雷神技術公司 (RTX) 2019 Q3 法說會逐字稿

Good morning, and welcome to the United Technologies Third Quarter 2019 Earnings Conference Call.

On the call today are Greg Hayes, Chairman and Chief Executive Officer; Akhil Johri, Executive Vice President and Chief Financial Officer; and Carroll Lane, 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, excluding restructuring costs and other significant items of a nonrecurring and/or nonoperational nature, often referred to by management as other significant items.

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

UTC's SEC filings, including its Forms 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

In addition, in connection with the proposed Raytheon merger to be discussed today, UTC has filed with the SEC a registration statement, which includes a prospectus of UTC and a joint proxy statement of UTC and Raytheon that contains important information about UTC, Raytheon, the merger and related matters.

(Operator Instructions)

Please go ahead, Mr. Hayes.

Okay.

Thanks, Daniel, and good morning, everyone.

Let me start out by apologizing for the consistency of these calls for the last year or so, but as you guys saw in the press release this morning, it was another really good quarter for UTX.

Now we reported adjusted EPS of $2.21, and that's up 15% versus the prior year and a continuation of the performance that we've seen for the last year.

Sales were up 18% with organic growth of 5%.

And importantly, margins expanded in each of the 4 segments.

Free cash flow, $2 billion in the quarter, really, really good number.

So based on our year-to-date performance, we're going to raise our outlook for the year once again, and we now expect adjusted EPS of $8.05 to $8.15 for 2019.

That's up from our prior expectation of $7.90 to $8.05.

Akhil will take you through the puts and takes of that in just a minute.

We're also going to raise our free cash flow outlook and we now expect $5.3 billion to $5.7 billion for the year, and again, that's up from our prior expectation of $4.5 billion to $5 billion.

Just a note, $500 million of that increase is from a portion of expected portfolio separation costs, primarily the tax-related payments that will probably get pushed out into 2020.

The remainder is good news from operations.

So no surprise here, 2019 is shaping up to be a really good year for UTC and the businesses are focused on driving results and meeting customer commitments.

Beyond delivering on the current year, we continue to execute on our strategic portfolio initiatives.

Those of course include the integration of Rockwell Collins, the separation of Otis and Carrier into stand-alone public companies, and lastly, of course, the merger with Raytheon.

So looking at the results in Q3, Collins continued to deliver great performance, with legacy Rockwell once again exceeding our expectations.

Adjusted EPS accretion in the quarter from legacy Collins was $0.16.

For the full year, we now expect to see around $0.60 of accretion from Rockwell Collins.

That's up about $0.10 from our prior expectations and about $0.25 up from our outlook coming into the year, really good performance.

This performance is really highlighted by accelerated cost synergy capture, which only strengthens our confidence in our ability to realize at least $600 million in acquisition-related cost synergies by year 4. The team is also targeting a pipeline of over $1 billion in sales synergies, of which over $175 million have already been captured in orders.

Okay.

Maybe just a second on the spins.

We continue to make good progress on day 1 operational readiness and the public company management teams are now largely in place.

As I said last month, we continue to target April 1st as the spin date for both businesses.

That is, of course subject, to the timing of the tax rulings from the U.S. and Canada, which we continue to expect to receive by year-end or shortly thereafter.

However, no surprises with the portfolio separation, we remain on track.

Finally, earlier this month, we are very pleased that both UTC and Raytheon share owners overwhelmingly approved the combination of our aerospace business and Raytheon.

We're going to continue to work closely with regulators for approvals required for the transactions, and we're making good progress on forming the management teams for Raytheon Technologies.

No surprises so far, which is really the good news.

I remain very excited about the opportunity the merger is going to create for a best-in-class, technology-driven global aerospace and defense system provider, and we continue to expect the transaction to close shortly following the completion of the portfolio separations.

So with that, let me turn it over to Akhil and Carroll to take you through the results, and I'll be back to wrap it up and then we'll take some Q&A.

Mr. Johri?

Thanks, Greg.

So I'm on Slide 2. For the third quarter, reported sales of $19.5 billion were up 18%, including 5% organic growth, and that's on top of 8% organic growth last year in the third quarter.

