雷神技術公司 (RTX) 2007 Q4 法說會逐字稿

Good morning and welcome to the United Technologies fourth-quarter conference call.

Today's call is being recorded.

On the call today are Greg Hayes, Vice President, Accounting and Finance; Jim Geisler, Vice President, Finance; and Ken Parks, Director, Investor Relations.

This call is being carried live on the Internet and there is a presentation available for download from UTC's homepage at www.UTC.com.

The Company 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.

UTC's SEC filings including its 10-Q and 10-K reports provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

At this time, I would like to turn the call over to Mr.

Hayes.

Mr.

Hayes, please go ahead, sir.

Thank you, Rufus, and good morning, everyone.

As you saw in the press release this morning, UTC ended 2007 with a strong fourth quarter, with each of our six business units delivering double-digit earnings growth and exceptionally good cash flow.

More evidence that the UTC operating model, with its focus on top-line growth, margin expansion, and cash generation delivers consistently for shareholders.

It is that operating model, along with the strong management team, that gives us confidence in another good year in 2008 despite the economic headwinds we read about every day.

We will have Ken take you through the Q4 detail in just a minute, but let me just hit a couple of highlights in the quarter.

In the fourth quarter, earnings per share were $1.08; that is up 24% over last year.

Revenues were up 15% including 8% organic growth.

That follows 10% organic growth in Q1; 10% in Q2; and 9% in Q3.

Free cash flow was $1.6 billion or 150% of net income.

It was driven by working capital reductions, primarily inventory reductions of a little over $500 million, as well as solid collections.

Included in the fourth quarter results is a net $0.04 a share charge driven by non-US tax law changes, restructuring, and a few other onetime items.

Ken will take you through those details in just a minute, but no surprises here.

This net $0.04 impact is consistent with what we told you back in the fourth quarter -- third-quarter conference call.

As we look across the business, we see continuing examples of solid execution.

Very good top-line growth at the aero units, strong margin expansion at Sikorsky and Fire & Security, solid operating performance at Otis and at Carrier in spite of the significant drag of the US housing market.

We hit a major milestone in the quarter as well with the Geared Turbofan, which successfully completed almost 70 hours of ground testing, demonstrating both the validity and robustness of the engine's design.

The rollout of ACE, UTC's operating system, continues, ending the year with 30% of sites at gold or silver level, nearly doubled from the beginning of the year.

Our goal remains 70% by 2009.

ACE is a proven operating system with a rigorous focus on the customer and process.

ACE provides benefits not just in the factory but in all the customer-facing and back-office functions that can drive value creation across the Company.

So a strong finish to 2007 that more importantly underscores the importance and success of operational excellence at UTC.

It is this operational excellence that gives us confidence that 2008 will be another good year for UTC.

I will come back and talk a little bit more about the outlook for '08 at the end.

But first, let me hand it off to Ken to take you through the details.

All right, thank you, Greg.

And as Greg said, fourth-quarter earnings per share were $1.08.

That is up 24% over last year including $0.04 of restructuring and charges in excess of gains.

Recall that last year's fourth quarter included $0.05 of restructuring in excess of gains.

Now let me go through the nonrecurring items in the quarter.

As shown, the sale of two noncore businesses generated $83 million of gain.

In addition to restructuring charges totaling $63 million, we settled a litigation matter at Carrier.

Finally, our effective tax rate in the quarter was higher primarily as a result of non-US tax law changes.

As you recall, we had $0.04 of net gains in our third-quarter results and told you to expect the same amount of net charges in the fourth quarter.

FX accounted for 5 points of our revenue growth and 2 points of our EPS growth as the 4Q average euro rate of $1.45 was significantly higher than last year's average rate of $1.27 and consistent with our assumption for 2008.

Moving on to page 4 and turning to the business unit details, I will remind you that I will talk to segment results adjusted for restructuring and these nonrecurring items that I just went through.

Otis finished the year with a strong fourth quarter, profits up 22% on revenue growth of 17%.

Revenues grew in all geographic regions including double-digit growth in Asia and North America as Otis continued to execute on a robust new equipment backlog.

While revenue mix continued to shift towards new equipment, margins expanded by 60 basis points to 18.9%.

Favorable foreign exchange contributed just under half of the revenue and profit growth in the quarter.

New equipment orders remained strong in the fourth quarter with an increase of 20%.

For the year, Otis delivered a 15% increase in operating profit on 14% revenue growth.

Margins expanded to 19%, a 20 basis point improvement, as ongoing cost-containment and efficiency action mitigated commodity and labor cost headwinds, continued pricing pressures, and the shift in Otis's revenue towards more new equipment.

Favorable foreign exchange contributed approximately 40% of the revenue growth and 45% of the profit growth.

Otis ended the year with a new equipment backlog 27% higher than the prior year.

The robust new equipment backlog positions 2008 to be another good year for Otis, with guidance of high single digit revenue growth and profit growth of 10% or more.

