雷神技術公司 (RTX) 2015 Q4 法說會逐字稿

Good morning and welcome to the United Technologies fourth-quarter and full-year 2015 conference call.

On the call today are Greg Hayes, President and Chief Executive Officer; Akhil Johri, Executive Vice President and Chief Financial Officer; and Paul Lundstrom, Vice President, 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 except where otherwise noted the Company will speak to results from continuing operations and excluding restructuring costs and significant other items of nonrecurring and or nonoperational nature often referred to by management as significant other items.

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.

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

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

Please go ahead, Mr. Hayes.

Okay, thank you, Kaylee, and good morning everyone.

As you saw in today's press release we reported full-year 2015 adjusted EPS of $6.30.

That's at the high-end of the guidance range that we gave you for last year.

Sales were just north of $56 billion and segment operating margins were a solid 16.7% for the year.

I'm pleased to say that despite a very tough macroenvironment we remain confident in our full-year 2016 adjusted EPS guidance of $6.30 to $6.60 a share.

That's on sales of $56 billion to $58 billion.

As I reflect back on 2015 we took a number of decisive actions.

I'm encouraged by the progress the team has made on our strategic priorities.

First of all, we streamlined the portfolio, we simplified the organization structure and we returned $12 billion to shareholders.

Most importantly perhaps we achieved some key program milestones.

As you know, we announced and closed the sale of Sikorsky for a very good price, $9 billion, and that generated a $3.4 billion after-tax gain in the fourth quarter and enabled us to initiate a $6 billion accelerated share repurchase program in November.

As a result of the divestiture UTC is now more focused on its core businesses, that's creating and supplying innovative and game changing technologies for the building and aerospace industries.

Going forward this portfolio will have a better organic growth profile.

It'll have higher operating margins and we will have stronger cash flows.

We've also simplified the organization.

We eliminated the Propulsion & Aerospace Systems layer and the Building & Industrial Systems layer.

That creates a flatter, more efficient structure with greater visibility and importantly greater accountability.

We now have four focused business units that are well positioned to deliver long-term, sustainable top- and bottom-line growth.

On the cost front we announced $1.5 billion multiyear restructuring plan and that included $400 million of restructuring we initiated in 2015.

That restructuring is focused on enhancing the long-term cost competitiveness of the Company.

We expect this restructuring plan to generate about $900 million in run rate savings by 2019.

We also returned over $12 billion to share owners last year through dividends and share repurchase and that includes the $6 billion ASR we announced in November.

After completion of the ASR this year we continue to expect to return at least another $3 billion through additional share repurchase plus more than $2 billion of dividends for the year.

Clearly the best M&A opportunity we see right now is UTX stock.

We will continue our share repurchase program as long as we feel there is a significant discount between the intrinsic value of UTC and the share price.

Flawless program execution continues to be a top priority and we achieved several key milestones in 2015.

The Pratt-powered Joint Strike Fighter achieved initial operational capability for the Marines back in July.

The A320neo aircraft was certified, the C series aircraft was certified, both with Pratt's geared turbofan engines and a number of UTAS systems.

The Mitsubishi Regional Jet also had its first flight and the Embraer engine began testing on our flying test bed.

These are programs that will drive growth for decades to come not only at Pratt but at our UTC Aerospace Systems business as well.

I'm proud to say that the dream of the GTF is now a reality.

The first Pratt & Whitney-powered A320neo was delivered last week to Lufthansa and entered into revenue service this past Monday.

And we're meeting our commitments on day one for fuel burn, emissions and noise.

For the first time in aerospace history that an engine delivered everything it was supposed to on day one.

That's a remarkable performance by both Pratt and Airbus.

Let me be crystal clear, we're extremely confident in the technology of the geared turbofan.

On the commercial side we continue to achieve key wins.

At Otis we won the Hudson Yards project in New York and the world's largest hotel, the Abraj Kudai in Saudi Arabia.

In Climate, Controls & Security we secured the new Atlanta Braves Stadium in Georgia and the Sheikh Jaber Al Ahmad Cultural Centre in Kuwait, to name just a few.

So overall I'm proud of our accomplishments in 2015 and as we move forward the priorities are largely the same that we've laid out a year ago.

That is first of all flawless execution, innovation to drive long-term growth, structural cost reduction and most importantly perhaps disciplined capital allocation.

We remain focused on what we can control which means controlling cost while continuing to invest and deliver differentiated products and services that will bring value to our customers over the long term.

So despite this mixed macroenvironment that we're all facing UTC is taking the actions necessary to drive long-term, sustainable top- and bottom-line growth and create real long-term share owner value.

Let me turn it over to Akhil and Paul to take you through the quarterly and full-year results.

And I will be back with a few closing comments in Q&A.

Akhil?

Thanks, Greg.

So I'm on slide 2.

Adjusted EPS was $6.30.

That's down 2% versus the prior year and up slightly, excluding a $0.19 impact from adverse foreign exchange.

Full-year GAAP earnings per share of $4.53 included restructuring charges of $0.31 and an additional $1.46 of net charges from other significant items.

As we told you back in December, a lot of moving pieces this quarter.

