雷神技術公司 (RTX) 2013 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 we 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 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.

(Operator Instructions)

Please go ahead Mr. Hayes.

Okay.

Thank you, Stephanie, and good morning, everyone.

You saw the press release; UTC reported 2013 earnings per share of $6.21.

Our integration of the transformational deals and solid execution drove 16% earnings growth, despite a slower than expected recovery in our end markets.

With a full year of Goodrich, UTC Aerospace Systems generated over $2.1 billion of operating profit.

The addition of IAE, or International Aero Engines, along with aggressive cost reduction helped Pratt & Whitney grow earnings by $177 million.

Climate, Controls and Security also delivered a strong 2013 with 9% earnings growth and 15.7% operating margins.

Even with the investments we're making for the ramp in aero, we delivered strong free cash flow at 102% of net income for the year.

Total sales for the year were $63 billion, that's up 1% organically.

As you see on slide 2, strong momentum as we exit the year.

Organic sales were up 4% in the fourth quarter after being flat through the first three quarters.

In the commercial businesses, we saw 7% growth in the Americas, driven by a continued US economic recovery.

Europe was flat and Asia grew about 4% with ongoing strength in China, where sales were up 9%, more than offsetting weaknesses in the other Asian countries.

In aerospace, continued weakness in defense was more than offset by a very strong growth in our commercial OE and aftermarket, where overall sales increased 14%.

So, it's an accelerating top line to go along with an improving economic environment.

In the US, consumer sentiment and spending continued to improve on strength of the equity and housing markets.

Europe is also seeing moderate improvement with a PMI expanding for six consecutive months and a return to modest economic growth.

In China, construction starts and property transactions were strong for the year, giving rise to solid backlogs across our commercial businesses.

Slide 3. In addition to the accelerated organic sales growth and an improving economic outlook, continued strength in orders positioned us well as we enter 2014.

At Otis, new equipment orders were up 8% with broad-based strength around the world.

Climate, Controls and Securities global equipment orders grew 5%, with double-digit growth in the Americas.

The aerospace business, commercial spare orders were up 20% in Pratt & Whitney and 19% at UTC Aerospace Systems.

Okay.

Taking a look at the fourth-quarter earnings on slide 4 now.

As always, a few puts and takes as we close out the year.

Earnings per share of $1.58 included $0.11 of restructuring charges, partially offset by $0.02 of gains from tax settlements and the ongoing portfolio transformation at CCS.

Absent restructuring and one-time items in both years, earnings per share increased 29% versus prior years.

That was driven by a few different items.

First of all, very strong performance at CCS and Pratt & Whitney and UTC Aerospace Systems, which all delivered profits in excess of our guidance to you.

We also had the absence of $100 million of inventory step-up costs that were recorded in the fourth quarter of last year, related to the Goodrich acquisition.

We also saw a lower tax rate this quarter.

It was $0.06 better than last year and $0.04 better than what we had expected back in December.

Of course, lower Canadian Maritime Helicopter Program charges this year.

On Sikorsky, operating profit grew 10% including the absence of the 2012 charge related to the CMHP.

Sikorsky shipped 77 large helicopters in the quarter and 240 for the year, with a 100% on-time delivery to the US government.

As we said in the press release, we did not recognize revenue on any of the CMHP helicopters in 2013, resulting in a net $0.06 benefit versus our expectations.

That's $0.08 from the lack of deliveries, partially offset by a $0.02 charge for cost growth associated with the delay.

As was reported in the press, Sikorsky concluded a principles of agreement with the government of Canada on December 31.

This is a positive step towards replacing the aging Sea King fleet.

Preliminary pilot training is ongoing in Shearwater, Canada and will be completed as planned this month, which will allow for the start of operational testing by the Canadian forces shortly thereafter.

The $89 million of liquidated damages associated with late deliveries were fully reserved in the prior years.

We continue to work with the Canadian government on a final contract amendment.

We are going to maintain our place holder of eight aircraft for 2014.

Okay.

Enough on Sikorsky.

Let's go back to the fourth quarter.

Total sales increased 2%.

As I mentioned, there was 4% organic growth which was offset by 2 points of headwind from ongoing divestitures at CCS, as well as Pratt & Whitney's Power Systems business, which was divested earlier in the year.

Free cash flow, 136% of net income in the quarter.

We paid down an additional $1 billion of debt.

It's important to note in the last 18 months, we've now paid down approximately half of the debt associated with the Goodrich acquisition.

We also bought back an additional $200 million of shares in the quarter, which brought us to a $1.2 billion total for the year.

We remain confident in our growth outlook.

We announced a dividend increase of 10.3% in October.

The businesses continued to reduce their cost structure in 2013 and identified solid payback restructuring projects totaling almost $500 million for the year.

Restructuring was offset by one-time gains and spread across the business units.

Pratt & Whitney led the way with over $150 million of restructuring, but UTC Aerospace Systems, CCS and Otis each spent close to $100 million.

And we continue to see pull from the businesses for additional restructuring as we enter 2014.

So, a strong close to what was a good year at UTC.

I'll be back to talk about 2014 in a few minutes.

But first, let me turn it over to Jay to take you through the segment results.

Jay?

Thanks, Greg.

Turning to page 5. Otis sales improved 4% organically in the quarter with new equipment sales up 10%, including double-digit growth in China and the Americas and modest growth in service.