At Carrier, fourth-quarter operating profit increased 20% year-over-year on 14% higher revenues, translating into 30 basis points of margin expansion.

As in recent quarters, strength in the building systems, international residential and light commercial, and refrigeration businesses more than offset housing-related weakness in North America.

Favorable foreign exchange contributed about 6 points to revenue growth and about half of the earnings growth, slightly exceeding the net commodity headwind in the quarter.

For the year, Carrier earnings grew 12% on 9% higher revenues.

Margins expanded 20 basis points to 9.5%.

Earnings growth was consistent with our initial guidance despite the continued deterioration of the US housing market.

While currency translation contributed about $50 million of the earnings growth, it was more than offset by net commodity headwind of about $80 million.

We continue to expect Carrier to grow earnings by at least 10% on mid single digit revenue growth in 2008.

UTC Fire & Security continued its strong performance as revenue of 27% generated profit growth of 38% in the quarter.

Revenue growth was substantially driven by acquisitions as well as 9 points of favorable foreign exchange.

Foreign exchange also added about 10 points of the profit growth.

Continuing benefits from previously announced restructuring actions as well as ongoing pricing and supply chain initiatives resulted in margin improvement of 80 basis points year-over-year.

In December, we completed the purchase of Rentokil's Initial Electronic Security Group, as we closed on our French piece of the business.

This followed our acquisition of the UK, Netherlands, and US businesses in the third quarter.

Fire & Security delivered full-year profit growth of 40% on revenue increase of 21%, resulting in margin improvement of 110 basis points for the year.

For 2008, Fire & Security will continue to focus on margin expansion and profitable revenue growth.

We expect revenues will grow mid single digits with operating profit growth of 25%.

Now turning to the aerospace businesses, Pratt & Whitney revenues increased $172 million or 6% in the quarter, led by 20% growth at Pratt & Whitney Canada and 80% growth at Power Systems.

Operating profit improved 16% in the quarter, reflecting the higher revenues, the absence of unfavorable adjustments in last year's fourth quarter, and the favorable impact from completion of contractual milestones on a commercial engine program.

Partially offsetting this growth were higher commodity and R&D costs, which each negatively impacted fourth-quarter operating margins.

For the full year, Pratt & Whitney increased operating profit 14% on revenue growth of 9% driven primarily by Pratt & Whitney Canada, the large commercial engine aftermarket, and Power Systems.

We anticipate the solid performance at Pratt to continue into 2008, expecting mid single digit revenue growth with operating profit growth of approximately $175 million to $200 million depending on the GTF program.

Spending on the GTF will approach $125 million, which is about 60% of UTC's total expected E&D increase of $200 million in 2008.

In the quarter, Hamilton Sundstrand revenues grew 15% with operating profit growth of 12%.

Similar to recent quarters, performance was solid in the aerospace aftermarket and industrial segments, both delivering double-digit revenue and operating profit growth.

R&D investments principally on the 787 program continue to be a headwind accounting for more than 100 basis points of operating margin in both the quarter and the year.

Even with these investments, Hamilton delivered a solid year with revenue growth of 13%, profit growth of 14%, and 10 basis points of operating margin expansion.

For 2008, we continue to expect Hamilton revenues to grow at high single digit rates and operating profit to increase 10%.

Revenues at Sikorsky grew 18% in the quarter as they continued to increase production to deliver their record helicopter backlog.

Operating profit grew about 80% over last year's fourth quarter and was subsequently from the third, in line with our guidance of sequential profit growth each quarter throughout 2007.

Sikorsky operating profit for the year was $370 million, as compared to our guidance a year ago of $340 million.

During the quarter, Sikorsky shipped 46 large helicopters, 22 military and 24 commercial.

For the year, that is a total of 174 large aircraft deliveries, up almost 60% from 2006, exceeding the guidance of 160 we started the year with.

In December, Sikorsky won the largest contract in UTC's history, a $7.4 billion five-year production contract for 537 UH-60 helicopters for the U.S.

Army and Navy.

As a result, ending backlog at Sikorsky reached $11.4 billion, up 30% from December 2006, and includes the $3.1 billion appropriated portion of this new contract.

For 2008, we expect revenues to increase mid teens on 200-plus large aircraft deliveries, generating operating profit growth of approximately 25%.

Now I will turn it over to Greg to wrap up.

Okay, thanks, Ken.

Before turning to 2008, just a few final thoughts on 2007, which was another strong year of both revenue and earnings growth for UTC.

Revenues for the year ended at just under $55 billion, and that is up 14% from 2006, with a full 9% of that growth organic.

This is the fourth consecutive year of solid organic growth, coming on top of 9% organic growth in '06, 7% in 2005, and 8% in 2004.

Earnings per share for the full year were $4.27; that is up 15% over 2006.

This was also the fourth consecutive year of solid double-digit EPS growth following 19% in '06, 18% in '05, and 19% in 2004.

And don't forget that the 2000 EPS includes a net $0.07 drag associated with the resolution of the Otis EU matter back in the first quarter.

