雷神技術公司 (RTX) 2014 Q4 法說會逐字稿

Good evening, and welcome to the United Technologies' fourth-quarter conference call.

On the call today are Greg Hayes, President and Chief Executive Officer; Akhil Johri, Senior Vice President and Chief Financial Officer; and Paul Lundstrom, 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 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.

Thank you, and good evening, everyone.

I appreciate everyone's flexibility in accommodating our changed schedule tonight for the snowstorm, which is quickly coming upon us.

Let me start out, and talk just briefly about 2014, and then I am going to hand it to Akhil.

But, as you can see from the press release that went out earlier this evening, 2014 is largely in line with the expectations we laid out last month at our investor event in New York.

Before we get to the results, though, I would like to take a minute and introduce, or reintroduce, Akhil Johri, our new CFO.

Akhil has been on the job for a few weeks now, but, you will recall, he is a 26-year veteran of United Technologies, recently on a sabbatical as CFO of the Pall Corporation.

He knows the businesses well, and is highly respected, both within UTC and externally.

Needless to say, we're excited to have him back on the team.

Akhil and Paul will take you through the results, then I will come back with some thoughts on the year and 2015 before we get into the Q&A.

Akhil, you have the floor.

Thanks, Greg; it is a pleasure to be back.

UTC reported 2014 earnings per share of $6.82, up 10% versus the prior year, and up 12% excluding the impact of restructuring and one-time items.

Sales of $65 billion included 4% organic growth, with all five segments growing organically for the year.

Segment operating margins expanded by 90 basis points to 16.6%, reflecting the benefit of volume leverage and cost control at CCS, along with lower pension expense, synergies, and restructuring benefits at Pratt and UTC Aerospace Systems.

Free cash flow to net income was 90% for the year, as we had indicated in December, and we completed $1.5 billion of share repurchase.

Moving on to slide 2: Top-line growth continues.

Organic sales were up 4% in the fourth quarter.

Recall that Q4 of 2013 was our most difficult compare, so we feel really good about 4% organic as we exit 2014.

In the commercial businesses, we saw 8% growth in the Americas, as the US economic recovery continues.

While Europe was up slightly, Asia grew 7%, with continued growth in China; their sales were up 10%.

Growth in commercial aero OE was offset by lower commercial aftermarket sales at Pratt and Sikorsky.

Military aerospace was up 7%, led by the timing of OEM deliveries at both Sikorsky and Pratt, partially offset by a weaker aftermarket across the segments.

Taking a closer look at our end markets on slide 3: And just as a reminder, we will talk to the commercial business orders on a constant-currency basis, as we usually do.

Overall trends remained consistent with our expectations throughout the portfolio.

In our commercial businesses, we continue to see good traction in North America.

US consumer sentiment reached its highest level in nearly eight years in December on lower gas prices, and better wage and job prospects.

ABI trends remained positive, and the outlook for commercial construction continues to be encouraging.

This is evident at Otis, where North America new equipment orders were up 20% in the quarter, and 40% for the year.

At CCS, orders for US Fire & Security products, and US commercial HVAC equipment, was strong, up 18% and 12%, respectively.

US Residential HVAC orders were down slightly year over year, following a very strong Q3, while sales were up 9%.

Europe was soft again in the quarter, with commercial HVAC orders down 9%, and Otis new equipment orders down 3%.

As you saw on Thursday, the ECB announced a significant new quantitative easing program aimed at stimulating economic activity in the region.

In China, Otis new equipment orders were up 2% in the fourth quarter, and finished up 6% for the full year.

New equipment backlog remained strong, up 13% versus the prior year.

While we expect overall economic output in China to moderate, it should still outpace global GDP; and our Building & Industrial Systems businesses continue to be well positioned in the region.

As a reminder, however, China domestic sales represent just about 6% of total UTC sales.

Moving to aerospace, revenue passenger miles continue to grow at slightly above the long-term trend rate, and airline profitability remains strong.

At UTC Aerospace Systems, commercial aftermarket sales were up 5%, driven by continuing strength in spares.

At Pratt & Whitney, total commercial aftermarket sales were down 6% in the quarter on a tough prior-year compare, and in line with our expectations.

Taking a look at fourth-quarter earnings on slide 4, total reported sales increased 1%, as 4% organic growth was partially offset by 3 points of unfavorable foreign exchange.

Segment operating profit was up 10%, and operating margins increased by 120 basis points, including the benefits from pension.

We saw profit growth and margin expansion in all segments during the quarter.

Earnings per share of $1.62 were up 3%, and included a $0.26 net charge from restructuring and other one-time items.

That is about $0.24 related to the German tax matter that Greg discussed last month, and $0.09 of restructuring that was partially offset by $0.07 of one-time gains in the quarter.

Recall that the fourth quarter of 2013 had $0.09 of net restructuring charges.

Absent the impact of these items in both years, earnings per share were up 13%.

Free cash flow in the quarter was 119% of net income.

Capital expenditures were $557 million, as we continued to invest for the ramp in commercial aerospace.

We acquired $405 million of stock under our share repurchase program, and we made nearly $300 million in voluntary pension plan contributions in the quarter.

One other item to note in Q4: The impact from sudden significant strengthening of the US dollar against most currencies created a translation FX-related EPS headwind of about $0.04, entirely wiping out the small benefit we had seen in the first three quarters.

The strengthening of the US dollar has an even larger impact as we look at 2015.

As you can see on slide 5, the US dollar has continued to strengthen, not just against the euro, but against most other currencies as well.

