雷神技術公司 (RTX) 2008 Q4 法說會逐字稿

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

On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer; and Akhil Johri, Vice President Investor Relations.

This call is being carried live on the internet and there is a presentation available for download from UTC's home page 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.

Please go ahead, Mr.

Hayes.

Thank you, Sean.

Good morning, everyone.

As we have said many times over the past few months, we are certainly living in interesting times.

As I read the headlines every morning, there seems to be little if any good news.

End market demand is changing daily, and generally not in a positive direction.

At UTC, we are not immune from the market forces, but we are I believe uniquely prepared and positioned to outperform in these difficult times.

As you saw in the press release this morning, UTC closed out a strong 2008.

Full-year revenues were just under $59 billion, and up 7% year-over-year.

Earnings per share were $4.90, up 15% versus 2007.

Cash flow, very strong, 105% of net income.

But despite the worldwide economic slowdown we continued to make investments for the long term growth of the business and to reduce costs.

Engineering and development spending totaled $1.8 billion in our businesses last year.

That's up nearly $100 million over 2007.

We also continued our aggressive restructuring efforts, preparing for tougher times ahead.

Total restructuring spending was $357 million -- strong evidence, I believe, that UTC can continue to outperform.

We began 2008 with most markets in a relatively good position with the exception of the US residential market.

Early concerns about the commercial construction slowdown in the US and western Europe expanded of course into broadbased slowdowns across all industries and geographies.

The net rate of decline accelerated in most end markets in the last couple of months, and combined with the strong US dollar, has created unique challenges for the global businesses.

In spite of this, UTC reported fourth quarter EPS of $1.23.

That's up 14% over last year.

Foreign exchange translation combined with Pratt & Whitney Canada's currency hedging adversely impacted EPS by $0.06.

Third quarter results also include $0.06 of net benefit from one time gains in excess of restructuring costs.

Last year's quarter had a net $0.04 charge from restructuring and other cost in excess of gains.

Absent the impact of these items, the results for both quarters EPS was up 4%.

Revenues were $14.5 billion in the quarter.

That's a 1% decline versus a year ago.

Foreign currency translation reduced revenue by $700 million or 5%.

Organic growth was 3%.

You see once again that balance works at UTC.

Sikorsky was the highlight in the quarter with 25% organic revenue growth, delivering 204 large helicopters for the year, a 17% increase from 2007, consistent with its commitment to delivering more than 200 aircraft for the year.

On the other hand, weakness in our short cycle businesses accelerated, as Carrier's organic revenues declined by 7%.

Fourth quarter order rates indicate that revenues will decline at a faster rate in the first half of 2009.

In addition to the weakness anticipated in developed regions in the world, we also saw slowdowns in China, Russia, and other emerging economies.

Otis new equipment orders declined 14% globally, including the impacts of foreign currency.

Carrier's commercial HVAC new equipment orders declined 7% worldwide, also including the impact of FX.

As discussed at the investor meeting back in December, Carrier's transport refrigeration orders declined over 50% in the quarter.

All right, turning to aerospace, Pratt & Whitney, book to bill for large commercial spares was just below 1 in the quarter, and commercial spares revenues were down just slightly.

Hamilton Sundstrand's commercial spares book to bill, on the other hand, was just above 1.

While the business environment is challenging, we continue to focus on taking out costs through restructure.

We spent $136 million on restructuring in the quarter, and as I noted before, a total of $357 million for the year.

Aggressive cost control and benefits from early restructuring led to margin expansion in four of the six business units, adjusting for restructuring and one-time gains.

As Akhil will talk about in a minute, Otis margins were down in the quarter, but would have been up slightly except for accounting adjustments related to the Brazil subsidiary.

Cash flow in the quarter was strong, as I noted, with free cash flow at 141% of net income, resulting from seasonal inventory reductions and strong collections.

We repurchased $690 million of shares in the quarter, bringing the year-to-date total to $3.2 billion.

I should also note that we contributed $250 million of our stock to our pension plans in December.

In 2009 we are again targeting share repurchase and acquisition spending at $2 billion each, although we will be opportunistic and may adjust these targets just as we did in 2008.

Acquisition spending in the quarter was $725 million including debt assumed.

This was primarily in Carrier and Fire & Security, consistent with our strategy of expanding our presence in service and installation markets.

As we've said many time, liquidity is not an issue at UTC.

Mid December, we successfully issued $1.25 billion of debt at a coupon rate of just over 6% -- evidence that the debt markets are functioning for companies with good fundamentals and strong cash flows.

We have about $1 billion of debt maturing in 2009.

On the back of the December offering, we have announced early redemption of $500 million, to take advantage of a slight interest rate differential.

I will come back and talk about 2009, but for now let me turn it over to Akhil to take you through the business units.

Thanks.

Before I get into the business unit performance, let me talk about the nonrecurring items in the quarter.

As shown on page three of the webcast, we had about $0.10 of one-time gains generated by the sale of certain investments and businesses.

These gains were offset by a comparable amount of restructuring charges.

In addition, the IRS tax settlement gains from the quarter had a pretax equivalent of about $100 million, as anticipated.

This settlement less the discrete taxes on the one time gains, adding $0.06 to earnings per share.

Turning to page 4, let me remind you I [talk through] the segment results adjusted for restructuring and the nonrecurring items I just described.

At Otis, revenues in the quarter were down 3% and operating profit was down 7% including the unfavorable impact of foreign exchange translation, which accounted for approximately 7 points of decline in both revenue and profit.

Operating profits were also negatively impacted by approximately $30 million of provisions to correct misstatement of inventory and other account balances which occurred over several years at the Otis subsidiary in Brazil.

These adjustments resulted from an investigation initiated by Otis headquarters in late Q3.

At constant currency, revenues increased 4%, driven by higher service sales globally.