Free cash flow for the year ended at essentially 100% of net income, even with inventory growth of $1.4 billion and the headwind of the Otis EU and Canadian tax payments back in the first quarter, which totaled almost $0.5 billion.

Although we saw significant improvement in working capital throughout the year, inventory -- and more specifically inventory turns -- was disappointing.

No easy answer here, but we can fix this through focus and by continuing to use the ACE tools in our own factories as well as at our suppliers to improve inventory velocity across the entire supply chain.

On perhaps a happier note, in 2007 we returned 75% of our free cash flow to shareowners in the form of share repurchase and dividends, the second consecutive year in which we have returned over for $3 billion of free cash flow to shareholders.

Acquisition spending including acquired debt for the full year was $2.3 billion, slightly higher than our guidance for the year.

A full $1.8 billion of this spending was allocated to our Fire & Security business as we continued to build scale in our newest segment.

So another excellent quarter and year for UTC.

Double-digit earnings growth across all of our businesses; robust organic revenue growth; and solid cash flow generation.

And just as importantly, solid execution by an experienced management team.

All of which gives us confidence as we look towards 2008.

On 2008, first of all, no changes from what we told you in December.

Although 2008 may be a tougher economic environment, we continue to see another year, solid year ahead, given UTC's geographic balance, the continued worldwide infrastructure buildout, our emerging market presence, and our solid execution capability.

On emerging markets, we expect these markets to continue to expand at roughly 2X those of the developed markets, albeit not quite at the pace we have seen over the last few years.

Commercial aerospace OEM markets remain strong due to continuing growth in revenue passenger miles worldwide and in spite of record high fuel prices.

We currently see good order and quote activity in our commercial construction markets; however we remain alert to the impact of the credit crisis and its potential spillover impact on these markets.

Although the North American residential market remain sluggish, it still represents only 5% of overall UTC revenues.

Balance does work.

Overall, despite some macroeconomic uncertainty on the horizon, we're confident in our ability to once again deliver strong results that our investors have come to expect from UTC.

For the year, we see revenues of approximately $59 billion on mid single digit organic growth, consistent with what we said in December.

We expect EPS to be in the range of $4.65 to $4.85 and free cash flow to equal or exceed net income, our usual standard.

So with that, let me open up the call to questions.

Rufus?

(OPERATOR INSTRUCTIONS) Heidi Wood with Morgan Stanley.

Sorry, I didn't know if there was a problem.

Can you guys talk a little bit about what you are seeing in commercial aftermarket?

How much did it grow in 2007, and what are you expecting in 2008?

I'm just wondering if you can give an update on what are the most recent trends you are seeing there.

I think, you know, Heidi, as we look across the business, what we saw was very, very strong aftermarket growth at Hamilton, 20% kind of growth.

Pratt & Whitney actually had a fourth quarter that was a little bit flattish -- again, coming off a very strong compare.

Sikorsky, which gets rolled up into this, actually was down just a little bit off of very strong deliveries back in 2006.

But I think the overall trends we see remain very, very strong.

We would expect high single digit kind of growth in the aftermarket for 2008.

RPMs continue strong, yields are very good at the airlines, and despite these record high oil prices people are still flying out there.

So we don't see any slowdown, especially as the OEMs continue this buildout of the record backlog.

All right, thank you.

Then, on Carrier, how much was North American residential down in 2007?

Tell us what you're expecting in 2008.

The market for North America was down, split systems a little bit more than 10%.

Remember that is a mix of res/new construction as well as AOR.

So you've got the res/new construction piece, which looks like based on housing starts down more than 20%, probably closer to 25%.

AOR was a little bit better than that, probably closer to just right at double digits down.

Res followed along with that.

As you know, we talked earlier in the year that we had lost a couple points of market share in the second quarter; and we basically held that position through the remainder of the year.

So that is kind of a look at '07.

What are we expecting for '08?

Well, we look at housing starts like you guys do, and we're still seeing a number that looks like another 24% or 25% drop in '08.

Maybe AOR is a little bit better than this year, but we're really just counting on a market that continues to be down year-over-year and probably doesn't start to show any favorable compares on a quarterly basis until we get very late in the year or probably even into early '09.

All right, great.

Thanks very much.

Deane Dray with Goldman Sachs.

Thank you.

Good morning.

I would like to hear you expand, if you could, on your comments on commercial construction.

Very specific, it looks like you are entering '08 with pretty sizable backlogs.

So can you touch on the backlog, and true up the number?

You said Otis at one time was 18 months of backlog; and Carrier around six months.

So how do those backlogs look?

Any risk?

And what has been the quote activity in both of those businesses?

It's Greg.

As we look at the backlog at Otis, Otis is going to end the year with about a $14 billion backlog.

That is up about $2.5 billion over last year.

Otis continues to see very, very strong activity especially in North America, but even in Asia.

I think North America, we had about 30% order growth in the fourth quarter; and even in Asia, it was 20%.

