雷神技術公司 (RTX) 2009 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 Financial Planning and 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.

Once the call becomes open for questions we ask that you limit your first round of questions to two per caller to give everyone the opportunity to ask questions.

You may ask further questions by reinserting yourself into the queue and then we will answer those questions as additional time permits.

Please go ahead, Mr.

Hayes.

All right, thank you, Cecilia.

And good morning, everyone.

As you saw in the press release this morning no surprises in the fourth quarter.

Three takeaways.

First, solid execution with strong margin expansion on the back of sustained cost traction.

Secondly, commercial aerospace and long cycle commercial construction markets remain tough.

But we did see some improvement in our short cycle businesses.

Finally, very strong cash flow performance as a result of our continued focus on working capital.

The story remains the same.

We're continuing to focus on structural cost reduction, process excellence in our factories, in our supply chain, and back office functions, as well as focused portfolio realignment and disciplined cash redeployments.

None of this is new.

All of these actions contributed to full year segment operating margin expansion of 50 basis points to a record 14.3%, adjusted for restructuring and one-time items.

And we accomplished this in a declining revenue environment.

Free cash flow was 118% of net income and included $1.3 billion of total pension contributions.

That's significantly more than we anticipated.

UTC also announced strategic acquisitions such as GE Security while divesting lower return non-core businesses particularly at Carrier.

Full year revenues were $53 billion and that's down 11% year-over-year.

Earnings per share were $4.12, and that's down 16% versus 2008.

Absent restructuring and one time items earnings were down 8%.

Fourth quarter performance was solid across our businesses despite continuing end market weakness, and we returned to EPS growth excluding restructuring and one-time items.

Total segment operating profit grew 8% on a revenue decline of 3%.

Nowhere was this solid performance more evident than at Carrier where portfolio rationalization and cost actions allowed operating profit to grow 34% in the quarter on a revenue decline of 12%.

All our six business units improved margins with Otis, Carrier and Fire and Security increasing margins by more than 100 basis points each.

Sikorsky's 10.4% operating margin in the quarter was firmly on track to achieve its margin targets in 2010 and beyond.

Earnings per share in the fourth quarter were $1.15, and that's down 7%.

Excluding restructuring and one time items in both quarters earnings per share increased 5% on 4% lower revenues.

Foreign currency was a tailwind with an impact of about $0.04 from translation.

Organic revenue declined 6% in the quarter with declines across all businesses except Sikorsky which saw 22% organic revenue growth and delivered a record 84 aircraft in the quarter bringing the total to 244 large aircraft for the year.

Restructuring and other charges were $135 million in the quarter and that's $830 million for the year.

We continue to drive productivity throughout our operations and UTC's headcount is now down by nearly 18,000 since the beginning of the year before the impact of acquisitions and divestitures.

Fourth quarter order rates remained stable although continuing at the low levels we saw in the third quarter.

However, as I noted before, trends in our short cycle commercial businesses have improved.

For example, US residential gas furnace and split unit shipments were up 13% in the quarter.

In addition, new equipment orders in China grew about 15% for Otis and around 20% for Carrier.

Akhil will take you through the orders details by business unit in just a few minutes.

In the quarter free cash flow was 107% of net income at $1.2 billion and that included $637 million of contributions to our global pension plans.

Solid cash flow resulted from good working capital performance across the business.

Inventory was again a source of cash.

We reduced inventory by $550 million in the quarter on top of over $450 million in the third quarter, so more than $1 billion of inventory out in the last half of '09.

Share repurchase in the quarter was $320 million bringing the year-to-date total to $1.1 billion.

Acquisition spend in the quarter was $146 million.

Just as a reminder, we expect the GE Security deal to close early in the second quarter now.

We ended the year with a strong debt to capital ratio of 32% and that's down from 41% last year.

No surprises here.

Just as we told you in December it's a quarter where we saw continued margin expansion, excellent cash flow in a still difficult end market environment.

I will come back and talk a little bit about 2010.

For now let me turn it over to Akhil to take you through the business unit in detail.

Thanks, Greg.

Turning to page 3 of the webcast, let me remind you that I will talk to the segment results adjusted for restructuring and nonrecurring items as we usually do.

Otis had another exceptional quarter with profits up 20% despite a 1% decline in revenues.

Operating margin expanded 390 basis points to 22%.

Excluding currency and last year's charge for inventory and other adjustments in Brazil, profits grew 6% on 7% lower revenues due to aggressive cost reductions, lower commodity prices, and continued strength in the contractual maintenance business.

New equipment revenue was down 14% in the quarter excluding currency with declines in most major markets partially offset by a double digit increase in China.

Service revenue was about flat as continued growth in the contractual maintenance business offset declines in both modernization and repair.

New equipment orders in the quarter were down 15% at constant currency.

We saw growth in China where orders were up about 15%.

Orders for Europe as a whole were flat while orders in North America were down around 50%.

For the full year margins expanded by 250 basis points to 21.8%.

Operating profit was up 2% despite a revenue decline of 9% from swift cost reduction actions and commodity tailwind.

At constant currency operating profit increased 7% on 5% lower revenues.

On slide four turning to Carrier, consistent with guidance Carrier returned to profit growth in the quarter with operating profit up 34% on 12% lower revenues.

This translates into 230 basis points of margin expansion bringing the margin to 6.7% for the quarter, the second highest Q4 margin in this last decade.

Carrier continues on the path of aggressive transformation to a simpler, more focused, higher returns business.

In Q4 the benefits of ongoing aggressive cost reduction and organizational restructuring combined with lower commodity costs more than offset the impact of lower revenues.

While organic revenues were still down 8% in the quarter, we are seeing improvement in the rate of revenue decline at Carrier.