New equipment sales increased in North America and Europe, but was partially offset by a high single digit decline in Asia driven by the postponement of over 5,000 units in China, principally from the slowdown in the residential housing market.

Excluding currency and the provisions related to the Brazilian subsidiary, profits grew 5%, as higher volume, field installation efficiencies, and continued cost containment more than offset higher steel and other input costs.

For the full year, Otis revenues were up 10% and operating profits were up 12%.

Margins expanded by 30 basis points to 19.3%.

As anticipated, the global financial crisis has begun to adversely impact commercial construction markets.

As Greg said, new equipment orders at Otis declined 14%, including impact of foreign currency translation, and 8% in the quarter at constant currency.

Asia including Middle East was flat, Americas down mid single digits and Europe down high teens.

We expect continued softness in equipment sales until government stimulus packages worldwide begin to have an impact.

Otis new equipment backlog remains strong, up 9% versus the prior year, including the impact of foreign currency translation and 12% at constant currency.

Turning to Carrier, consistent with the comments at the December investor meeting, Carrier's fourth quarter operating profit decreased 42% on 13% lower revenues.

Operating margins contracted more than 200 basis points.

Foreign currency translation contributed about 6 points of the revenue decline and 5 points of the profit decline in the quarter.

In addition, about half of the EBIT and margin drop in the quarter came from the unfavorable impact of dramatic currency changes on cross country transactions.

Revenues at the refrigeration business were down high single digits with Europe down double digits.

While the US residential business was down high single digits in a tough market, Carrier shipments outperformed the industry.

Commercial HVAC business was up low single digits, all from acquisitions with strong earnings and margin expansion.

For the year, Carrier earnings were flat on 2% revenue growth.

Approximately $150 million of benefits from restructuring and other cost reduction actions offset the adverse impact of net commodity headwinds and unfavorable mix.

The slowing global economy has had an immediate impact on Carrier's cycle businesses, and as Greg mentioned we are also seeing a slowdown in commercial HVAC order rates as well as significant declines in transport refrigeration orders.

First half compares from Carrier will be very challenging given the weak end markets and stronger US dollar.

On slide six, UTC Fire & Security delivered solid performance in the quarter, despite significant FX headwind.

Organic revenue growth of 3% was more than offset by 2 points of impact from net divestures, along with 12 points of unfavorable foreign exchange translation.

Fire Safety lead the organic growth with high single digit growth in Europe and Asia.

Operating profit at Fire & Security increased 5% or $9 million.

Higher organic revenues along with the benefits of restructuring, integration, and continuing productivity initiatives generated approximately 21% profit growth.

Foreign exchange translation adversely impacted profits by 16% in the quarter.

Operating margin expanded 180 basis points to 11.8%.

Fire & Security delivered full year profit growth of 26% on revenue increase of 12%, resulting in 100 basis points of margin expansion for the year.

Full-year organic revenue and operating profit growth was 3% and 18% respectively.

Turning to the aerospace businesses, on slide seven, Pratt & Whitney revenues increased 3% in the quarter.

Over 10% growth in commercial engines revenue from higher shipments and aftermarket services was partially offset by lower military development revenues and engine delivery.

Pratt & Whitney Canada revenue was about flat as higher engine shipments offset weaker aftermarket sales.

Commercial engine spares were down slightly in quarter.

Fourth quarter commercial spares including the benefit from the previously announced [JT9D] distribution agreement.

Operating profit improved 8% in the quarter on better commercial engine mix and aftermarket performance, lower net commodity headwind, and a favorable adjustment worth less than $0.02 to a commercial engine program.

These increases were partially offset by lower [military] engine volumes.

E&D were essentially flat in the quarter and lower than expected due to efficiencies and changes in program timing.

For the full year, Pratt & Whitney operating profit grew 9% on 7% higher revenues.

Pratt & Whitney Canada shipped 4,000 engines in 2008, up 34% over 2007.

On slide 8, in the quarter, Hamilton Sundstrand revenues were up 6% with solid organic growth up 6%.

On an organic basis, aerospace OEM revenues were up high teens, industrial businesses were up mid single digit, while aerospace aftermarket revenues were down high single digits.

Commercial spares revenue was down mid single digit in the quarter, the book to bill slightly above.

Orders for the industrial businesses were down mid teens.

Operating profit grew 14%, primarily from higher volumes and favorable mix both in aero OEM and industrial businesses.

Better repair shop performance and favorable adjustments worth about $0.01 to a old acquisition related liability.

These increases were partially offset by the impact of lower aftermarket revenues.

Operating margin at 19% was up 180 basis points from the fourth quarter of 2007.

For the full year, Hamilton increased revenues 10% and delivered on its guidance of $100 million operating profit growth.

At Sikorsky, on slide 9, operating profits grew 38% on 25% higher revenues.

During the quarter, Sikorsky shipped a total of 64 large helicopters, 38 based on military platforms and 26 commercial.

As Greg mentioned before, Sikorsky met its 2008 commitment of 200 plus aircraft deliveries, with a total of 204 shipments for the year.

Operating margin expanded 90 basis points in the quarter to 9.5% from higher helicopter shipments.

For the full year, Sikorsky's operating margin of 8.9% reflects a 120 basis point improvement from 2007, and is on track to meet the target of 10% operating margin by 2010.

During the quarter, Sikorsky also achieved first flight for the Canadian Maritime helicopter and executed an agreement that successfully rebaselined the program.

This will be the most sophisticated maritime helicopter in the world and first delivery is scheduled for the fourth quarter of 2010.

With that, we will go back to Greg for wrap up.

Okay.

Thanks, Akhil.

Let me spend a minute here on 2008 before I get to the 2009.

It is important to focus on what a good year 2008 really was for UTC.