In fact, at $1.10 a euro, which is a little less than today's rates, we have almost $0.25 of headwind that wasn't contemplated in the initial EPS guidance that we discussed back in December.

The incremental negative sales impact from translation FX is expected to be around $1.5 billion.

We also saw a further dip in the global discount rates for pension expense.

On our measurement date of December 31, the US discount rate was 3.9%, about 30 basis points lower than expected, adding to another $0.06 of EPS headwind, net of slightly better asset returns and $200 million of cash contribution to the US pension plan.

All together, $0.30 or so of new, non-operational headwind.

Based on this, we are updating our 2015 sales and earnings expectations, as you can see on slide 6. As always, we remain focused on what we can control.

We are now targeting $3 billion of share repurchase, at the high end of our prior range.

We will take additional cost actions; and at the midpoint of the new range, we now have no contingency.

Together, these actions should offset half of the $0.30 headwind; so, we now expect EPS of $6.85 to $7.05 on sales of about $65 billion to $66 billion, down from our previous expectation of $7 to $7.20 EPS on sales of $66 billion to $67 billion.

However, to make it clear, nothing has fundamentally changed in the health of the underlying businesses.

Just as we told you in December, strong operating leverage across the Business should still allow us to deliver segment earnings growth of $0.57 at the midpoint, excluding the impact of foreign exchange and pension headwinds in 2015, and with no growth at Pratt.

That is 8% percent growth operationally.

We will work to rebuild some contingency as we move throughout the year.

With that, let me turn it over Paul to take you through the segment results.

Okay, thanks, Akhil.

We're now on page 7. Otis sales improved 5% in the quarter at constant currency, led by double-digit new equipment growth most notably in China and the Americas.

Service sales were up slightly.

Overall, foreign exchange translation was a 5-point headwind to the top line in the quarter.

Foreign exchange was also a profit headwind; a full 6 points.

Operationally, Otis performance in Q4 was solid, with operating profit up 7% at constant currency.

Profit growth in the quarter was driven by contributions from higher volume and productivity initiatives, most notably from strong performance in the Americas and in Asia.

We did see continued pricing pressure in the quarter, both in Europe service and in China.

New equipment orders were up 12% in the quarter at constant FX.

Asia was up 16%, driven by a large order in Singapore, the Thomson Line transit project; and we saw low single-digit growth in China.

New equipment orders continued to be strong in the Americas, where orders were again up double digit; and for the second year in a row, we closed the year with double-digit increases in new equipment backlog.

For the full year, operating profit was up 4%, or about $100 million at constant currency, on 6% higher organic sales.

FX translation for the year had a 2-point unfavorable impact on both sales and profit.

Turning to page 8: Climate, controls and security had good traction in the fourth quarter, with 5% organic sales growth.

We saw strength in the Americas with residential HVAC and Fire & Security product businesses both reporting high single-digit growth, and commercial HVAC up mid-single digit.

Outside of the US, EMEA grew low-single digit, and Asia was up slightly.

Commercial refrigeration was up mid-single digit, while Transicold was up high-single digit, driven by solid growth in container and North America truck/trailer.

At constant currency, profit was up 6% in the quarter, driven by contribution from organic volume growth.

FX translation represented 3 points of headwind in the quarter.

Margin was up 50 basis points from prior year to 15.7%, continuing the CCS margin expansion momentum.

CCS global equipment orders were strong, up 11% in the quarter, driven largely by Transicold, which saw more than 50% growth.

Global commercial HVAC equipment orders were up mid-single digit, driven by the Americas.

Orders for Global Fire & Security products finished the year strong, and were again up high-single digit based on strength in the Americas.

And Global Fire & Security field orders were up 5%, with growth in all geographies, including Europe.

For the full year, operating profit was up 10% at constant currency, on 3% organic sales growth, achieving record margins of 17%, up 130 basis points from prior year.

As Akhil mentioned, we do see significant headwind from foreign exchange, both at CCS and at Otis.

Geraud will come back in March to talk about specific guidance for those two units.

Moving to Pratt & Whitney on slide 9, Pratt delivered solid results in Q4, with 12% operating profit growth, despite continued investments in E&D, and a 2% sales decline.

In the quarter, 4% growth in military engines was more than offset by a 6% lower commercial aftermarket.

Recall that in Q4 of 2013 the commercial aftermarket business was particularly strong, up 24%.

Operating profit growth was driven by favorable pension and restructuring benefits.

The quarter also benefited from better aftermarket contract performance, which helped to offset lower aftermarket volume in the quarter.

Margins were up 170 basis points to 13.8%.

For the year, Pratt delivered organic sales growth of 2%, driven by mid-single-digit growth in the commercial aftermarket.

Incremental investments in E&D were more than offset by tailwind from pension, restructuring savings, and a stronger aftermarket, both from higher volume and better contract performance.

These led to operating profit growth of $200 million for Pratt, with 140 basis points of margin expansion.

This was at the high end of the original guide.

Turning to slide 10, UTC Aerospace Systems continued its strong momentum, growing profits 17% on 5% higher organic sales in the quarter.

Commercial OEM sales were up 7%, and commercial aftermarket sales increased 5%, with strong growth in spares, even on a difficult compare.

Similar to Pratt, the commercial aftermarket had a very strong finish to 2013, which led to difficult Q4 compares.

Military sales continued to be soft, with the military OEM essentially flat, and a low single-digit decline in the aftermarket.

Profit growth was driven by strong conversion on the incremental volume, integration synergies, and the benefit of lower pension expense.