Europe was even to kind of, I think, mid single digits or high single digits.

So strong order growth around the entire geography for Otis.

So backlog is strong there.

You think about that, that is a little over a year's worth of sales at Otis.

But it's actually more than that because of the service element.

Think about Carrier, they ended the year at a little over $2 billion of backlog.

That is up a little more than 10% year-over-year.

I would tell you that the quote activity at Carrier also remains fairly strong.

We have not seen yet a slowdown in any of the commercial construction markets that would give us an indication that we're going to see a big problem here, at least in the first half of the year.

Greg, did I hear in your prepared remarks you mentioned pricing pressure at Otis; and has that changed at the margin?

What does that look like for '08?

No, I think if you think about pricing pressure, it really is in China specifically was the comment.

North America pricing looks actually fairly robust, but the pricing pressure in China will continue.

I think it is going to be the world's biggest elevator market.

It is the world's biggest elevator market.

Lots of competition, and we don't expect that that pricing pressure will abate anytime soon.

Great, thank you.

Steve Binder with Bear Stearns.

Yes, Greg, you touched on the fact that there is no change in the December 13 -- in the guidance from December 13.

I am just wondering if you look at your short-cycle, long-cycle, more short-cycle commercial end markets, and not just the short-cycle business, but also long-cycle at Otis you obviously have some front-end signals.

I am just wondering.

Over the last month, month and a half, seasonally adjusted for it, have you seen any real change in those end markets?

Steve, we really have not.

And believe me, we're asking that question every week because as we read the headlines, I think everybody is concerned that there is a slowdown out there.

We have not seen it.

I think that is the best news that we could convey to everyone.

Right.

Secondly, with respect to R&D, you know, obviously, Pratt is a big chunk of the increase in '08.

Just wondering, given the uncertainty about consolidation, the economy in North America, and the airline businesses, since one of your large customers potentially is a US airline that has been talked about.

Coupled just with global concern, can you see a possibility in '08 where that $200 million number turns out to be high?

Just discuss the puts and takes, because I know the 787 could be a headwind obviously, relative to that plan.

But is there a chance that the $200 million comes in lighter than that?

Maybe just to dissect that $200 million for you, Steve.

We think $100 million to $125 million of that spending is going to be at Pratt & Whitney.

That is primarily going to be on the GTF.

I don't see any way that that is going to slowdown or abate in any way during the course of the year.

We are committed to those programs.

We're committed to the flight test in the middle of the year.

We are still looking for partners, obviously.

We have signed up one partner for 15%; that is MTU.

We're working with other partners.

But, I think the $125 million or so at Pratt is pretty solid.

The rest of the increase in spending is really about $30 million at Carrier; about the same amount at Otis; and the same amount at Sikorsky.

If we think about the 787 program specifically at Hamilton, we actually are going to see a little but of a decrease in spending, although certainly not at what we had hoped in the middle of last year, given the latest schedule slip at Boeing.

I think there is always risk on the 787 if the program continues to slide.

But right now we actually see a little bit of good news coming out of Hamilton on the E&D line.

Lastly, Fire & Security.

I mean the organic growth rate was a little lighter than it has been the first nine months of the year.

Is that just comparisons, tougher comparisons?

Any change in their environment?

Steve, this is Jim.

The organic revenue growth rate in the fourth quarter was low-ish.

But I think it goes back to the basic premise that our focus is on margin.

I will give you an example of that.

If you look in Europe, in Security Europe in this quarter we had a slight decline in organic revenue growth.

But that is also where we have done the Initial Rentokil acquisition.

So the focus of the organization has been in driving margins and getting synergies out of the deal.

Because you know, their maintenance, their call centers and their branches sit right on top of ours.

So we continue to drive that cost reduction, and sometimes that has resulted in revenue growth that is not very high.

But I think as the business gets its cost base in line, you'll see revenues start to move up.

All right.

Thank you.

Joe Campbell with Lehman Brothers.

Good morning.

There has been a lot of talk about whether the international markets and the emerging markets are coupled or not coupled with perceived or real weakness in the US economy.

I wondered if you would just kind of walk around the various overseas UTC businesses and comment on how you see them.

You mentioned you see the develop -- the emerging markets running twice the developed markets.

But maybe just kind of walk around.

Then if you could just give us the kind of year-end FX numbers for each of the businesses.

You gave us the fourth quarter, and I know you have given them to us over the course of the year, but just perhaps remind us of the overall contribution of FX to the businesses.

Thanks very much.

Sure.

Okay, Joe.

I will have Ken get you the FX numbers as I try to address the first part of your question.

As we look around the world, specifically Asia, I think what we would tell you is that the trends that are driving growth in Asia do not look to slow down in the near term.

That is really the continued migration of people from the farms to the factories.

17 million people a year coming in China from the farms to the factories.

30 million people across Asia.

That is what is driving the infrastructure buildout, and we don't see anything that is really going to slow that down in the near term.