Despite the deteriorating economic condition, earnings share were up 15% over 2007 to $4.90 a share, and revenues ended the year at just under $59 billion, up 7% over 2007 on 5 full points of organic revenue growth.

Free cash flow was $4.9 billion or 105% of net income.

On ACE, our operating system, we reached 49% ACE Gold and Silver sites - across the business in 2008, and we are confident we can meet Louis's target of 70% ACE Gold and Silver sites by the end of 2009.

We are also making progress in rolling out ACE to our supply base.

You will recall this past December, Louis set another stretch goal to have 70% of key suppliers spend ACE Gold and performing levels by the end of 2011.

The business unit presence will provide an update on both our internal and supplier ACE initiatives on our February 24th investor meeting in New York.

And 2008 was also an exiting year for product innovations and accomplishments.

Pratt & Whitney continued testing its PurePower Geared Turbofan Engine, which based on testing to date is expected to achieve 12% reduction in fuel consumption, 55% reduction in nitrous oxide emissions, and 50% reduction in engine noise versus today's engines.

At Sikorsky, besides the Canadian maritime, their revolutionary twin rotor X2 TECHNOLOGY demonstrator achieved first flight in August.

That prototype is expected to demonstrate that a helicopter can cruise comfortably at 250 knots while retaining excellent low speed handling and efficient hovering and safety.

At Carrier and Otis, their energy efficient products performed flawlessly at the Beijing Olympics.

As noted earlier, we continue to invest in the future, spending $1.8 billion on engineering and development.

2009 will be no different.

We'll continue to invest in the business and spend another $1.8 billion.

Okay.

Let's talk about 2009 for a couple of minutes.

In December, Louis provided an EPS guidance range for 2009 of $4.65 to $5.15, plus or minus 5% excluding the impact of acquisition related costs for implementation and the adoption of FAS 141-R.

We are reaffirming that full year guidance today, and also want to point out a couple of developments since December that will put pressure on the high end of the range.

First, pension expense.

Pension expense headwind increases compared to our guidance.

Discount rates came down from 7% early December to 6.1% at December 31st, although investment performance was slightly better than anticipated, the resulting impact of the sharp discount rate move, is an incremental pension expense headwind of about $125 million on top of the $100 million already contemplated in our guidance.

As a result, we are now anticipating making a $400 million contribution to our US pension plans in 2009.

Also since early December, end market conditions have clearly deteriorated in some of our businesses.

The order rates we mentioned earlier have put more pressure on Carrier's outlook, and Otis is also seeing pressures from push out on projects, particularly in emerging markets.

On the aerospace side, while there is optimism that the world's commercial airlines will be profitable in 2009 due to lower jet fuel prices, global air traffic may be down 3% to 4% versus the range of plus or minus 1% we anticipated in December.

The business jet market is also weakened.

With fewer departures and reduced OEM rates, there will be more pressure on Pratt & Whitney Canada.

In response to this, we are accelerating our restructuring plans, and we now anticipate $150 million restructuring actions in the first quarter, with only about $50 million of that offset by gains.

UTC's senior leadership team is working aggressively to initiate additional cost reductions beyond that $150 million across the businesses to rightsize each of our businesses for this challenging environment.

You will hear more about specific business unit actions in our February meeting.

A few words on currency impacts.

When we provided the 2009 guidance, we mentioned the significant adverse impact the stronger US dollar was expected to have on UTC's revenue and earnings.

About $600 million on earnings with half of that on the euro decline alone.

Of course the first half of 2009 will see a disproportionate impact, as the average Euro rates in 2008 were EUR149 to the dollar in the first quarter to EUR156 second quarter, much higher than the rates we have seen in the last several months.

As a result of these adverse FX compares, tougher market conditions, and the $100 million of restructuring in excess of gains, we expect first half results to be below the bottom end of the full year range, plus or minus 5%.

We continue to watch all of these trends carefully.

Based on the extensive global stimulus efforts underway today, we still expect a modest recovery in the latter part of 2009.

As per our normal practice at the February meeting, February 24th, business unit Presidents will update you on market conditions, latest trends, and cost reduction actions.

As you have come to expect from UTC, our ACE operating discipline, restructuring expertise, and experienced management team will allow the company to navigate through these turbulent times.

Doing more with less is the way of thinking at UTC -- to consistently deliver market leading results.

Operating discipline, market-leading franchise, balanced global presence are the factors that give us confidence in the future -- confidence we will continue to outperform even in these uncertain times.

Let's stop there and open up the call for questions.

Sean?

(Operator Instructions) We will go first to Nicole Parent of Credit Suisse.

It was hard to hear you guys.

Can you just I guess restate what the size of the Brazilian adjustment was in the quarter?

And with respect to the color on the backlog at Otis, you alluded to in your comments on the fourth quarter and 2009 some pushouts in emerging markets -- did you have any cancellations in the US?

And maybe give us a sense of the comfort level/visibility with the backlog and did you have any emerging market cancellations or pushouts you think become cancellations?

Is that it?

Yes.

For now.

Let's start with the Otis Brazil.

That was about $0.02 in the quarter.

That is behind us, we believe.

We are fortunate to earn those things that happen (inaudible) -- about $0.02 in the quarter.

Obviously we adjust out to that Otis margins would have become 20 BPS.

As for new equipment backlog in orders, we can did not see any significant cancellations in any of the businesses or any of the regions, but the regions we did see significant deferrals, especially in China and also in Russia.

The emerging markets were probably hardest hit and the biggest surprise to us is over 5000 units in China were deferred out of 2008 -- not canceled just deferred.

Backlog is still up about 9% for Otis for the year.

We think 2009 will be a good year.

We expect revenues to be up, and Otis to gain with their new equipment.

But obviously these challenging times are putting pressure on that.