So let me walk through a few of the larger pieces that make up the $1.46 of other significant items using the table on the right side of the page.

This morning's press release tables have a more detailed reconciliation.

The largest item is a $.72 charge for the previously disclosed $867 million settlement of the Canadian royalty obligation at Pratt Canada.

There were also $0.41 of charges for tax-related items.

Roughly 75% of that is for US taxes on the planned repatriation of $1.4 billion of cash related to foreign earnings.

This will happen over the next couple of years.

Our Aerospace businesses recorded $0.27 of charges for customer contractual matters.

$0.21 of that was at Aerospace Systems related to the completion of significant customer negotiations including the enhancement of our contractual position on a key program, the settlement of certain customer contract disputes and a contract termination.

At Corporate we recognize the liability of $0.17 for pending and future asbestos-related claims.

This was based on an analysis of our claims history, broader nationwide asbestos claim trend data and most importantly recent agreements reached with insurers.

On the other side of the ledger you'll recall in Q1 we had a gain on a fair value adjustment related to the acquisition of a controlling interest in a CCS joint venture.

That was a $0.14 benefit.

Now, net income for the year was reduced by these charges, resulting in free cash flow to net income of 126%.

In that number the benefit from net non-cash restructuring charges and other significant items was slightly more than 25 points.

Moving to slide 3, organic sales were up 1% for both the year and the quarter in what continues to be a slow growth macroenvironment.

Looking at the fourth quarter, our commercial businesses saw 4% growth in the Americas driven by continuing strong fundamentals in the US.

Europe was down 2% primarily from continued pressure in the Otis service business.

And Asia was down 1% due to China where sales were down 4%.

Growth in commercial aerospace was primarily driven by the aftermarket both at Pratt and UTAS.

Military aerospace sales were down 11%, mainly due to tough prior-year compare on engine delivers at Pratt, . Military aftermarket was down slightly at both Pratt and UTAS.

I'm pleased to say that Pratt has resolved the supply chain delays they experienced in Q3 at the New England Logistics Center or NELC.

They're back to their pre-NELC engine delivery cadence and were on schedule with deliveries for large commercial engines and the Joint Strike Fighter as of year-end.

Taking a closer look at our end markets on slide 4, and just a reminder we will talk to Otis and CCS orders on a constant currency basis as we usually do.

Overall trends remain broadly consistent with our expectations across the portfolio.

In our commercial businesses, we continue to see good momentum in North America, particularly at Otis where North America new equipment orders were up over 50% in the quarter and 30% for the year.

This is on top of 40% growth in 2014.

So very encouraging trends here.

At CCS, US commercial HVAC equipment was down 5% in the quarter, driven mainly by a slowing export market and tough compares in [unitary].

For the full-year orders were up 5%.

US residential HVAC sales were up 2% in the quarter and up 5% for the full-year.

EMEA was somewhat mixed in the quarter.

Otis new equipment orders were strong, up 20%.

At CCS commercial HVAC equipment orders were also up 4% while fire and security product orders were down 7%.

In China Otis new equipment orders were down 14% in the fourth quarter and finished down 13% for the full-year.

On the other hand, CCS fire and security orders in China were up 8% and commercial HVAC was flat, an improvement compared to trends earlier in the year.

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

At Pratt & Whitney total commercial aftermarket sales were up 11% in the quarter including a 3 point benefit from sale of legacy engine hardware.

At UTC Aerospace Systems commercial aftermarket sales were up 8% on strong repair and provisioning activity.

Now before I let Paul take you through the additional details for 2015, let's talk briefly about the first quarter of 2016.

Based on our expectation of slowly improving economies as the year progresses, and easier compares in the second half, we expect 2016 to be back-end loaded.

Additionally, the second half of 2016 will benefit from declining E&D trends and higher cost savings.

Also, recall the first quarter of 2015 benefited by about $0.10 from timing of a few exceptional items.

First quarter last year was also the highest organic growth quarter of the year for CCS and UTAS.

We had a slowing but still growing China for Otis and lower negative engine margins at Pratt.

Primarily due to these factors as compared to an adjusted EPS of $1.44 in Q1 2015 and consistent with our plan we expect adjusted EPS in the range of $1.35 to $1.40 for the first quarter of 2016.

This includes about $0.08 to $0.10 benefits from lower share count and another $0.10 in pension tailwind.

As Greg said we remain fully confident in our full-year 2016 adjusted EPS guidance of $6.30 to $6.60.

With that let me hand it off to Paul to walk you through the business units in detail.

Okay, thanks, Akhil.

So turning to Otis on slide 5, in the quarter sales were $3.1 billion, up 1% at constant currency.

Otis profit was $561 million and down 13% also at constant currency, reflecting increased pricing pressure principally from China and the margin impact from softer service sales in Europe and lower new equipment volume in China.

Foreign exchange translation was an 8 point headwind to sales and earnings.

Otis also had headwind from foreign currency related mark-to-market adjustments in the quarter.

New equipment sales increased 1% led by 26% growth in North America and mid-single-digit growth in Asia outside of China.

EMEA new equipment sales were up 1% while China was down 7%.