In fact, volume is up in the US residential HVAC and truck/trailer businesses.

Q4 shipments of US Residential splits and gas furnaces combined were up year-over-year for the first time since Q1 of 2006.

For Carrier Transicold, in total, orders were down only a little over 10% at constant currency, an improvement from the nearly 40% decline in the first three quarters of 2009.

On the other hand, there was no meaningful change in the rate of decline of longer cycle commercial HVAC business where revenues were down mid-teens organically and we saw new equipment orders there fall by about 20% at constant currency.

For the year, Carrier results were in line with guidance with adjusted earnings down $523 million on 24% lower revenues.

Operating margin for the year was down 170 basis points.

However, proactive cost reduction and restructuring actions contributed more than 275 basis points of margin and partially mitigated the impact of the steep volume decline.

UTC Fire and Security delivered another solid quarter with operating margin expansion of 130 basis points to a record 13.1% on 2% higher revenues.

Organically revenues contracted 9% with high single-digit declines in both fire safety and electronic security.

Volume currency translation and net acquisitions increased revenue by 8% and 3%, respectively.

Operating profit was up 14%.

Excluding the impact of FX, profits grew 5%.

Fire and Security continues to realize the benefits of integration of the field operations, organizational delevering, restructuring, and cost controls.

Despite the lower revenues, productivity initiatives drove down overhead by more than 100 basis points in the quarter from a year ago.

Consistent with our guidance, Fire and Security held profit flat year-over-year while revenues declined 14% resulting in 150 basis points of margin expansion for the year.

Now turning to Aerospace, on slide six at Pratt & Whitney revenues declined 9% in the quarter driven primarily by the lower overall aftermarket volume and Pratt & Whitney Canada engine shipments.

Engine shipments were down at Pratt Canada over 30% from last year's strong fourth quarter.

Large commercial engine spares were also down over 30% partly due to tougher compares as 2008 Q4 included the benefit from a JT9D distribution agreement.

Book-to-bill in the quarter was about 1.

Military revenues were up mid-teens on higher engine deliveries.

Operating profit at Pratt declined 9% in the quarter.

The impact from lower revenues, particularly of higher margin spares and unfavorable foreign currency at Pratt Canada was partially offset by fewer large commercial engine shipments, lower E&D, and restructuring benefits.

Also you will recall that in the fourth quarter of 2008 Pratt & Whitney had recorded a favorable adjustment to a commercial engine program worth less than $0.02 of EPS.

For the full year Pratt & Whitney operating profit declined 8% on 10% lower revenues.

Operating margin at 16.1% was up 40 basis points for the year in spite of 25% decline in higher margin large commercial engine spares.

On slide seven in the quarter Hamilton Sundstrand revenues were down 8% with aero OEM down high single-digit.

Industrial businesses down low teens,and aero aftermarket down slightly.

Commercial spare revenues were down high teens with book-to-bill of about 1.

Provisioning order rates remain depressed and were down over 35% as airlines continued to conserve cash.

Industrial orders were down slightly over 10% in the quarter on constant currency.

However, they were slightly higher on a sequential basis from Q3.

Operating profit declined 14% primarily from greater volume reductions in the higher margin businesses and the absence of an acquisition related liability adjustment last year.

The decline was partially offset by lower E&D expenses primarily on the 787 program, as expected.

We continued to invest in the program although at a lower rate as Boeing moves towards certification and entry into service of the 787.

For the year Hamilton Sundstrand revenues were down 9% with operating profit down 13% from the decline in higher margin commercial spares and industrial businesses partially offset by benefits from restructuring and cost reduction actions.

Turning to Sikorsky, record levels were achieved in Q4 for revenue, operating profit, and aircraft deliveries.

Operating profits grew 33% on 22% higher revenues.

During the quarter Sikorsky shipped a total of 84 large helicopters, 57 based on military platforms and 27 commercial.

Operating margin expanded 90 basis points to 10.4% from higher helicopter shipments and product cost reductions.

During the quarter Sikorsky's Blackhawk helicopter fleet surpassed 1 million flight hours in Iraq and Afghanistan without a single significant failure.

For the year Sikorsky delivered a record 244 aircraft, above the high-end of its commitment of 230 to 240 aircraft deliveries.

Consistent with the guidance last December, operating profits grew 29% on 18% higher revenues.

Operating margin of 9.7% for 2009 is up 80 basis points year-over-year, and as Greg said, puts Sikorsky firmly on track to achieve its margin targets in 2010 and beyond.

With that let me turn it over to Greg for wrap up.

Okay, thanks, Akhil.

Just on slide nine on the webcast just to summarize 2009, excellent execution through structural cost reduction and portfolio realignment along with strong cash performance in a difficult end market environment.

Margins improved despite lower volumes, and we positioned the business for continued margin expansion when volume does return.

This is evident in our earnings per share conversion.

Excluding restructuring and one-time items EPS declined 8% on a revenue decline of 11%.

Free cash flow was 118% of net income and that included $1.3 billion of global pension contributions.

We drove down working capital by over $1 billion and inventory was down 8% for the year on an organic revenue decline of 7%.

We also returned about $2.5 billion to shareholders in the form of share repurchase and dividends during the year.

Although 2009 was a tough year, there was a lot of good progress made across our businesses.

Otis improved its industry leading operating margins with best in class products, service, and operating performance.

Carrier completed two-thirds of its portfolio realignment agenda with simpler, more focused, higher return business.

Fire and Security significantly enhanced its geographic and product breadth with the GE Security and GST acquisitions.

Pratt & Whitney launched testing of a full scale GTF engine core and delivered its final development JSF CTOL engine as it readies for decades of production.