We also had 14 points of M&A benefit, mainly the Rockwell Collins acquisition.

Foreign exchange was a 1 point headwind in the quarter.

Adjusted EPS was $2.21, up 15% versus the prior year.

On a GAAP basis, EPS was $1.33, down 14% versus prior year and included $0.06 of restructuring and $0.82 of net nonrecurring charges, the largest of which was $0.73 related to the portfolio separation activities.

Free cash flow for the first 9 months of 2019 was $4.7 billion, up 48% or approximately $1.5 billion compared to 2018.

This strong year-to-date performance gives us confidence in the increased free cash flow outlook for the year that Greg mentioned earlier.

As a reminder, we expect significant outflows in Q4 from the tax and transaction costs related to the portfolio separation actions.

Overall, there is no change to our estimate of $2.5 billion to $3 billion for the total onetime portfolio separation cash cost.

However, within that, tax cost will be lower than the $2 billion we were expecting earlier and debt redemption and other transaction cost will be slightly higher.

Turning to Slide 3, you see the drivers of our organic growth in Q3.

Looking at the commercial businesses first.

In the Americas, sales were flat, Otis up low single digits and Carrier down slightly.

On an encouraging note, award activity for Otis in North America remains strong in the quarter on very high levels already.

For Carrier, transport refrigeration was down year-over-year off a hard compare.

Within EMEA, sales were also flat in the quarter.

The economic outlook across Europe remains mixed and weaker than our expectations coming into the year.

Activity levels in the Middle East remain very low for both Carrier and Otis.

In Asia, sales were up 7%, China sales were up 11% including mid-teens growth at Otis.

Importantly, this was the eighth consecutive quarter of positive price mix in Otis new equipment orders in China.

On the aerospace side, commercial OEM sales were down 1%, driven by Collins Aerospace, which was down 8% on an organic basis.

Growth in new platform sales there was more than offset by the expected declines in legacy platforms.

Pratt & Whitney commercial aero OEM sales were up 13% organically.

For commercial aftermarket, sales were up 11%.

We continue to see healthy air traffic and strong fleet utilization.

At Collins Aerospace, commercial aftermarket sales were up 20% organically.

Provisioning for the legacy UTAS business was up over 30%, driven by continued MRO demand and airline activity.

Pratt & Whitney saw commercial aftermarket growth of 6%.

Organically, military sales were up 15% at Pratt & Whitney and 14% at Collins Aerospace, driven by both OEM and aftermarket strength across key platforms.

Now before I hand it over to Carroll, just a few comments on our updated 2019 outlook and the moving pieces.

As you saw, we have improved our adjusted EPS and free cash flow outlook range for 2019.

We have also tightened our sales range for 2019 and now expect total reported sales of $76 billion to $76.5 billion versus our prior outlook of $75.5 billion to $77 billion.

This updated sales range reflects the adverse impact of the stronger U.S. dollar as well as a reduced organic sales outlook for Carrier.

More on that in a minute.

At the UTC level, we continue to expect organic sales growth of 4% to 5% given the strength in the aerospace businesses.

Now at the segment operating profit level, a reduced outlook at Carrier is offset by the continued strength at Collins Aerospace.

Like last quarter, we have included a chart in the appendix on Slide 12, with updated sales and profit walks for both those businesses as a reference.

So what's happening at Carrier?

In Q3, we saw continued weakness in orders in the Refrigeration business, higher distributed inventory in the U.S. residential HVAC channel and a softer EMEA market.

We now expect organic sales for Carrier to be down low to mid-single digit in the fourth quarter, with low double-digit decline in the Refrigeration business.

We have reduced Carrier's full year sales expectations by approximately $500 million and profit expectations by the corresponding approximately $125 million.

The change in profit also includes nearly $25 million of negative impact from the significantly lower discount rates used for evaluation of long-term liabilities, including warranty.

However, looking beyond the short-term challenges, fundamental growth drivers for Carrier's end markets remain intact.

Carrier continues to have significant value-creation opportunities through their focus on innovation, G&A reduction and portfolio optimization.

On the positive side, we see a $125 million improvement in the full year adjusted operating profit outlook for Collins Aerospace driven by continued strength in commercial aftermarket, both at heritage UTAS and Rockwell Collins, higher military sales and higher synergies from integration efforts.