Urbanization is a powerful force, and it is what has been driving the business really for the last five years and driving organic growth at Otis and Carrier, as well as in the aerospace business, as we have seen record orders in India and China for new aircraft.

So, Asia looks to remain solid.

I think Europe, the question there is what happens with the euro at $1.44 or $1.45.

We have not seen any precipitous slowdown in Europe.

It is certainly not going to have the kind of growth rates that Asia does.

But, we would expect it to still have kind of mid single digit growth in 2008.

In North America, again, I think you've got to go back to the individual businesses.

Res, as Ken said, it's going to be a tough market this year.

We think the market for new home construction could be down 25%.

Nonresidential construction, we still think it may moderate a little bit from last year's growth, but still fairly strong.

Of course, the aero businesses I think are all going to remain strong.

Both Boeing and Airbus have record backlogs.

Sikorsky has got a great backlog; they are going to build over 200 helicopters this year, and you're going to see strong revenue growth out of Sikorsky.

So we don't see any big bumps on the horizon here.

Maybe one other comment on that, Joe, just to offer a little bit of perspective.

That is, I think as Greg said we haven't seen any slowdowns, period.

Full stop.

However, we are very cognizant that other things are happening in other sectors that may come to affect our markets.

So while we haven't seen anything yet, we have to open our minds to the fact that something in time may come to affect our businesses.

All that being said, I think we feel very good about our position with 62% of the revenues outside the States, a really great mix of short- and long-cycle businesses, and frankly a Company that has performed well in adverse times.

All right, Joe, let me give you the FX numbers that you were asking about.

For the year, for UTC overall, it contributed a couple of points of the EPS growth.

Now, the main place where it plays, obviously, is on the commercial side of the business.

So Otis, for their profit growth for the year, it contributed about 7 points of growth.

For Carrier it was around 4.

And for Fire & Security, it was around 9.

The aero businesses are small numbers.

But all of that come together would give you a couple of points of EPS growth for UTC.

Thank you very much.

George Shapiro with Citi.

You know, Rufus, while we are waiting, is there someone we can go next on the list and then come back to George?

Mr.

Shapiro, your line is open.

Okay.

I don't know what happened.

But my question is, given that this is the second quarter in a row that we have seen like zero spares growth at Pratt and 20% this quarter and 15% last quarter at Hamilton Sundstrand, have you gone back and looked at why the discrepancy is so large?

Does it relate to lack of narrow-body share at Carrier versus Hamilton or what have you come up with?

I think actually, we have, obviously taken a look at this, because it is unusual, I would say, for there to be such a divergence between the order growth rate at Hamilton Sundstrand versus Pratt & Whitney.

But as we look at Pratt & Whitney we saw a fairly good increase in inductions into the engine shop; about a 9% increase into the overhaul shop.

We didn't get all of those engines out.

I think had we actually seen that kind of -- or had we been able to get those engines out, we would have seen probably much better growth in spare parts.

Because obviously, a big part of the revenue there is spares.

Also, you point to the fact that Hamilton is on every aircraft out there.

So obviously they have a larger base on which to grow.

But I don't think there's anything that would tell us that Pratt is going to grow any more slowly than Hamilton over the long term in terms of its installed base for aftermarket.

Remember one other thing we talked about, George, as we moved through 2006, was that spare parts and aftermarket ramped up as we moved throughout the year based on airline profitability.

So we saw some tougher compares in the second half, just to supplement a little bit what Greg was saying -- was the compares in the second half of this year have been awfully tough compared to the second half of last year.

But why would it be that much tougher at Pratt than Hamilton?

It's just based upon the timing of how the engines come in.

I think it really just goes back to the engine inductions.

I think also as we look back at 2006, there was a little bit of an influx of engines as we completed some of the ring case work on the Pratt 4000.

So that drove a little bit of the timing here.

But again, long term, we do not see a divergence in order rates.

Okay.

Then, Ken, could you just provide deliveries?

Or if you wanted to do it off-line, I will wait for off-line, at Pratt?

I can give you deliveries while we are here.

Commercial engine shipments in the fourth quarter were 111.

Military were 40.

Pratt Canada was 922.

And industrial were 19.

Okay, thanks a lot.

Cai von Rumohr with Cowen and Company.

Yes, like many other companies, you have good results, you haven't seen any slowdown, and yet the markets continue to tank.

You are sitting there with very good financial position.

How do you react with that financial firepower?

At what point to do you go into the market and buy in your own shares?

At what point do you say, now I am going to make another acquisition?

This is Jim.

We agree, the stock is attractively priced right now.

We already committed to $2 billion of share repurchase, so we look to buy; we will continue to look to buy; and frankly, while the stock is very attractively priced for us, there may be other opportunities as well.

So again, I mentioned earlier that this is an environment I think where UTC typically does well and may have the opportunity to take advantage where others cannot take advantage.

So stay tuned.

So what you're telling me is that you are more likely to kind of redeploy cash if we see this -- what we have seen in the last couple of weeks.