Hamilton Sundstrand systems successfully support the 787 first flight and Sikorsky continued to increase its production velocity with record aircraft deliveries in the fourth quarter and for the year.

On ACE we achieved Louis' goal of 70% ACE gold and silver sites across the business by year end 2009.

We also made significant progress towards deploying ACE at our key suppliers.

In fact, 50% of key suppliers spend was at ACE gold performing sites at the end of 2009.

This is the type of performance you have come to expect from UTC and gives us confidence we have positioned the Company for earnings growth in 2010 and beyond.

Turning to 2010, in December Louis provided EPS guidance range for 2010 of $4.40 to $4.65.

That's growth of 7% to 13% on revenues of $54 billion to $55 billion.

And we're affirming that guidance today.

Okay, so let's take a couple of minutes to talk about calendarization.

First, on organic revenue growth, while we still expect to see full year growth of 0% to 2%, organic growth in the first half of the year could be flat to slightly down and will likely see a decline of 2% to 3% in the first quarter.

While that is down, it is still a significant improvement from the 6% organic revenue decline we saw in the fourth quarter.

The pressure on growth comes from the fact that we saw good backlog conversion into revenues in early 2009.

As an example, Pratt & Whitney Canada shipped almost 1,000 engines in the first quarter of 2009 and that dropped to about 700 by the fourth quarter.

That's the rate we expect will remain through most of this year.

Otis new equipment backlog is also down about 15% from last year and commercial aero aftermarket activity is only expected to pick up as the year progresses.

In spite of these headwinds we expect restructuring benefits, continuing focus on cost control, and favorable currency translation to provide earnings growth in the first half consistent with our full year earnings growth expectation of 7% to 13% growth.

On cash flow we continued to expect free cash flow equal to or in excess of net income.

As Louis stated in December the acquisition place holder is $3 billion and that includes the GE Security transaction.

Share repurchase guidance is $1.5 billion for the year.

With our seasoned management team, structural cost reduction and significant aftermarket content we are well-positioned to resume earnings growth and outperform in 2010.

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

Cecilia.

Thank you.

(Operator Instructions) Our first question today is from Nigel Coe of Deutsche Bank.

Thanks.

Good morning.

Just to pick up where you left off on calendarization, can you just talk about how you expect restructuring net of gains to stay through the year?

For the full year we're expecting about $350 million of restructuring, about $200 million in the first half, probably spread evenly across those two quarters.

We also expect gains for the year of about $100 million and I think we'll see about $25 million of gains here in the first quarter and then $75 million sometime in the third, fourth quarter.

So $250 million net.

That's very helpful.

To Otis margins, can you maybe talk about what you have seen on the OE pricing and maybe if you can throw in the OE margins, are you seeing any pressure on OE margins within Otis.

And then if you adjust the mix, normal mix of between OE and aftermarket, what do you think the long run margins for Otis are?

Is this now a low 20s business?

Let's start with the last part of that question.

Absolutely.

We think this is a 20% plus margin business going forward.

I think with the costs that Didier and team have taken out over the past year and with the strong aftermarket franchise, 20% is a goal that ought to be achievable not just for one year but on a continuing basis.

As far as pricing, pricing has been difficult.

As you would expect with new equipment orders down 50% here in North America we have seen some very difficult pricing, and as a result I think you're going see a little bit of pressure on new equipment margins coming into 2010.

Saw pricing pressure in China, that's a continuing thing.

Even in Europe we saw pricing pressure, and in fact I think we have been, or Didier and team have been very disciplined.

We lost a little bit of share in 2010 at Otis, but I think we did not give up on pricing, and that cost us share but I think it is good discipline for us to keep pricing where it is.

And finally can you remind us on the other temporary cost reductions in 2009, how much of that is coming back in 2010?

There is about $750 million of let's call it temporary cost reductions.

That's furloughs, merit deferrals.

Probably see about half of that come back in 2010.

Okay.

Thanks, Greg.

Our next question comes from Joe Nadol of JPMorgan.

Greg, just first of all on the calendarization of the sales, is that different than six weeks ago or are you just giving a little bit more color on that now?

I think it is exactly as Louis explained.

It is just as we started to look, revenues have been getting better although still down throughout 2009, and that trend is going to continue where you're going to see slower growth in the first half than the back half.

We've always talked about a back half recovery in the economy, so nothing new, just trying to get a little bit of specificity out there so we don't surprise people if we see revenues down.

Earnings will certainly be up in the first half, but revenues could well be down, especially in the first quarter.

Is there anything that's changed?

What would you highlight across all the businesses from when you gave your guidance six weeks ago then?

What's changed in my mind is really some of the performance we saw at Carrier short cycle businesses where we saw really good traction I think in the US res business.

We also saw good traction in Transicold and the truck/trailer business in the fourth quarter.

Finally, US res turned for the first time, as you mentioned, in almost four years.

Do you think that's sustainable?

Do you think you'll be in the black every quarter in terms of growth rate in 2010?

I don't know that I want to comment on or predict quarterly growth rates, but we do see growth throughout 2010 at Carrier in the res business.

It's going to be on the back of housing and economic recovery.

Okay, thanks.

Geraud can give more color on that certainly at the March meeting when we're together with you guys.

Appreciate.

Thanks.

Next question is from Terry Darling of Goldman Sachs.

Greg, on this phasing discussion, just to make sure I am clear, you're saying you would expect the 7% to 13% EPS growth for the full year to be consistent throughout the year.

Right.

And just to make sure we're on the right starting point, $0.78 Q1 '09 so we're implying a range of $0.83 to $0.88 for the first quarter, just wanted to be clear on that.

Am I missing something there?

That's how the math would work out.