Service sales for Otis were flat overall as mid-single-digit growth in both Asia and the Americas was offset by a 5% decline in EMEA.

New equipment orders were up 2% in the quarter.

The strong momentum in North America continued with orders up over 50% on continued strength in major projects.

In EMEA, new equipment orders were up 20% with strong growth in most major markets excluding Russia.

New equipment orders in China were down 14%.

That's 8% on a unit basis while new equipment orders in the rest of Asia were up 15% excluding the impact of the Thomson Line Metro Project in Singapore that we referenced last year.

For the full-year, operating profit was down 3% at constant currency on 1% higher organic sales.

Foreign exchange translation for the year had a 9 point unfavorable impact on both sales and profit.

New equipment orders finished up 4% with solid growth in North America and in EMEA, partially offset by a 10% decline in Asia driven by the 13% decline we saw in China.

Outside of China, Otis global new equipment orders were up 17%.

Moving to slide 6 Climate, Controls & Security grew sales 3% at constant currency with 3 points of tailwind from net acquisitions and flat sales organically.

Profits were up 5% at constant currency with continued benefits from restructuring and other productivity.

Overall, foreign exchange translation was a 5 point headwind to both sales and earnings.

During the quarter we saw continued sales growth in HVAC in North America where commercial HVAC was up 9%.

EMEA saw growth in HVAC as well, up 4% organically, and Asia was down 7% driven by a lower China.

Overall sales growth in HVAC was partially offset by 2% declines in both the fire and security product and field businesses globally.

The fire and security business in China was up 9%.

Our global refrigeration business was flat in the quarter with mid-single-digit growth in Transicold offset by mid-single-digit declines in commercial refrigeration.

CCS equipment orders were down 5% in the quarter primarily driven by last year's tough compare at Transicold.

If you recall last year Transicold saw orders up more than 50% in the quarter.

In the fire and security business we were down mid-single digits globally with pressure from the oil and gas sector.

For the full-year operating profit was up 7% at constant currency driven by drop-through from the 3% organic sales growth and productivity including lower commodity cost.

Shifting to Aerospace on slide 7, Pratt & Whitney sales of $4 billion were flat organically in the quarter.

Commercial aftermarket sales grew 11% in the quarter supported by low-teens growth in the commercial engines business primarily from the V2500, up 26% in the quarter, and approximately $60 million from a sale of legacy engine hardware.

Military sales were down 15% on lower engine deliveries and large commercial OE sales were also down 15%, primarily on engine mix as Pratt shipped more V2500 engines and fewer PW4000s than in the fourth quarter of 2014.

Operating profit was down 1% in the quarter.

Headwinds from lower military volume along with higher negative engine margin and pension headwind were largely offset by drop-through from the stronger commercial aftermarket, continued declines in E&D spending and better warranty experience.

For the full-year Pratt sales were down 1% organically driven by lower engine deliveries in all segments and lower military aftermarket sales.

Commercial aftermarket growth was 6% for the year.

Operating profit was down $150 million in 2015.

Headwinds from pension, negative engine margin and lower military aftermarket were partially offset by margin from the commercial aftermarket and lower E&D spending.

Turning to slide 8, Aerospace Systems sales were up 4% organically in the quarter.

Consistent with the last three quarters, sales included the benefits of a change in arrangement that added around $80 million of pass-through sales with no margins.

Excluding those pass-through sales, the commercial OE business was up 2% in the quarter with growth in new platforms partially offset by declines in legacy.

Commercial aftermarket sales were up 8% organically in the quarter, largely driven by growth in provisioning for the A320neo and the 787.

Overall commercial spares finished the year with a book-to-bill of 1.0.

Military OE sales were down high single digits in the quarter driven by declines in the C-17 and other programs and the military aftermarket was down as well about 1%.

Aerospace Systems profits were down 10% in the quarter.

The year-over-year decline was driven by lower military sales, unfavorable commercial OE sales mix as we began transitioning to newer platforms, higher pension expense and lower contribution from licensing activities.

These headwinds were partially offset by higher commercial aftermarket volume and continued cost reduction.

Engineering spending was essentially flat in the quarter.

For the full-year, Aerospace Systems sales grew 3% organically with about 2 points of benefit from the pass-through sales mentioned before.

Profits for Aerospace Systems were down 3% for the year driven by adverse OE mix, lower military sales and higher pension expense, partially offset by continued benefits from productivity, lower engineering expense, income from licensing agreements and benefits from both higher commercial aftermarket sales and favorable aftermarket contract adjustments.

So with that let me turn it back to Greg for the wrap-up.

Okay, thanks Paul.

As I mentioned at the beginning of the call I am encouraged by the progress the team is making.

With the actions we've taken we're much better positioned for the future.

There is of course some uncertainty surrounding the macroeconomic environment.

If you think about the three biggest markets for UTX, starting with the US I think it's a relatively solid outlook for US GDP growth despite what we've seen in the equity markets in January.

China as you know is working through some structural challenges and in Europe we're starting to see signs that the recovery continues apace.

Against this backdrop we see continued growth in our North American markets and we expect that Europe will continue to slowly improve based on the order rates and the backlog as we exit the year.