Operating profit was flat at constant currency, as profit growth in Asia, led by China, was largely offset by continued factory transition costs in North America.

Profit in Europe is stabilizing.

New equipment order growth remains robust, up 8% at constant currency with mid-teens growth in China and the Americas and strength in the Middle East.

New equipment backlog ended the year up double-digit versus prior year.

For the full year, operating profit was flat on 4% higher sales.

Slide 6. Climate, Controls and Security increased profits 12% in the quarter on a 1% increase in sales resulting in another sharp increase in margins, up 150 basis points from prior year to 15.2%.

Organic sales continued to steadily improve and were up 4% in the quarter.

Geographic mix was consistent with recent trends.

Europe was flat.

China was up high-single digit, while Asia, overall, was flat driven mainly by a decline in Australia.

Americas was up mid-single digit driven by 18% growth in the residential HVAC business.

Transicold was up 22% with solid growth in the Eastern European truck and trailer business and a robust recovery in the container market after a weak quarter last year.

Profit growth in the quarter was driven by strong conversion on organic sales, restructuring savings, and net productivity, which more than offset headwind from divested earnings.

Orders for global commercial HVAC equipment were up low-single digit in the quarter.

Orders for global fire and security products were up 10%, although that was largely offset by a decline in the fire and security field businesses.

Global commercial refrigeration orders were flattish, while Transicold was down mid-single digit following a 70% increase in the third quarter.

For the full year, CCS grew earnings by $221 million or 9% on a 1% organic sales increase.

Operating margin of 15.7% was up 160 basis points from prior year, comfortably above the 15% margin target set for 2015.

Turning to Aerospace on slide 7. Pratt & Whitney delivered strong results with 23% profit growth on 5% higher sales resulting in margin expansion of 170 basis points.

Organically, sales were up 14% reflecting growth across the businesses led by high teens growth in the large commercial engine business where aftermarket was up over 20%.

The military engine business was up low-double digits driven by higher JSF program sales, while Pratt & Whitney Canada was up mid-single digits.

On a reported basis, sales were up 5% as organic sales growth was partially offset by the Power Systems business divestiture.

Profit growth in the quarter was driven by the benefits from higher organic sales and restructuring savings, as well as lower E&D, which more than offset headwinds from adverse large commercial OE mix, the Power Systems divestiture and higher pension costs.

For the year, Pratt & Whitney delivered profit growth of $177 million, exceeding its prior expectation of $150 million, based on its seamless integration of IAE, solid execution of cost reduction and restructuring, and improvement in the commercial aftermarket.

Slide 8, UTC Aerospace Systems delivered its strongest quarter of the year with operating profit of $544 million, on sales of $3.5 billion.

Sales were up high-single digit, with commercial aftermarket up high teens, and commercial OEM up 10%.

Overall military sales were flat to prior year with mid single-digit growth in military aftermarket offset by a low single-digit decline in military OEM.

Year-on-year profit growth was driven by the absence of last year's inventory step-up costs, higher aftermarket volume, and continued synergy traction.

As Greg mentioned, orders for commercial spares grew 19% on a year-over-year basis.

UTC Aerospace Systems delivered strong results in its first full year with operating profits slightly above $2.1 billion.

Integration remains on track towards delivering solid growth in 2014 and beyond.

Turning to Sikorsky on slide 9. Operating profit increased 10% on 13% lower sales.

The sales decline was driven by lower international military OEM and military aftermarket volumes, which were partially offset by higher commercial shipments.

During the quarter, Sikorsky shipped a total of 77 aircraft, including 58 based on military platforms and 19 commercial.

On profit, lower overall sales volumes, the unfavorable mix of aircraft and headwinds from higher pension and compliance costs were more than offset by the lower year-over-year CMHP charges.

During the quarter, Sikorsky delivered its first fully configured S-76D aircraft into service.

Customer interest in the S-76D is strong with a backlog in excess of $600 million.

For the full year, Sikorsky delivered 240 aircraft, operating profit of $644 million was down 16% on 8% lower sales.

Based on 2013 results, we are updating our 2014 expectations to flattish operating profit on high single-digit sales growth.

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

Okay.

Thanks, Jay.

So a good year for UTC.

In aggregate, the business units delivered solid margin expansion to 15.7%.

And EPS grew 16%, despite a slower than expected global economic recovery.

On top of the solid financial results, we continued to achieve significant milestones on development programs and secured key wins for the future.

At Pratt, 31 GTF engines have now completed more than 7,000 hours and 16,000 cycles of full engine testing, including 750 hours of flight time.

The C Series engine achieved certification in February of 2013 and successfully powered the maiden flight of the C Series aircraft this past September.

The A320neo engine is on track for certification in the back half of 2014.

And our customers recognize the value of the GTF and have now ordered over 5,000 engines, including options.

We also quickly realized the benefits of the Goodrich acquisition and our propulsion and Aerospace Systems organizational structure in 2013 when Embraer selected UTC to provide a fully integrated propulsion system.

That is the engine, the cells and the controls, along with the electric system and wheels and brakes for its second generation E-jets.

These combined wins highlight our ability to leverage our technology across our aerospace businesses to win more content on new aircraft while providing greater customer value with more integrated systems.