Operating margins increased 180 basis points to 17.6%.

For the full year, sales were up 7%, and operating profit was up $327 million, or 15%, resulting in 130 basis points of margin expansion, in line with our original expectations.

A strong full-year organic growth of 6% reflects the UTC Aerospace Systems' position in a large and growing commercial aerospace segment.

The earnings growth and margin expansion follow the continued successful integration of Goodrich, which is now yielding run-rate savings of $400 million, with line-of-sight visibility to $500 million.

Turning to Sikorsky on page 11, operating profit increased 38% on 10% higher sales.

Sikorsky shipped a total of 72 aircraft in the quarter, including 57 military platforms and 15 commercial.

Overall, aircraft shipments were down five compared to the prior year, but aircraft completion volume -- that is the aircraft customization that occurs following baseline aircraft delivery -- those completions were up significantly, driven primarily by international military programs.

We also saw growth in our development programs, as a number of recently awarded programs, including the US Presidential helicopter, have begun their development ramp.

The operating profit increase was driven by the impact of higher international military volume, better mix on commercial OE volumes, and favorable contract adjustments, partially offset by the drop-through from lower commercial aftermarket volume and unfavorable mix in the military aftermarket.

For the year, strong international military and commercial OEM sales, coupled with the ramp of funded development programs, drove sales 6% higher at Sikorsky.

Adjusted for restructuring and special items, operating profit of $699 million was up 9%.

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

Okay, thanks, Paul.

All in all, a pretty good year for UTC.

If you think about it, the business units delivered solid margin expansion to 16.6%, and we grew EPS 10%, despite a slower-than-expected global economic environment.

Beyond the financial results, we also continued to achieve significant milestones on development programs, and to secure key wins for the future.

With the Goodrich integration now largely complete, we recently announced the elimination of the propulsion and aerospace systems organization.

Pratt & Whitney and UTC Aerospace Systems will continue as stand-alone business units, but now reporting directly to me.

This new streamlined structure better positions us to serve customers, and to focus on ensuring a successful entry into service and production ramp-up of our Geared Turbofan engine, and the numerous aircraft systems designed and developed by the UTAS team.

At Pratt & Whitney, the GTF engine completed FAA certification for the Airbus A320neo platform on December 19.

The certification marks a key milestone for the engine and the A320neo program, which remains on schedule to enter into service in the fourth quarter of this year.

And we continue to make good progress on the more than 35 new system programs under way at UTC Aerospace Systems.

In 2014, we achieved major milestones, including the entry into service on the Boeing 787-9 and the certification of the A350.

At Sikorsky, another major win in the quarter: India's Navy selected Sikorsky to fulfill the service's maritime helicopter requirement, and negotiations are currently under way with the Indian Navy to procure 16 S-70B Seahawk helicopters, with an option for eight additional aircraft, along with a complete logistics, support, and training program.

This represents a major step forward for Sikorsky in an important growth market, and positions the business well for future opportunities there.

The Building & Industrial Systems businesses had another solid quarter, with both Otis and CCS delivering 5% organic sales growth.

We feel really good about the progress we've seen in both segments.

CCS organic growth has accelerated, while delivering 290 basis points of margin expansion since 2012.

And Otis profits are growing again, after a couple of very difficult years.

So, good momentum across the board; that's going to allow us to deliver solid organic growth in 2015.

The growth rate exiting the year gives us confidence in our sales assumption of 3% to 5% organic growth in 2015.

And we expect continued recovery at our North American markets, slight growth in Europe, and moderating but still solid growth in China and Asia.

As Akhil mentioned, we do have two headwinds this year that have worsened since we spoke in December.

As much as I would like to, I can't control FX or the discount rates.

Akhil hasn't figured out how to help me with that yet.

As usual, we'll do as much as we can to mitigate these headwinds, and that includes leaning out the corporate structure and additional share buyback.

Lastly, we continue to make progress with our portfolio review, and as I promised, we will discuss this in more detail over the coming two months.

With that, let's go ahead and open up the call for questions.

(Operator Instructions)

Doug Harned, Sanford Bernstein.

When you describe the changes in guidance for the year, can you walk through how that rolls out across the four different businesses compared to what you talked about in December?

Sure, Doug, for a more precise discussion, we'll wait for the president to stand up and talk to you in March, but conceptually, you know where this falls, right?

That the FX headwind is largely going to be in the BIS space more heavily towards Otis, which has 80% of its sales internationally.

The pension headwind is going to be more in the aerospace space, where it will be 40% or so at Pratt, and the rest around UTAS and a little bit on the commercial side.

The good news of $0.15, which offsets half of that $0.30 headwind is going to be spread across, on the cost reduction side, across all the businesses a little bit and at the corporate office, as well, while the share count reduction benefit will be more at the corporate office, as you'll see a lower share count number.

If you look at the operational improvement part of this, so you are looking for -- I'm not sure how much of that $0.15 is operational improvements, but could you describe the kinds of actions you are taking that perhaps you hadn't thought about back in December?

Or you might have thought about, but weren't signing up for it yet?

Obviously, some of the announcements that have gone out over the last couple of weeks are all part and parcel to this trying to lean out the corporate organization, as well as lean out some of the structures that we have on the aerospace side, specifically at the Aerospace Systems group.

You'll recall, Doug, at Aerospace Systems, we had two guys running the business, Dave Gitlin and Mike Dumais.

We consolidated all of that under Mike and we will be consolidating all of the functional responsibilities over the coming weeks, as well, so we will be taking out a significant amount of cost as we go through that.