You should also remember Ari mentioned the fact some of these issues in China are of our own making, because we tried to literally -- tried to avoid credits of our agents.

You know these orders actually deferred at our request because we didn't want to take additional credit risk.

The market did slow in China.

Do you have the split between service and equipment revenue growth at Otis in the quarter?

You might have given it.

I apologize.

With respect to the nature of deferrals actually moving into cancellation, can you give us a sense of the comfort level of them staying deferrals or moving into cancellations through 2009?

This is Akhil.

With regard to the growth rates for both service and new equipment service grew mid to high single digits, between 6% and 7%.

The new equipment at Otis was between 2% to 3%.

That's the first part.

Second part, I don't think we really have seen any cancellations beyond normal at this point at Otis.

Usually Otis does see some cancellation as part of normal business.

[At Otis] the things which are bigger, as Greg mentioned, and I think emerging markets we have to wait and see what happens.

We don't think the underlying demand driven by urbanization is going away.

It is just a matter of time as the Chinese government stimulus packages start to get in place and residential market demand comes back.

Whether it takes three months, six months, nine months, that's up for debate -- but we expect the backlog to be solid and come back at some point in new equipment [for Otis].

Okay.

And just one last follow up on the commercial business, probably more on the Carrier short cycle and maybe also Hamilton Sundstrand industrial, how would you guys characterize the inventory levels that are out there?

When we think about the massive deceleration you saw, or everybody saw in November and December, could you characterize where you think the inventory levels are at the customer?

On Carrier specifically, as we look at channel inventory, channel inventories are down in line with the market, so we don't think there's a big inventory overhang out there and not a tremendous amount still to bleed down.

On the industrial side at Hamilton, orders were down low double digits there -- most of that was in the compressor side.

We're still seeing good order at Sundyne, especially in the oil and gas industry.

But on the compressor side, we expect slow growth here in the first half.

I don't have a view on inventory, but I see order rates coming down pretty significantly (inaudible).

Okay.

Thank you.

Our next question comes from Joe Nadol, JPMorgan.

Thanks, good morning.

Hi, Joe.

First question was just a clarification.

What did you say specifically on the first half Was it that EPS would be below the bottom end of the full year range, meaning below 5% down?

That's exactly what I was trying to get across.

5% is the full year range at the bottom end and clearly first half is going to be lower than 5% down.

Right.

Okay.

Secondly, I guess you're maintaining the $150 million restructuring placeholder, but that's all in Q1.

It would be unthinkable, I think, you wouldn't have any more during the rest of the year.

How do we think about what kind of incremental restructuring your EPS guidance can withstand?

If you think about it, Joe, we have talked about $150 million of restructuring in the year.

Assume that's all offset by gains.

That's the same number we started in 2008 -- we ended the year 2008 with $357 million.

Right now, I can tell you we are looking actively at doing additional restructuring across most of the businesses.

There is contingency at the mid and bottom end to absorb some additional restructuring.

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

We are working hard in each of the business to quantify that.

We'll give you a lot more detail when we stand up in February meeting.

What's your early look at the gain outlook this year?

I guess the $150 million, how much of that do you have buckled down and are there other bigger items out there?

We have visibility too, as I said -- about $50 million here in the first quarter.

That, these gains -- they kind of pop up in unexpected places like they did fourth quarter, where gains were better than what we had anticipated.

But right now, we have a clear line of sight from $100 million to $150 million -- a little bit here in the first half and more in the back half.

Beyond that, not much visibility.

Okay.

On the aero side, your Pratt spares were surprisingly good.

They actually outperformed Hamilton, which hasn't happened in a while and is a little surprising, given the mix.

Just wondering if you could give color.

I guess Hamilton is where I thought they would be and Pratt was surprisingly good?

In fact we talked about the distributor agreement which we announced late in third quarter.

That [helped] the Pratt spares situation a little bit.

So while they were down slightly on a reported basis, if you adjust for the pick up in regards to the inventory stocking agreement at this new distributor, that would take the trend line more to double digit decline [in the third quarter], more like what you would expect.

It is more like in the teens?

Less than that.

Low double digits.

And as we think forward through the next few quarters, I guess you will only annualize that in the fourth quarter.

So maybe the first nine months of the year, you continue to see the stocking or how do we think about that?

I wouldn't draw that conclusion just yet.

What we saw in the back half of 2008, especially at Pratt spares, was a response to the rather significant curtailment in capacity, especially in the US carriers.

The spare order rates obviously are driven by RPMs and available seat miles.

We would hope that we have stabilized now and see a run rate.

Again we are not predicting spares will be up at Pratt this year.

In fact, down a little bit, but I don't think we are going to see the major decline unless we see a much bigger drop in the capacity or RPMs.

remind you, as we talked about before, capacity reductions impact the old engines, which is the JT8Ds/9Ds, more than the other engines.

That has become a much smaller part of the overall Pratt stream.

It is generally [$50 million] in 2007, lower than that in 2008, compared with the [$1 billion] it used to be in the [early 2000s].

Okay.

One more little one on the same topic.

What were the Pratt Canada spares down in the quarter?

Down double digits.

Okay.

Thank you.

Thank you, Joe.

Our next question comes from Joseph Campbell, Barclays Capital.

Good morning.

Morning.

On the, in the December meeting, we had a slide that talked about the commercial businesses having revenue sort of down 2%, but operating profit growth up 5% to 6%, and I gather that that outlook is now worse.

I wondered if you can -- looking at that slide that we or the numbers that we had which was basically commercial businesses offset by aerospace businesses, you've now said the commercial business outlook looks like it is getting worse.

The aerospace traffic numbers have been revised down, perhaps Boeing and Airbus will lower deliveries in 2010, which might affect shipments in the back half of the year.

How does this chart now look, which once upon a time was sort of 3% negative growth, 3% positive at constant FX and 3% negative after FX?