Sikorsky continues to see strong civil demand for deepwater -- or from deepwater oil and gas exploration around the world and has a total commercial backlog now of nearly $3 billion.

The investment in X2 technology has paved the way for our agreement with Boeing to co-development a demonstrator for the next generation of multi-role helicopters.

New three and four year labor contracts were also ratified by the union membership at Pratt & Whitney and Sikorsky, respectively.

These agreements are a good result for both the Company and our employees.

On the commercial side of the business, Climate, Controls and Security continued to see success leveraging the combination of our Carrier and fire and security business and delivered a record 15.7% operating margin.

Going forward, we'll leverage the combined capability of CCS and Otis in the new building and industrial systems organization to accelerate top line growth.

Otis had several key wins in 2013 including the Tianjin 117 and the Abu Dhabi airport.

Worldwide, Otis new equipment orders were up 14% in 2013, including 22% growth in China.

So, good momentum that will allow us to deliver solid growth in 2014, and really no changes to the expectations that Louis laid out in December.

The solid organic growth and backlog exiting the year gives us confidence in our sales assumption of 3% to 4% organic growth in 2014.

And we expect continued recovery in our North American markets, slight growth in Europe and solid growth in China.

Okay.

Looking at the DoD budget.

The developments in Washington are encouraging, but it's still a little early to determine the impact on our businesses for 2014.

We're still planning for a 3% to 5% decline in our US government aerospace sales, which Louis mentioned in December, but that will be more than offset by strong growth in our commercial aerospace businesses.

Overall, we continue to expect total sales of around $64 billion this year, including almost $1 billion of headwind from divestitures.

As always, we remain relentlessly focused on cost reduction and leveraging our global scale.

Last year, we invested nearly $500 million in restructuring.

For this year, we expect about $300 million, all offset by one-time gains.

Restructuring spending in 2014 should be evenly distributed across the quarter, so expect about $75 million of restructuring charges each quarter, while the gains are probably going to come in the middle of the year.

Strong operating leverage across the business should allow us to deliver earnings of $6.55 to $6.85 this year.

We remain confident in that guidance range with earnings growth accelerating during the year.

Specifically in the first quarter, we have about $0.22 of headwind year over year.

You'll recall that last year's first quarter had $0.11 of net gains, while this year we expect $0.06 of net restructuring.

We also had about $0.05 in good news at Pratt & Whitney last year which is not going to repeat in this year's first quarter.

So wrapping up with cash flow, we expect to invest about $2 billion in CapEx this year, after investing $1.7 billion in 2013.

That $2 billion should be the peak.

The timing, of course, will be dictated by program schedules.

These are critical investments for our commercial aerospace business as we prepare for an unprecedented ramp in production.

While these investments in the non-cash pension tailwind create some pressure on cash flow, we continue to target free cash flow equal to net income for the year.

So in conclusion, a solid year for UTC.

The momentum we have exiting the year gives us confidence in 2014.

We've got the right strategy and the right portfolio in both the developed and growth markets along with an organizational structure and experienced management team that will capitalize on the continued global economic recovery and deliver sustainable earnings growth both in 2014 and into the future.

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

Thank you.

(Operator Instructions)

Carter Copeland, Barclays.

Just wondered if you could give us a little bit more granularity on the commercial aftermarket order numbers?

Parse that out maybe at Pratt, what you're seeing on the large commercial side for the PW4000s versus the V's, any differences in the trends there?

Then broadly speaking, maybe at UTAS differences in military versus commercial and the outlook there?

Sure.

It's all pretty good news, as you would expect, on the commercial side.

Spares orders were up at Pratt about 20%.

We saw at UTAS or Aerospace Systems grew 19%.

But I think what was most encouraging for us is what we saw on the services side.

This is in our shops around the world, where we saw sales up over 40% in the quarter.

We have finally started to see the airlines switch from these light overhauls we've been talking about for the last couple of years to more heavy overhauls.

That really drove a tremendous amount of volume in the shops.

It drove the order rates as well.

So, airlines are making money.

Things look pretty good.

We saw delinquency in receivables down, because airlines are making money.

We saw spares.

We saw heavy overhauls.

It was all pretty good on the commercial side of the business.

As far as the split, Jay, in terms of the V's?

Sure.

Carter, the V2500 was up high single-digits in the quarter.

The PW4000 was up high teens.

PW2000 was very, very strong.

There was an order there for delivery in 2014.

But all models did pretty well in the quarter.

On the Aerospace Systems side, provisioning was strong in the quarter.

Again, that was narrow body growth as well as some 787 provisioning.

Again, as Greg mentioned, we're seeing these higher, stronger overhauls, heavier overhauls with profitability getting better, traffic continuing to grow, cycles and the hours are there.

So the trends, all the fundamentals, as we've been saying all along, really we've seen that in the quarter.

What about on the Sikorsky side in terms of the orders there?

Obviously the spares were off a lot.

The orders were off a lot.

Have you seen any reversal on that trend?

We saw -- just on the sales, military aftermarket was a little bit better.

It was down low teens.

However, that was on an easier compare.

Last year, military was down high single-digits in the aftermarket.

So not all that much better.

I would just tell you, we think we've kind of bottomed out from the impacts of sequestration at Sikorsky in terms of the aftermarket.

