each of the businesses over his administration.
JIM CRAMER: Nicely, Dr. Kennedy, I do have a query, you could have a wonderful set of enterprise: missile, unbelievable. Aerospace, nice. If the President says, ‘You realize what, we would like you to compete towards United Applied sciences anyway, although you don’t, as a result of we would like you to decrease costs.’ What do you say to the concept he says, ‘Hey, you guys are each protection. Protection, you’ve obtained to compete. We don’t need this,’ and even Ash Cater, whom I assume he would trash as a Democrat however nonetheless was a distinguished American says we shouldn’t not have extra protection mixtures. How do you cope with that sort of 90,000 sq. – 90,000-foot evaluation that the President provides you? You recognize. It’s up right here.
TOM KENNEDY: To start with, I’ve obtained to return to what you stated. We’re complimentary, we aren’t aggressive. I don’t keep in mind the final time we competed towards United Applied sciences. We do companion with them. They’ve some complimentary applied sciences we convey along with our know-how to go to the marketplace. On this case right here, we’re going to have the ability to take about $eight billion of analysis and improvement spend and our 60,000 engineers to develop the subsequent degree of applied sciences to create the subsequent era franchises so we will go to the worldwide international market and take home windows in markets and convey that stuff again to the U.S. to create extra jobs. And that’s what we’d like. We have to create extra jobs on this nation — extra manufacturing-related jobs so we will take the financial system even to the subsequent step from what the President is driving to. So, I feel as soon as the President hears our story and understands the complimentary nature and the facility of this merger of equals within the worldwide market, he’ll perceive how we’re going to have the ability to generate extra jobs and take this nation and make it safer sooner or later.
CARL QUINTANILLA: We must be clear. The President, his line was, if you wish to purchase a aircraft, you don’t get any bids. You guys don’t make planes. That’s not what that is about.
GREG HAYES: We’re platform agnostic. We’re a techniques supplier throughout the whole business aerospace sector and the entire protection sector. So, this isn’t about bidding on planes. Actually, if you consider it, Tom is strictly proper. We’re complementary, there isn’t any overlap right here, and there nonetheless is competitors. Proper. We nonetheless compete with everyone else for all of those techniques. The know-how that we now have by bringing the businesses collectively simply makes it so a lot better from a — what we will supply to the purchasers.
CARL QUINTANILLA: So, but when the grievance is about single-bid solicitations and consolidation amongst contractors, does it get any extra scrutiny from an optics standpoint?
GREG HAYES: I don’t assume so. Look, we’re huge. Proper? We’ll be about 75 billion mixed proforma this yr, virtually 80 subsequent yr. But when you consider that, we’re nonetheless the identical corporations that we’ve got all the time been. Proper? We’re nonetheless going to be buyer targeted in every thing we do. There’s nothing anticompetitive of bringing these corporations collectively.
JIM CRAMER: Alright I need to ensure about that. As a result of you recognize– Ash Carter’s a sensible man, he did say there must be consolidation – I do know once I first heard this, Tom, let me ask you: we actually do need many protection contractors as a result of it helps us a nation to have a lot of totally different corporations bid for plenty of totally different offers. Aren’t there some offers that you simply may need gone for, I do know you haven’t competed with Greg, that perhaps Greg would have determined to become involved after the newest acquisition he’s made and also you – the President is true that you simply provide you with a division that would compete towards it.
TOM KENNEDY: Nicely, for instance, Pratt & Whitney, we don’t construct engines. And so, we’re not going to compete–
JIM CRAMER: Proper. However the President may say ‘Why don’t you?’ Keep in mind, the President is probably not as refined as you gents. I’m simply placing that on the market. That’s simply not gospel. However see, he might say, ‘You make aerospace and also you make aerospace. No.’ As a result of, you understand, he’s not likely a element man.