Both Otis and Pratt continue to perform well, and we have raised the low end of their respective operating profit growth outlooks.

Below the segment operating profit lines, we now expect a full year tax rate of approximately 22.5% compared to our prior range of 23% to 24%.

There are other puts and takes that are slightly negative.

Of significance, we realized a pension curtailment gain of $98 million in the third quarter that was adjusted out of earnings as you saw.

However, as part of those actions, we were also required to true-up the 2019 pension expense discount rate -- based on the discount rate -- which resulted in a $0.04 headwind to our nonservice pension income for the year, mainly in the fourth quarter.

With that, let me turn it over to Carroll.

Okay.

Thanks, Akhil.

I'm on Slide 4. I'll be speaking the segments at constant currency, as we usually do.

And as a reminder, there's an appendix on Slide 15 with additional segment data you can use as a reference.

All right, starting with Otis.

Otis sales were $3.3 billion in the quarter, that's up 4% organically.

New equipment sales grew 2%.

High teens growth in China was partially offset by low single-digit declines in North America and EMEA.

Service sales growth was broad based and was up 6% in the quarter.

New equipment orders grew 6% in the quarter, with growth across all major regions.

Orders in the Americas were up 10% and that was driven by the timing of major project bookings in North America.

Asia, excluding China, and Europe, saw orders up mid-single digits in the quarter, and China orders grew 5% as the business continues to benefit from favorable pricing and mix.

And that's the sixth consecutive quarter of value growth in China.

Operating profit was up 7% at constant currency driven by a strong volume growth as well as favorable price and mix in both new equipment and service.

This marks the fourth consecutive quarter for operational profit growth at Otis, and it's largely from consistent improvement in the profitability of the service business.

Foreign exchange translation was a 2-point headwind to sales and earnings.

And given the strong year-to-date performance, we expect that Otis will finish at the high end of their constant currency profit growth range.

That's up approximately $75 million.

The profit growth at actual FX will be in the range of $0 million to $25 million.

Turning to Slide 5. Carrier sales were flat organically in the quarter.

Transport Refrigeration was down 6% with container down more than 20% and commercial refrigeration down 5%.

Global HVAC sales were flat, with North America residential down 1% and global commercial HVAC up 1%.

Global Fire & Security was up 2%.

Carrier equipment orders contracted 11% organically in the quarter and that's primarily driven by a decline in refrigeration orders.

Transport Refrigeration orders were down 68%, driven by higher-than-average cancellations coupled with tough compares in North America truck trailer.

You'll recall that orders for Transport Refrigeration were up more than 90% in Q3 of 2018.

Commercial refrigeration orders were down 5% in the quarter.

Fire & Security product orders were down 2%.

Global HVAC orders were up 6% with both North America residential and global commercial HVAC up mid-single digits.

At constant currency, operating profit was up 1% in the quarter.

Pricing benefits and material productivity, net of tariff impact, were partially offset by lower volume and mix.

Foreign exchange translation was a 1 point headwind to earnings.

As Akhil referenced, volume is expected to be down in the fourth quarter and as a result, we are lowering Carrier's outlook for the full year.

We now expect organic sales to be flat with operating profit down $100 million to $125 million at actual currency.

Okay.

Shifting to Pratt & Whitney on Slide 6. Sales of $5.3 billion were up 11% on an organic basis and 10% on a reported basis.

Commercial OEM sales were up 17% on higher Pratt & Whitney Canada engine shipments and a favorable mix of large commercial engine sales.

Commercial aftermarket sales were up 6%.

Early GTF shop visits contributed to the growth as well as V2500 overhauls returning to expected levels with inductions up 10% versus the prior year.

Favorable aftermarket content at Pratt & Whitney Canada also contributed to the growth.

Military sales were up 15%, driven by the continued ramp of the F135 program and strong aftermarket demand.

Operating profit of $471 million was up 15%.

Results benefited from commercial engine mix, continued GTF cost reduction and drop-through on higher commercial aftermarket and military volumes.

These tailwinds more than offset the absence of prior year commercial aftermarket contract adjustments and higher E&D and SG&A.