China will be down for 2016 but let's keep China in perspective.

While it's certainly experiencing some challenges as it grapples with reform and rebalances its economy from an industrial growth story to a consumer consumption economy its long-term growth prospects remain strong.

We still expect to see 100 million people urbanize in the next five years or so in China.

By 2025 there are forecast to be 221 million cities in China with more than 1 million inhabitants.

Just to put that in perspective, today in Europe there are 35 cities with more than 1 million inhabitants.

So urbanization will continue to be a powerful force and it will drive growth in our commercial and aerospace businesses going forward.

On the aerospace side, RPMs are continuing to grow.

We saw that last year with more than 7% RPM growth and the airlines are making money and the backlogs are there.

Right now for UTC it's about program execution and program costs.

Again we continue to be confident in our 2016 adjusted EPS guidance of $6.30 to $6.60 on sales of $56 billion to $58 billion.

Given the portfolio and the team we have today I've never been more confident about the future of UTC.

Our long-term outlook remains strong.

Innovative products and industry-leading franchises, global scale and solid market fundamentals in our core businesses driven by revenue passenger mile growth and the global expansion and continued urbanization of the middle class have positioned UTC to deliver strong earnings growth well into the future.

And all of this will create long-term share owner value.

It's important to remember in today's turbulent environment that UTC designs and manufactures products that people rely on every single day.

Our products enable modern life and are installed and serviced for decades regardless of the economic cycle.

Our balance between aerospace and commercial, our balance between new equipment and service and our balance geographically will help us weather these uncertain times.

Before I wrap it up today just a word on the transition at Pratt.

I'd like the first of all take a minute to welcome Bob Leduc back to UTC.

You recall Bob is the new President of Pratt & Whitney following the announcement of Paul Adams's retirement earlier this month.

As you know Bob most recently led Sikorsky and Bob's leadership was instrumental in the successful sale of that business last year.

I'd also like to thank Paul Adams for his many contributions to the Company and his tireless work over the last six years in bringing all of these engines to the marketplace.

We wish Paul nothing but success in the future.

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

Kaylee?

(Operator Instructions) Julian Mitchell, Credit Suisse.

Hi, thank you.

Just a question first on the organic sales trends.

So should we expect organic sales overall to be down a few points in Q1 and then sort of stable in Q2 and then up low mid-single digit in the back half to get to that 1% to 3% guide for the year?

Yes, so I think it's probably going to be more in the zero to 1% range in the first quarter.

It's not likely to be negative.

I think there were some tough compares but close to zero to 1% I would say and then slowly improving as the year progresses.

You've got to keep in mind, Julian, we still see despite what we saw in China for Otis new equipment orders continue to be up globally.

And I would think that backlog will continue to play out.

So Otis should have a very solid year outside of China and Europe is recovering.

So again it's not all doom and gloom here.

Sure.

And then on Otis secondly, a tough margin performance in Q4.

You guided in December I think for about a $250 million price mix headwind this year.

Just wanted to check how confident you feel in that guidance for now and maybe explain a little bit when you think we should start to see some of those market share improvements show up in orders or revenues?

So I think the pricing pressure is continuing to be there to the point you made.

We did see increased pricing pressure in China this quarter.

And the Europe service business has not seen much improvement in its pricing environment as of now.

On the other hand, there is additional cost improvements that Otis is continuing to push for.

Part of the commodity tailwind that we are seeing will also help improve the Otis tailwind from the cost side.

Remember they have 40,000 service vehicles, so the lower the gasoline prices are, the better it is from service cost point of view.

So we continue to look at cost to offset the incremental pricing pressure but net-net pricing is probably slightly higher than what we were thinking in December.

Now with regard to margins for the current quarter, keep in mind we took a significant mark-to-market FX hit in the quarter which impacted margins by nearly 100 basis points which is not normal for Otis.

So if you adjust for that Q4 margins were not that far out of line versus our 2016 guidance.

Julian Mitchell

Great, thank you.

Howard Rubel, Jefferies.

Thank you very much.

Just to talk about GTF I realize it's quite an accomplishment, Greg, but there's an enormous industrialization challenge.

And we've clearly gotten some indications from Airbus that it's going to be go slow before you go fast.

So could you articulate how you're going to move forward with the engines so that the customer acceptance is flawless?

Howard it's a great question.

And as I mentioned many times over the past year it's the single biggest challenge that UTC has is the ramp on the GTF and coming down the cost curve on the GTF so that we can actually improve overall performance at Pratt.

You're exactly right, there is going to be a relatively slow ramp in the first half of the year.

No change to the full-year, however.

We still expect to deliver about 200 GTF engines.

Most of those of course will go to Airbus.

There will be some going to Bombardier for the C series aircraft.

But I think again we're following the lead of Airbus on this but we think this is the prudent thing in terms of ramping up production relatively slowly, entering into service and we want to have flawless entry into service across all the airline customers.

This gives us the opportunity to ensure that exactly happens.

So far it's been wonderful at Lufthansa this week since we put the engine into service and we expect that trend to continue.

The engine is in great shape technically and we will focus again on supply chain execution throughout the year.