Clearly -- let me start on the commercial side.

Clearly there's pressure on the Carrier top line here and a little bit of pressure even on the Otis top line because of the order trends that we saw in Q4.

I don't know that we are ready to revise guidance on any of these businesses quite yet.

With two weeks under our belt here in January, it is hard to draw a trend line, but clearly there's pressure on the guidance on the commercial side.

As far as on the aerospace side, as I mentioned, we have pressure there from lower RPMs and lower business jet volume at Pratt Canada.

I would say both Carrier and Pratt are probably the most challenged as it relates to the guidance we gave about five weeks ago, but it is early in the year.

So we will update these things in another month as we get better data points.

Let me just remind you.

We talked about in December as well.

If all of these businesses met the guidance we provided in December, it would be at the top end of the range.

These are stretch plans, and that's why we have a contingency toward the low end of the range.

Yeah.

Can you comment a bit on what the impact is at PWC business jets, precisely what's the exposure there?

Which models are going up and down?

I think we are still awaiting discussions with our customers to give you a firm idea on the specific models there.

Obviously the PW600 has had some stress as you would imagine.

These schedule changes are still not finalized and we will have better input for you from Dave Hess in February.

Overall we should think about, about $1.5 billion roughly of revenue associated with business jets at UTC, what you will see, out of the $57 million to $58 billion, just the number keeping on.

Okay.

Great.

To make sure I understand what's happening here, on all of these businesses the conference [constant] effects have deteriorated since December, but of course those were the stretch goals.

When we look at the slide that had the individual businesses, you didn't change any of them in the slides we had today.

Should we expect in March that these will get revised to reflect what we are already seeing which you have left alone?

As we said, Joe, you are going -- there is pressure clearly on the Carrier end of Pratt guidance here.

Akhil noted they were stretch goals to start with and there hasn't been a lot of good news in the Carrier markets or the Pratt markets since the December meeting.

So yes, I think there's pressure to bring the guidance of at least those two units down a little.

Thanks very much.

Just another point -- there is volatility which could swing in any direction.

I mean you saw Euro move between $1.46 and $1.29 just in the last 30 days, and each Euro has a $15 million impact on our earnings.

So we recall all of those things exactly -- and the commodities the other factor to keep in mind, obviously it'd be much easier to give more precise guidance.

Terrific.

Thanks again.

Our next question comes from Cai von Rumohr of Cowen and Company.

Thanks.

Can you tell us where are you looking now for R&D in 2009 and how -- is it going to be up and are all of the quarters up, any kind of patterns we should look for there?

R&D is going to be flat year-over-year, about $1.8 billion as I said before.

Even by business I don't expect -- I shouldn't say that.

You will see a little bit of headwind at Pratt on E&D, and you will also see a little tailwind on E&D at Hamilton as the 787 program goes through first flight.

But overall, I would say quarter to quarter and year over year, no significant changes.

So it will still be with a ramp in the final quarter would be the pattern?

No, I think again more consistent with what we saw in 2008 in terms of a spending profile.

It is all depending on program timing, and Pratt has relatively big programs like the Mitsubishi regional jet and C series.

Both of those as I said earlier have -- some of the program timing slipped a little to the right.

We don't expect deferrals out of 2009.

So not a big change in E&D.

Okay.

A follow up -- I might have missed this.

You said $100 million to $150 million of gains and the total restructuring number for the year?

Right now we are still at $150 million, but as I said, answering Joe's question earlier, we will launch $150 million in the first quarter.

It is only about $50 million of gains, and I would expect before we are done and perhaps even before the end of February, you will hear about more restructuring.

Okay.

As you look at the offsets between your guidance and achieving your guidance and saving -- bolstering 2010 if this goes longer, as it looks like it will, where do you guys come out?

Help me with that question again.

If you look at -- clearly it looks like you're going spend on $150 million.

It looks like you have the trade off of coming in at the absolute bottom of your range and bolster during 2010 just for instance, if it looks like the it is weaker and delivering a little bit more -- where is, where do you put the trade off in terms of where you set the restructuring?

I would tell you we are looking on a long term basis.

I think there are restructuring opportunities across most of the businesses, and I think as you will see here in the coming months, we will take additional actions based upon what we see happening in the markets, because we want to outperform -- outperform this year and next year and even beyond.

So we are going to rightsize the business with the markets as they exist today as we see them.

We are not going, we want to be proactive as opposed to reactive.

That's what the $150 million is meant to convey.

There's a sense of urgency on our part to get on with this and more to come beyond that.

Okay.

And could you give us some help in terms of which, what types of restructuring are you looking at doing here?

What sectors, if you can help us there, and what types of things are you looking at doing?

Clearly the $150 million we are watching here is all quick payback.

It is primarily headcount related restructuring -- it is taking out structure, taking out G&A, taking out overhead across the businesses.

In fact all of this $150 million as we look at it has a payback of less than a year.

If you didn't see all of the gains in the back half, I am still confident that we'll recover this just through the restructuring savings.

Okay.

Terrific.

Thanks so much.

Our next question comes from Jeff Sprague, Citi Investment Research.

Thank you, good morning.

To switch from the P&L to the balance sheet for starters.

I assume it is pension, but your equity took a roughly a $5 billion hit sequentially in the quarter.

Could you just give us some color on what's going on there and where the funded status played out at the end of the year?

Obviously it was almost a $6 billion charge on other comprehensive income down to the equity section and $4 billion of that related to pension plan performance.

We ended the year down about 27% on a return basis, and on a ERISA basis I think we're 91% funded at the end of the year, so just a little bit under the target of 94%, so we'll do a little funding this year.

The other major change on the equity section is the charge related to just currencies translation adjustment.

As the currencies moved obviously against us in the back half of the year, that was a big swing down in the equity section as well.

