雷神技術公司 (RTX) 2012 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 Jay Malave, Director Investor Relations.

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

Please note, the Company will speak to results from continuing operations except where otherwise noted.

They will also speak to segment results adjusted for restructuring and one-time items, as they usually do.

The Company also reminds listeners that the earnings and cash flow expectations, and any other forward-looking statements provided in this call, are subject to risks and uncertainties.

UTC's SEC filings, including its 10Q and 10K 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 to two questions per caller to give everyone the opportunity to participate.

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

Please go ahead, Mr. Hayes.

Okay, thank you, Stephanie.

Good morning, everyone.

You saw in the press release this morning no surprises.

UTC closed out a transformational 2012, just as Louis laid out for you in December.

Full-year sales were just under $58 billion.

That was up 4% from 2011.

That of course, was driven by the Goodrich and IAE acquisitions.

Earnings per share was $5.35, and that included about $0.50 of headwind from FX, pension, and E&D.

For the year, Goodrich is only about $0.06 dilutive.

A little better than what we had expected due to lower amortization, financing, and one-time deal costs, and more importantly better underlying performance in the Goodrich business.

Free cash flow was again strong at 108% of net income attributable to common share owners, and we paid down about one-third of the Goodrich debt, just as we had planned.

As we all know, 2012 was a challenging global economic environment.

And while there is still plenty of uncertainty ahead for 2013 in both Europe and the US, we have seen signs of stabilization, particularly in Europe, and we've started to see a gradual recovery in the US economy led by a rebounding housing market.

And we continue to expect solid growth in emerging markets throughout the coming year.

As you've come to expect from UTC, we just didn't wait for the economy to recover, we proactively leveraged our scale and optimized our cost structure, while we continued to invest in game-changing technologies.

All the while, we are transforming the portfolio to take advantage of the growth opportunities over the next decade in our core markets of aerospace and commercial buildings.

We also took the difficult actions this past year, reducing our structural overhead costs and focusing on global growth markets.

In 2012, we invested nearly $600 million in restructuring, of which $258 million was in the fourth quarter alone, as the businesses continue to find solid payback projects to reduce costs, and position us for earnings growth this year and beyond.

Okay, slide 2. Turning to fourth-quarter results, total sales increased 14%, again, driven by Goodrich and IAE.

Organic sales were flat in the quarter, a slight improvement from our third-quarter results.

Segment operating profit was also flat, although Climate Controls and Security had a very strong quarter with 17% operating profit growth on flat organic sales.

As expected, Sikorsky did not ship any of the Canadian Maritime helicopters in the fourth quarter, but we did record a charge of $157 million related to costs associated with the program delay as we now expect.

While we are continuing discussions with the Canadian government, we are also encouraged by the progress we've made since Louis spoke to you in December.

Nothing new to report today, but we are cautiously optimistic, and Mick will provide you with a full update in March.

We are also maintaining our place holder of eight aircraft deliveries for 2013 at Sikorsky, and there is no change in the projected P&L impact of those deliveries.

You'll recall that's a loss of about $14 million per aircraft.

All right, back to Q4.

Segment operating margins was down 200 basis points, with the CMHP charge and Goodrich acquisition each accounting for about 100 basis points of the headwind.

Restructuring savings and productivity benefits offset $140 million of headwind from pension, E&D and FX.

Fourth-quarter earnings per share were $1.04, that includes $0.25 of restructuring and one-time charges.

The restructuring was spread across the business units, including $75 million of UTC Aerospace Systems, as they continue to make good progress with the Goodrich integration.

Excluding restructuring and one-time items in the fourth quarter of both years, earnings per share decreased about 9%.

The tax rate was 30.1%, a little bit better than we expected back in December, but still an $0.08 headwind versus last year.

Free cash flow very strong -- 139% of net income.

Great performance, especially as we contributed nearly $200 million in cash to our international pension plans.

Okay, moving to slide 3 -- order trends.

As you can see, they are showing signs of improvement.

Pratt & Whitney's large commercial [spare orders] were up 46% in the quarter, including the additional share of IAE.

Excluding that incremental share, Pratt's orders were down 8%, following a 21% decline in the third quarter.

Legacy Hamilton Sundstrand commercial spare orders were down 4%, following a 6% decline in the third quarter.

But importantly, book to bill for both Pratt and Aerospace Systems was over 1 for the quarter.

So, the rate of decline has moderated at the aerospace unit, and we saw a good order growth across the commercial businesses in the fourth quarter.

UTC Climate Controls and Security's North American residential HVAC orders were up 20%.

Global commercial HVAC orders grew 7% at constant currency.

And at Otis, new equipment orders were up 13% on the same basis.

And importantly, Otis saw new equipment orders in China grow 17% at constant currency, as they continue to gain momentum there.

Orders also grew in North America up 18%; while not surprising, Europe was down slightly.

We also saw solid growth in emerging markets.

Combined BRIC orders for the commercial business units were up 11% this quarter.

So, order trends broadly improving, a good leading indicator for UTC's return to organic growth in 2013.

I'll come back in a second to talk about 2013, but let me turn it over to Jay to take you through the business unit results.

Thanks, Greg.

Turning to page 4. Otis operating profit was down 5% on flat sales in the quarter.

Foreign currency translation reduced sales and profit by 1 and 2 points, respectively.

Operating margin was 21.9%, 110 basis points lower than prior year.

At constant currency, new equipment sales were down slightly, as growth in China and the Americas was offset by declines in Europe and the rest of Asia.

Service was up low-single digit led by growth in modernization and contractual maintenance.