I think Bob Leduc will hit the ground running there.

He has spent a lot of time in his first week on the job focused on this.

And this is going to be the game for Pratt this year.

But just to follow up, you wouldn't have made this management change if execution weren't part of the issue.

And so how do we think about the P&L impact?

And also the ramp in 2017 is stunningly high and probably not achievable the way you've laid it out.

So we're going to see a restructuring of some form because you're not going to get there I think under the old plan.

Howard, did you get cranky this morning and forget your coffee?

Let me just first of all --

No, but it's just like -- no, but in all seriousness, Greg, and I mean you have a remarkable optimism but I want you to plan for the downside so that we can see something that's a little bit better.

But that hill is huge.

Howard, I couldn't agree with you more.

It is a huge hill to climb.

Let me first of all just go back to your first comment.

Paul's retirement was sudden.

It wasn't expected but you've got to give Paul credit.

He is the guy that shepherded this engine through the design, through the development, through the certification and working nonstop for the last six years you understand why Paul wanted to take a pause.

We're very fortunate to have Bob Leduc on the bench with the sale of Sikorsky to hit the ground running over there and Bob knows the business.

He was at Pratt for more than 30 years.

He has been at UTC for more than 35 years.

He knows what needs to be done from a ramp perspective on the operations side.

And the team is focused on it.

I think again this slow entry into service that we've laid out with Airbus gives us a chance to make sure the supply chain is in sync with our manufacturing facilities.

And I'll tell you, Howard, with all the money that we have spent on the capital and infrastructure within UTC operations I'm confident we can hit this run rate going forward.

These engines don't take long to assemble.

It's a question of just making sure all of parts are there on time.

And that's what the focus is going to be at Pratt as well as driving the cost down.

So just because Bob is coming in there is no change to Pratt's guidance, let me be clear on that.

There is no change to the ramp schedule.

2017 is I'll remind you 12 months away.

I'm not going to give guidance on 2017.

But we remain confident along with Airbus that we'll be able to meet their requirements going into the next couple of years.

Thank you very much.

(Operator Instructions) Carter Copeland, Barclays.

Hey, good morning guys.

A question for Akhil actually.

I wondered if you could give us a little bit more granularity on Q1 at the segment level.

It sounded like you were highlighting more of a revenue growth challenge against tough comparison CCS and UTAS.

Obviously we know about the margin pressure at Pratt.

Presumably those early deliveries have a very negative engine margin, not just the sort of averages that you guys talk about but you also called out negative mix impacts on UTAS on the OEM front.

I was just wondering if you could just help us a little bit more at the segment level in understanding those trends and how we work through the year.

I know you talked about E&D tailwinds as well.

Where will we see those primarily at Pratt?

Any extra color would be helpful.

Sure.

So I think the trends, unfortunately as you know at the segment level 2016 is a year where only CCS is talking about a growth in earnings.

So the challenge with first quarter is a little more pronounced in the case of UTAS, in the case of Pratt and in the case of Otis where they will recover as the year progresses.

But the first quarter is going to be more than disproportionately down in earnings at those segments relative to their full-year guidance.

It's the mix at UTAS that you talked about, Carter, it's the continuing pricing challenge at Otis and the lack of service recovery yet in Europe.

CCS continues to do well, although that has a tough compare in the first quarter based on just the strong organic growth they had 5% organic growth last year.

Yes, 6%.

6%.

So I think as a result CCS will have a little bit of a challenge.

The good news will come as I said on the pension side which will flow through some of this -- all of the segments and then the share count reduction which is the affective capital deployment that we have been doing.

So again no surprises here, Carter.

I don't want to let anybody feel that this is new news.

This is something we knew all along when we put the plan and our guidance together.

It is just the way the structure of the year is.

Yes, so just trying to get the cadence right.

So effectively Q1 will mark the low point for all four segments?

Yes.

Okay, thanks guys.

David Strauss, UBS.

Good morning.

Greg, on the GTF there was a comment in the release today about hitting all its key performance requirements.

Can you just update us on the cooling issue where that stands getting a fix there?

Yes, David, we continue to make progress there.

I think we talked about this in detail in December.

I would tell you that the Pratt team has identified the fixes, it's a software fix and a minor hardware fix.

Just to be clear, every next-generation commercial engine out there has to cool down to a uniform thermal before they start the engine.

So this is not something endemic just to the GTF.

The starting time and the cooling is a little longer than what the customers would have liked.

These changes that we're talking about on software and the hardware again relatively simple to do, not a big cost and I think importantly doesn't change any of the fuel burn or noise or remissions on the engine.

These are really minor changes.

If you guys are looking for something to worry about worry about things we don't control like FX.

I wouldn't worry about the technical aspects of this GTF.

It is rock solid.

Greg, when would you expect the fix to be in the market?

So we expect the hardware comes in for the changes in our February build.

We'll get those out by towards the end of the second quarter.

You'll actually see those out there in deliveries.

Okay and --

I was just going to say, given the slow ramp it's actually beneficial, there's not going to be a lot of engines out there with the old hardware.

We'll retrofit those over the course of the next year or so.