Obviously, eliminating Alain's organization takes a lot of cost of the corporate level, some of which got allocated down to Pratt and UTAS.

So all of this really focused on leaning out the corporate and the overhead organization.

But does that mean that most of this benefit is occurring on the aerospace side as opposed to the BIS side?

BIS has already been working on that.

As you know, over the last two integrations, if you will, first Fire & Security into Carrier and then now Otis with CCS, there has been a significant reduction in the overhead in the management structure at those companies.

If you think about it, Doug, Geraud has done on the commercial side what we are just doing now on the aero side.

We've taken out over 100 executives, first when we put Fire & Security into Carrier, put that together under CCS, and then as we put the Otis business under the BIS banner, again more and more executives.

So Geraud has already leaned out the overhead structure in those businesses and that is why you see the margins where you do for BIS, why you see that very, very strong margin, a lot of that is just cost reduction.

Okay, great.

Thank you.

Joe Nadol, JPMorgan.

I actually just want to continue down that line there, on the PAS elimination of that structure.

Greg, a couple of years ago when this organization was stood up, I thought it was advertised as a cost-saving measure, and now it is being advertised again as a cost-saving measure when it goes away.

I'm just wondering if you could explain a little more philosophically, which is it?

And then, you mentioned BIS, as well.

I am wondering if there's any larger scale changes that might be possible along these lines in that organization, as well?

Let's talk about PAS.

Originally, this has only been a couple of years when we put Goodrich and Hamilton Sundstrand together, this is July of 2012.

The idea was we would put PAS in to oversee the integration of those businesses and to drive the $500 million of synergy benefit that we were expecting on the acquisition.

I would tell you for the most part, that is complete.

We've got about $400 million of the $500 million, we have got line-of-sight to the next $500 million and more beyond that.

Alain and that whole team did exactly what we asked them to do in terms of driving cost reduction across.

And it wasn't really just the Aerospace Systems; we also did significant cost reduction at Pratt, again, leaning out the structure of Pratt to taking about a 20% reduction in the overheads at Pratt & Whitney over the last couple of years, so they did exactly what we asked them to do.

But again, time changes things, and today, with that mission largely complete, I thought it was best to have Paul from Pratt and to have Mr. Gitlin report directly to me.

It also gave me the opportunity to take a guy like Mike Dumais, who did a wonderful job running his half of the Aerospace Systems, and bring him into the corporate strategy group and let him help me with this portfolio analysis.

So this is a win/win.

Again, leaner Organization, more focused, I get more line of sight to what is going out of the business, and the businesses get less overhead cost to worry about.

As far as BIS, look, again, I would just go back to what I said.

Geraud has been doing what we're doing on the aerospace side for the last three years there.

This started in 2011 when we put F&S into Carrier, again significant overhead reductions.

The whole idea here is, again, not to have a lot of overhead.

We do not need that.

We want a decentralized organization.

We want decision-making close to the customer and not at the corporate center.

My job is not to tell these guys how to run the business.

These guys know the customer.

Each one of the guys at Otis, Carrier, and Fire & Security, they are out there on the front lines, still.

They just don't have that same overhead structure above them and I think Geraud would tell you he has got line of sight a lot more clearly as to what is going on in the business as a result of what he has already done.

Okay.

Then a second question, a major event this year is the ramp up of more work on GTF and you mentioned you got certified on Airbus.

Can you speak about the industrial part of the ramp up that is happening this year and maybe give some context as to when you really feel like you can say, we're hitting where we should be on the learning curve, from a manufacturing standpoint?

Secondly, from a cash-flow standpoint, if there is anything we should know about the profile, as you ramp up throughout the year, will that impact the Company cash flow?

Joe, let me just put it very simply.

We're not going to be done until we are done.

But this year, we will build about 85 engines for the Airbus neo platform.

Next year, it will be about 220 and it will double again in 2017.

So, again, every time we double the engine production, we're coming down a learning curve.

By the time we get to about the 250th engine, which is towards the middle of next year, we will be pretty closer to closing in on target costs, not quite there.

By the time we exit 2017, we will be at our -- or should be at target cost or somewhere close to that.

A lot of work to do between here and there.

As I said, we're going to get additional negative engine margin this year, next year, and the following year, and then the run rate actually levels out because the number of engine levels out and we continue to come down the cost curve.

We just did a whole review of the production readiness level at Pratt over the last week, had some of the best folks around the business to take a look, to make sure we were on track.

While it's not without risk, and there's a lot to do, we've got high confidence that the Pratt guys have their arms around this and we're going to be able to meet the production needs at Airbus, as well as Bombardier, as well as at Mitsubishi, as well as with Embraer in 2018.

A lot of work to do, but a good process in place to make sure that we are going to get there at the right cost.

One minor correction, Joe.

Greg said about 80-plus neo engines, it's actually more like 40-something, for this year.

And then the other point on your cash flow, there is clearly going to be some stress, as you have seen in our numbers for the last year or two.

The Aero ramp-up does add to the CapEx number, which has been above depreciation by a significant amount and that is a number we watch very carefully.

Obviously, you know our gold standard is to be 100% of net income as free cash flow and last year, 2014, was not bad.

We still have some pressure in 2015 as a result of that, but we are going to work very hard to take out some other things, like focusing on inventory and working capital, to try and manage some of the CapEx requirements that exist in the business from the Aero ramp up.

Okay.

Thank you.

Jeff Sprague, Vertical Research.

Just on the cost side, Greg or Akhil, but thinking about raw materials costs.