What we're trying to do is make sure everybody understands that first quarter will be a very tough compare versus last year on the revenue line because, again, we came out of 2008 with very strong backlog and still good production out of Pratt.

So revenues are going to be a little challenged.

I think you will see good cost traction the first quarter.

Sikorsky will have a good first quarter because they're not going to have the settlement costs from the union negotiation.

Getting good cost traction.

I am not going to give quarterly guidance.

I just want to make sure everybody understands, it is just a tough compare.

7% to 13% each quarter.

Understood.

And then on the commercial spares at Pratt, I just wonder if you can calibrate what happens sequentially there and what you are expecting in the first quarter there.

The down 30% was down more sequentially on a year-over-year basis but did the spares number go down sequentially as well and would you expect we're running along the bottom here in the first half or could there be another leg down there?

This is Akhil.

We typically see a pickup in the fourth quarter of spares.

That is just a normal calendarization.

We saw that again the year.

The reason why year-over-year compares were tougher was because of this agreement we had last year on JT90 which propped up the spares last year in fourth quarter.

If you adjust for that, the year-over-year run rate would be about 25% which is consistent with what we have seen through the rest of the year.

At some point the airlines will have to buy the spares.

The question is when does that happen?

As traffic improves, probably first half may be a little difficult but I think second half should be strong.

We don't expect, Terry, to see another leg down here in commercial aero.

What we saw last year we think was the bottom.

Airline profitability is still a challenge going into 2010, but we are seeing better inductions into the engine centers, and we would expect to see spare pickup, as Akhil said, gradually through the year.

Just to be clear, there really is nothing changed on your commercial aftermarket view overall for Pratt and Hamilton relative to December, is that correct?

That's right.

We still think they're up 6%, 7% for the year, about half of that on RPM growth and the other half on pricing.

On China, Greg, you had talked about China running a little bit better in December.

And the order rates that you called out on the commercial side certainly reinforce that.

I am wondering your take on the tightening efforts and what impact that might have on China in the second half of your 2010 year at this point in terms of what your field people are telling you in terms of conversations with customers and so forth there.

Do you think that we're going to see a little bit of a moderation in growth in some of those numbers in the second half or how are you looking at that now?

Terry, what we're hearing from our folks in China is that the bank lending is starting to tighten.

I think we have seen that across the headlines here for the last couple of weeks, and that's really focused on trying to keep some of the economic growth, the factories and some of the residential housing prices in check to eliminate the possibility of an asset bubble there.

We're still seeing good order intake, though, on the infrastructure and on the low end housing market which is where Otis plays for primarily, as well as Carrier.

So we're still expecting a good full year 2010, and in fact they're still going to spend $250 billion of stimulus in China this year on the infrastructure projects, on that low end residential housing.

So again, the idea there is you have to keep growth from getting out of control, but I think we still are expecting 9% to 10% GDP growth evenly throughout the year there.

At the total commercial level is there a way, can you call out what growth in China was overall in '09 and what you would think is a reasonable range for 2010 to calibrate us there?

I can give you the specific details later on.

I think for the fourth quarter we saw roughly 15% to 20% growth in the order rates across all our commercial businesses, and I think in terms of revenues because there is a little bit of a lag probably a little less than that, but still pretty good growth, double-digit growth in China across in revenues and 15% to 20% on orders.

Just to be clear, Terry, orders were down for the year.

Otis orders in China were down about 15% for the full year.

For Carrier it was down I want to say 10% to 12% for the year, so it was a very tough first half.

We saw good traction in the back half, and that traction is really going to continue throughout 2010.

Great.

Thanks very much.

Next question is from David Strauss of UBS.

Good morning.

Greg, your flattish revenue forecast for Carrier for the year, can you just walk through all the different moving pieces there between what you're expecting specifically out of res and commercial and Transicold and then the offset with the divested revenues?

Let's start with the divested revenues first, David.

There is about $500 million of divested revenue impact next year.

That's just for the annualized effect of divestitures done in 2009.

There is organic growth of low single-digit, call it 3% or so, in the assumptions overall, and the breakdown of that would be growth double-digit growth in US residential, 10% to 20% level for transport refrigeration offset by a decline in commercial HVAC.

Terrific.

And at Otis are you still thinking on the new equipment side down mid-to high single-digits?

I think given where we ended the year with orders down and backlog down about 15%, it will probably be towards the higher end of that range on the downside, probably closer to 9% or so down for the year.

Okay.

And the guidance you gave for 2010 back at the investor conference, I think you talked about $0.20 to $0.25 contingency at the midpoint.

Obviously the dollar's moved a little bit against you since then.

Is there anything that's made up for that move in the dollar eating into your contingency a little bit?

I think when Louis stood up we talked about a contingency at the midpoint which is about 10% growth where we had about $275 million of contingency.

I think the euro this morning is about 1.41 versus our guidance of 1.48, and that's cost us let's call it $100 million -- 75.

Akhil will correct me here, $75 million.

But we have had some good news on the pension plan.

The discount rate on the pension plan we had assumed 5.7% back in December.

It ended up being around 6% for the US plan.

We also had a little bit of returns and we did a little bit more funding for the pension plan.

So you add all that up and it gives us about $50 million of benefit versus the guidance that we gave you in December.

That's a long way of saying contingency is probably about 250 today at the midpoint.

Okay, terrific, thanks.

Next question comes from Howard Rubel of Jefferies & Company

Thank you, good morning.

Can you talk for a minute about military sales for Sikorsky?

I know that's going to be part of what happens going forward, the opportunities.

I think the biggest opportunity in front of us right now, Howard, is with the international Blackhawk and I think the biggest opportunity on that program is going to be in Turkey in the near term.

It is a very large contract up for bid right now.