As you guys have all seen, it looks like the defense budget for 2014 will be the same as it was for 2013 when they restored that $20 billion of cuts.

So, we don't expect much further deterioration at Sikorsky in terms of the order rates.

But clearly the backlog is going to be down going into 2014, which is why we think the military spares or sales will be down again about 3% to 5%.

Great.

Thanks, guys.

Thanks, Carter.

Sam Pearlstein, Wells Fargo.

Can you share a little bit more about the Canadian helicopter in terms of this potential agreement?

You said, you're still going to assume eight deliveries this year.

Is this going to give you any ability to treat the production and the service differently?

Maybe be able to write off any of the production costs?

Anything else you can share along the lines of that agreement?

Yes, I think -- again, this POA or this principles of agreement that was signed on December 31 really is a milestone for us.

I think we have a path forward with the customer to deliver aircraft now.

We've got a lot of the bad news behind us, I think, on the program.

We weren't able to revenue recognize any of the helicopters.

But, again, I think as we go forward, we've got a clear path this year to revenue recognize eight.

The contractor amendment should be finalized by the 31st of March.

Hopefully, by the time we stand up in front of investors in March, we'll have some more details in terms of that contract amendment.

But right now, it looks like we've got the ability to deliver out through 2018.

Our goal is to get those things delivered all by 2016.

So we think eight this year, eight next year and eight the following year.

I think importantly, the customer recognizes the value of the aircraft.

There was talk in the Canadian press about termination and all that.

They need these helicopters.

These are the best damn military helicopters -- Maritime helicopters out there.

So, I think it's all very positive for Sikorsky.

As for the accounting, while I wish we could get this behind us, Sam, I just -- I don't see a way based upon the structure of the contract that we're negotiating today to do that.

So again, I don't see any more bad news beyond that which we've expected today.

We're going to lose about $14 million a helicopter going forward.

It's unfortunate I can't get that behind us.

If I had a way to do it, I would.

But at least for right now, we'll just assume that's the plan.

Okay.

Then the change in the segments where Sikorsky is now going to be flat in terms of the profit year over year instead of up zero to 50%.

It doesn't look like the other segments changed.

So really, where is the offset?

Is it tax rate?

Interest?

Share account?

Where do you offset that?

If you look at -- it's just a change from where they ended, Sam.

If you look, at based on our guidance, the absolute number for Sikorsky, the expectation is the same.

So at our midpoint, the bottom line number for Sikorsky is really the same number it was before.

It's just the change is different.

Okay.

If I could squeeze one more in?

Greg, back at the third quarter call, I think you talked about I thought a tax rate somewhere close to 29%.

That would seem like a little bit more than the few cents you mentioned in terms of the variance.

What was in this quarter that was different in terms of the tax rate?

There were a couple of different pieces in here.

There was a small settlement with the IRS which gave us a couple of pennies of benefit which we hadn't expected in the rate.

I think we called that out as part of the gains math.

Then we had a little bit better year-end rate because of some planning that we had put in place earlier in the year.

I think the operational rate would have been about 28.6%.

So we picked up about, call it, $40 million or $0.04 operationally because of the tax rate benefit in the quarter.

Thank you.

Julian Mitchell, Credit Suisse.

I had a couple of questions on Otis.

First of all, looking at your China OE business there, based on the order backlog and the order trends you had through 2013, I guess is it fair to assume that your OE deliveries in China, the growth rate should be pretty similar this year as what you had in 2013?

Yes We're expecting about 15% sales growth there this year based upon the backlog.

Great.

Then within the US part of Otis, do you still have a drag in the first half of the year from the factory relocations?

Or that's mostly finished in Q4?

No, there will still be a little bit of a drag, probably through the middle of the year.

I think we had a little less than $20 million of headwind in Q4.

That will step down a little bit each of the next two quarters.

I think, the plan right now is by the third quarter that should be generating tailwind as opposed to headwind.

But still, a little bit of drag here in the first few quarters.

Got it.

Then lastly, just within Pratt, you're getting closer now to starting to ship for commercial use, the GTF.

Any change in your thoughts on the kind of headwind within Pratt that you'll see to earnings from that ramp-up?

No.

I think it's the same as we talked about in December.

We will be losing money, especially on the early deliveries.

So there will be headwind from negative engine margin.

That's going to accelerate as the ramp goes.

So you're going to see, we've got a little bit of headwind this year, a little more in 2015.

Then 2016, 2017 some significant negative engine margin.

Obviously, we're working the product cost piece of that equation.

It's a great engine.

This is just a headwind that we're going to have to deal with.

There's offsets of course.

We've got E&D should be coming down.

You've got the rest of the business, which we expect to recover.

The V's of course, as those go away, so will the negative engine margin on the V's, which will help offset a little bit of this.

The aftermarket should also continue to grow.

So, it's headwinds, but we know about it.

We're working it.

We'll tell you more about it as we go through the year.

Great.

Thanks.

Thanks, Julian.

Doug Harned, Sanford Bernstein.

On Otis, you said that new equipment was up 10%, but sales were only up 4%.

Can you talk about what came down?

Is this repairs and modifications or contract services, what happened there in the quarter?

It really is just mix.

Service revenues were only up about 1%.

That's 60% of the business.

That's what caused the overall sales only to be up 4%.