You didn't address that at all, and I would think in parts of your business, you could be getting some substantial relief.

Maybe any color there and are there hedges or something that are delaying potential positive impacts?

Yes.

Sure, Jeff.

Probably the biggest item is copper, where you would expect a significant saving there.

We do hedge.

We are hedged about 75% of our 2015 requirements at over $3, $3.05 if you will.

So there is really limited impact that we will see in the later part, with the significant reduction in the copper that has come about lately.

But there is definitely going to be benefit on the oil side.

The lower fuel costs, both for jet fuels that are used by our aerospace companies, as well as in the large number of trucks and service vehicles that we have.

We should see some benefits there.

We estimate maybe $50 million to $75 million of benefit, which probably, towards the later part of the year, help us build a little bit of our contingency back.

On the other hand, customers see the same papers that we do and the same reports that we do and there is likely to be probably a little more pressure on the pricing side, because they will expect some of this to be passed through to them.

So we've got to balance both those things, which is why we have not reflected that potential savings in our road map that you saw on page 6.

On the other key metals, steel and aluminum, maybe not hedged per say, but are you indexed and contractually locked in there, that you don't get any significant immediate benefit also?

There's actually a little bit of headwind on aluminum right now.

Iron ore and steel prices have come down, but we don't really have a lot of hedges out there on there.

So we will see a little bit of benefit on steel, a little bit of headwind on aluminum, which should pretty well offset each other, I would think, for the year.

I was just wondering, just back to where the prior question ended, on cash flow and CapEx, it looks at you actually throttled the CapEx back pretty hard relative to the annual expectation here.

Can we go down from this $1.7 billion level in 2015?

And how do we think about working capital in 2015?

We had been looking at about a $2 billion number for CapEx going into last year.

The folks out in the businesses did a pretty good job of reducing that and trying to move some of that out.

Obviously, it puts a little bit of pressure on the $1.7 billion number that we have got this year, but we are not done.

The CapEx investment will be what it needs to be.

The bigger opportunity, when I think about cash flow, it goes back to working capital and it goes back to inventory.

We have got almost $10 billion of inventory out there.

The turns are not spectacular and the focus has to be on improving turns and it's not in our factories.

I would tell you, our factories are world-class.

When they get the inventory, they can move it very quickly through the assembly and test process.

The issue is in the supply base, where we do not have suppliers that all deliver 100% on time with 100% perfect quality.

As a result, we have a lot of buffer inventory, at every level of the production process.

So one of the other benefits of eliminating the PAS structure is operations is now going to report directly to me.

We've got a team under Benoit Brossoit, who is very focused on supplier process improvement.

We're going to go after this inventory reduction at its root cause, which I would tell you is supplier performance.

If we can get our suppliers at the same level of delivery and quality as our own factories, we can reduce inventory by a significant amount.

And it's not a this year or next year, it's the next several years.

But we're going to work at it and that will help us get back to that 100% of free cash flow to net income, despite what is a little bit of elevated CapEx investment this year.

Great.

Thank you.

Sam Pearlstein, Wells Fargo.

Some of the additional cost reductions that you have talked about, does it change the plan in terms of the $300 million worth of restructuring offset by $300 million in gains?

Does that dynamic change at all during the year?

No, Sam, we do not think so.

We still think restructuring will be about $300 million for the year and probably ratably across the quarters, $75 million each quarter, if you will.

Okay.

Then, in total, what is your assumption about Europe right now?

I know Greg said slight growth, but is it different than it was in December, and it's just -- is it the same and it is a translation issue or have you assumed a slower Europe at this point?

Despite the Greek elections on Sunday, generally, we think Europe will probably be a little better with the quantitative easing that Mr. Draghi has initiated on top of the much lower fuel prices, gas and oil.

There's a natural stimulus that we ought to see in Europe this year that we didn't really see six weeks ago when we're talking about Europe.

So we say up slightly; it could be better.

We had pockets of business that was very good last year.

The fire products side in Europe was very good.

The service side, not as good.

But again, overall, will get better, and Europe will get better this year than what we had expected, so that may be a little bit of upside.

Okay, and then last question, the SEER-13, and you just talked about inventory, was there any sort of a build in terms of the last of the manufacturing and what you could do this year and does at all go back out in 2015?

Can you size that at all?

Greg mentioned this at the last call or the last meeting, about [$150] million worth of inventory build up associated with SEER-13.

As you know, the regulations would say that we cannot produce any more SEER-13 in 2015.

So, all that inventory was on our balance sheet at the end of December and will be sold through the early part of this year, we expect.

That is just for those parts of the country that we cannot sell SEER-13 (multiple speakers).

Right.

Exactly.

But it is not significant.

I think, again, it will play out here in the first four or five months of the year and it will all go back to normal.

Okay, great.

Thank you.

Carter Copeland, Barclays.

Just a couple of end-market color questions for you.

The first on the military softness you called out at UTAS.

Any color you can give us on where you saw that?

And I know the expectations around military have been -- we've been coming up a little short in both last year and some of the recent quarters.

Can you give us some color on where that came from?

Not a huge deal of impact, frankly.

Both OEM and the aftermarket on the military side for UTAS was down low single-digit, so it's really nothing dramatic, nothing out of the ordinary.

As we look ahead at next year, Carter, the feeling is that the aftermarket might be actually slightly better, maybe up low single-digit for UTAS, while the OEM side will probably be down low single-digit.

So in balance, we still feel it is treading water, if you will, nothing either positive or negative to talk about it.

Yes, in Q4, OEM was essentially flat.