Looking ahead, we expect Pratt & Whitney to grow full year operating profit by $225 million to $250 million.

Turning to Collins Aerospace Systems on Slide 7. Sales in the quarter were $6.5 billion, up $2.5 billion on a reported basis and up 7% organically.

Operating profit of $1.2 billion was up $568 million.

On a pro forma basis, which includes results for Rockwell Collins in the third quarter of 2018, Collins Aerospace delivered operating profit growth of 23% on 6% higher sales.

The pro forma sales growth reflects continued strength in the commercial aftermarket and defense channels, partially offset by lower commercial OEM volume and commercial aftermarket sales were up 17%.

Passenger traffic investment -- passenger traffic -- as well as investments in initial provisioning and demand for modifications and upgrades all remain strong.

Military sales were up mid-single digits, driven by higher F-35 volume and aftermarket demand.

Commercial OEM sales were down low single digits, driven by declining volumes on legacy programs, as Akhil referenced earlier.

Operating profit growth was driven by the contribution from Rockwell Collins, drop-through on higher organic sales as well as synergy benefits.

And this growth was partially offset by mixed headwind and higher SG&A spend.

Given the continued end market strength and solid execution at Collins, we now expect full year reported sales growth of approximately 55%, with organic sales up mid- to high single digits versus our prior outlook of mid-single digits.

And we now expect Collins Aerospace operating profit to be up $1.85 billion to $1.875 billion for the full year.

That's an increase from our prior expectation of $1.7 billion to $1.75 billion.

And with that, I will hand it back over to Greg.

Okay.

Thanks, Carroll.

So as always, a few moving pieces but overall, I would tell you we're very pleased with our third quarter results, and we're confident in our improved adjusted EPS and cash outlook for 2019.

While the macroeconomic environment shows varying degrees of strength through our commercial businesses depending upon the region, we continue to see growth in commercial air traffic as well as favorable trends in defense spending, the combination of which benefits both Pratt and Collins Aerospace as you've seen this quarter.

We do have some near-term pressure at Carrier, but I'm confident that Dave Gitlin and the team are taking the right actions to position the business to drive long-term shareowner returns.

We see solid long-term growth fundamentals on the commercial end markets, driven by urbanization and growing middle class and regulatory changes, all drivers that will translate into growth for Carrier as well as Otis.

Across all of UTC, we remain focused on the key priorities, which remain unchanged.

First and foremost, it's executing on customer commitments, continuing to innovate, continuing to take cost out and to be disciplined in capital allocation.

I remain very excited about the future for Otis and Carrier as stand-alone public companies and for the future of UTX as we merge with Raytheon to become Raytheon Technologies.

So before we go to Q&A, just a couple of personnel announcements, something we don't typically do here.

And I think that some of you probably have already heard that Carroll Lane, this is his last earnings conference call after about 3 years in the seat.

Done a great job.

Carroll, call sign Cujo, for those of you that follow that type of thing, will become President of our Commercial Engine Business at Pratt & Whitney reporting to Chris Calio and that will be effective about the 1st of the year, assuming we let him go then.

Carroll's done a great job.

I hope all of you have a chance to thank him for that, and we wish him well as we hand him the keys to the future of Pratt & Whitney.

Good luck.

Secondly, just perhaps more importantly, Akhil Johri will be stepping down as CFO of UTC on November 1st.

For Akhil, this caps a 31-year career at UTC.

And everybody, I'm sure, will miss him.

I will personally miss him, both for his sage advice as well as for his calming influence.

Our goal, however, is to make you miss him not so much by ensuring a seamless transition.

Akhil, as you know, has been instrumental in the transformation of the UTC portfolio and he's been a great partner.

If there's a better CFO in corporate America, I haven't met him, that includes me.

So Akhil, thank you, and good health to you and Shashi in retirement, and I'm sure you guys will keep busy.

Best of luck.

Thank you.

So with that, effective November 1st, Neil Mitchill, formerly the Chief Financial Officer of Pratt & Whitney, will assume the job of acting CFO.

Neil will hold that role until the merger is complete with Raytheon sometime early next year, shortly after the separation of the commercial businesses.

Neil joins us -- joined us in 2014 from Pricewaterhouse where he was a senior partner.