Lower volume and continued pricing pressure in Europe more than offset the benefit of ongoing cost reduction and profit growth in the rest of the world.

As Greg mentioned, at constant currency, new equipment orders were up 13% with double-digit growth in all areas except Europe, where orders were down slightly.

China orders for the quarter were up 17%, solid improvement after being down 11% over the first three quarters of the year.

For the full year, profit was down 7% on 3% lower sales.

At constant currency, profit fell 3% on flat sales.

We expect the improving new equipment order rates, especially in China, and the aggressive cost reduction and restructuring actions taken over the past year, to result in the return to profit growth in 2013.

On slide 5, Climate Controls and Security drove profits up 17% on 6% lower sales, resulting in another sharp increase in margins, up 270 basis points from prior year to 13.7%.

Organic sales were flat overall with mixed results across the businesses.

Mid-single-digit growth in the Americas led by solid growth in residential HVAC was offset by low-double-digit and mid-single-digit declines in Transicold and the US Security business, respectively.

Asia and EMEA were flattish.

CCS had another solid quarter of earnings growth despite flat organic sales.

Profit growth was driven by restructuring and productivity, including savings from the consolidation of Carrier, and Fire and Security, lower commodity costs, and a $22 million special dividend from a distribution partner.

Global commercial HVAC orders were up 7%, driven by a sharp uptick in China toward the end of the year.

Transicold orders were flattish, with container down about 10%, offset by growth in Europe and North America truck trailer.

Commercial refrigeration orders in Europe were down high-single digit given economic conditions in that region, while orders for global Fire and Security products were up low-single digit.

Current order rates are consistent with our expectations for a gradual resumption of organic sales growth at CCS this year.

For the full-year 2012, CCS grew earnings by $116 million, or 5%, on flat organic sales.

With operating margin at 14.1%, up 190 basis points from prior year, CCS is well positioned to achieve 15% margin in 2013, two years ahead of target.

Turning to aerospace on slide 6. At Pratt & Whitney sales were up 12% in the fourth quarter, driven by the consolidation of IAE and the AeroPower business.

Organically, sales were down 4% year over year, as higher military, Pratt & Whitney Canada, and power systems sales were more than offset by lower commercial aftermarket.

Large commercial spare sales were down 18% organically year over year.

On a reported basis, large commercial spares were up 30%, including consolidated IAE sales.

Operating profit in the quarter was down 25%.

The impact from lower organic sales of large commercial spares, unfavorable engine mix, and higher E&D and pension costs were partially offset by the benefits from the IAE consolidation and restructuring savings.

Also, the prior year included the benefit of about $0.04 from a contract termination.

Commercial spares orders were down 8% organically and up 46% including the benefit from the IAE consolidation.

Embraer's recent selection of the GTF to power the second generation E-Jet family is another significant endorsement of the technology.

Even with the small incremental E&D from this win, Pratt & Whitney still expects to increase profit by [$100 million] to [$150 million] on mid- to high-single-digit sales growth in 2013.

UTC Aerospace Systems, which includes the Hamilton Sundstrand business and the full quarter of Goodrich, finished the year strong with sales in the quarter of $3.2 billion and operating profit of $339 million.

Organic sales in the quarter were up 4%, with OEM sales up high-single digit, commercial aftermarket up mid-single digit, and military aftermarket down mid-single digit.

On a pro forma basis, Goodrich sales in the quarter were flattish.

Orders for commercial spares were up sequentially, both at the legacy Hamilton Sundstrand and Goodrich businesses.

Organic operating profit in the quarter at Aerospace Systems was flattish with the benefit of higher volume offset by higher E&D and pension costs.

The EPS impact from Goodrich in the quarter was neutral to UTC's results.

Turning to Sikorsky on slide 8. Operating profit decreased 20% on 3% higher sales.

During the quarter, Sikorsky shipped a total of 91 aircraft.

77 aircraft were based on military platforms, and 14 commercial.

Higher sales were driven by international military and commercial aircraft volumes, partially offset by lower aftermarket sales and the absence of two Canadian Maritime Helicopters in 2011.

Operating profit benefited from the higher international military and commercial aircraft deliveries, but was more than offset by the charge taken on the CMH program.

For the year, Sikorsky delivered 243 aircraft.

Including the CMH charge, operating profit of $765 million was down 7% on 8% lower sales.

Accordingly, we are updating Sikorsky's 2013 operating profit guidance.

We now expect profit to be down $100 million to $150 million versus our prior guidance of down $250 million to $300 million.

Despite the earnings decline in 2013, Sikorsky is well positioned.

We announced $10.9 billion of orders in 2012, and ended the year with a record backlog of over $14 billion, including Denmark's selection of our MH-60R for its maritime helicopter replacement program, and orders for more than 35 aircraft in the fourth quarter.

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

Okay, thanks, Jay.

So, close to 2012 that was essentially in line with our expectations, and importantly order rates coming out of the fourth quarter that give us confidence as we head into 2013.

Before I talk about 2013, let me just spend a minute on some of the accomplishments for 2012.

And obviously 2012 was a transformational year for UTC, as we repositioned the portfolio to focus on those key growth markets of aerospace and commercial buildings, but the businesses had some other big accomplishments.

Pratt & Whitney made great progress in developing the GTF and bringing this disruptive technology to market.

We've now completed nearly 4,200 hours and more than 12,400 cycles of full engine testing.

We recently completed the final significant test on the C-Series engine, including the FAA mandated 150-hour endurance test, and we expect to certify this engine shortly.