Military aftermarket was down a little bit.

Okay.

With respect to Sikorsky, if you were to give us a real-time assessment on how things look there on the commercial helo side, given obviously, the anticipated weakness in oil and gas and what the expectation is there for spares and what you are seeing and any color there would be helpful?

Maybe I will give you a high level and Akhil will tell you the right numbers.

Essentially, we are seeing some softness on the S-92 deliveries, as you would expect.

We've got about 40 this year, we had expected to deliver.

There's a little bit of pressure there as some of the exploration companies are scaling back.

I'd just mention, though, that more than 80% of the use of the helicopters for offshore oil is for current production, it's not for exploration, so you're talking on the margin, there maybe a few aircraft that will be a little bit more difficult to sell, but Mick and team are on top of it down there.

Aftermarket has been a little bit slower on the commercial side than we expected.

Part of that is because the reliability of the S-92 has been so good and the other part is just cash conservation by some of the operators.

There are some, as you would imagine, a little bit of concern about the oil- and gas-related helo market, as you said, but I know Mick and team are committed to delivering on their plan and they are not going to let small things like this come in the way.

Great.

Thanks, guys.

Julian Mitchell, Credit Suisse.

Just a question on the balance sheet, because one advantage of having a very large balance sheet is that you can use it to offset surprise headwinds.

If I just pro-forma that $0.15 of tailwind or offset into the three buckets, buyback is $0.05 of that, so I just wanted to check what the urgency to use the balance sheet this year to drive earnings is?

I don't think there's any urgency other than the fact that we're not going to sit still and just take and let these cost headwinds tank the year.

Again, we're doing what we can to offset those.

The $3 billion, and we talked about that back in December, we said $2 billion to $3 billion, I would tell you with rates remaining low, without, I would say, a very robust M&A pipeline, it's pretty easy to commit to the $3 billion today.

Again, I wouldn't suggest that, that is a big use of our balance sheet.

When you have got a $92 billion balance sheet, obviously, you have room to do a lot more than an additional $1 billion if we wanted to.

We're not going to commit to anything more than the $3 billion today, but it remains an option if, again, our share price remains low and the acquisition pipeline doesn't fill up.

The key thing there, Julian, is to keep in mind, as Greg laid out, very clearly, we are interested in M&A, we would like to do some transactions.

The valuations prevent us from going too far out on that today.

Greg very clearly laid out the criteria that we look at M&A transactions with: IRI of double-digit, accretive in year two, and [a new print] to ROIC for UTC overall by year four, and those are tough criteria in today's market.

But at the same time, we want to keep our flexibility and keep our balance sheet optionality available and not go much higher on share buyback until we completely conclude on the M&A environment.

Understood.

Thanks.

Then just on the commercial Aero aftermarket.

As you said, the trends in Pratt and UTAS on sales were both lower than the high single-digit growth guidance for 2015.

How quickly do you think you will snap back to that high single-digit trend?

Is it something you could see at the beginning of the year?

And any impact you're seeing on airline behavior on aftermarket from oil?

At this point, I don't think the trends were any different than what we expected.

Remember, Q4 last year was extremely strong.

Pratt spares, if I remember correctly, were up 24%, and the UTAS spares were up significantly, as well.

17% --

On 17%, Paul tells me.

On top of those strong numbers, UTAS grew 5% and Pratt was down 6%, or 5%.

So given that, it's really not a change in our expectations.

We still expect mid-single-digit type of growth at Pratt and high-single-digit growth in the aftermarket at UTAS.

So I wouldn't call it a change in trend.

With regard to customer behavior, obviously, the expectation is that, certainly on the Pratt side, with the airline profitability being what it is, we would hope for a little more content per visit when the engines actually come back, and perhaps a little bit more provisioning and inventory build-up at the airlines.

That should help us a little bit, but it is too early to call that.

Right.

Thank you.

Cai von Rumohr, Cowen and Company.

Let me join in welcoming you back, Akhil.

Commercial aftermarket, could you give us what the orders were in the fourth quarter for Pratt and UTAS.

How much you think that might have been impacted by price hike, and are you seeing anything in terms of impact from lower fuel prices yet?

The answer to your last question, not much yet.

On the Pratt side, as the spares orders were down, about 8% or so for the quarter, and that is, again no surprises there.

Within that, however, I would remind you that V2500s were actually up mid-single-digit and the decline was in what has been a secular issue for us, which is the legacy engines of PW2000 and PW4000, where retirements are hurting and the surplus parts market is hurting our spares business a little bit.

So no change there.

The trends continue to be where they are.

As I said earlier, we do expect some benefit from the oil price reduction, but it's not yet showing in our numbers, and maybe at some point we'll get some benefit there.

On the UTAS side, again, the spares orders were up year over year, probably a little lower than what the sales were up, but we are still on track there for the high single-digit growth.

You mentioned that Otis's orders in China were up 2%.

As you are probably aware of the decline, the monthly decline in residential home prices has been accelerating through December.

What are you seeing in terms of tone?

You talked in December of looking for 10% growth in constant currency and in new elevator sales at Otis in China.

Is that still realistic?

Cai, it is certainly within the realm of possibility.

If you think about it, backlog at Otis will end the year up about 13% year over year, and we will convert probably 60% or 70% of that into sales.

As we start the year, in a flat market, you would expect 7% or 8% growth in Otis China.

We will see.

Again, there is obviously pressure on home prices.

We continue to see that, which has really held orders down for the year, especially the back half of the year.

But again, there is a pathway towards double digit, if we see any recovery.