Again we expect the impact to customers to be very minimal.

Okay and follow-up, on the aftermarket pretty good numbers this quarter both at Pratt and UTAS.

How are you feeling relative to the forecasts you've given for 2016?

I think pretty much flat to low single-digit growth.

Do you think maybe there could be upside or how do you feel overall?

Thanks.

Look, we're very encouraged by what we saw at the fourth quarter.

We've been talking about aftermarket growth.

RPMs are up as I said 7%.

We expect them to be up at least 5%, 5.5% this year.

Airline profitability remains very, very strong.

So we expect the guidance that we gave, clearly we have a very good shot at that.

And if there's upside we'll talk about that at the end of the year as opposed to the beginning of the year.

Okay, that works.

Thanks.

Ron Epstein, Bank of America Merrill Lynch.

Good morning.

So big picture question for you.

I think I've been covering you guys almost 15 years and you've been doing restructuring for 15 years.

When do we finally see a return on all this restructuring?

It's like billions a year.

When does that happen?

So, Ron, we've been doing restructuring -- I've been here 26 years.

I think every year we have done restructuring amongst those 26 years.

The fact is we see the payoff all the time.

As I think about the latest big tranche of restructuring, that's 2009 through 2014 we did about $3 billion of restructuring.

You saw big payoff from that restructuring, in fact almost $3 billion of run rate savings.

We'll continue to see savings on this next tranche of restructuring.

It's about $1.5 billion over four years from 2015 through 2018.

By 2019 you should see about $900 million of run rate savings.

The fact of the matter is you've got to keep doing this.

This is in the DNA of UTC is to take cost out to do more with less.

It's about productivity every day because the world just gets more competitive.

And had we not done the restructuring in the past we wouldn't be where we are today in terms of product cost and global scale.

So I'm -- it's real, it's necessary and it's things that we know how to do.

It's also, Ron, since you're talking big picture I'll step back also on a big picture basis and remind you of the operating margin that UTC had.

In mid 90s when we started doing restructuring it was 6% and it is 16.7% now.

And a lot of that margin expansion has been fueled by this continuous restructuring that we do taking cost out.

I would also put our SG&A rates against any industrial company and you will see that our aerospace companies are best-in-class in terms of SG&A as a percent of sales as are our commercial companies.

So all that has been fueled.

Where we need to continue to work on is reducing our manufacturing footprint as Greg talked about in December where we have 40 million square feet of which 22 million are still in high-cost locations and we need to continue to work on that.

So productivity is a way of life at UTC.

As Greg said it is part of the DNA and we just need to keep doing that.

Okay, and then just one quick detail.

That $900 million to the Canadian government, is that the Bombardier tax?

I mean, can you give us more color, what is that?

So, look, we over the last several years we have had these agreements, multiple agreements with the Canadian government on through which they would provide reimbursement for a portion of our E&D.

We had in turn promised certain jobs in Canada and certain supply chain related investments.

And in return we had to pay royalties for several years.

So where we stood at the end of last year was we had 20 years-plus of variable, high royalty payments looking ahead for us and all we did was crystallize that liability into a certain payment at this point of time which we'll pay off in four years.

Net-net it's good news for both the Canadian government and for us.

We've essentially given back the E&D funding that they had given to us.

We've also taken advantage of a good exchange rate in the process.

Canadian dollar is at a pretty decent rate right now.

And so I think net-net it's a pretty good thing to do.

Okay, that makes sense.

Thanks, guys.

(Operator Instructions) Cai von Rumohr, Cowen and Company.

Yes, thank you very much.

So I joined a little bit late but maybe tell us how many GTFs you delivered in the fourth quarter?

And you've mentioned that supplier issues kind of are a potential bottleneck.

Where are you on that and are there any other potential restraints beyond the cooling issue?

Thank you.

Yes, I think total deliveries on GTF in the fourth quarter were only five.

And keep in mind that goes to 200 this year.

As I think about the technical aspects of the engine as I said before this cooling issue has really proved to be a non-issue.

We've got that issue behind us I believe.

And as far as the rest of the engine goes, so far it's been rock solid.

It's 15% better on fuel burn, it's 15% better on emissions, it's 75% better on noise than the engine it's replacing.

And it's been proven in both the development program and in flight test to meet all of those criteria.

I think you're going to see airlines lining up to get this.

We've got orders for more than 7,000 of these engines, keep in mind.

As far as the supply chain I think it's all of the normal challenges that you have in any ramp-up.

Again we are ramping down the V2500, ramping up the GTF.

There are 500 suppliers on this engine.

The fact is there's probably five or 10 that cause us concern on a daily basis.

Leduc and the team at Pratt are working all of those issues on a daily basis.

We've been putting a lot of resources into supply chain.

So there's no one supplier I would call out here other than to say that we're on top of all the suppliers making sure that they meet their commits.

Keep in mind that 80% of this engine comes from the supply chain.

So supply chain has to be perfectly synchronized with the build plan and that's what we're working to ensure.

Jeffrey Sprague, Vertical Research.

Thank you, good morning, gents.

Maybe shifting gears a little bit to the commercial companies.