As you saw, the GTF also has been selected to power Embraer's second generation E-Jet family, the fifth airframe manufacturer to use our technology.

This is a big win for Pratt Whitney, and solidifies our position in the regional jet market well into the future.

And with nearly 3,000 firm and option engines in backlog, airline customers have embraced the lower fuel burn, emissions, noise, and operating cost of the GTF technology.

At UTC Aerospace Systems, the integration of Goodrich is progressing well.

We've deployed a customer-facing organization with a single point of contact for our key customers around the globe, and we've conducted integrative program reviews with many of these customers.

We're developing new solutions based on the best technology from each of the legacy organizations.

And we've achieved over $60 million in cost synergies in 2012, and we're well on pace to achieve nearly half of the $400 million of synergies by the end of this year.

At Sikorsky, we secured Black Hawk demand for the next five years of the multi-year eight contract, part of a record $10.9 billion in orders at Sikorsky in 2012.

The Climate Controls and Security team integrated the Carrier, and Fire and Security businesses, seamlessly.

Nearly $100 million in savings in 2012 helped CCS grow operating profit 5% despite flat organic sales.

With 14.1% operating margins, they are well ahead of the schedule on their goal to 15% [ROS] by 2015.

And Otis continues to regain momentum in China.

While the new equipment sales declined 2% in 2012, orders grew 17% in the fourth quarter, as Otis continues to win significant projects such as the Guangzhou Fortune Center where we will install 49 elevators, including Gen2 and double-deck units.

Otis is well positioned in China, entering 2013 with a $1.5 billion backlog.

So, good progress at the business units despite the challenging macroeconomic environment in 2012.

As we look at 2013, really not much change to the expectations that Louis laid out in December.

We continue to expect 2013 earnings per share of $5.85 to $6.15 on sales of $64 billion to $65 billion.

That is organic growth of 3% to 5%.

We have had some positive developments since our December meeting.

The pension cost came in a little better than expected, with a discount rate of 3.9% versus our plan of 3.8%.

And we had a planned return last year -- the domestic plan of 14%.

And there are two pieces of the tax extenders that were passed as part of the American Taxpayer Relief Act in January which will benefit us in '13.

First, the benefit from the 2012 E&D extenders will provide us with a first-quarter pretax benefit of around $100 million.

This will drop the tax rate in the quarter, and offset some of our restructuring investments this year.

For the year, we now expect $300 million of restructuring offset by one-time gains.

And that's up from the previous estimate of $200 million.

The 2012 piece of the tax extenders will partially offset a tough compare in the first quarter of 2011, which you'll recall had $0.21 of gain in excess of restructuring.

The second piece of the tax extenders, the 2013 benefit, will be booked throughout the year, and it will reduce our 2013 tax rate to about 29% versus our initial expectation of 29.5%.

We're also keeping an eye on FX.

Europe remains a question mark, but we have seen some recent upside to our plan of the euro/US dollar exchange rate of $1.28 with the euro averaging about $1.32 so far.

So, a little bit of good news.

So, in summary, we are seeing good news on pension, FX, and the tax extenders, and that gives us some additional contingency for 2013.

But I'll just remind everybody it is early and there's still a lot of uncertainty in some of our key end markets, particularly Europe and the aerospace aftermarket.

Our plan, as you recall, is based on 3% to 5% organic growth.

And although order trends have been improving, commercial spares have yet to attain our growth assumption of mid-single digit at Pratt and about 10% at Aerospace Systems.

And with the continued fiscal uncertainty in Washington and the threat of sequestration, we remain cautious early in the year.

Turning to cash flow.

Very strong close to 2012 with free cash flow at 108% of net income for the year.

We made significant progress on debt reduction, delivered on our commitment by paying down about one-third of the Goodrich-related debt in 2012.

We paid down the $2 billion term loan, nearly all of the commercial paper, and about $800 million of the Goodrich debt.

In 2013, the combination of solid cash flow performance and proceeds from the remaining divestitures will position us well to pay down additional debt and to fund our share repurchase program, which we restarted this January.

Despite an increase in investment for the aerospace OEM ramp, we expect free cash flow equal to, or in excess of, net income.

2012 was a transformational year for UTC, and as we enter 2013 with a stronger portfolio, we're positioned to outperform.

Our end markets are showing improvement, and we are focused on integration, execution, and delivering the EPS growth that you have come to expect from UTC.

Just one final point before I open it up for Q&A.

I know there's a lot of questions and concerns about the 787, and as you guys know, we are a key supplier on the 787, although we do not supply the lithium-ion battery or the battery charger.

We are supporting both Boeing and the NTSB in their ongoing investigation.

The 787 went through the most rigorous certification process in aviation history.

We are highly confident in the design and performance of the aircraft.

However, given the ongoing review by regulatory authorities, I can't make any further comments at this time other than to say that we don't believe that the results of these investigations will have a material impact to UTC.

So, with that, let's open up the call for questions.

Stephanie?

(Operator Instructions)

Jeff Sprague, Vertical Research Partners.

Greg, can you just elaborate a little bit more on Sikorsky, for us?

So the charge in the quarter is basically just late fees, as it were, because the deliveries didn't happen?

Yes, let me take you through it.

Really the charge was related to all the costs that we foresee related to what we believe will be later deliveries and contractually required.

As you know, we're supposed to deliver all the aircraft this year, the final 19.

We didn't deliver any next year's.

So, our expectation or our assumption now it that we will deliver the helicopters over the next three years.