Many of you know Neil from his time at Pratt and before that as Controller of UTC.

So again, we wish both Neil well and the whole team as we go through these transitions.

Our goal again is to make this as seamless as possible.

So best of luck to all of you.

And with that, let me open up the call for questions.

(Operator Instructions) Our first question comes from Carter Copeland with Melius Research.

Hey, good morning guys.

Congratulations, Carroll, on the move, and Akhil, it's been an absolute pleasure to work with you over the years, so we wish you the best in retirement and you will be missed.

Thank you.

Thanks, Carter.

Just some clarification around the aftermarket strength.

Greg, I mean, obviously, ADS-B and that mandate has had a big impact on sales growth this year.

Can you give us a sense of what your updated thoughts on that contribution are?

And I wonder if you have any insight.

There's clearly some indirect sales benefit for that upgrade cycle where you have an airplane in there and you do some other work while you do that mandate work and I wondered if you might have any insight on how much indirect benefit you have from ADS-B in addition to the direct.

Thanks, Carter.

First of all, what's important as you look at the third quarter results at Collins, the ADS-B mandate actually was not a driver of growth, it really was provisioning in support of aircraft that are already out there.

So we saw decent parts growth.

ADS-B was relatively flat, but the provisioning was what drove the strength, which is, again, it's episodic, so I wouldn't get excited about 30% provisioning growth.

It's not going to repeat itself here in the fourth quarter.

At the same time, the ADS-B mandate, it certainly is driving growth.

It's been a key driver of some of the good news.

It was not really expected on the Collins acquisition this year.

And keep in mind that ADS-B mandate has to be completed in the U.S. here by the end of the year and Europe by June of next year.

So we'll get a little bit of a benefit, but it's a pretty tough compare as we think about next year for Collins, both on ADS-B as well as just the overall strength in the aftermarket.

So again, no drama.

I think it's all what we had expected.

As far as ancillary business associated with the ADS-B mandate, again, this is kind of a one-off thing and we really haven't seen anything that would indicate that we're pulling through a lot of additional work as this mandated change has been occurring.

So I think it's really just -- it goes to the fact there's a huge demand for spares and for provisioning as people are looking for capacity.

Capacity is at an all-time high and with the 737 MAX continuing to be grounded, people are flying over planes a lot longer.

We expect, obviously, that trend is not going to continue once the MAX gets back in the air.

So again, good news for us this year, but a little bit of headwind next year.

And our next question comes from Ronald Epstein with Bank of America Merrill Lynch.

Hi, good morning guys, this is Kristine Liwag calling in for Ron.

There were news earlier this week about the Airbus A220 program.

Can you provide any details on how we should think about the progress of the engine in that program and the progress of the fixes?

Yes.

Hey, Kristine, maybe just a quick word.

We did have a couple -- we've had an issue that we found on the GTF engine on the A220, that's the 1500 -- PW1500.

It's the same engine that's on the Embraer 195.

As a result of this issue, we actually had a mandated inspection period for the airlines.

And so what you saw earlier this week, one of the major operators actually put their fleet down for about a day and a half to go through and update, and all the inspections.

That went off without a hitch, and we continue to have an accelerated inspection on this engine.

Keep in mind this has nothing to do with the A320 fleet, which is the PW1100, which is the vast majority of the fleet.

There's probably about 100 of these engines out there in service today.

We're working through the root cause analysis.

I don't have anything to report other than the fact that we remain confident in the engine.

Clearly, any time you've got an issue like this, we're on top of it.

The guys are working through it.

It's not a safety issue, first and foremost, that's an important thing to remember.

This is just increased inspection routine that we have -- there is an AD out there for that and Pratt has instructed or asked the operators.

We feel badly about what they're going through, but they still have to just have increased inspections for this issue but no other concerns at this point.

Our next question comes from Julian Mitchell with Barclays.

Hi, good morning, and I'll wish Carroll and Akhil all the best, and thank you for the help.

In terms of, I guess, my question, really around the outlook at Carrier.

Sales are guided to be down in Q4, probably down through much of next year just given what will happen at the Refrigeration business.

So just wondered what your outlook was for that revenue line in the coming quarters.