Then on Pratt, the C Series, Bombardier is now talking about this being delayed going into service until the back half of 2015.

What's the impact of that on you all?

It's good news in terms of -- we had talked about some negative engine margin both at Pratt and some negative margin at UTAS for the year on deliveries that were starting to ramp.

It wasn't a big number.

Unfortunately, the good news associated with not shipping is mostly going to be offset by the fact that the program is going to be out there longer.

So, the R&D bill is going to go up.

So, it was a small net benefit but not big.

Then just on the other side of that, now that you're starting to see the F35 growth begin to kick in, how do you see that going forward in terms of margins?

It's a good thing that you're seeing this grow, but I would assume there should be some dilution on margin as it becomes bigger.

Yes.

Again, those are -- now, I think we're in launch 6, those are all firm fixed price at this point.

So as we go forward here, I think we'll take cost out.

We're still coming down the learning curve pretty rapidly on that.

But it will be slightly dilutive to margin but not a huge impact, really, across Pratt.

The fact is the demand for these engines and these aircraft are much stronger internationally than we expected.

So we expect this ramp to be pretty strong over the next three years.

Okay.

Very good.

Thank you.

Yes, Doug.

Jeff Sprague, Vertical Research Partners.

I was wondering if we could just drill into Otis service a little bit?

The 1% growth kind of geographically, where you're seeing pressure, maybe just kind of what's going on in Europe in particular I guess, and maybe that ties to your stabilization comment?

Yes, I think, again, in the Americas, we saw modest growth.

I think it was up about 4% service overall.

Europe was down about 1%.

So good news here is in China service is actually up 10%.

Again, it's off of a low base.

The good news in Europe, if you will, is we have not seen the big continued deterioration that we had been seeing for the last couple of years.

So while it's not exactly stabilized, since it's still down 1%, at least there's some light at the end of the tunnel as the economies improve.

I'll tell you, this is -- we're probably the biggest focus of Geraud Darnis and the whole team at the BIS organization today is making sure that service portfolio in Europe continues to or returns to growth and profitable growth.

Then on China, as you said, it's a low base, but is there a visible turn in your service capture in that business?

Is that on a clear upward trajectory?

It is going up.

I think, again, we're seeing I think OCL, the Otis China Limited brand conversions are running around 60% on all of our direct sales.

Overall, it's still about 25%.

Obviously, that's a big focus that we have going forward as we grow that business.

The new equipment business is wonderful today.

But we all know the ultimate prize in China will be service.

We're focused on it.

The whole team really is in China.

Then just finally from me and I'll move on.

Pension, how did that actually end?

Did you pick up a little bit of cushion relative to your guide in the year?

Relative to where discount rates ended?

Yes, we did.

It was -- the discount rate, I think when we stood up, we'd expected a 4.8% discount rate.

I think that's exactly where it ended up for us.

But I think overall the plan was up about 10.8% in terms of performance for the year.

Really strong performance.

Right now, the US plan is about 98% funded on a PBO basis.

So where we were short $4 billion three years ago, today the shortfall's only about $500 million in the pension plan.

We'll see probably about $100 million of additional good news on pension this year beyond that which Louis had talked about in December.

So it adds to that cushion that we talked about at the midpoint.

You're also getting a little bit of benefit out of currencies, where I think we've forecast the euro at $1.33 for the year.

Today it's $1.36-ish.

So, you pick up $0.03 there.

Feel pretty good about the midpoint as compared to where we were just six weeks ago.

Great, thank you.

Cai von Rumohr, Cowen & Company.

So the very, very strong commercial spares orders and the MRO activity in the fourth quarter, any sense whether that might have been driven by your relatively large price hike announcements for 2014?

What are you seeing in terms of color in those areas in the early weeks of January?

I might push back a little, Cai, on your characterization of an unusually high price increase.

I think this is typical, normal price increases that we see almost every year.

I think what was important is we didn't see a lot of discounting in the fourth quarter this year.

We saw really solid order intake.

Was there a little bit of beat the price?

There may have been.

But quite frankly, that wasn't a big driver of the increase.

I think it really is just pent-up demand and again, as we talked about, more heavy overhauls in the shop which drive a tremendous amount of spare parts.

Yes.

Cai, remember, the fourth quarter is typically the highest.

Seasonally, that beat the price activity incurs, so the compares are pretty clean.

It's not like -- this year is much greater than last year.

Right.

So was the activity flow-over into the first quarter so the first quarter -- what you've seen in January looks about what it looked like last year in terms of percentage changes?

Yes.

Well, book-to-bill was above 1, Cai, so there will be -- some of that flows over into the first quarter.

The fundamentals haven't really changed.

I think the airlines are still flying these planes full.

They're still flying a lot of hours.

Some of this pent-up demand that we've been talking about is continuing to play out, we expect here in the first half.

Now, obviously, we're not going to get 20% aftermarket growth for the full year at Pratt this year.

We're thinking now it's going to be --

Mid single-digits.

(multiple speakers)

Mid single-digits.

If we get 20%, things will be really good.

But it will slow down a little bit.

Again, as the compares get tougher in the back half of the year.

But I think so far, so good.

Yes.

But as I said, Cai, there was one large order in the PW2000 that was for delivery in 2014.

So the 20% was a little high related to that one order.

Got it.