We are more likely to see you take more aggressive initiative either in terms of M&A or share repurchase than you did in the fourth quarter?

I would say right now we feel very good about having a strong balance sheet and the opportunity it gives us.

Okay, terrific.

Just, one follow-up to George.

Could you give us the split at Pratt in terms of year-over-year change, and large engine spares and large engine MRO, and at Pratt Canada?

Well, I think we don't typically give the spares changes.

But I will tell you that the book-to-bill in the quarter was right around 1.

And Pratt Canada growth, we quoted as about 20%; and that business has had good growth both on the OEM and aftermarket side.

I think it is fairly comparable.

Okay, terrific.

Thank you.

(OPERATOR INSTRUCTIONS) Ronald Epstein with Merrill Lynch.

Good morning, guys.

When we think about the GTF program, what milestones should we be looking for when we look out over the next 12 months?

I think the key milestone, as we have gotten past full power testing and the ground run here in the fourth quarter, the next key milestone we are going to be talking about is the flight test which will happen midyear.

I think the other milestones to keep in mind are the actual launch of both the Mitsubishi and the Bombardier C-series aircraft.

Those are still not officially launched yet.

But again those will be big milestones for us, because that is when the spending will begin to ramp up on those programs.

Your spending on those programs is what?

Contingent on some sales figure of those programs, right?

Does Mitsubishi have to sell a certain number of airplanes before you guys --?

There are certain launch conditions, obviously, in both contracts.

We had to be satisfied that we have a good customer base and it's going to be a successful launch.

But we're confident that both Mitsubishi and Bombardier are going to get those commitments from customers.

Okay.

Then just a financial question, if you look at the run rate of CapEx in the first three quarters of the year and then in the fourth quarter, fourth quarter was kind of well above trend.

Why was that?

It was concentrated more at Sikorsky and at Pratt.

I think that just comes along with the fact that the capital cycle tends to be heavier in the fourth quarter of the year.

It is really related to volume too.

The thing about Sikorsky is they're continuing to ramp up volume down in Stratford as well as at some of the supply base, as well as at Pratt Canada as we are ramping up volume on the small engines.

We shipped almost 3,000 engines out of Pratt Canada this year.

That obviously is going to take more capital as we continue to increase the lines up there.

So, a little bit higher than we would have expected, but still in line with what we are seeing in terms of revenue growth in those businesses.

Okay.

Then just one last quick question.

The Otis aftermarket in China, what kind of conversion are you seeing from the OE equipment you have put in place to the aftermarket?

I think it hasn't changed significantly since we talked last.

We are seeing conversion.

There is a long pathway with that.

Conversion rates in the teens, maybe.

It is not high, yet.

We have talked about this a lot.

The fact is we do not have a large service portfolio yet in China.

But it is the opportunity as we look forward, as all of these elevators that we are delivering -- and we will probably deliver more than 50,000 elevators in 2008 in China.

It will eventually be a huge market for service, and we would expect that over the long term that the service portfolio would generate more than half of the revenue in China, as it does throughout the rest of the Otis world.

Okay, great.

Thank you.

Nicole Parent with Credit Suisse.

Good morning.

Jim, just one follow-up on M&A.

Could you just talk a little bit about kind of what you are seeing?

Meaning with the private equity bid gone, are you seen a lot more favorable pricing?

Then I guess maybe a little bit more granularity when you look at the portfolio, should we expect bolt-ons?

Or are there any large things or unrelated new businesses that might be of interest given where prices are?

Private equity is not very active in the M&A market right now.

I don't think I am telling you anything new by restating that.

But we still see that prices can be a little bit sticky.

So people remember what their price was three or six months ago, as opposed to what it is exactly today.

Strategics have money, but all that being said, I think over time prices will reset.

Again, there may be opportunity for us that wouldn't be possible or available to others.

Where will we grow?

We will look everywhere.

But I think last year was a good indicator that there is good opportunity in Fire & Security, and you will continue to see acquisitions there for sure.

Great.

Then, Greg, could you elaborate on ACE?

Which businesses had the biggest contribution in the improvement in silver in gold in '07?

And what do you view as the biggest opportunity in '08?

I will start with the biggest opportunity.

I will tell you that the business that is probably furthest behind because it is the newest business is Fire & Security, which only has about 10% of its businesses at silver and gold today.

Bill Brown and the team are focused to drive that business to higher returns through the implementation of ACE.

So that will be a key.

We also saw good growth at Sikorsky and also at Carrier during the year.

Pratt is, of course, I think, furthest along.

We have talked about that, but Sikorsky is quickly catching up.

I think you see that in their results where they have got fairly strong margin expansion here in the quarter, and we're going to see more of that next year.

Great, thanks.

Howard Rubel with Jefferies.

Thank you.

Good morning, gentlemen.

Will this be the last quarter we hear that commodity headwinds have bothered the business?

How fast do you think you can take advantage of lower commodity prices?