TOM KENNEDY: Jim, let me simply take it again a step right here. So, primary is what this merger of equals supplies is a strong-based firm with robust applied sciences that it could actually take into the marketplace. And that is on – once I say market, I imply the worldwide market. That’s going to permit us to take that enterprise again to the USA, the place are manufacturing amenities are. We’re going to have the ability to create extra jobs. And these are noble jobs. These are jobs that pay means over minimal wage. They permit people to have the ability to, you understand, purchase a home if they need, ship their youngsters to colleges. These are very highly effective jobs. And that’s what we try to create. And on the similar time, we’re additionally making an attempt to safe the sovereignty of our nation and the safety of our nation. Not simply on the protection aspect but in addition on a civil air-side. And on the civil air-side, what we convey is our applied sciences and cyber safety to assist safe the civil air-side of our nation. After which, on the army aspect, we deliver our patriots and our missiles and our different capabilities to safe us from a protection perspective. So, that is an general nice play for the United States of America, making us a greater nation, a a lot stronger nation, and a rustic that’s constructed on noble jobs. It’s a win-win for all.
JIM CRAMER: Okay. Alright. Greg, difficult transaction. As a result of you haven’t completed your spin-offs but of Service and Otis. How does the typical individual attempt to perceive what he will get? It looks like for those who don’t tender, you simply nonetheless get United Applied sciences. In the event you do tender, you get the brand new Raytheon. You have got created a type of a posh transaction.
GREG HAYES: Nicely, the truth is, Jim, I feel this truly simplifies our life going ahead. I do know, if you consider it, we’re on monitor. Proper? We’re going to be able to spin Otis and Service finish of this yr. I feel we’ll get all the regulatory approvals. The goal is finish of March to all be carried out. On the similar time, we expect this transaction due to the complementary nature, little or no regulatory hurdles on the market. Once more, lower than 1% overlap in gross sales. We expect the profit right here is as an alternative of standing up at UTC Aero company workplace after which six months later merging the businesses, we’re going to do all of it concurrently. It’s going to save lots of some huge cash. It will be an incredible mixture from our shareowner’s perspective. A UTX shareowner will get a share Otis, they get a share of Service they usually’re going to get a share of RTX. And that’s, I feel, an enormous profit to everyone.
CARL QUINTANILLA: The President stated he’s purchased many an Otis elevator. Is there something that Otis or Service tells us about China proper now — China progress?
GREG HAYES: Nicely, actually, we have been simply wanting on the orders popping out of China final week and China is recovering. The market seems to be fairly good. We’re nonetheless taking a look at 500,000 elevators, market. We’ll ship about 88,000 of these this yr out of our China enterprise. The enterprise is recovered. It’s been three years. Proper. We noticed pricing deteriorating, we noticed profitability deteriorate. The final in all probability 4 quarters we’ve truly began to see an uptake. So, regardless of all of the tariffs and all the different noise that you simply hear, I might inform you the Chinese language home market is comparatively strong.
JIM CRAMER: Nicely, that’s at odds however nice to listen to. However I do additionally need to know, you’re platform agnostic. Dennis Muilenburg at Boeing, when the hell is that going to have the ability to be resolved? I imply, I do know it’s pushed again once more. What’s your tackle it?
GREG HAYES: Properly, look: we now have been working with the Boeing firm to resolve a few of the points on the software program and the sensors. We’re a provider to the Boeing firm. I can’t remark clearly, Jim, it’s an NTSB ongoing investigation. However all I’ll say is it’s an ideal airplane, it will be a protected airplane and we absolutely help Boeing to return its flight standing. And the earlier the higher. There’s nothing extra necessary in aviation than flight security. And Tom touched on it, I feel the capabilities of our mixed corporations will enhance that. However, I’m completely assured that Boeing firm will get it proper.
JIM CRAMER: Alright. And Tom, I feel your missile enterprise is second to nobody. However what I do fear about, the margins have been taking place, to not your satisfaction. You simply had Wes Kremer are available — you had just a little change, though the earlier fellow did need to retire. You even have let’s simply say categorised info that we don’t know that introduced your margins down. It all the time made it exhausting for me to research Raytheon, as you recognize, as a result of the final – it’s nice to have new orders, however not good to tug down the margins. Will we have now to fret with any of that when it’s mixed? As a result of it won’t be as huge part of the huge mosaic.