We're competing with AgustaWestland.

I think we will hear on that contract shortly.

The key for us on the international Blackhawk is low cost sourcing and low cost manufacturing and we're gearing up in Mielec in Poland to build the international Blackhawk there.

Significantly lower costs obviously than Stratford, so we think there is a huge market out there.

The US market, the European market is pretty well spoken for, but international Blackhawk, still opportunities we think in Taiwan, in Singapore.

Second, from time to time the JSF has been a topic, and this might be good opportunity for you to give us an update on the progress on the engine and how well it is going so that you eliminate some of the confusion.

I don't think there is any -- there shouldn't be any confusion on the development of the engine.

The engine has performed beautifully in the flight test program.

We had a little hiccup about a year with a blade, but I think all of that is behind us and we are on track.

We're delivering engines under the LRIP program right now.

The STOVL version is in test.

That's also performing very well.

We see nothing but upside on that program right now from an engine standpoint.

That's encouraging.

Second, and last, frankly, when you look at your outlook for Carrier, how are you weighing the risks of the stimulus for housing abating and maybe the market petering out?

How are you balancing that risk versus at 550,000 units a year?

The 550,000 was obviously a low point, and we do expect modest growth, I would tell you, in housing this year.

But you think about US res, it has really become an add on replacement market.

Over 80% of the revenues in res now come from add on replacement, so new housing starts make up a very small percentage of total revenue there.

Again, AOR, as we would call it, is really more dependent upon overall economic growth as opposed to growth in housing.

Housing price stabilization is important, I think, for consumer confidence, and we expect all of that to be positive this year but not in a big way.

I know modest growth, but you looked at the downside and feel like some of this stimulus is you just being careful that if some of the stimulus has a transitory effect it won't impact your business plans?

Yes.

I think Carrier is pretty well calibrated on the res side.

We don't expect much impact from the elimination of the housing tax credit here.

I think it happens in March or April.

Quite frankly with 550,000 starts, it is hard to imagine a lower 2010.

Thank you, Greg.

Our next question comes from Deane Dray of FBR Capital Markets.

Thank you.

Good morning, gentlemen.

Can we get an update on Transicold?

It looks like you recovered nicely from last quarter, the ordered fall off.

Do you have some visibility on that business now?

Do you think the worst is behind you?

Sure.

I think, Deane, the truck/trailer business clearly seeing improvement, North America more than Europe but both grew in terms of orders year-over-year.

The container business is still down year-over-year in orders, but a lot better than the 80% number that we quoted earlier in the past, so clearly some signs of improvement there.

Like the US, residential HVAC market we believe transport refrigeration is probably an early indicator and that's an encouraging sign.

Sure.

The other early indicator, as you say, Akhil, is the residential HVAC business of Carrier.

We have a different dynamic this year with the Watsco joint venture.

Is there anything in terms of how we'll be watching inventories in the channel?

Will it be more difficult for us to track that and what is the assessment of inventories today?

I think, Deane, our visibility to inventories remains the same.

Remember, this is a joint venture we have with Watsco called Carrier Enterprises, so we still see what's going on in the marketplace.

As we continue to divest out of some of the distribution we'll continue to have equity stakes in these ventures to give us visibility.

Inventory is down across the channel.

I think that's actually an encouraging sign for us because when we see a pickup, any pickup in economic activity, we're going to have our factories back up and running to support that.

So I think it is down in line with the market, but upside for us for the year.

Great.

And then just to clarify, you updated the numbers on restructuring expectations for 2010.

Can you just reaffirm on the savings for expected incremental savings on the carryover from '09 and then new restructuring initiatives on 2010?

Deane, we have about $350 million of savings in 2010 from the restructuring actions taken in 2009 and a little bit from the 2010 programs that we have on the anvil.

Keep in mind those savings will come more early in the year and then a little less as we got some good savings last year as well.

Good.

So the $350 million is what you talked about in December and can you calibrate the expected on 2010 yet?

I think 2010 you're looking at probably less than $50 million of incremental savings this year.

Most of that payback is going to really come in 2011 and 2012 as we're taking out some of the longer haul restructuring, some of the more structural things like factories and such that you don't see the payback right away.

But still maybe $50 million-ish this year.

Just to be clear, the $350 million we said in December contemplated that $50 million in there.

If you recall, the 2009 restructuring savings profile is $300 million in '09, $300 million in '10 and another $100 million in '11.

Thank you.

Next question comes from Ronald Epstein of Bank of America.

Hi, guys.

Greg, what are you seeing on the M&A front?

How is pricing in M&A markets and can you give us some color there?

You see the equity markets every day, you know.

The fact is, prices have recovered, and I think that's maybe the message of the day as we think about the M&A pipeline.

There is still a lot of targets out there, but pricing has certainly firmed up from what it was a year ago when we talked about being aggressive on the acquisition front.

There is really nothing to talk about in terms of the pipeline except to say it is full.

We're going to be disciplined.

We're not going to do a big deal.

We're not looking to do a big deal.

What we're looking for are more deals like Clipper Windpower where we can add to some of our capabilities and take advantage of some good valuations.

You may see more smaller deals like that during the course of the year, but again more in the core.

We're not looking for the big deal.

Great.

Maybe just one more.

On the GTF can you give us an update with what's going on with that in terms of the testing and then for the various programs that it is on?

Yes.

The engine is on test.

It started in mid-december so on full scale testing up in Canada.

It is performing as we expected.

The program, the C series program, continues on track, lots of talk out there in the market about the C series.

MRJ, the Mitsubishi Regional Jet, that program has slipped a little bit, as you know, but the engine continues to work.

And we're working with the other OEMs as well on potential re-engining opportunities.