And also, do you feel that you're doing enough on the cost base?

I saw restructuring spending was up almost double in the 9 months at Carrier but you've got a pretty big EBIT decline in Q4.

Should we see even more acceleration in restructuring coming up in that business?

So first, just to give you a bridge for what has changed in Carrier, it's isolated largely to 2 businesses.

One is the transport -- the Refrigeration business in total but transport Refrigeration specifically.

Julian, if I was to break down the $500 million decline in sales from our prior outlook, $100 million of that is just FX, right, dollar has been stronger; $200 million is on the Refrigeration business; and about $150 million on the residential HVAC business, which is going to be flattish now compared to our expectation of mid-single-digit growth.

So not a decline, just a mid-single -- a flat growth profile there.

Transport Refrigeration is where the biggest drama is and that's because some of it is just because we had tougher compares, some of it is just declines in the backlog that we have seen, both on the container in the North American truck trailer side and some weakness in Europe truck trailer.

Now that business, I've lived through that at least 4 short cycles in the last 20, 25 years, and I'll tell you that goes down sharply, but it comes back pretty sharply as well.

The redeeming feature of that business is that the underlying growth of refrigerated trade continues unabated at 3% per year type of levels.

And even if you believe that the short-term perturbation we are seeing, I'll give you just one example and it can apply to container as well, but if you look at the North America truck trailer market today, it's about 46,000 units we expect for this year.

15 years ago, that market on average was somewhere in the mid-30s, so 33,000 to 35,000 units.

That would suggest a compound annual growth rate of 2% in terms of capacity of the market when the underlying trade has been growing at 3%.

So even if there is some short-term adjustment and there is some decline that happens in North America truck trailer next year, it will come back whether it's the second half of next year or whether it's '21, but it will come back and come back strong.

We saw the same phenomena in container.

So I'm not too worried about that.

The good news on the residential HVAC side is I think the fundamentals for end market remain pretty strong.

We've seen -- we have been impacted more by the 2-step distribution that we have, so the inventory in the channel is higher than what we would have liked and that's impacting short-term carriers' sales.

Overall, again, not a big concern and restructuring certainly is being ramped up.

Yeah, let me just pile on there a little bit, a couple of points.

So we have been taking out a lot of costs.

We've reduced over 1,000 headcount at Carrier in the last few months, and that will continue on as Mr. Gitlin and company adjust the workforce to the size of the market.

Obviously, it's a challenge when sales are dropping in these very profitable businesses, and we know the sales will come back.

As Akhil says, the fundamentals remain very strong.

And I think even in the U.S., resi was essentially flat in the quarter off of a pretty tough compare from last year, where we saw pretty good growth in that market.

So there's no panic here at Carrier.

I mean the business remains strong.

I think the thing to keep in mind is margins still expanded by 30 basis points even with all of the drama in the marketplace.

And just as importantly the market in China, we actually saw decent growth.

And I think that's a 5% growth in commercial, which is pretty solid; Otis, the same thing, they saw really good strong growth in orders and even saw a positive sales again as we've talked about.

So the fundamentals of both the commercial businesses remain really good.

And I hate -- I don't want people to get too worried about this Refrigeration piece, which, again to Akhil's point, it's very cyclical but it does come back, whether it's container or whether it's truck trailer, Europe or the U.S. And again, the high confidence in Dave and team, we'll work through this.

And our next question comes from Steve Tusa with JPMorgan.

Hey, good morning.

Morning, Steve.

So just on this ADS-B thing and I'm not an aerospace analyst, so maybe I'm not as much of an expert as the other guys, but Honeywell talked about it as being like extremely minor, like less than maybe 50 basis points of growth on their total aerospace business over the last couple of years.

I mean you talked about it as being a tough comp, but is that -- you guys are, maybe even a bigger aerospace, more diverse aerospace business.

So is that kind of the right kind of framework for how big that is?

Because it just seems like it's like being talked about, it just should not be that big of a deal.

Steve, yes, the ADS-B mandate is driving about $250 million to $300 million of sales this year, right, with good margin.

So that's what you have to assume.

I think on a normal basis, you would probably see $60 to $70 million of sales from that aspect of that product line.

So that -- so it is significantly higher.