If we could actually accurately forecast commodity prices, Howard, we probably would be doing something else.

The fact is, commodities have mitigated considerably.

We only saw about $40 million of headwind here in the fourth quarter.

A big piece of that at Pratt and a little bit less at Carrier.

As we look at the market today, obviously, copper looks to be at a price much lower, not much -- 10%, 15% lower than what our average price was for 2007.

In some of the specialty metals, the titaniums, the nickels, those have really moderated from what we saw in the middle of last year.

So I think we will see some opportunity there, if they continue down.

But again, I think we are not ready to call the market in terms of where commodity prices are going.

So you have left unhedged a fair amount of your copper exposure?

We, in fact, are not hedging any of the copper exposure today.

To follow-up on a separate issue, what were the two businesses you sold at Otis and Carrier, respectively?

At Carrier, it was Fincoil, which is a Finnish commercial refrigeration business.

At Otis, it was a Korean business, a motor business, noncore.

A small motor business in Korea.

Right.

Just two other things.

One is, if I am not mistaken, you probably were able to benefit slightly from the expansion in the spreads over treasuries for a pension discount rate.

Is that fair?

We have set the rate for 2008 and I think you will see that coming up.

It will be a little bit above 6%; I think about 6.2%, in fact, is the discount rate.

So a little bit better than what we had for 2007.

Not materially different, though, in terms of the overall impact on the pension plan.

Because there were other things that were going against us, like salary growth.

Thank you.

Oh, and Fire & Security still had a charge.

I think that was your largest charge, yet it is your smallest business.

It is also sort of the one that has had the most M&A.

So could you sort of reconcile a little bit of how come you have not been able to totally capture the expected restructuring in the original purchase prices?

Or is this just some other things that are going on for an advantage?

Howard, it is really -- we did have restructuring charges in Fire & Security.

First tranche really is just cost take-out throughout the business.

Second is sometimes in these deals -- or I should say not sometimes, all the times.

When you buy a company and you undertake restructuring, under the current accounting you can put the cost for closing their operations up in purchase accounting; while the cost to close your legacy operations will go to the P&L.

So in the case of, for instance, Initial Rentokil in Europe, we had a little bit of both of those kinds of costs.

Thank you very much.

Nigel Coe with Deutsche Bank.

Thanks.

Good morning.

Just to follow up on Howard's question on commodity prices, it sounds like the answer is no; but steel prices, obviously looking to be much higher in 2008.

You know, you are buying more steel and copper and significantly more volumes of steel than copper in Carrier.

Is that a risk to 2008 margins?

Look, as we look into 2008, we would tell you that we do see some commodity headwind when we look at the year-over-year prices.

It is much less as we look out now than we have seen in the last couple of years.

If it stays where it is you might hear us talk about it less, because the numbers are actually significantly down.

Okay, okay.

Then, looking at Otis's margins this quarter, you know, you have still got some significant OE mix issues but the margins are significantly better year-on-year.

Anything to talk about there?

You talked about productivity, but any stepout in productivity that is worth talking about here?

I think what it really goes to, Nigel, is simply factory cost productivity.

We saw very, very good traction in the factories and good cost reduction both in the supply base as well as in the factories.

That is really what is driving a big piece of the growth at Otis is continued factory productivity.

So that flows through into 2008.

So maybe we should be expecting slightly better margin expansion than we saw in 2007.

Certainly as the volumes continue to pick up you're going to get absorption in the factories, which also helps on product cost.

But I think overall they are just doing a much better job in the factories.

Okay, great.

Then just one final quick question on organic growth.

You are guiding for mid single digit next year.

You know, you are tapering down from 10 to 9 to 8 in the last couple quarters.

Should we expect that gentle decline to continue?

Or do we see a stepdown to mid single digit from here?

I think organic for the year, we feel good about mid single digits.

We're not going to forecast it for the -- by quarter.

Again, we are in uncertain times and we have to keep our minds open to the possibility that although we haven't seen a slowdown we could see one in the future.

But right now, we're not expecting anything to fall off a cliff.

Just to move down in organic revenue growth from what was the high single digits to the mid single digits.

Okay, that's fair.

Thanks a lot.

Myles Walton with Oppenheimer & Company.

Thanks.

Good morning.

You talked about the business backlog in a lot of the businesses.

One of the ones we didn't mention was Pratt & Whitney.

Could you give us that number as well as the overall corporate at year-end?

Sure.

Pratt & Whitney ended the year with about $23.5 billion of backlog.

That is up over $6 billion.

So very, very strong backlog growth at Pratt.

About half of that was really related to one contract.

It was a Northwest long-term service contract that we had to provide engine maintenance.

So a very strong backlog there.

Overall for the Corporation, we ended the year at about $57 billion of backlog.

That is up just about $13 billion year-over-year.

So really there was strong backlog growth across all of the businesses as we ended the year.

All right, great.

So that is about 30% year-over-year, book-to-bill 1.24.