I think there is lots of pull from airline customers for what the GTF has to offer which is 10% to 15% better fuel burn and lower noise, lower emissions and all of those good things.

So we think 2010 will be a very good year for the GTF.

We see lots of opportunities and we'll update you as we go along.

Great.

Thanks.

We'll go next to Sam Pearlstein of Wells Fargo.

Good morning.

I just wanted to follow up on the comment you made about the spares and if you ex out the JT9D comparison.

Pricing usually changes on January 1, and I am wondering, one, did you see a prebuy in December ahead of that, and can you talk about what the realized price actually was at four spares in 2010 versus 2009?

Sam, we typically see the prebuy at Pratt, and this year was no different than that.

The level, I would say, is also consistent with what we have seen in the past years, and the pricing realization is also consistent with price with what we see every year.

So no new news there, no surprises, everything as you would expect.

Okay.

And then the $577 million reduction in inventories in the fourth quarter, can you talk about where that mostly came out off?

And as we think about a recovery in the businesses during 2010, are you going to be able to hold inventories at these levels or should we start to see that grow in 2010 versus 2009?

That's clearly the challenge, Sam, is to keep inventories in check and to improve turns as we see some of the demand come back.

In terms of the reduction for the fourth quarter, about $450 million of that let's call it $550 million, ex acquisitions and all of that, about $450 million came from Carrier, Pratt and Sikorsky.

It's good new at Sikorsky.

You would expect that on those high shipments.

Otis also had a good quarter taking out almost $90 million of inventory.

In fact, each one of the businesses actually took out inventory during the fourth quarter, so good performance across all the businesses.

Thanks.

One last question.

The deferred income tax line of the $415 million or so in terms of cash, what is that related to in the fourth quarter?

That's really related to the pension contributions that we made primarily.

Okay, thank you.

Next question comes from Jeff Sprague of Citigroup.

Thank you.

Good morning.

You covered a lot of ground.

I've got a couple things though.

Greg, just on the inventory both for the quarter and the year, did that end up being a net negative or positive to the P&L?

In other words, you had absorption issues as a result of that but you also probably cut into some LIFO layers along the way.

How do you think that shook out?

I think in total it was a net negative to the year.

We had big absorption across most of the businesses, as you can imagine, with Carrier's volume down at much as it was.

At Hamilton I think the absorption impact was over $100 million alone.

There was a little bit of benefit in the fourth quarter from LIFO.

That came partially from divesting of some of those Carrier distribution businesses but also just on the lower volume.

So on a net basis I would tell you it was a big negative.

Okay.

The flip side of Howard's question on stimulus, stimulus for energy retrofit on commercial has been AWOL.

Have you guys seen any uptick in energy performance contracting or anything on the commercial side that mutes the negative headwinds in 2010 on commercial OE?

We certainly have seen some good traction at the NORESCO business which is the energy services contracting business we bought in late 2008.

They've got a very strong backlog.

The problem there is it is a $200 million or so business as compared to the totality of the commercial HVAC business, so it is going to be improving this year.

We have seen good traction on the government side which is where they focus, but in terms of stimulus impacting or energy efficiency impacting the rest of the BSS, it is really pretty moderate.

The only real benefit, Jeff, has been in the US residential business where the mix is better because of the rebate for 13 SEER equipment.

That has driven the mix up which is ahead of the margin a little bit, again not meaningful but that's certainly been the most positive impact.

And then on Carrier res in particular, can you give us a little color on how price/cost dynamics are playing out?

Obviously everybody is hearing some footsteps on cost.

And we're running at real low utilization rates.

What do you think is the shape of pricing as the year unfolds here?

What is going on in the channels right now?

I think pricing is probably the one question mark we have and maybe the biggest risk we think about Carrier for the year.

As volumes pick up, we know there is excess capacity in the channel out there.

I think the good news from a Carrier perspective on a cost side over the last year-and-a-half Carrier has actually reduced the breakeven point at its factory, big res factory in Tennessee, from about a 50% volume to 25%.

We think we have a cost advantage out there.

Obviously copper could be a headwind if we see that start to pick up here, as we have in the last quarter.

But from a cost perspective I think we feel pretty good.

Pricing is is the great unknown, and again we have to stay disciplined just like Otis stayed disciplined last year.

I think Carrier will have to remain disciplined and not give up on pricing.

And just finally on GTF, obviously there's been a lot of development dollars expended along the way here for years as you work on this.

But if one of the big commercial OEs actually hits the bid, if you will, on a re-engining program, what kind of inflection in E&D spending would that trigger as it relates to the GTF?

Obviously there would be a big bill associated with any re-engining of one of the large commercial transports be it a 737 or A-320.

The good news, of course, is we have partners out there that would absorb a big chunk of that, but you would see an inflection.

You probably wouldn't see it in 2010.

It is probably more a 2011 phenomena because even if Pratt were selected this year to ramp up spending, I don't think you're going to see it until 2011 and really probably 2012 and 2013 before you get to the bigger dollars.

Can you give us an idea, though, of order of magnitude even after once you dish off pieces to partners and the like?

It is a big number.

I think the question is how much of it goes to the partner share and how much of it ends up at our P&L.

But if you think about it, Pratt spends about $700 million a year on E&D now, so obviously other programs will go down.

This will replace a piece of that spending, but you will probably still see an incremental number, but you're not talking about $200 million or $300 million a year.

Okay.

That's very helpful.

Thanks a lot.

We'll go next to Robert Stallard of Macquarie.

Greg, going back to the aerospace aftermarket on the commercial side, I was wondering if you can give us an idea of how orders in this area have progressed over the last quarter and if possible into this year?

We're not going to get down to daily and weekly order rates discussion here.