Again, you can do the math better than I can in terms of the total aerospace impact, but that's the level of sales that we are expecting.

Some of that will continue next year as well, as Greg said, because there is still the European mandate, which goes through until June of next year, but we will see a step-down next year and then see a little bit more of a step-down to normal levels in 2021.

Yes.

So like -- maybe like a little less than $100 million a year for the next couple of years type of step-down?

Yes.

Next year could be a little more than that in 2020 because you can go from like $300 million to $100 million to $150 million type of a number.

Again, we'll give more guidance and specificity in January.

But then the year after, it will be more somewhere in the $60 million to $75 million type of a range in 2021.

Okay.

And then just picking on Carrier here a little bit.

Lennox yesterday reported 20% growth in their independent channel and our checks kind of suggest that they're kind of aggressively moving in that direction because they're having a hard time kind of regaining the share the lost at the high end.

Are you guys seeing any of that?

I know you guys are mostly independent, and I mean, they've attacked you before in like commercial.

So are they trying to kind of pick away at some of your independents there?

Is that partly the reason why you guys are kind of more flattish and kind of into the fourth quarter a little more cautious?

No.

I think it's more a function of -- you saw the Watsco results as well.

I think those results weren't that different from, say, Lennox results in terms of the quarter or the distribution out in the -- with the end consumers.

The thing I look back at, Steve, is the -- how is that market share doing, right?

Ultimately, that's the real test of what or whether we are winning or not in the market.

We have got a pretty good position and the good news in the U.S. residential market, as you know, is that there is good data available.

AHRI provides us with the total industry shipments.

We know our shipments, we don't know what other people's are, but we at least know what the total industry is doing and what we are doing.

And when we look at that on a 12-month rolling basis, 12-month for a year because a quarter may be up or down, but when you look on a 12-month basis, our total splits business, ducted and ductless, is up about 15 basis points in terms of share from a reasonably high level already.

On the furnaces, we are probably down a little bit, 30 basis points or so, 30 to 40 is what I've seen.

So I think it's not like we are -- irrespective of what the others may be doing or seeing, we certainly know what we are seeing, and from that perspective, the shares are not that different than what we've seen historically.

And our shares are pretty good in that market.

Right.

One more just very quickly.

Just to clarify this ADS-B headwind.

I mean, there's plenty to offset that.

There's other products that are ramping, and I mean, you guys are obviously absorbing the MAX way better than others that are calling it out as more of an excuse.

So there's obviously other things that will offset this ADS-B is kind of not to be isolated in the context of other platforms that are growing for you guys, correct?

Yes.

Yes.

Look -- yes, that's exactly right.

2020, we would still expect to see growth in the commercial aftermarket at Collins.

I'm going to stop right there because I'm not going to give guidance for it.

But I would say the ADS-B mandate is just part of one of many moving pieces and what is a very large commercial aftermarket for Collins.

Our next question comes from Nigel Coe with Wolfe Research.

Thanks, good morning guys.

I think we've covered ADS-B here in quite a bit of depth.

So Akhil, first of all, thanks for all the help.

You'll be missed, and good luck with your next move.

Want to move to Otis and touch on the service trends, 6% growth in services.

By itself, it's very, very strong.

It's very, very broad based across geographies.

So maybe just touch on what's driving that, how you view the durability of that kind of growth rate.

And then maybe touch on Europe which also saw mid-single-digit growth, what we've seen in terms of price and volume in that region.

Yes.

That's actually the most encouraging part of the Otis story, the improvements we are starting to see in the service side, which is where a lot of our investments were focused in terms of digitalization of that business overall are starting to bear fruit.

And the best thing about, Nigel, as you said, was the broad-based nature of the growth in services.

It was across geographies.

It was across all major countries.

And it's across the 3 categories: maintenance, repair and modernization all grew, and I think the credit goes not just to the focus that Judy and the team have put on it but also the investments that we have made in ensuring that the mechanics are finally into the modern age with the digital tools that they need and have.

The repair business is doing particularly well, and that's again part of the tools that we have given, the new app that the team has put forth which makes it easier for both the customers and our mechanics and our service sales people to offer value-added suggestions to improve the performance of elevators in buildings.