We put a placeholder of eight, as you know, for each of the next three, which we think is a reasonable schedule for both ourselves from a production standpoint and the customers from a delivery standpoint.

But having said that, we recognize that there are costs, contractual remedies that we will have to cover as it relates to the Canadian government and then we are going to also have fewer flight hours and we're probably going to have some costs on the program related to that longer timeframe.

So, really three pieces.

There is some contractual relief costs, there is some flight hour degradation and there is just some additional program costs and all that added up to the $157 million charge.

But we still absorb whatever it is $4 million a unit as you ship those eight a year over the next three years, correct?

Yes, it's $14 million a year.

Again, we should point out we obviously can ship more than just the 8 a year, we can probably deliver most of the helicopters this year, we just don't think that that is practical.

I think Mick and the team have made some really good progress in the last month since Louis spoke in having discussions with the Canadian government.

And I think, again, we will hear some good news coming out of Mick in March.

And just on share repurchase, you said you started here in January.

Obviously, the cash has been strong.

Do you have a little bit more leash with the rating agencies to try to, at least, fully arrest share creep in 2013 or potentially even go further than that?

Well, I think we will certainly be able to arrest share creep with the share buyback that we've got.

As you know, we have got a placeholder of $1 billion for share buyback this year and $1 billion for M&A.

As I think about the cash, yes, we are still going to see about $1.5 billion of cash proceeds coming in from these divestitures that will close here the first half.

We ended the year with strong cash flow almost -- over $5 billion on the balance sheet.

We'll have strong cash flow for the year, so I think -- you think about the calls on cash.

You have got $2 billion going to dividends, you have got $1 billion for share buyback, you've got $1 billion of debt that is due in December, that is the 18 month floater, we will certainly be a position to pay that.

We will probably pay down another $1 billion of debt.

Some stuff that's due in '15 or '16.

And then we will talk to the rating agencies about taking up the number, but I think cash looks very strong, stronger than what we expected and of course my boss is pushing me to do a lot more than $1 billion, but it's January so we will see what happens.

And then just finally, and then I'll move on, can you elaborate a little bit more on the complexion of what you're seeing in Otis China, whether it is primary city, secondary cities, residential versus non- and anything to add there about how things are playing out?

Yes, I think again as we talked in December, where we are seeing the growth is in the Western provinces.

Along the coast I think the residential investments picked up a little bit, but the real strength we're seeing is on the residential side in the, I'll say, the third and the fourth tier cities.

This factory in Chongqing that we just opened in September of last year is probably fully utilized.

I think we'll ship about 10,000 units out of there this year.

But that is really where the growth is coming, it is from the west and it's nothing new.

I think it's the same phenomena we saw last year.

But we are also seeing, I think, just an uptick in the overall economy in China.

It wasn't just Otis that was strong, CCS had a very good fourth quarter from an order rates perspective there.

Howard Rubel, Jefferies & Company.

Just two questions, hopefully.

One is you talked about impairment charges in CC&S.

Could you give us a ballpark idea of what you're close to selling or dispensing with so we can think about next year's baseline in that business?

Yes, I think we had a placeholder of about $800 million of divestitures.

I think we got done, what, Jay, about $550 million of those.

A little bit less than that, yes.

It will be about $500 million of that last year.

So, you still got a little bit to go.

I think we took a $65 million impairment charge on a number of some of the legacy F&S businesses and I think Geraud laid all that out for you back in September in terms of the listing of those businesses.

So, no surprises.

I suspect most of the transformational, portfolio transformation will probably be done in the first half.

Some of it will linger into the back half, but I think they've got pretty good line of sight now to get that all done this year.

You actually -- if we look at what you have here, then your 15% margin is almost a low hurdle, not to give you too hard a time about that.

You would not be giving me a hard time about that if you were to say that because I think, again, Carrier just based on their guidance is going to hit 15% this year, assuming their markets come back as we expect.

So, I think the integration of Carrier and F&S has come across without a hitch.

So, I think 15% ought to be very achievable if the markets cooperate.

And then on Sikorsky, if we exclude all these -- I know for accounting you can't exclude the $157 million, but for us we can back that out and you end up with something around 16% operating margins in the business unit.

Was there just some cum catches and maybe some absence of R&D and I know you alluded to a lower decline year on year in the business, could you talk a little bit about what I will call core operating performance?

I think core operating was actually very good at Sikorsky.

They delivered 91 aircraft, I believe, in the fourth quarter.

It was a huge number of aircraft.

I think they delivered 242 or so for the year and 91of that was in the fourth quarter.

So, they had a lot of shipments, again, profitable.

We saw good shipments on the commercial side.

The S 92s going out.

We saw the S 76.

I think we delivered four of those in the quarter.

So, it's really just a very strong quarter and you'll recall again the operating performance in terms of profit growth was not very strong throughout the year.

So, really, all the profit growth came in the fourth quarter.

Yes, Howard, they had nice mix, good restructuring benefits and also, just as a reminder, strong backlog as we go into 2013.

Some of it is price and some of it is some permanent cost reduction?

Exactly.

Joe Nadol, JPMorgan Chase & Co.

Actually, it is Seth on for Joe this morning.

Just two quick questions.

First of all, if there is anything you can say at this point and I know it is difficult, about the calendarization of the improvement in the aftermarket for 2013.

Yes, I wish my crystal ball was clear on how that calendarization is going to work.

Obviously, we talked about mid single-digit growth at Pratt Whitney and it is about 10% at the Aerospace Systems business.

Obviously, the order rates in the fourth quarter were still not positive, but they were a lot better.

So, again, this is probably more back half than front half, but were seeing airline profitability continuing to improve.