TOM KENNEDY: Properly, I don’t assume there’s something to fret about. And so, it’s truly – it’s type of a excellent news story. One of many the reason why the margin strain is there’s all these packages we have now been profitable. The enterprise grew 9% yr over yr within the first quarter. A variety of that was in categorized work. That categorized work is paying the subsequent era franchises within the missile enterprise. In that area, these contracts are cost-plus contracts, which are likely to have decrease margins. As soon as we get that as merchandise and new franchises into manufacturing then these margins will rise. We’re in what’s referred to as a modernization part relative for the Division of Protection. And so, the modernization price range has considerably elevated through the years. For instance, in fiscal yr ’18, the modernization finances elevated 19% and elevated one other 2%-Three% in 19 and the President’s finances coming ahead is one other Three% progress. So it’s all within the modernization finances. And the missile firm has been capturing a big a part of that price range. And what that it’s doing for us sooner or later that it’s going to present the franchises for the subsequent era.
JIM CRAMER: Okay. Greg, the — I’m sorry to be so linear however you’ve obtained two guys – plenty of totally different stuff. I keep in mind, considerably famously, you got here right here and also you talked about that and a notion of what was going to occur with United Applied sciences Honeywell, which you had informed us – due to antitrust points, it wasn’t going to occur. Are you able to delineate why that is much less of an antitrust drawback then a deal you didn’t actually look after: the United Applied sciences Honeywell.
GREG HAYES: Properly, look, when you return two and half years to the time when Mr. Coty was perusing UTX — you guys keep in mind that, proper?
JIM CRAMER: Yeah, it was sort of performed out right here.
GREG HAYES: The overlap in our aerospace market, particularly business, was large – whether or not it was surroundings of controls, APUs, small engines, we have been taking a look at divestitures of $eight billion to $10 billion. Proper? And as we considered that– all of the valuation from the merger evaporates whenever you’ve acquired $eight billion to $10 billion of divestitures. On this case, you’re speaking about perhaps 1% of our gross sales. So, let’s name it 750 million. Insignificant. Within the enterprise of the overlaps, once more, we’ll discover good new house owners for these companies that can be aggressive. They’re simply not the antitrust danger that we had with Honeywell. This can be a deal that may occur versus the one which ain’t going to occur.
CARL QUINTANILLA: This will probably be 45 worldwide, Tom?
TOM KENNEDY: About 45% worldwide and protection will probably be round 50%. I might simply step again and say yr to yr that may change. I might say it’s going to be about, which is a superb firm if you consider it– 50% worldwide and 50% domestics—50% protection, 50% business. However the backside line is the underlying know-how helps all of that construction. And that’s the place we’ll be capable of drive and regularly leverage that know-how to create these subsequent era franchises within the market.
JIM CRAMER: I need to know, Tom. You’ve obtained some issues within the works they usually’re actually going to return to fruition when you guys merge. The Exoatmospheric Kill Automobiles, the hypersonic work that you’re doing, these are issues that make me really feel snug. What number of of this stuff which might be simply so revolutionary that the American individuals might say you already know, Raytheon and United Applied sciences – properly Raytheon Tech — have our again? As a result of I’ve obtained to inform you, that is all very science-fiction what you’ve received within the field.
TOM KENNEDY: Properly, it’s – I’ll inform you, we’re taking science-fiction to actuality. And a mixed firm goes to permit us to try this a lot faster and take it to the market a lot quicker. And that’s good for the USA, and it’s good for you and it’s good for Carl and it’s good for all of us right here at present in our nation. So.
JIM CRAMER: Nicely, okay. And Greg, let’s go over to Otis for a second. You bought a terrific new CEO for Otis.
GREG HAYES: Judy Marks.