I think the market is trending as we expected.

I think that's probably the best way to put it.

Obviously fourth quarter was pretty similar to the third quarter when you adjust out everything.

We didn't see a big change sequentially from the third quarter to the fourth quarter, but the market is really progressing as we expect.

That's this slow gradual recovery that we talked about earlier.

And as you talk to your airline customers there, do you get the sense this destocking trend is coming to an end or there's further to go?

I think again 2009 was all about cash conservation.

I think the airlines will probably lose money globally again in 2010, but they are still flying, and I think as we've seen in the reported results of especially the US majors, it looks better.

They have done a great job on costs and raising revenues, and I would expect as they continue to fly these aircraft that they're going to need parts.

We expect RPMs to probably be up about 3% this year, and as long as they fly, they're flying our engines.

We haven't seen a big uptick in parked aircraft.

Again, I think that all bodes well for a recovery here in 2010.

And secondly, on the acquisitions in dispose you said GE is expected to close early.

Do you expect that to be material?

What do you mean by material?

You said that GE Fire and Security acquisition was going to close slightly earlier than you expected.

Is that going to have a material impact?

No.

I think as you think about it, we talked about first half.

We just got US and Canadian antitrust approval.

We're in the queue in the EU to have approval in late February, so we'll probably close 30 days or so after that.

If you think about it for the whole year, we're not expecting any type of net pickup in terms of accretion dilution.

We're going to issue some debt to pay for the deal.

We'll do that right around the close time, so we think the interest expense, it really offsets what we expect to be about $80 million or so of profit that we're going to see for the year from the acquisition.

Just as a reminder, Robert, I think when Louis said in December it is consistent with that, our guidance assumed about an April close at that time with $800 million of revenues and $75 million to $100 million of earnings.

That was part of our guidance in December, and this is consistent with that.

Right, okay.

Our next question today comes from Kai von Rumohr of Cowen & Company.

Thank you very much.

And good quarter.

R&D looked a little bit light in the fourth quarter.

Where do you expect R&D for the year to be in 2010?

I think when Louis gave guidance back in December we said up about $75 million.

Given that E&D came in a little light in Q4, we would now expect E&D to be up about $100 million for the year and most of that is going to be at Pratt with a little bit at Sikorsky.

I think you're going to see E&D flattish at Hamilton where you have good news of 787 spend coming down but really replaced by C series and the A-350.

Terrific.

And to follow up to Jeff's question, what sort of progress have you made in terms of integrating the GTF into the International Aero Partnership given that that's something that Airbus views as important?

I think it has always been our goal to have the GTF be a part of the IAE joint venture and to go to market through IAE.

Obviously that's all subject to approval by our partners, and we're still working through that.

And I think we're going to continue to work through that with Airbus during the first half of the year.

Okay.

What's the impact looking out?

You mentioned that JSF engine is all upside and yet there are rumors that the DOD is going to cut by 20% F-35 production through 2015 and the F-16 it looks like the 2012-13 customers, Turkey and Egypt are brand X's engine versus today you've got the production.

Should we worry about Pratt a little bit more as we look out there in terms of what's happening to the military engines or do you still think that aftermarket in bus jet can outweigh that?

Kai, take me through the question again.

Are you specifically concerned about JSF production in the next couple of years?

As we get out to 2012-ish, '13 before we have GTF contributing, if there is less JSF engines, if the F-16 is going down, C-17 is going down, and you have R&D at a relatively high level for the GTF, is there a growing concern that Pratt would be flat or do you think that Pratt Canada and aftermarket and restructuring can still give you growth during that period?

There is no doubt I think 2011 will be a low point on the military engine business.

You're going to see the engines for the F-22, they start to go away after this year.

JSF does not ramp up to replace all of that until 2013, 2014.

I think Pratt is going to be challenged next year.

But to your point, we're going to see benefit from restructuring next year, you're going to see a little bit of recovery in spares continue, and you're going to see better outlook from Pratt Canada.

So again it is a little early to give guidance out of 2010, but I think Pratt understands the challenge and the military is certainly going to be a headwind for them in the next couple of years.

Terrific.

Thank you very much.

We'll go next to Heidi Wood of Morgan Stanley.

Yes, hi, thanks very much.

Question on Hamilton Sundstrand, Greg and Akhil, if you can give me a little more color.

I know we saw 10% decline in revenues and a 32% decline in profits, clearly weaker in spares.

And you gave us color on industrial and commercial, but can you add even more color on what we saw and talk about the sustainable margins in 2010?

Heidi, I think for Hamilton, the numbers you quoted were reported numbers, so when you adjust for restructuring, and Hamilton did a lot of restructuring as you would expect in this environment, I think the numbers are closer to down 13% for the year on earnings.

That primarily is because both their spares business and the industrial business were down about 20% for the year-over-year on revenues.

That's a big decline on their highest margin businesses.

So that put a lot of pressure on it.

They did do a lot of cost actions like everybody else, furloughs, travel restrictions, merit deferrals and restructuring.

All of that gave them about $200 million of good news in the year, but that wasn't enough to offset the declines from the higher margin businesses.

I am sorry, those numbers I quoted I backed out the restructuring, and I still found that it fell short, but it was just the significant weakness more on the commercial side?

Commercial spares and industrials.

And then what about what we should think about margins in 2010 and also touch on when will we see provisioning spares on the 787 ramp up?

Does that happen in 2010?

I don't think so, Heidi.

I think margins ought to be up at Hamilton this year just on the back of the cost reduction that Akhil talked about.

Revenues will be challenged there, again primarily because of the regional jets going down as well as some of the military vehicles that have been a big piece of the revenue for the last couple of years.

So they're going to be challenged on the top line but cost reduction will actually give them some margin expansion this year.