The flip side of that equation, the big move in other long-term liabilities, is pension and OPEB moving around also?

That's exactly right.

Then just switching gears back to the restructuring question, following on where Cai was, as you look deeper and go for more in the slowdown, do you get more into heavy manufacturing restructuring actions -- tougher to do, longer to play out, slower payback, maybe some line of sight on how this might progress over the next year or two?

The first restructuring we're going to launch as I said is going to be very quick payback.

As we dig further and further into this restructuring, obviously paybacks aren't quite as good.

Eventually you do have to start taking out capacity.

Right now everything we're looking at has pretty good payback.

G&A actions are less than a year and some of the branch office restructurings have payback a year to two years.

And when you get into the big factory closures, if we come to that,if we think volumes are going to be depressed for a long time -- those are more like four year paybacks.

You are right on track.

Depending on how we see the markets develop here, we'll tell you how deep we have to cut.

Then just on this question of deferrals, a couple of people poked around in these earlier questions.

I am wondering if there's anything different in the complexion of what's going on.

Are you seeing deferrals once projects have already started and people killing stuff midstream?

Or are these deferrals that are happening earlier before groundbreaking and how does that compare with maybe what you have seen in the past?

A lot of the deferrals are in the China and emerging markets whether it's not as much rigor when a project starts or before ground breaks.

Some of these deferrals are before the ground is broken.

They do have some deposits with us, and the reality is the underlying demand as I said it would not go away, because it is going to be the demand for people to move to cities in China and maybe for a year or six months.

But then the urbanization trend will start again and some of these projects will be on track.

A lot of these deferrals are in emerging markets where the profile is different than what we have seen in rest of Europe or American markets.

Right.

Then just finally, what's the color for the tax rate in '09, Greg?

It will be just about the same, right around 28% is the targeted effective tax rate, as it was for the last few years.

Great.

Thank you very much.

Our next question comes from Doug Harned, Sanford Bernstein.

Hey, Doug.

On Carrier, if I look at Q4, you would have had benefits from copper -- that should have helped on margin -- and I would expect the average currency was not as weak as you thought it was going to be at the time of the December dinner.

Could you talk about the margins in each of the four units there?

I know you said commercial was up, but what happened in each of these that got you to this lower margin in Q4?

Just a couple of points here.

Let me start out and Akhil will fill in some of the detail, but if you think about copper, copper actually averaged about $3.37 for us in the fourth quarter at Carrier.

We said we've got about six months of long term agreements in place, particularly since the significant decline in copper, down to $1.50 a pound we saw towards the end of the year didn't benefit and won't benefit Carrier until the second quarter or second half of 2009.

As far as currency, one of the big surprises, one of the big challenges that Carrier faced was this unprecedented move in currencies, and I am talking about US dollar versus -- here I am talking about Japanese yen versus Argentinian peso or Brazilian real, and we actually have about half of the margins decline we saw in the residential international business was related to these abnormal or displacements between these currency pairs, where we're producing product in Japan or Thailand and shipping them to South America and other places.

And that typically we look at that -- we're going to hedge those transactions, but then again we have never seen currency shifts the way we saw in the fourth quarter.

That was the biggest I will say headwind in Carrier's FX.

But when you look at the margin, you are saying that operating leverage was not a particularly important issue here.

What I am wondering in when you go into 2009 and I know you are expecting weaker revenues, are we looking at an issue here with capacity and operating leverage that will put some additional stress on margin?

No.

That's not what we think.

If you go back to the map that Ari laid out in the December meeting, we expect high single digits organic decline, maybe a little worse than we have seen in the fourth quarter.

That would mean about a $375 million headwind from a contribution point of view, to have an additional $150 million of headwinds on FX.

So that's $525 million roughly headwind.

Of that, the good news on the other side is commodity, which will start to give us some benefits, maybe more in the later half as we get the benefits of long-term agreements go away and spot rates come into play.

That's between $100 million and $125 million.

And we have some aggressive product cost reductions actions that have been taken, which is another $100 million to $125 million, and restructuring actions, which would be another $100 million.

[You see Carrier] has had the largest chunk of the restructuring dollars within this year, so I think that was all headed back to the $200 million hundred roughly midpoint guidance we gave year-over-year.

Now is there more distress as we see the order rates, certainly in the first quarter and first half as we look at the more profitable Carrier business, yes.

There is some stress in the system as Greg mentioned early.

But that's the rough math of what's expected in Q4.

So is it fair to say that there will be pressure basically of an operating leverage nature, but that you are going to be able to offset that pressure with restructuring commodity prices and product cost reduction -- is that fair?

That is the game plan.

Okay.

Thank you.

Our next question comes from David Strauss, UBS.

Morning.

Morning.

Following up on Doug's question, what are you assuming for the net commodity costs benefit in 2009, for the businesses total?

Expecting about $150 million of actual tailwind in the year, a little over $100 million at Carrier and the rest between Otis and Pratt & Whitney.

What does that mean for price?

We presume relatively a flat price in the case of Carrier and Otis, so the pricing tailwind is less than what we have seen in 2008, but it is not a huge amount of negative pricing assumed.

Okay.

Finally, Joe asked about the aerospace aftermarket.

I think in December, in the December meeting, you were talking about a slightly lower aftermarket in total for aerospace, obviously with taking down your traffic forecast from flat to down 3% to 4%.

I would imagine it would be materially worse than that.

If RPMs do come in down to 3% to 4%, it will put pressure on the aftermarket both at Pratt Whitney as well as at Hamilton.

Any guidance on what the aftermarket will look like under that scenario for you guys?

I am not comfortable giving updated guidance today.

We closed out Q4 okay and the first couple of weeks have been okay, but it is too early to give you specific guidance.

Again, Hess and Bellemare will have a chance to update you on all this when we have a few more weeks under our belt here in another month.