Then, we now know the FY14 DoD appropriations.

You're still looking for down 3% to 5%.

I mean, kind of when you take together the budget agreement plus the DoD, is there any potential for favorable results relative to your expectation?

Yes, I think there are, Cai.

But again, most of that benefit's probably going to flow to next year.

But if you think about it, the CRH, the combat rescue helicopter was fully funded.

The VXX, the presidential was fully funded.

If we're fortunate and get awarded those two contracts, you would expect to see some additional revenues this year, not much on the bottom line obviously because they're development contracts the first couple of years.

But I would expect the bigger impact to be next year.

I think the good news on sequestration is at least everybody knows what it is now.

So we have a baseline so people aren't scrambling and moving money around in a diseconomic fashion.

I think the DoD has the ability now to plan for next fiscal year as it was a two year budget deal.

So we expect some stability and not as many surprises going into the year on the down side as we saw last year on military.

Okay.

Last one.

You mentioned in response to Doug's question that a little more E&D as a result of a C Series slip.

What are we looking for E&D now for the year?

We're still flattish.

It may go up a little uptick from here but generally flattish is still the expectation.

We're probably talking about $10 million of pressure on E&D from the C Series delay at Pratt.

This little bit smaller number at the Aerospace Systems business.

So, we're not talking huge numbers here.

Great.

Thanks so much.

Thanks, Cai.

Howard Rubel, Jefferies.

I might pick up a little bit where Cai left off on the military.

If I recall correctly last year, you were down over 20% in military spares in the first quarter or so.

Do you see that sort of playing out?

Or do you see something better there, Greg?

Are you talking specifically at Sikorsky, Howard?

Or are you talking --

No, I believe it was at Pratt.

No.

I'd think, again, Pratt -- we saw actually spares at Pratt, let me just take a look here.

Probably were off in the first quarter.

It's pretty ugly I thought.

So, you're going to have some positive comparisons there, right?

Yes, should be positive, yes.

So how else do you -- you kind of are saying to us, be careful in the first quarter because of the gains and some of the other items.

What else on an operating basis might help you lift the number?

We're looking at a bottom line that's going to be a tough compare but I'm sure there's operating performance that will make a difference.

What you're going to see because of the accelerating organic growth coming out of the fourth quarter -- backlogs are up, so I think you're going to see good top line growth.

I would expect decent conversion out of that top line growth.

If you think about it for the year, we're forecasting organic growth of 3% to 4%.

That will give us $2 billion to $2.5 billion.

We should see some organic growth here in the first quarter which is going to help.

You'll see it at Otis because of the backlog.

I think you'll see it at CCS.

You'll certainly see it on the aerospace OEM side.

The only weak point you'll probably see in the first quarter is Sikorsky, which again is still looking at reduced Blackhawk production this year.

Recall, we've been talking about a 20% reduction in Blackhawk sales year over year.

So that's probably the biggest pressure point the first quarter.

So a tax rate normalized going forward is like 28.5%, Greg?

Is that sort of where you're thinking about and --

I wish it were 28.5%.

I think, again, we had some planning opportunities in the fourth quarter.

Last year's rate, you'll recall benefited from the tax extenders which got passed back in January of 2013.

So we lose that benefit which was a full point on the rate.

So from a planning standpoint we're expecting about a 30% rate going into the year.

Now, if that gets better because of extenders getting passed.

Again, there's about 1 point of good news there.

We'll look for some planning opportunities.

But right now, we've got visibility to a 30% rate.

That's the planning assumption at least going in.

Then just two more items.

One on CCS.

Can you -- have you gotten to the point where you feel very comfortable with the portfolio?

Or are there still some other divestitures that are teed up?

Does that reflect part of what you think will be the gains?

Yes, probably not gains associated with the portfolio transformation.

If you think about it, Geraud's been talking about $850 million of portfolio reductions or transformation at the legacy F&S business.

As we sit here today, I think he would tell you, it's more like about $1.2 billion.

So, think about the revenues this year, I think, CCS is going to see about $500 million of headwinds between divestitures we did during last year, including the Australia cash and transit business and some of the other businesses we've divested and what's on the block still for 2014.

You had a very nice call on saying at the bottom that Carrier was going to show some leverage and that housing wasn't going to go to zero.

Can you put on your forecast hat for a moment and sort of tell us how you continue to see residential?

Do we see any commercial improvement at Carrier this year?

Yes.

In fact, though the resi story I think is pretty well-known.

We finished the year very strong with sales up about 18% in the residential.

We saw that in heating.

We saw it in small package.

We saw it in cooling as well.

So, I would expect that momentum continues.

But I think the better news, if you will, really goes on the non-resi side.

We saw Otis orders in North America up almost 30% in the fourth quarter.

The CCS, the commercial business, orders were up about 5% even though sales were down 5%.

So we're starting to see that recovery that we have been talking about in non-res.

We always say Otis is the leader and then CCS is a little bit later in the cycle.

But it feels pretty good on the non-resi side as we exit the year in the US.

Thanks, Howard.

Peter Arment, Sterne Agee.

If I could circle back quickly on the aftermarket.

Greg, you've talked a lot about the heavy overhauls for a while.

It's nice to start seeing that.

What's the expectations on how long this can persist or the pent-up demand?

Is this a six month phenomenon?

Or is this something we could see throughout the year?