The trend line was good.

As I said, book to bill was over 1, but I'm not sure if this is going to be a second quarter or third quarter, but just given the cycles that the airlines are flying today, we know that there's going to be a recovery here sometime, whether it's second, third, fourth I can't tell you.

Is there anything else you can say now about the agreement you came to with Boeing on pursuing Army helicopter award?

Yes, it's a team area and really it's a win-win for UTC and Boeing.

It teams us with Boeing.

This is on the joint multirole helicopter program.

We will be submitting a joint bid with Boeing here in March.

This is for up to 4000 helicopters.

Again, this is -- we will develop a prototype, we won't actually deliver production helicopters for 10, 15 years, but this is a great teaming that [puts us in].

Sikorsky is going to lead on the aircraft itself.

Boeing will lead on the mission system equipment, really capitalizes on the strength of both companies.

And you recall, this is not a new thing.

We teamed with Boeing back 15 years ago when the Comanche program was launched and we had a very good working relationship between the two organizations.

Carter Copeland, Barclays Capital.

First, on the Pratt spares, it looked like your compare there would have eased a lot, but obviously there was still a lot of pressure there along the revenue side.

I wondered if you might speak to, from a platform level, where that pressure is coming from and if you're seeing it in one area more than another, maybe it's in a PW4000's versus what you're seeing in the V's, but any color you can provide there on that continued weakness would be helpful.

Yes, I think it's the same trend we've been talking about, really, for the last four or five months.

We continue to see weakness on the wide body fleet, which is the PW 4000 and we continue to see strength in the narrowbody, which is the V's.

And even the PW 2000s on 757, we thought that 75's were going to be -- start to see some acceleration of retirements.

We haven't really seen that.

In fact, they are flying more now.

So, spares actually look pretty good on 75s and on the Vs.

And all the weakness we're seeing, all the year-over-year decline is really in the 4000 family.

So, again, we know those wide-bodies are flying.

Those are relatively newer aircraft.

We will see spares come back.

And that 4000 weakness would you attribute that to cargo?

Can you see that in the trends?

I don't know that --

Well, a decent size of the 94-inch fleet is cargo, Carter, but it is difficult to tell exactly where it is coming from.

As we looked at this, the cycles at a cargo aircraft are not much different than the cycles on the commercial side.

So, although we talked about cargo versus commercial from a spare parts perspective, it doesn't make a heck of a lot of difference at the end of the day.

And on China in your comments there about on Otis.

I wondered if you might comment about the implied change in market share that you are looking at there relative to 2012?

Assuming you lost a couple of points of share and is it the plan to regain that, all of it, part of it, some of it?

Any comment you can make there?

Yes, I can make a lot of comments.

I guess I would say just a couple of things.

Obviously, we did lose share early in the year.

I think we regained a lot of momentum in the third and then even more so in the fourth quarter.

I think Pedro Baranda at Otis, has talked about regaining all of our lost share by the end of '13.

I think we are well on track to do that.

The market is very dynamic and we are breaking it down between social housing and residential and then you've got the factories and the office, but in all of those markets I think we've got a pretty good share and again I think the momentum coming out of the fourth quarter ought to continue into 2013.

Does the plan imply that Pedro hits that goal?

Absolutely.

Okay.

Great, thanks, guys.

Myles Walton, Deutsche Bank.

First one, I may have missed it, but did you comment on how Pratt spares organically were sequentially, Jay?

We did not.

They were -- spares sequentially,.

I think you said Hamilton was up.

Yes,.

They were down 21% in the third quarter.

They were up -- are you talking about the rate of decline or just absolute.

No, absolute.

Yes, absolute they were up for you would always expect them to be up because of the feed the price type of ordering activity that happens in the quarter.

And then Greg, on the contingency, I think on taxes it sounds like $0.04 has been added to the contingency, euro maybe $0.03 or $0.04, pension, could you size that?

Yes, it's another probably $0.05 or so.

Is that roughly the puts that you have and then you mentioned spares as being an unknown or aftermarket as being an unknown, is there anything else that is emerging as being more of a put to that $0.15 or $0.16 additional contingency.

No, in fact I think, surprisingly, it's been a pretty good start to the year.

As we said, we feel a little bit better today than we did back in December because we have got this additional, call it, $0.15 or $0.16 or so.

Plus, recall we've taken up restructuring by about $100 million.

So, we feel good about the guidance range and again if the business units hit their high end of their guidance range, we will certainly see ourselves towards the top end of that range as opposed to the midpoint.

But, recall at the midpoint we didn't have much contingency and now we've got, call it, an extra $0.15 or $0.16 of contingency sitting there today.

So, feel pretty good.

Sam Pearlstein, Wells Fargo Securities,.

Can you talk a little bit about Aerospace Systems?

If I just look at the 2013 guidance of $13.5 billion, $14 billion in revenues and the $2.1 billion in operating profit, just looking at where you were in the fourth quarter, which would've had a full quarter of Goodrich in it, it certainly seems like you need to step up the run rate on a quarterly basis and outside of the 87 what else is really going to help move that quarterly run rate up so much over the course of the year to hit those numbers?

You got really two things that are going to benefit Aerospace Systems as we move throughout the year.

One, of course, will be additional synergies.

We recognized about $60 million of synergies last year.

This year we'll probably add another $100 million plus of synergies and maybe $120 million of synergy.

So, that will help the run rate and you've got a recovery in spares.

The thing about what is holding margins down in the fourth quarter at Aerospace Systems, it's really the decline in spares year-over-year.