Okay.

And then I think for Carrier you talked about a 10% organic revenue decline in '09.

What are you assuming at Otis and Fire & Security?

Excluding currency?

Otis -- the plan was based, the guidance was based on high single digit organic growth and Fire & Security was low to mid single digits.

Thanks a lot.

Our next question comes from Ron Epstein, Banc of America Securities.

Good morning, guys.

Just a couple of quick follow on questions.

When you go back to the Pratt & Whitney Canada, should we expect some sort of charge or something related to the demise of the Eclipse program, because there's not the launch customer for the PW600?

It was indeed the launch customer for the PW600, but we have taken care of in the fourth quarter any exposure we had related to the Eclipse program, a little less than $0.02.

That's all pretty much behind us now.

Is there an upcoming labor negotiation in Sikorsky, and if there is, what is your expectation for that?

One more time.

Sikorsky -- do you have an upcoming labor negotiation in one of the facilities?

We do, we have the National Brotherhood of Teamsters.

That contract expires on February 15.

We are cautiously optimistic that we will be able to reach a settlement with the Teamsters before that, and not go through another work stoppage like we had just three years ago.

Okay.

Great.

Thanks.

Our next question comes from Nigel Coe, Deutsche Bank.

Thanks, good morning, a couple of quick followons here -- on the pension, you mentioned $400 million of funding.

Is that cash or stock primarily?

It will be primarily in cash of that $400 million.

On the inventories, we saw a big reduction in this quarter, I'm assuming that's primarily within Carrier.

Did that have any outside impact on the margin?

Inventory was down about $700 million from September through December.

Carrier was the biggest piece of that, down about $300 million.

We saw inventory reductions at each of the businesses for the first time in a long time.

Pratt was the other one, down almost $250 million.

So, it was good inventory management.

We have been focused on this for the last year or so, as you know.

It is just a typical normal first quarter behavior.

Okay.

Do you have any targets for inventories, maybe a year end 2009 target for inventories?

Louis has targeted a 50 basis point improvement in inventory turns each year.

If you think about that, our inventory turns ended the year at around 4.8.

Obviously that's not great, but there's clearly upside there.

So we hope to drive inventory turns toward the mid-5s toward the end of next year.

Finally on within Carrier, how would you describe your line of communications with your customers -- are they giving you any color on the end markets, they're back at work?

Nothing exceptional other than what you are hearing and reading every day.

There is a concern about the capital expenditure on the commercial side and the orders have held up relatively well, driven by energy efficiency play.

On the residential side, the market has been so weak for such a long time, I don't think anybody is thinking.

In fact, Louis had mentioned an expectation that the housing starts for 2009 would be 662,000.

I think the most recent number is 606,000.

It is just hard to believe that those numbers could keep going down, but that's the gloom out there in the marketplace.

Okay.

And just a quick one on transportation shipments -- you said orders were down 50% in the quarter.

What about shipments?

Shipments for -- there is a little bit of a lag between orders and deliveries.

The shipments were down in high single digit levels in the fourth quarter, and taken a decline toward the end of the year in December.

So we expect that to have a greater impact in first quarter and first half.

That business is one where the snapback happens relatively quickly as well, if the economy recovers the business will see that as well.

Sure.

Thanks.

All right.

Our next question comes from Robert Stallard of Macquarie.

Morning.

Just a couple of questions on Otis if I can.

Looking at order trends, you're down 8% on a like for like currency rate in the fourth quarter.

It's early days in Q1, but what are your salespeople saying you could expect for this first quarter of the year?

It is too early, Robert.

We should wait for -- until you have Didier in front of you in February.

We will have six weeks of data by that time.

That is the time to really talk about -- a lot of the companies, a lot of the people out there have pushed hard, including our customers, focused on the year end, and the first two weeks of January are never a good indication of what's to follow.

Okay.

On the deferrals issue which we talked about this morning, when these customers are deferring, are they deferring 2008 or 2009 deliveries?

Mostly 2008 deferring into 2009.

So they have relatively short window of time here between them making the decision and the actual impact on you?

We are talking a couple of months maybe?

Yes, that's exactly what happened.

In the fourth quarter, we saw these deferrals accelerate, especially in China.

They were not canceled.

They were just deferred into 2009.

But if the market conditions for your customers say in China remain weak for the next six months, is it conceivable that Otis OEM production could can turn out to be lower than you're forecasting because these deferrals.

Yes, it could be.

If these deferrals continue or if we continue to see more deferrals.

Right now, we are forecasting a high single digit new equipment growth at Otis for 2009.

Clearly that will put pressure on it if we continue to see deferrals.

Okay.

Great.

Thanks so much.

Our next question comes from Howard Rubel, Jefferies.

Thank you very much.

A couple of things -- first just to conclude on your balance sheet or just to come back on that, Greg, I mean in this market that has much more uncertainty than we have seen in a while, why not not buy back the stock and wait for a little more clarity?

Well, I guess what I would point to is the $5 billion of free cash flow we had last year.

We all continue to think that the UTX stock is probably the best investment that we can make with the free cash flow dollars, and we are not going to stop the acquisition agenda either.

But as long as we see visibility of strong cash flows and fourth quarter is a great example -- despite everything going on in the world we generated 141% of an income in free cash flow.

So, unless we see some major change in the markets, I would think that UTX shares is the place we continue to invest.

I understand the acquisition agenda, and could you provide more color in the terms of -- are you closer to finding either suppliers or horizontal transactions that would add to the business in a material way, or discussions more lively than they have been?

Or people still holding out for the same argument you have just made with your stock?

Well, obviously they're all everybody has the same view in term of valuations today.

I think Louis said, talked about a willing buyer and a willing seller.

We are clearly in the market.

We think there's some great values out there.