Yes.

It's a great question, Peter.

I think again, it caught us a little by surprise in terms of how strong the services business or the MRO business was at Pratt in the fourth quarter.

But clearly, if you think about it, over time with the airlines flying the hours that they've been flying and the dip that we've seen in spares over the last couple of years, you'd expect this recovery to last at least into the first half of this year.

But I don't want to get ahead of ourselves either.

I think you're going to -- we still think 5%'s probably a reasonable expectation for the aftermarket to grow at Pratt & Whitney this year.

Could it be better?

It could.

But I'd actually like to see another quarter or so of this under our belt before we declare victory.

Okay.

Jay, just could you remind us what's the aftermarket assumption for the year for UTAS?

UTAS, high single-digit.

Okay.

That's great.

That's all for me.

Thank you.

Peter, thanks.

Myles Walton, Deutsche Bank.

I just had two quick ones.

One on the EPS guidance for 2014.

I think you had negative contingency at the high end.

I think Greg you mentioned a couple things on pension currency, maybe a little bit benefit from the $100 million higher restructuring.

Have you now established some positive contingency at the high end of EPS guidance?

Let's talk at the midpoint.

You can do the math.

We think there's probably about $200 million to $250 million of contingency at the midpoint at $6.70.

So, there is a path to that high end today that's a little bit more certain than it was six weeks ago, really because of pension and currency here.

So the restructuring gives us a little bit of opportunity.

But it is January.

So let's not get too excited about it.

Bad things can and will happen.

(laughter)

I'll restrain myself, Greg.

The 15% China Otis growth you've baked into the guidance.

Can you remind us the dynamics of the backlog visibility for China versus the rest of Otis?

Is it kind of a six months that you have 90% certainty on?

Then tails off in the second half?

Yes.

Peter, six to nine months is a typical rule of thumb that we use.

Some do go longer, but six to nine months is a typical visibility.

Similar in China to the rest of the business?

The rest of the business is a little bit longer in China.

Yes.

Your longer cycle projects, you're talking more 12 to 18 months, Myles.

Okay.

Great.

Thanks again.

Thank you.

Joe Nadol, JPMorgan.

So organic growth perked up finally in Q4 to the 4% level.

Just wondering as you look at --

4.5% to be specific.

I'm sorry?

4.5% if you want to be specific.

Go ahead.

Right.

Okay.

As we look into 2014, just thinking through the quarters here, is this level sustainable in the early part of the year?

Or how do you see that playing out?

Yes.

I think, again, the order rate that we saw exiting the year gives us confidence in the organic growth.

Obviously, backlog at Otis gives you -- I'm very confident in Otis, we've got 6% growth forecast for Otis this year.

I think that's -- I wouldn't say in the bag because you still have to deliver and you still have to see service recover a little bit.

High confidence there.

I think on the CCS side, we're forecasting 4% organic growth for the year.

Again, good backlog around the business, on the non-resi side.

The resi business looks to be good.

Transicold looks to be okay.

As long as Europe remains stable and does not surprise us on the down side, I feel pretty good about that as well.

So again, commercial OE, that all looks pretty solid for the year.

So yes, I expect pretty good growth throughout the year.

The challenges you're facing on the EPS line in Q1 are pretty much all restructuring and earnings related, EBIT related but not really sales related at all.

Exactly.

It's really just these one-time -- Pratt had a little bit of good news last year, I don't know, $0.05.

Correct.

It was about $0.05

-- from a couple of contracts.

Then you had, of course, the gains last year versus the restructuring headwind this year.

So I did want to give you guys a heads up but makes but it makes the IR team, the rest easy, when we've got that out there and they can talk about it.

But there is $0.20 plus of headwind going in the first quarter.

Okay.

Then just my other question is on Goodrich.

Could you give us an update on how you finished the year in terms of synergies?

What you're seeing I guess in real-time on the deal?

What you're expecting now in terms of the trajectory in 2014 and 2015 in terms of an update?

Synergies we're well on track.

I think we ended the year cumulative synergies at about $270 million, I think.

So about $20 million ahead of what we had expected even in the middle of the year when we updated it last.

So good synergy traction.

We'll see another $100 million or so this year.

I just remind you, the next tranche of synergies becomes more difficult because it relates to moving facilities, product cost reduction and all of those things.

So I think Elaine and team have got their arms around this and I'm pretty confident they're going to see that other $100 million.

Then you'll see another almost $100 million in the next couple of years beyond that.

Okay.

Thank you.

Thanks, Joe.

Noah Poponak, Goldman Sachs.

On the growth you've seen in Otis China on the original equipment side, is it possible to parse out how much of that is market share gain versus just the underlying market?

Yes.

I don't know that I have that breakdown, Noah.

I think clearly the market share in China has stabilized through the course of the year.

We think our share is somewhere around 15% or so, maybe 16%.

The market grew a lot stronger than what we had expected in 2013.

So a lot of that growth is just the market acceleration.

Okay.

That's helpful.

Then just one follow-up on cash deployment.

I know they're place holders but the place holders you have would generate a pretty large increase in the cash balance through the year.

Greg, you mentioned in the prepared remarks how much you've paid down debt since Goodrich.

Can you just sort of update us all on which buckets are most likely to see upside in terms of cash deployment this year?