JIM CRAMER: Yeah, and I’ve actually received to applaud you for that. And I feel she’s sensational. Clearly nice for Service. Can these two divisions, I’m making an attempt to determine what they’re value, now that you’ve achieved this. Are you able to assist us making an attempt to determine, you’ve truly put a worth on these two by doing this? Give us a way of multiples and the way you probably did that. As a result of it’s arduous stuff. I spend my life analyzing these things and I don’t understand how you probably did it.
GREG HAYES: Properly, look, if you consider it, we’ve all the time talked about the truth that you possibly can unlock values by spinning off Service and spinning off Otis as separate corporations. We all know that a good HVAC firm like Service, tremendous excessive margins, 17 or 18%, good progress prospects. That ought to commerce someplace — 12 or 12.5 perhaps 13 occasions. And so, we take a look at that worth and I’ve seen numbers as excessive as $41 billion of type of EV, so perhaps 30 after debt, in all probability about $30 billion of fairness. Similar time, Otis, elevator companies due to the money flows, in all probability commerce 14.5 or 15 occasions. You consider that, you’ve received two companies that mixed should be value net-of-debt about $60 billion. Add that to the aerospace enterprise right here and a number of the elements in all probability $160.
JIM CRAMER: And it does appear that Raytheon has a wonderful stability. quarter. You in all probability purchased again 2 billion shares final quarter. I imply, you’ve obtained an unbelievable stability sheet. You have got a variety of debt on this. Mixed what’s the debt profile that you simply completed?
GREG HAYES: It’s good. It’s going to be an A-rated firm with the mixed aerospace companies when that is achieved. And we’ve obtained the pliability. And we simply talked to buyers, we’re going to return 18 to $20 billion to capitol to buyers over the subsequent three years. That’s one thing United Applied sciences aero couldn’t have achieved as a result of we’ve been paying down debt. So, I appreciate– Tom obtained an incredible stability sheet. After which one of many actual advantages of this deal is that stability sheet with ours provides us a singular flexibility. Not simply to show capitol however to spend money on all of these new franchises that Tom is speaking about.
JIM CRAMER: You had an fascinating couple of conversations with the president when he received elected about Service. Sort of conscious of the place Service was going to go.
CARL QUINTANILLA: That looks like a very long time in the past.
JIM CRAMER: There was some Mexico concerned. I imply, it’s type of a, you realize, face to face. Now, if he calls you and he says you already know I don’t consider for a minute that you simply’re creating jobs. When these two corporations get collectively, you hearth individuals and also you needed to place jobs in Mexico. So, I don’t find out about you. What do you say to him?
GREG HAYES: I’m going to inform the President that we’re going to — we now have yr thus far employed 5500 individuals, we’re going to rent extra 10,000 individuals within the U.S. this yr. Tom’s going to hire–
TOM KENNEDY: I’m going to rent 10,000.
GREG HAYES: 20,000 jobs.
JIM CRAMER: The place are you going to seek out all these engineers? You could have 50, going to 60. Can we produce sufficient engineers on this nation?
TOM KENNEDY: No, we don’t produce sufficient engineers on this nation. We have to have extra of our people going into STEM-related careers, and producer extra engineers. And, the underside line is the roles are there, however we’ve obtained to get our youngsters going into STEM-related actions so we can–
JIM CRAMER: He by no means talks about it as a result of he’s too humble and it drives me loopy. How many individuals have you ever put via school?
GREG HAYES: 38,000 individuals. Spent $102 billion on our worker scholar program. It will get —
JIM CRAMER: Anyone out within the authorities put extra individuals by means of school?
GREG HAYES: No sir.
JIM CRAMER: Will you please speak about that.
CARL QUINTANILLA: One final thing. Do you consider this offers as one other nail within the coffin of the normal conglomerate? We’ve talked about this prior to now.
GREG HAYES: Look, once we speak about a targeted A&D firm, which is what we’re. We’re huge, however we aren’t a conglomerate. And I feel once more, we’re going to be targeted on these core markets within the A&D area. And I feel that’s the necessary half to recollect. We aren’t a conglomerate, we’re targeted on aerospace and protection, our core markets.
JIM CRAMER: Alright. From what it says, Carl, I’ve to inform you I feel this mix is sensible..