We've seen some stimulus measures take hold, seen some bank lending regulations ease a little bit to try and, again, reinvigorate the property market.

So I wouldn't give up on this.

There's still opportunity there, but again, just given the strong backlog that we end the year, I feel pretty optimistic we're going to continue to see growth in China.

Thanks so much.

Howard Rubel, Jefferies.

Greg, I want to be a little bit high level.

There is two things: one is restructuring and the second is capital spending.

How do you think about the two of those as you put them together to improve the profitability of the various business units?

With margin expansion, cost reduction is part of the DNA of UTC and that is not going to change.

I do not care who is sitting in my chair.

That is just the way we do business and the businesses are always focused on taking cost out.

As we go into the year with this $300 million placeholder, we've got plenty of opportunities to do cost reduction and probably more opportunities than there is funding as we start the year.

But, again, we always find ways to fund the really good ideas.

So we are going to continue on this path of cost reduction.

That is just the way we do business here.

As far as CapEx, we have been, I would say, overconsuming here, but again, it is all part of this, I call it, the reseeding of the commercial engine business with new GTF engines.

As a result, we're going to have to catch up a little bit on the spending.

That's not just Pratt, it is also of course at Aerospace Systems.

You've got 50 new aircraft systems going into production here the next few years, requires a lot of capital.

So we are in a secular cycle here where CapEx is just naturally going to be high.

It will come down.

But frankly, we're not capital constrained.

We are going to fund what we need to from a CapEx standpoint.

We're going to fund what we need to from a restructuring standpoint.

Because they all have very, very solid returns.

We have got a good process internally where all of these capital appropriations, as well as all the restructuring programs, they come through Akhil's finance organization, they are reviewed, they are validated.

We're making solid investment decisions, whether it is restructuring or CapEx.

I get it.

It's really to drive the returns and improve the performance or competitive position.

The follow up, I'm going to talk about maybe CCS for a moment.

Usually, we find Fire & Security is the one that is more of the challenged business unit and this time it's this and maybe elements of Carrier, rather a pleasant surprise.

Could you talk a little bit about whether it is additional new product, whether it's markets who have become more competitive, or what's the other change there?

Or, is it something else I've missed?

You probably hit on it and then some.

Again, part of it is Geraud has invested a lot in new products in the Carrier on the Commercial HVAC side, we're seeing that start to pay off.

We are spending more many of the security side, both fire products and electronic security, getting new products driving a return of growth.

I also think the way we've organized the business, again, while we think about BIS as this central organization, it is really decentralized decision making out in the field, where you've got people that are focusing on individual markets, individual countries that are driving decisions, that are helping to drive growth.

As I was thinking about 2015, while cost reduction will be important, the real key to 2015 earnings growth is going to be top-line growth.

Geraud has a very aggressive plan out there, but he has got the products and the people and the markets are going in his favor.

He can actually see 5% or 6% organic revenue growth this year.

We will see where we are at the end of the year.

Even with tougher tough conditions in Europe and slowing China, I still feel very confident we're going to hit those numbers.

If you were to ask Geraud, Howard, I am sure he will tell you that, with the portfolio transformation pretty much behind in the Fire & Security space, there is a lot more focus on looking at the growth opportunities and the growth markets and devoting the time and resources to make sure that we are capitalizing on those opportunities.

So, we would fully expect that the growth profile for both Fire & Security and for the CCS business overall will be better than what you've seen in the past.

Thank you very much.

Jason Gursky, Citi.

Just wanted to go back to the guidance for a moment.

In the prepared remarks, you've suggested that the FX headwind was going to be $1.5 billion for the year, and yet guidance has come down by about $1 billion at the midpoint.

I was wondering if you could provide a little bit more color on that and connect some dots?

Sure, Jason.

Yes, the exact math is $1.5 billion on the top line from the change in currencies.

We typically don't like to give guidance in decimal points this early in the year, so whether it's $64.5 billion to $65.5 billion or it's $65 billion to $66 billion, I would say, probably, in our new range of $65 billion to $66 billion, it wants to be the low end of that range.

On the other hand, to what Greg said earlier, we are hopeful that the organic growth might come in a little bit on the higher side of the range that we had before, the 3% to 5%.

It may be towards the higher end as opposed to the lower end of that.

So does it end up being $65.5 billion or $65.3 billion, too early to call, but we left the range in round numbers.

Okay, great.

Then just a quick question on the efforts to reduce the buffer in inventory, the $10 billion.

Can you talk a little bit about the reaction that you've seen thus far from your supply base and whether this will lead to consolidations amongst your supply base?

Just how they're reacting to it?

And then, I don't know if it is in one business or another, but maybe where the biggest opportunities might lie?

Enthusiastic support, Jason.

We have many really, really good suppliers, large suppliers, so you can't lump them all together.

The bigger suppliers tend to be the better suppliers.

One of the things that we have been pushing in the supply base is consolidation of some of the second and third tier, because quite frankly, they can't afford to invest in the technologies and the systems the way the larger suppliers are.

In terms of where the opportunities are, I'll tell you, it's primarily on the aerospace side.

Again, as I go to BIS, and think about supply chain at Otis or supply chain at Carrier or Fire & Security, pretty well developed, and again, a little bit different in terms of the technologies, but again, their suppliers generally have performed better than the suppliers in the aerospace side.

Part of that is because of all of the changes on the aero side, but really that is where most of the work is going to have to be done is in that supply chain on the aero side.