I think again, you've got the place holder for $1 billion of share buyback, a place holder, $1 billion for M&A, place holder of $1 billion for debt paydown, dividends will be another call of about $2 billion.

That's as we see today.

I would tell you the $1 billion of M&A is probably the squishiest number we have out there just because the pipeline today is not terribly robust.

But that can change.

I think, again, you never know what opportunity might avail itself during the course of the year, so we'll see what happens there.

I'd just remind you that the color of money for M&A is primarily outside of the US.

Because of the $2 billion CapEx spend this year, a big chunk of which is here in the US, that's a big consumer of US cash.

The opportunity for us is working capital reduction.

If we see a turn in inventories starting to come down, we generate a little more cash, clearly we'd like to see that share buyback number go north of $1 billion again.

We'll just have to see how that plays out during the year.

But we don't want to see share growth again this year although there's a little tiny bit forecast just with $1 billion of share buyback and the stock price where it is.

You're still going to get a little dilution from the higher shares.

Is that less robust M&A pipeline just plain old lack of availability of assets?

Or is it more that the assets are there and there's an issue with pricing expectations?

There are lots of things out there for sale, but again, the focus really for this year, for last year has been on execution.

So we haven't been really I would say pushing very hard on the M&A front.

We're obviously always looking.

But the focus is going to be again on execution this year.

So if something comes up, I would tell you prices have obviously accelerated dramatically in the M&A space.

We're going to focus on the core here.

So if something avails itself to us we'll certainly be in a position to do something.

But I'm not hopeful you're going to see a big M&A number this year.

Not to say we're not looking, though.

Okay.

Thank you.

Nigel Coe, Morgan Stanley.

You've covered a lot of ground already but just going back to the 2014 bridge, you've got $0.08 in for commercial OE mix.

I'm just wondering, does the Bombardier C Series push out, does that make that $0.08 a bit more maybe use the word squishy?

Squishy.

(laughter) I guess I did use that word.

Obviously, it gives you a little bit of upside.

I think we talked about as we said $0.08 or about $100 million of negative engine margin.

We'll pick up a little bit of that.

Again, that just adds to that contingency that we talked about at the midpoint.

But it's not $100 million.

It might be a couple of pennies that we're going to pick up.

We're still going to be shipping hardware this year.

I think that Bombardier continues to build aircraft.

We're just not going to be shipping at the same rate that we had expected.

Yes.

Both UTC Aerospace Systems and Pratt both have upticks in commercial OE.

UTC Aerospace Systems has higher volume on a 787 as well as an A350.

They're going to be delivering; that's still going to drive some negative margin.

Pratt just has higher commercial shipments.

It will -- really doesn't change that number meaningfully at all.

Okay.

No.

That's clear.

Then the 80 bips at Otis, I'm assuming 50 bips on mix and up to 30 bips for the factory transition.

But I'm just wondering, are the service margins pretty stable year over year?

I think we would say they're down slightly for the year.

That's, again, pricing pressure that we saw in Europe.

Okay.

Then just finally, you mentioned the $2 billion on CapEx that appears in 2014.

Beyond 2014, Greg, do you think it stabilizes at this level?

Or do we come back town to a normalized, 1.6, 1.7.

Sure.

No.

It should come down -- this is really the year of the ramp.

If you think about it, we have to have the CapEx in place and facilities in place this year because we start delivering Neo engines next year.

So this is really the biggest year.

We should see it, I would hope, come down $300 million, $400 million next year, although don't -- I guess you can quote me on it.

We'll see what happens.

Okay.

Thanks, guys.

That's great.

Robert Stallard, Royal Bank of Canada.

Greg, just in your Aerospace Systems, looking at Aerospace OEM, orders at Boeing are pretty much at full rate on everything really this quarter with only the A350 net yet to go.

Is there an opportunity to take out some of your inventory or working capital here now that we know we're at a fairly stable rate?

Yes.

I think that probably -- as we look back on 2013, one of the, I would say, disappointments is the inventory turns did not increase.

As production rates ramp up, we would certainly expect to see the velocity if not the actual amount of inventory increase.

So that's one of the focuses that Louis has this year, is inventory.

Again, not reduction but turn rate improvement.

Okay.

Then maybe just secondly on the engine side of things, you commented about the technological progress on the geared turbofan.

I was wondering if you could comment on the market share?

And the competitive situation?

Or how it's held in versus the alternative engine on the A320.

Yes.

I think across the A320 family I think it's a little bit north of 50%.

On the A321's I think the market share is much better than that, a little less on the A321 -- I'm sorry, the A319 family.

So it really varies by thrust class.

But I think the GTF clearly has been the winner on the longer range, higher thrust variance.

Great.

Thanks, Greg.

Okay.

So I think we'll end it there as we approach the top of the hour.

Just to remind everybody: a good year; 16% EPS growth; good fourth quarter organic growth, 4%; and strong cash.

So making great investments in E&D.

We've got a great backlog going into the year.

It should be a very solid year for UTC.

I want to thank everyone for listening.

We look forward to seeing you at our annual investor and analyst meeting.

We're going to do it here in Hartford this year.

So, we look forward to seeing you on March 13.

Thanks very much.

Thank you, ladies and gentlemen.

That does conclude today's conference.

You may all disconnect.

Have a wonderful day.