So, again, if we get to that 10% spares up that we expect, plus we see the synergies, I think you will certainly see an improvement in the run rate.

And then just in the CC&S, some of the other companies that have reported the December quarter, talked about some softening in some of the HVAC end markets.

I think it might have been more refrigeration, but just in general have you seen any trends in any areas within the HVAC markets that might've been softening over the course of the quarter and into January?

No, I think -- well, let me go through it piece by piece because obviously there's puts and takes in the CCS portfolio but res, as we mentioned, ended very strongly, up 20% orders, up 10% in sales.

Commercially HVAC globally was up about 7%.

Again, strong in North America, strong in Asia, not so good in Europe.

I think the one governor of the year is going to be Transicold and specifically the container business, which was still down in the fourth quarter.

And it's not clear that we're going to see a big recovery, although we're certainly hopeful on the container market.

Now looking at the Baltic's dry goods indices, obviously that is still down at a relatively low level and it doesn't bode well for the containers, but it is a very cyclical business.

So, containers were down and commercial refrigeration in Europe was also down year-over-year.

Again, not much going on there in Europe.

We are, of course, very strong there.

What is in Geraud's guidance in terms of the container assumption for this year?

Container is up, I believe, about 15%.

Cai von Rumohr, Cowen and Company.

So, on the Canadian maritime helicopter, where are we in negotiations with the Canadian government?

Are you in talks?

Let me be very clear about this, Cai, and we are in discussions with the Canadians.

We have not entered into a renegotiation of the contract yet.

We are in discussions to get to that point where we can restructure the deliveries of the IMH, which is a interim configuration of the helicopter.

We started those discussions late last year.

I think they are going very well, but we are not at the point yet where we are ready to put pencil to paper.

So, obviously, you had a lower number than expected at Sikorsky last year, but you brought the decline down a little bit.

So, do you feel better today than you did in December about those discussions?

I think, yes.

Generally, we feel better in general about the relationship.

I think we are making progress everyday up there.

Mick and his team have been working very closely with the customer.

And it just takes time to work through all this.

And then help us understand maybe the tax rate.

You took it down 50 bps, but you said there is $100 million plus from the R&D tax credit in the first quarter for 2012?

Yes.

Presumably another $100 million, so $200 million benefit.

Shouldn't that be a little bit more than 50 bps?

Well, yes.

In fact, the benefit will be a little bit more in 2013 then we saw in 2012.

Again, we've taken the rate down by 0.5 point and probably wanted to come down 1 point, but this actually gives us an opportunity to make sure we actually hit that rate.

As you know, we have to do some tax planning to get from the statutory rate down to that target rate of 29.5%.

This takes some pressure off of that and we will see how the year goes.

There is obviously a little -- it helps a lot by having that R&D tax credit out there.

Cai, the 2012 piece that we booked in the first quarter will reduce the reported rate.

When we refer to 29%, we are talking about the operational rate.

And in that $100 million, as Greg spoke to, will basically be used to offset the incremental restructuring that gets us to $300 million.

But you are correct, the reported rate will be lower than 29%.

I guess I didn't get that.

So, the reported rate will be lower than 29%.

Yes, the operational effective tax rate will be 29%, but because this 2012 extenders it will be booked in the first quarter.

We will actually get the tax -- .

No, no, no, I get that.

Maybe you could also help us.

So, where should we expect the rate to be in the first quarter and assuming the 2013 is equally spread, where should it be for the last nine months, approximately?

Yes.

In fact what will happen is, to Jay's point, you're going to get this $100 million benefit or so on R&D in the first quarter.

So, the rate normally is going to be about 31% in the first quarter and it declines throughout the year as we implement tax planning strategies.

So, this $100 million will help in the first quarter.

I don't have an exact number.

We can get back you on what -- in fact, when we update you, I think sometime here coming up in February, we can give you probably a better look at what that rate's going to be quarter by quarter.

Terrific, thank you very much.

Shannon O'Callaghan, Nomura Securities.

Just a couple things on cash flow.

So, CapEx jumped up in the fourth quarter, can you talk about what the focus areas where there and should we assume this percentage of sales close to 4% as a run rate?

Yes.

Let's talk a little bit about CapEx.

I think we spent $641 million or $642 million on CapEx in the quarter and almost $1.4 billion for the year.

That was up $500 million year-over-year.

So, we saw that spending all over, but really it is on the aerospace side as Pratt gears up for production of the GTF.

And as Hamilton Sundstrand Goodrich businesses, as they gear up for this big increase in OEM production, we're seeing a lot of pressure on CapEx.

Same time we also had spending on the commercial side of the business.

I think Otis was up to $142 million, that is up about $70 million year-over-year.

So, we're making investments around the business.

I think we will continue to see pressure on CapEx, that number wants to be higher in 2013.

We, obviously, got a little work to do to hold that to a more reasonable level, but that $1.4 billion could well go up to $1.5 billion this year.

So, a little bit of an increase year-over-year, but not -- so fourth quarter was sort of a heavy quarter?

Yes, in fact, we didn't actually believe the forecast since it got rolled up because we've never seen a quarter that big before, but the ramp is real.

787 production is going to go from 7 to 10.

You've got A380 production increase.

And really across the aerospace platforms you are seeing big increases and that just leads to CapEx.

And then just where did you end the year on the funded status in terms of pension and you put in $200 million in the international plans in the quarter.

Any plans to contribute in '13?

We ended up about 85% funded and, again, we had a very good year on the pension side.

I think returns were around 14% on the domestic side.