As far as provisioning, provisioning was a big piece of the aftermarket.

We saw that down significantly last year and don't expect it to pick up much this year.

And specifically on the 787 with entry into service probably here towards the end of 2010 we wouldn't expect a big uptick in provisioning orders in 2010, especially since the first customer which is ANA, they're actually on our long-term, we call it a care program where they don't actually provision but they pay us a fee for the provisioning.

Okay.

So that's something we can anticipate for next year.

Yes.

And then quick question, Greg for you, is on GTF, another way I am wondering about is how do we think about the risk to the C series given that Boeing and Airbus have lodged complaints on unfair subsidies even though that is a little like calling the kettle black?

I think it is actually a great testimony to how good the GTF is that Boeing and Airbus are concerned about the C series.

I think again it is a good aircraft.

Bombardier is going to have it to market ahead of any re-engine A-320 or 737 and we think there is nothing but upside with GTF.

Great.

Thank you very much.

We'll take our next question from Myles Walton of Oppenheimer and Co.

Thanks, good morning.

Good quarter.

Question for you on the cash side of the house.

You obviously added another $500 million on the pension, and I think you had a placeholder for 2010 of $400 million domestic, $200 million international.

I assume the international hasn't changed.

Right.

Has the domestic?

We did a lot of prefunding in December, as you noted.

We still have a $400 million placeholder out there, and I think cash ought to be strong this year, so we're still anticipating another $400 million, but it really depends, I think, on the market and cash.

But $400 million is a good placeholder for now.

The other cash item was on CapEx.

Obviously you pulled back the reigns pretty hard in 2009 on CapEx.

Do you go back in 2010 to more of the 1.2 or equal to D&A kind of rate?

CapEx is down a little over 30% last year.

Obviously all the businesses that we saw the economic environment, they tightened up and Louis put an edict out there to cut back on CapEx, and the guys executed on that.

You will see a little bit of an increase this year, not back to the levels we saw in 2008, but you will see a little bit of uptick in CapEx year-over-year.

There are a few program related investments that need to be made.

For example, in Pratt you see the setting up of the Turkish and the Shanghai engine centers, so there is some CapEx that got pushed out from '09 into '10 which will put a little pressure.

But we don't expect it to be anywhere close to the $1.2 billion, Myles, it'll be maybe a double-digit increase but not much more than that.

I will stick to two.

Thanks.

We'll take our next question from Doug Harned of Sanford Bernstein.

Good morning.

On Carrier could you walk through some of the actions that have been taken?

I know you have done a lot on overhead headcount reduction, you talked about R&D consolidation, exiting under-performing businesses.

I am trying to get a sense of where you are right now in terms of actions that have pretty much been completed and what you have ahead of you in the next year or so.

I think, as we said in the opening comments, we think about two-thirds of the structural work has been done at Carrier.

The other third is still to come.

I think the key, and Geraud will take you through this in more detail in March, You will see more on international res, exiting some of those, and of course discontinuing down the path on the US distribution business and probably see more of that here in the first half.

The big tough things have been done.

I would say the heavy lifting is behind us.

But still some more.

Again, Geraud can give you a lot of detail here and he will spend some time in March on that.

And then similarly on Fire and Security, I know one of the things that Ari has emphasized was the need to do consolidation around service centers.

Where are you on that?

Is this at a point where it is being implemented or are you still in the planning stages for that work?

We're going the full tilt there.

We started last year in France.

We have some more teed up around Europe this year.

You will see in fact a big piece of the restructuring costs this year are going to be at Fire and Security, not just for GE Security but also to continue on the branch office consolidation.

That ought to be wrapped up by the end of 2010 or so.

So we should actually see savings impact from that in 2010?

There is some savings from the actions -- as you can imagine this is a geographic business, so we started actions in Australia, we've seen benefits from that.

There are actions in France, as Greg talked about, which are starting to give some benefits in 2010.

Bulk of the benefits will come in 2011 and 2012.

Okay, very good, thank you.

Last question then.

From George Shapiro of Access 342.

Good morning.

I wanted you to run through sequentially both at Pratt and Hamilton Sundstrand, the margin was down despite revenues being up, and I thought I heard you say, Akhil, that normal seasonality is that the spares are up a little bit sequentially in Q4 versus Q3.

So just looking for the reason for the margin decline.

My guess is maybe it is just more OE zero margin engine deliveries, but if you could provide the color.

Sure.

George, let's take Pratt first.

The normal seasonality on the spares is also followed by seasonality in E&D where E&D ramps up in fourth quarter typically.

So we saw from Q3 to Q4 an increase of approximately $50 million in the Pratt E&D number.

The second thing to keep in mind there is if you go back to our third quarter call we mentioned a one-time benefit in Pratt numbers associated with several contract adjustments.

We talked about a $35 million number there which was on a year-over-year basis.

In the quarter the number was more like $50 million-plus.

So if you take those two factors into account, higher E&D and the one timer in Q3, you pretty much explain the margin change there.

For Hamilton actually sequentially there is really no change in the margin.

The margin is pretty consistent, about similar level of profits and similar level of sales.

The little decline there is also a function of E&D being higher in Q4 as compared with Q3.

Okay.

That was my question.

Thanks, George.

Maybe just to close, just a final word on 2009.

A great year for execution.

It's positioned UTC for earnings growth in 2010 and beyond.

Thanks for listening today.

We appreciate your time.

We look forward to seeing everybody in March at our annual investor meeting.

It is going to be on March 12th in New York City and Akhil and team will be happy to take your calls throughout the day.

Thank you.

With that, that does conclude today's conference.

Ladies and gentlemen, again, we appreciate everyone's participation today.