Just couldn't keep up with all the color on CCS.

It was unclear to me the comment about commercial orders down.

Did that include Transicold in that commentary?

Could you just speak to the actual commercial HVAC end market and what you're seeing there in the quarter in sales and orders?

Yes, sure, Jeff.

So we talked about CCS equipment orders in the quarter being down 5%.

That was largely driven by declines in Transicold which if you recall last year, we talked about Transicold orders being up more than 50%.

So some of that's compare.

If you look at sort of across some of the other product lines, global commercial HVAC was down about 2%, driven by a softer North America.

And both the fire and security products business and the field businesses were down a little bit as well.

I guess one bright spot on the fire and security side was that China was actually up in the quarter about 8%, and that was driven by our fire detection and alarm business in Qinhuangdao -- that's the GST business -- which saw better order rates coming out of the commercial vertical.

And the comment about weakness in US export related, was that also a Transicold comment or is there something else?

It was commercial.

It is likely to do with some of the projects in the Middle East, if you will, on the export side where we've seen some weakness.

Commercial HVAC.

Commercial HVAC.

Right.

And then maybe just shifting gears, so you decided to take a charge and bite the bullet on repatriation.

Do you see more of that as we move forward or you just kind of is that a one-time opportunity you're taking given the gain on Sikorsky and other dynamics in the quarter?

We were trying to be opportunistic.

I think it will bring back about $1.4 billion as a result of that charge.

I think the effective tax rate on that is about 17%.

So we thought it made sense to do that.

Given what we're trying to do this year in terms of another $3 billion of share buyback and $2 billion-plus of dividends it just seemed to be the most advantageous way to get at that cash.

There are no further plans to take charges like that.

We bring back $500 million to $1 billion a year anyway from overseas at typically relatively low tax cost.

But this was just kind of a one-time item and probably won't be repeating in the future, or the near future at least.

And if I could just sneak one more in, can you give a little bit more color there?

The end markets overall seem to be getting a little bit better.

Do you still think that traditional lag effect will kick in, that better tenor on equipment will feed back into service or is there some other dynamic there?

Yes, you're exactly right, Jeff.

I think if you look at what makes the service revenue go up it's essentially conversion of new equipment coming out of warranty into service contracts.

And that has been anemic in Europe as you know.

The fact that new equipment orders are starting to be up and new equipment sales in EMEA was up in the fourth quarter as well, those will translate into service contracts further down the line.

The other aspect is also that the modernization side of the service business has been hurt significantly as some of these regulations have worked itself out primarily in France.

I think we've hit bottom there.

Modernization backlog is actually up so that should start to turn around as well.

So the combination of new equipment sales turning into service contracts and modernization improving should start to turn that.

But it is going to be a slow process as you said, Jeff, it's not going to turn right away.

Yes, Jeff, just to put a couple of data points around that, we talked about Europe new equipment orders or EMEA new equipment orders being up 20%.

They are also up better than 20% for the year including Western Europe which was also up double digits.

So that's encouraging.

And then to Akhil's point on the mod side if you look at the end of 2014 we finished the year with MOD backlog down in the teens.

It was essentially flat in 2015.

Now flat, we'd rather see up, but it's certainly a better starting point going into 2016 than what we saw last year.

Great, thank you for that.

Jason Gursky, Citi.

Hey, good morning.

Thanks for taking my call here.

Just going back to China on the commercial businesses and the comment that you made that it was a bit of a disconnect between HVAC and fire and security orders relative to Otis, can you just provide a little bit more color on why that disconnect has developed and let us know whether you think one is a leading indicator over the other?

Meaning is HVAC and fire and security begin to follow Otis or are we going to begin to see a reversal of Otis and see some better things to come more in line with what we've got it HVAC and fire and security?

As you think about Otis in China, 60%-plus of the Otis business relates to residential construction.

And that of course is the market that has been the most hurt by I would say the overbuilding and maybe some of the overleverage that we've seen in the Chinese economy in the last five or six years.

So it's not surprising to see the Otis orders down a lot more than the rest of the business.

On the commercial industrial side you see again orders were flattish on our commercial HVAC business.

That's really what we see in the overall economy, industrial economy.

There's not much growth but it's not declining the same way the residential space is.

And if you look at the fire products that is really more of a consumer-driven purchase as opposed to residential construction or even industrial and that was up 8%.

So as China makes this transition from this industrial economy to this consumer economy we can expect to see more of these trends continue.

But urbanization is not done, as I said, you've still got a huge population of people moving to the cities.

We're not giving up on the residential elevator market.

We still see growth there.

We see a lot more growth I think on the service site.

Otis is a service business.

I think we were servicing 165,000 elevators at the end of the year.

That's up about 20%.

We expect another 20% kind of growth as we go into 2016.

So the dynamics are not unexplainable.

I think you just need to peel it back a layer and understand the individual dynamics of the businesses.

That's helpful.

Thanks.

Nigel Coe, Morgan Stanley.

Thanks, good morning.

We've covered a lot of ground so I just want to do a couple of quick cleanup questions here.

So going back to the $1.5 billion of charges in the quarter, is that all cash?