If I may, having grown up through some of those businesses, what happens is typically, it is not so much the issues, inventory driven by the suppliers, it's because internally nobody wants to hold up the line, so when material planning people are concerned about a supplier performance, they end up safety stock, and that just builds upon itself.

So even if one part is going to be up, you end up having a lot more inventory in the chain.

As Greg said, once we can get all suppliers supplying on time with perfect quality, that is when you will see all that buffer inventory in our system start to disappear.

(Technical difficulty) will get there.

Great.

Thank you.

David Strauss, UBS.

Otis, North American new equipment orders have been really strong about two years now.

Greg, can you just talk on, maybe give some color exactly what is going on there?

What you see as a market rate of growth and how much share you might be picking up there?

What do you really think is driving this outsized growth that we are seeing?

It is a couple of factors, David.

Obviously, Otis is ubiquitous brand here in the US and we have been gaining share back.

But it is also a market that is recovering off of some very low numbers and we're still not even back to the 2007 levels.

While the recovery feels really good, we still have a ways to go.

Otis has done a great job on the product side, and as well as the cost side, to deliver much better value to the customers and the customers value that.

The ABI has been improving, as you see it has been over [50] now for most of the past year, and quite frankly, we've also gotten our house in order.

You remember some of the messes we had in terms of the move from Nogales to Florence, South Carolina.

That is behind us.

Again, we're delivering product on time, very good quality.

All those things coming together are helping Otis regain share here in the US and the party is not over.

All of these orders that we have been taking for the last two years are going to come out in sales over the next two years.

I think Otis North America is going to have a very good couple of years coming up.

Greg, can you talk about how far you're still below prior peak levels in North America?

As I recall, 2007, we were about $1.2 billion in new equipment.

We're at about $800 million, $900 million, maybe this year, so you still got another 25% to go.

Okay.

Great.

Business jet market.

Pratt Canada sales were -- engine shipments were a little bit lower in 2014.

What are you seeing in that market?

We've got some players talking about things improving.

Are you actually seeing any underlying market improvement or is it just new product that's shipping through?

It's more a weakness on the helicopter side of the Pratt Canada engine market, if you will.

Some of the things that we talked about before, the operators had been a little gun shy in terms of taking new deliveries of engines.

There is some concern, we hear about inventory at the operator's level, people who are making those aircraft for the helicopter market.

So that's the space.

On the business jet side, there is no significant change in trends.

We still -- the engine shipments were in line with our expectations, probably just slightly ahead of last year, but it is primarily the turboprop and the helicopter market where we saw some weakness.

Okay.

Greg, you mentioned the German tax case.

At the investor day, you talked about $400 million potential cash tax -- cash payment.

Is that still the right number and is that explicitly in the 90% to 100% free cash flow guidance?

It's in the 90%.

It's not the 100%.

If you want to think about it, 10% of free cash will be about $600 million, so if we have to pay the German tax authorities before we have the case fully adjudicated, you're going to see a lot of pressure on that 100% getting closer to 90%.

We are thinking about it, we're still working on it, the attorneys still tell us that we are going to win eventually, but we may have to put up the money in the interim.

We will let you guys know.

That is one place where the euro weakening is actually good news.

Right.

Got it.

Thanks, guys.

Nigel Coe, Morgan Stanley.

Obviously, you have taken the bit of [medicine on currency up front], which I think is commendable, but did you mention you've gone to a $1.10 euro?

Yes, that is correct.

$1.10 euro.

Okay, that's pretty conservative.

Then, just obviously, you mentioned in the second [bridge] that a lot gets taken within Otis, which makes perfect sense, but how does the weak euro, how does that impact Otis margins this year?

The impact that we're talking about is more just from translation, so I don't think that changes anything on an organic basis for the margins there.

Within Europe, we still have the same operating fundamentals that existed, there is still some pressure on the pricing side in the service business, but there continues to be improvement as we continue to help improve the total number of units under contract in Europe.

That was declining for a while and is starting to stabilize and moving in the right direction.

Geraud is very focused on that, but there is nothing changing as a result of the currency.

It's more just --

As you think about currency, it's simply a translation issue.

The fact is, we manufacture in most of these locations where we sell, so in terms of real economic impact, it is really muted by the fact that you manufacture, be it in China, or you manufacture in Europe, so this is just a translation and it's going against us right now.

We think $1.10 is the bottom, but we will keep looking.

I was just wondering, obviously Europe is mainly a service market, so I was wondering if the translation of that higher-margin service in Europe distorts the overall segment [module]?

There is a slight impact, Nigel, you are right, but it is not that material.

There is something impact.

Absolutely.

Okay.

I just wanted to try and draw that out.

Then just switching to -- obviously, you collapsed the PAS structure.

Does that imply that you've had a look at the BIS structure, Greg, and you are comfortable that, that is driving synergies that you expected?

We have talked about this already a little bit on the call, but Geraud has already done, on the BIS side, what we are doing on the aero side in terms of reducing structure.

He has done it over the course of the last couple of years from 2011 through this past year end, where we have been taking out executives and taking out structure as we consolidated the back-office functions, as well as the overhead structures of these businesses.

So, I don't think the opportunity exists on the BIS side the same way it did on the PAS side.

Okay.

Thanks, guys.

Thanks to everyone for the audible tonight, to change the timing of this.

I hope everybody has a safe couple of days here with the coming snowstorm and we look forward to seeing you guys all in March.

The IR team will be available for a few minutes tonight, and then all day, of course, tomorrow, so please give us a call if you have any questions.

Thanks a lot.

Ladies and gentlemen, thank you for participating in today's program.

This concludes the program.

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