We did put $200 million into the international plans in late December.

We will probably put a similar number in this year.

There is no US contributions this year.

None required this year and probably none for next year.

So, again, the funded status -- again, we have a good run-up like we did last year will correct itself.

Plus in discount rate helped us a little bit at the end at 3.9% versus the 3.8%.

So, still a long way to go from where it's been historically, but I think all those factors point to the need for very little funding.

David Strauss, UBS.

On Goodrich, came in a little bit better than you guys forecast, $0.06 dilution.

It looks like synergies were a little bit better.

Also sounds like, in response to Sam's question, you are now forecasting a little bit higher synergy number for '13.

Did anything else for the Goodrich forecast in terms of accretion change for '13?

No, we're still looking at $0.60 of accretion year-over-year.

Get about $1.2 billion of EBIT and you got the synergies and offset by -- and then they got $90 million or so of amortization.

So, none of that has really changed.

The restructuring is still about $100 million.

Maybe the one nuance in this is that $0.60 of accretion includes $100 million of restructuring and we will cover that $100 million of restructuring at the top level.

So, the real number you are going to see is probably more like $0.68 of accretion year on year.

And then CCS, given what you're seeing today I think back at the meeting in December you had talked about the underlying assumptions there being about mid-single digit growth in resi, volumes and mid-single digit growth on the commercial side.

Does that still hold today?

Yes, I think so.

And again, order rates would seem to support those numbers coming into the year and I don't think there's been any change to those base assumptions.

Okay, great.

Thanks.

Noah Poponak, Goldman Sachs.

Just wanted to try to dig into the commercial aftermarket broadly again.

It looks like we could see airlines destocking inventory throughout 2012.

You guys have talked about this dollar cost per shop visit been under pressure.

It sounds like things are getting a little better there, but that behavior isn't really changing and, Greg, you mentioned flight hours are growing at a nice clip.

Airline profitability is pretty solid relative to prior cycles.

Can you elaborate on when you're talking to the customer, why are they behaving that way?

What is making them do that?

It seems like oftentimes the answer to that question is just broader macro and broader uncertainty, but that was true, that's been true for four years now and there have been pockets of inventory restock and destock.

So, why are they doing that now?

And what is it that will make them stop so that that trend reverses?

I think what will make them stop is the shelves will be bare and they won't be able to dispatch aircraft.

So, again, this is a very cyclical business.

You go back to 2009 and we saw spares down 25%.

Came back in '10 and '11 and then last year, again, there was a lot of uncertainty from a macro standpoint.

What is going on in Europe, we saw a big reduction in the European airlines' order rates.

The US uncertainty.

Again, I -- slowdown in China, all of those macro factors I think impacts the airlines perception of how much do I need to order, how much stock do I need to have.

It will come back.

It is a very cyclical business and, as I said earlier, I'm not sure if this is a first quarter, second quarter or third quarter, fourth quarter, but we know typically these cycles run 12 to 18 months where they have to buy, come in and buy parts.

The good news is as we go to this next generation of aircraft, more than 80% of our customers are electing to go on some type of an FMP.

So, we will take the volatility out of this eventually, but today that number is less than 40%.

So, they are still seeing revenues today, just not seeing that incremental piece from all of these flight hours that are out there.

And you don't have the data on what the customer holds to give you a little bit more precision on when they are -- when they do have the shelves bare and need to start restocking?

Well, keep in mind there are a couple of different phenomena here.

At Pratt, we know pretty well as going into the year which engines are going to come off wing and which for overhaul and how many inductions we should be seeing in our shop.

And we can -- we'll know that within 10%.

What we don't know when we do that forecast is what level of overhaul the customer is going to ask for, whether it is a light or a heavy.

And what we saw last year, of course, was a lot more of the lights than the heavy.

So, they descoped and that just shortens the interval between overhaul cycles.

Now, the Hamilton and Goodrich size a little different.

Those are primarily on condition repairs where something breaks, they have to fix it, but there is no time based overhauls.

So, that is another business.

I think that is why the Hamilton business isn't down nearly as much as the Pratt business because, again, as things break on planes they have to fix them, but they still have some ability to wear down or to use up the spares that they have in stock.

Just one other question on a separate topic.

Otis margins, can you just elaborate on whether or not the margin in the quarter or how the margin in the quarter compared to what you thought it would be and I know you have 2013 guidance that shows a little bit of improvement, there.

Is there any change to the longer-term, a few years down the road thought on what the right margin is in that segment, particularly as you start to take that market share back?

What we say, there's no surprises in terms of the fourth quarter.

We knew margins would come down, it's about 110 basis points, I guess, which is just where Pedro had calibrated us or that Louis for the fourth quarter.

This year margins will go up a little bit.

Again, we expect to see a recovery in new equipment sales and we expect to see stabilization in Europe.

I think the margins at 23% we probably aren't going to see those again anytime soon and that was really because new equipment sales were down so much in the aftermath of this great recession.

So, as new equipment becomes back to the more normal 55% instead of 60% of revenue, I'm sorry, goes back to 55%, we should see again probably those margins in the 20% to 21% range long-term.

Julian Mitchell, Credit Suisse.

My first question is just on the overall UTC wide organic sales growth.

It is flat in Q4, flat in 2012, for the midpoint it is up 4% for '13.

Looking at the four main order numbers that you always call out, half are down, half are up.

So, without getting too bogged down all over again in commercial aftermarket forecasting, when do you think the overall UTC wide entity will start to see decent organic sales growth?

Will we have to wait till Q2 or Q3 or you think Q1 will start to see some growth again?