And then on the I guess specifically on the Canadian R&D reimbursement does that have future indications for margins?

It feels like there's a royalty payment that goes away in the future years.

Sure.

The second question first, Nigel.

The Canadian royalty trade-off would probably be a $30 million benefit in 2016 but it will result in about $100 million EBIT benefit four or five years out when the E&D reimbursement were expected to be there which are going away now and the royalty payments go away as well.

So definitely benefit to Pratt four or five years out of about $100 million or so a year.

With regard to overall the cash charges a lot of these payments the Canadian payment which is the largest one of the $1.5 billion charge that you refer to is cash.

In 2016 we would probably have a $500 million cash outflow as a result of these charges that we have taken in Q4 of this year, roughly $250 million or so from a Canada and another $250 million or so for this tax-related cash repatriation if you will.

So that's the impact.

The rest of it will follow over the course of the next few years.

Okay, that's really helpful.

And then just quickly on CCS and I know this question has been asked a few times but the down 5% orders, do you have the backlog number to hand?

How did the backlog look year over year?

The backlog we can get you the exact number later on but I do believe the backlog was because the full-year was up for commercial HVAC and the sales were up slightly more so, backlog may be slightly down is what I am guessing, but we will get you the exact number.

Yes, don't have the number handy but I would just remind you that on CCS it's a relatively quick turn, not relatively, very quick turn.

So on the HVAC side you're going to turn orders in a few weeks up to as high as maybe three months and on the fire and security side it's essentially a book and ship business.

So I would say backlog is a lot more important of the Otis side than CCS.

Okay, thanks a lot.

Deane Dray, RBC Capital.

Thank you.

Good morning everyone.

I was hoping you could comment on whether you see any changes in how UTC's competitively positioned with this announced JCI-Tyco merger in commercial building services?

We've talked about potential consolidation, so this is a big one here.

Does that change the equation for you guys at all?

Not very much.

I think Tyco's fire business if you think about it is primarily a field business, it's about 75% field, 25% product.

We obviously compete against them, both the field and the product.

We're actually more heavily weighted to the product side than the field side.

And as far as JCI goes on their building efficiency side obviously we compete with them against with Carrier.

But again they'll take some cost out as I think you saw in their press release, just similar to what Geraud and McDonough and Delpech did when we put fire and security and Carrier together about three years ago.

So it's nice to see they are running our playbook there.

But I don't really see that there's a big competitive impact as a result of that.

Thanks.

Then just a question for Akhil on the asbestos charge.

How far out have you reserved the asbestos liability and have there been any changes or material changes in your insurance coverage?

As I said earlier I think we've looked at the potential from all the knowledge we have today of the pending and future expected claims and adjusted that downward for the insurance agreements that we entered into in Q4.

So net of those two is what you're seeing here.

Hopefully we won't see any greater charges beyond this but you never know.

But at this point based on the best knowledge we had we took that into account.

So just to clarify on the time horizon we've seen companies take different approaches here.

Did you take what's called an end-of-life charge which is as far as you can foresee?

It sounds like that's in your answer or did you do a 10-year reserve?

No, it's an end-of-life is the approach we took here.

That's great to hear.

Thank you.

Sam Pearlstein, Wells Fargo Securities.

Good morning.

Can you talk a little bit about Pratt & Whitney?

It looks like when you talked, I guess before you talked about I think it was $15 billion in revenues, looks like it came in a little bit less even on an adjusted basis.

Just was that military weakness?

Why was it a little bit light in the fourth quarter?

Sam, you're exactly right.

If you think about the revenues in Q4, Pratt was a little short of our expectation even from December.

While we hit on the earning side we were a little short.

We were 100% on contract at Pratt as we exited the year both on the commercial and the military side.

But we had expected to get a few more engines out the door on the military side than what actually shipped.

So there was a little bit of I'll say backlog there that we had expected to get out.

The other one, Sam there is the Pratt Canada business.

As you know the helicopter-related engine shipments have been weak throughout the year.

There has also been some weakness in the general aviation market, particularly related to engines for the agricultural segment, etc.

So I think Pratt Canada and military engines, those were the two shortfalls versus say a few months ago.

And then just on Otis, can you talk a little bit about sequentially from the third quarter to the fourth quarter there's over a 200 basis point shrink in the margin on an adjusted basis.

Is that foreign exchange?

Is that the R&D step-up you've talked about?

What --

Yes, Sam, it's largely due to the foreign exchange because as you recall Q3 actually had a positive, roughly $30 million benefit from mark-to-market adjustments and that almost entirely reversed in Q4.

So if you adjust for those things I think the adjusted margins are not that far off quarter to quarter.

Okay, great.

Thank you.

I would now like to turn the call back to Mr. Hayes for closing remarks.

Thank you, Kaylee.

First of all, thanks for listening in today.

I appreciate it.

I know there's a lot of data here and Paul and the team will be available throughout the day and the week to take all of your questions.

I look forward to seeing many of you at our Annual Investor Meeting.

We'll be doing that in New York on March 10.

Again if you have any questions give us a call.

Take care everyone.

You may all disconnect.

Everyone have a wonderful day.