Just as I look, it looks like kind of the best book-to-bill that you have had -- well, at least in terms of the numbers I have.

So I guess a lot of these contracts that came through in '07 are longer lead times than usual; and that is what is driving to the only modest mid single digits (multiple speakers).

Certainly on the aero side, where we've got these longer-term contracts like Pratt & Whitney, as well as at Sikorsky where we have got large or long-term deliveries of the Blackhawk to the US military.

Otis, I think the backlog there, that typically builds out in 12 to 18 months.

Okay, great.

Then maybe last one on Otis, I think you had about 1.5 points of shift towards OEM in '07.

What is the trendline in '08?

Are we going even more in that direction?

Well, we've reached 48% new equipment, a little bit more than that in the fourth quarter.

That was, as you said, up 1 point year-over-year and 1.5 points sequentially.

You know, with the backlog where it sits, a very strong backlog, and the growth that we are seeing in the markets, I wouldn't expect that trend to reverse.

Okay, thanks.

Let's take our final call, Rufus.

Joe Nadol with JPMorgan.

All right, good morning, everyone.

First question is, I just want to hone down specifically on spares at Pratt.

Because I think you gave overall aftermarket, but there has been some divergence between services and spares in the past.

Wondering what you saw for spares in Q4, and what you are looking at for '08.

Well, let's start with the '08 because it's always better to look forward at the longer-term, which is, we have said that the aftermarket at Pratt including spares are going to decelerate from what we saw the last couple of years, where they were growing at about 20%.

Something more like an RPM growth rate plus the annual price increase, which puts it right at double digits.

We're not coming off of that.

That is what we think for the next year.

What we saw in the fourth quarter was the spares part of aftermarket did grow slower than the overall side of the business.

Spares --.

(multiple speakers) was down, no?

Excuse me?

Which means it was down in the quarter?

It was basically flattish, yes, it was right at flat.

I wouldn't even call it down.

Okay.

Okay?

So that is what we saw in the quarter.

But keep in mind we had that conversation a little while ago about the tougher compares year-over-year.

So I will also give you one other data point that sequentially we actually saw spares in the fourth quarter a little bit stronger than the absolute number of spares in the third.

But nothing out there concerning us significantly.

Okay.

Secondly, just on the Carrier residential business, it gives a pretty dire outlook.

We all know housing is terrible.

But there have been some positive comps I think the last three months industrywide, according to ARI.

I am just wondering if that is not what you are seeing.

The second part of the question is in terms of the margins.

At this point, we all know things are terrible.

At what point will you be able to cut enough cost out of the business you maybe get a little bit of a margin boost even with a top line that is not doing anything, or still declining?

You know, Joe, this is Jim.

It is really frankly just too early to say anything good about the US housing market, comparison or otherwise.

Because that market is in tough shape right now; and again, we should be clear in the fact that that market is very tough.

I would also point out, Joe, that we're not just sitting back waiting for the market to deteriorate.

We're actually taking very aggressive cost reduction actions across that business.

I think Geraud and team are focused on taking significant cost out both through restructuring and just [cleaning] out the factory and the supply chain.

So there is still opportunity in that business, even in a down market, for profit growth this year.

Yes, that is what I was getting at.

Okay.

Then, finally, just a balance sheet question; and this is a little bit theoretical.

But you have pointed out you have a strong balance sheet.

There is opportunities to buy back stock.

Obviously, the M&A opportunities are really lighting it up compared to any time in the last few years.

How aggressive are you willing to get with the balance sheet really to take advantage of the opportunities out there?

Joe, we have a little flexibility in the balance sheet.

Obviously, we value our credit rating.

It comes in mighty handy at times like this when the rest of the world struggles.

So I think we can afford to be a little bit more aggressive; but it's all going to come down to what opportunities are out there that present themselves or that we can go get.

So there is no forecast today on what is going to happen with either M&A or share repurchases.

It is just we find this a more favorable environment for that kind of stuff than it was six months ago.

Can you specify how much capacity you have to keep your credit rating?

I think, again, at times like this and times that are changing it is best to retain flexibility.

So I don't want to give a number today.

We would just be mindful of our rating and continue to grow the Company.

Okay, all right.

Thanks, guys.

Thanks a lot, Joe.

Okay.

Rufus, I think that is all for the questions.

I will just take one second to summarize.

First of all, thank you all for listening in.

I think as you have heard this morning, a very very strong close to 2007.

I think we are all pleased with the way each of the businesses delivered both on the earnings and the cash flow side.

I would also say that as we look at 2008, we do not see kind of the dire economic circumstances which we read about every day.

The order backlog looks very strong.

The business will do well this year, and we will do well in any environment.

We are built to outperform, and I think that is the key message here.

You read a lot of bad things out there, but we will outperform, and we will continue to deliver.

That's it.

Thank you.

And ladies and gentlemen, this does conclude the United Technologies fourth-quarter conference call.

We do appreciate your participation and you may disconnect at this time.