I would expect you will see modest growth in the first quarter and then it should accelerate as the year progresses.

Again, I think, if you think about the CCS business, it is obviously seasonal as well.

So, second and third quarters are typically stronger than first quarter, but I think what you will see is a gradual resumption in organic revenue growth.

Last year was clearly an anomaly for UTX.

It has been a dozen years since we've seen sales growth at that level.

So, we're well positioned in the emerging markets.

I think China is going to come back strong this year after a weak last year.

We've seen that in the order rates at both CCS and Otis.

Again, commercial OEM will be strong.

We know that the backlog is very strong.

There is Sikorsky, again, down a little bit on the Black Hawks but commercial business is doing well.

Spares is probably the big question mark in terms of whether that is a first, second or third quarter recovery, but I would expect this gradual recovery in organic growth, but we should see some in the first quarter.

And just to circle back quickly on Otis, I wasn't -- I think you mentioned early in the call that Europe in some areas was stabilizing.

It doesn't sound like that happened in HVAC or in aerospace.

So, does that mean you've already seen some stabilization in Otis Europe?

I think you have to look at it almost country by country as we go across Europe.

Obviously, Spain was down big.

Italy was down big.

France was relatively flat.

Then we saw decent growth in Russia and the emerging Europe.

So, again parts of Europe are okay, other parts are still, I would say, in the doldrums.

But again, Spain's has stabilized.

I think it is not getting worse.

Italy, we think, is stabilized not getting worse.

So it is at a low level.

I think we should see a gradual recovery.

We are not expecting much this year.

Remember we're talking two or three points of growth out of Europe after a down two years.

And pricing in Otis, obviously, you had some changes in strategy in China in the spring of last year.

For now Otis region by region the pricing strategy is unchanged?

I think again, there is pricing pressure across the globe in the Otis business.

We've see it especially in China and we also see it in Europe.

Actually seeing pricing get a little bit better here in North America, but it's a fight every day.

Got it, thanks.

Doug Harned, Sanford C. Bernstein.

I was interested if you could give a little insight into the CC&S margins?

Good margins, but if you were to separate what has caused the improvement in terms of mix, commodity cost, and the benefits of the integration exit some lower performing businesses, and you did give us a special dividend, how would you give those puts and takes?

Let me just talk about the growth, because the growth in the quarter was essentially, as we said, the restructuring benefits, you had some improvement in commodities and then you had the dividend.

As far as the operating margin, you did get some and I think we've talked in the past about one third of the benefit comes from the portfolio transformation.

But, again, a lot of that is the heavy lifting that they have done related to the consolidation and the restructuring that they have done and continue to do over the past number of years.

So, I think that's mainly the big drivers of their operating margin expansion.

And how much was it in commodity?

The reduced commodity costs?

Commodities was, let's see.

It wasn't much, Doug, but I can get back to you on that.

Wasn't the biggest driver.

Actually, if you think about it restructuring is probably the biggest followed by special dividend out there and then you would get the down to commodity pricing.

Then on Otis, now that orders, you have seen some pickup in orders, in terms of lead time today, what do you see in terms of when that would turn into sales?

Yes, market by market it will vary.

Typically in China we're seeing about a six to nine month lead time from order to delivery.

The US some of the, especially some of the big mega projects or even in the UK like this Crossrail project, we won't be delivering those for a couple of years.

So, again the US orders more like 18 to 24 months as opposed to Asia which is typically much shorter cycle.

And then have you seen any changes in competitor behavior here with regard to pricing?

I think, again as I mentioned before, pricing is difficult in all of the markets.

I don't think that we've seen any changes per se, but it is a very difficult pricing environment in all of these markets.

Again, as orders pick up, obviously, some of that pressure abates, but it is still a very, very competitive market out there.

Peter Arment, Sterne Agee.

More of a clarification on the restructuring.

Greg, the additional $100 million that you picked up, here, where exactly is that going to fall?

Is it in the Goodrich comments that you mentioned earlier about covering the restructuring cost there or is it placed in CCS?

No, I think in fact, what you will see is the $100 million of restructuring that we had at UTAS or the Aerospace Systems, that is unchanged from December.

What we have seen is really both at Otis and at Pratt Whitney is a desire for more restructuring dollars.

They've got projects that they are working on, both domestically and internationally, where they are looking for some restructuring dollars.

So, again, we see really good payback.

This is one to two-year payback projects and the list is longer than my funding ability right now.

So, again, I think you will see it, just like you did last year, across each of the business.

And then just for clarification.

Going back to your EPS walk that you laid out in December, it sounds like we're going to have a little bit less of a headwind here for Sikorsky given the charge and pension came in a little better and a slightly lower tax rate.

Is the midpoint still is intact because the additional restructuring.

Is that a fair way to look at?

No, I think the midpoint is intact and we have got a little more contingency.

The $100 million of additional restructuring is actually covered by the tax extenders from 2012, which, although we got -- because we got them in January they come through in the first quarter of this year.

So, I'm going to take that $100 million of good news and we're just going to use it to fund additional restructuring.

The other good news like on the tax rate for the 2013 extenders, plus the good news on pension, FX and all that, that just really gives us more contingency at the midpoint.

We are not going to take the guidance up because of that good news today, but certainly we feel better about where we are than we did even a month ago.

Okay, understood.

Thank you.

All right, thank you, everyone, I appreciate you guys listening in on the call.

We will see everybody in March at our annual investor meeting and look forward to talking to all of you.

Thank you.

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

You may all disconnect and have a wonderful day.