We want to add to the core.

We still have strong cash flows.

I think with currency we could do a deal this year.

But again willing buyer, willing seller.

These things take time.

I can't comment on anything more specifically than that, as you know.

But we want to keep looking.

And you have talked a number of times about -- a lot of the tone of the call has been frankly the challenge of predictability.

Are there any signs you have that you can talk about positive or negative what you are looking for that would give you some comfort that in fact the -- whenever you reset guidance that this is rock solid bottom, we have seen the worst?

And just to complete the thought, is that -- look, if the number turns out to be below the end of -- below the low end, are you really just like prepared to say, look, this is, this is a number that it rock solid and it was just hard to get there?

No.

I think there's a couple of steps ahead of us here.

We are not going to change here.

We are not anticipating a change of guidance, the minus 5%, plus 5% that Louis talked about -- we still see that as toward the year.

The positive thing about that are happening in the market every day, and I can't find any one thing to give us the confidence that the markets won't get worse.

We are going to focus on those things we can control and that is our overhead costs and efficiencies within the supply chain and our own factories and in fact we're going to focus on those -- we will work to outperform.

So, it is a tough question and it is something that we are continuing to focus on.

We don't know how bad the markets are, but we are cautiously optimistic.

There's lots of stimulus out there.

We have a bigger stimulus package passed here shortly by the US Congress and signed into law by the President.

Once consumer confidence starts to recover, as we all know, that will drive the US economy and eventually the world economy.

So I don't want to throw in the towel on guidance or anything else.

Stand by what we said in December, and we will see what happens.

I want to see quality earnings.

That's what you are saying.

Exactly right.

Thank you.

We will go next to Heidi Wood, Morgan Stanley.

Good morning.

Actually a little bit on that same, Greg.

I wanted to get a sense of -- a better understanding of your economic assumptions embedded in 2009 guidance, and a sense of the change in revenue visibility you are seeing versus usual.

If you think of the profile of the visibility, in year one and year two for sales, how does that differ for you as you think ahead of not only 2009 but 2010?

Because I am just wondering on 2010, given your combination of long cycle and shorter cycle businesses, some of 2009 sales would be somewhat cushioned, but I am wondering how much cushion you have in 2010 sales.

My crystal ball is not very clear beyond tomorrow, and as we get out to 2010 it is cloudy.

The backlogs are strong in the business.

If you think about Otis as I said before, backlogs were up 9% for the year, and in the shorter cycle businesses, obviously backlogs don't make nearly as much difference as the general economic conditions that we are experiencing in the world.

We have very strong backlog at Sikorsky, we have good business in the Fire business and Fire & Security.

The OEM businesses at Hamilton and Pratt all look good, but there's pressure on all things outside of the military spending.

Aftermarket will continue to be strong, people still use elevators everyday even if they're not building new buildings.

40% of our revenues come from the aftermarket.

So I'm trying not to generalize here, but we feel pretty good about the revenues for this year and not so bad about the revenue outlook for next year.

And on your assumptions for the first half being weak in 2009 and the second half recovery, is embedded in that, is that predicting a global recovery in the second half, so that your earnings rise along with that rise in consumer confidence you talked about?

What we are anticipating is probably a late 2009 recovery.

It will probably be led by consumer confidence, and I think mostly that will happen in the US.

And we will see that first -- Carrier is the first to see the pain of an economic slow down and first the see the benefit of an economic expansion.

As well as you think about compares for 2008 to 2009 in the back half will be easier, as it was a tough back half of 2008.

So we will see what happens.

Again, right now, we are cautiously optimistic as I said that you should see an economic rebound with all of these massive stimulus packages.

All right.

And then turning actually to Hamilton Sundstrand, are the Hamilton Sundstrand systems you have delivered on the 787 -- are they presently able to fully interface with all of the other systems on the aircraft or are you having troubles there, and can you talk to us a little bit about that?

Well, I think all of the systems that we have delivered, including electric power system are up and operating, and we are fully ready to go for first flight here.

We are still working -- the Boeing Company has the final certification of the electric, the power system.

That is done by the end of the month.

But right now, we think everything is good to go.

And that includes being able to operate within the other systems, not just on an standalone basis?

Yes.

Great.

Thanks very much.

Thank you.

Our last question then, Sean.

The last question will come from Myles Walton of Oppenheimer.

Morning.

Thanks for taking the question.

You mentioned the stimulus package -- is there anything a direct benefit that UTC is seeing or could capitalize from?

Or we are talking about the indirect consumer confidence issue you alluded to?

The consumer confidence piece is probably the easiest to point to.

Some of the proposals we have seen in the stimulus package, especially as they relate to energy efficiency products, fit right into the Carrier, Fire & Security, and Otis businesses, so we actually are optimistic that we will get a little bit of a bump just from those particular programs.

Any way to quantify that?

I wish I could, no.

It is just a general, general feeling.

You are going to see investments in energy efficiency.

You are going to continue to see in green buildings.

It is part of the new president's agenda.

That's all generally good for UTC.

Fair enough.

One last one, can you give us an update on the F35 engine development and your schedule for delivering the redesigned [third stage] to Lockheed.

We are still on schedule.

We've had a couple of testing issues over the last month.

We had some foreign object enter one of the engines.

We had another engine shut down.

But other than the typical normal development problems that you encounter on a high tech engine like this, we are pretty much on track.

That could happen in the next few weeks to next month or so?

I don't have an exact date.

I will get back to you on that, but right now, word from Pratt is we are on schedule.

Okay.

Thank you.

Thank you everyone.

We appreciate your time, and it has certainly been a very good 2008 and we should not forget 2008 performance.

2009 -- it will be challenging, and we all realize that, but we are prepared and we look forward to speaking to you in another couple of weeks.

Thank you very much.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

You may disconnect at this time.