And all that is starting to show in the numbers.

So productivity was pretty good in Europe per se.

This has been now the second quarter in a row where we have seen actually profit growth in Europe after several years of decline as you know.

So China is now 4 quarters of profit growth after a few years of decline, and Europe, 2 quarters of profit growth year-over-year after many years of profit decline, so it's all pointing in the right direction.

Yes.

So just a quick follow-on.

Obviously, the 30 bps of margin expansion at Otis is very good news.

But with positive price/mix in China, positive mix on aftermarket, lower steel prices, why can't margin expand more than 30 basis points going forward?

The new equipment growth -- clearly, margins -- the growth where it is coming is on the repair and the modernization side so there is a little bit of a mixed negativity, if you will, in the Otis service side.

The service contribution is growing in absolute dollars and margin is expanding as a percent, but we also are continuing to make strategic investments that you know, right, that there is still more of these handheld tools being given to additional service technicians.

There is still some pricing pressure on the new equipment side as we have talked about.

So I think China is seeing price/mix improve, but in North America on the other hand, on the new equipment side, there is certainly increasing pricing pressure.

So we are happy that Otis is showing profit growth, that's the first step and margins are expanding.

I won't get too far ahead of ourselves and start to expect 100 to 200 basis points of margin expansions.

Yes.

Look, I think, just to be very clear, we think margins can expand -- continue to expand.

We're market-leading today.

We're like a 15.5% this quarter at actual FX, so good progress.

But to Akhil's point, we still have investments to make.

We still have ERP systems that need updating.

We have digital tools that need updating.

And I think, again, steady margin progression is the story that you're going to hear for Otis for the next several years.

And when Judy is out talking about the Otis story for the coming years, I think that will be key messages.

We will get margin expansion, but most importantly, we're going to get top line.

And every time you sell an elevator, you service that 80% of the time and that's the annuity we want to continue to invest in.

So the fundamentals are strong, but we're not going to get ahead of ourselves here in terms of curtailing investment just to pop ROS for a year or 2. And again, steady progress is the word.

And our next question comes from Sheila Kahyaoglu with Jefferies.

Thank you and congratulations, Akhil and Carroll.

Thanks, Sheila.

Maybe this first one for you since you're taking over this business.

How do you think about what's going on with GTF?

Maybe you could update us on what -- how's the business trending as commercial deliveries were down in the quarter, what engine models were driving that.

Well, look, the GTF program overall is doing extremely well.

We've got over 4 million revenue flight hours on the engine dispatch reliability of 98 -- 99.8%.

So overall feeling very good.

If you think about the shipments, yes, you can look at the quarter, but more importantly, year-to-date, shipments to customers up nearly 30% on GTF.

So feeling very good about our progress there, feeling very good about our cost takeout on the engine.

That's clearly an ingredient to our success going forward.

So I think overall and holistically, we're feeling good about our market share, good around the cost takeout, good around the profitability.

We've get plenty of work to do in supporting our customers, but pretty positive at this point.

Great, thanks.

And then maybe just a follow-up.

I'm not an elevator analyst, but on Otis, what are you seeing in the service portfolio?

What are you seeing in terms of attrition rates and maybe investment needed there, Greg or Akhil?

No.

The attrition rates actually have been part of the reason why we are seeing growth in the portfolio.

As I often talked about before, Sheila, I think the first step is to ensure that the portfolio keeps growing quarter-after-quarter, and we are at -- close to 2.05 million units now.

At some point, Judy will start rounding that up to 2.1.

But just a little shy from that, but the good news is that the portfolio grew across geographies.

The only place where we are being a little more selective right now is in China, where we have adopted a strategy of smart service growth, where we are trying to make sure that we're not just taking service contracts for the sake of service contracts but that they're profitable service contracts over the long term, and we are continuing to look at the portfolio carefully from that perspective.

But really encouraging news is that there is good service growth.

If you exclude China, the growth in portfolio from Q2 to Q3 compared to last year, almost similar levels, encouraging, and that's the basic secret sauce, as Greg said, right?

You install elevators so that you can keep servicing them for years to come.

Our next question comes from Jeff Sprague with Vertical Research Partners.

Thank you, good morning everyone.

Congrats, Carroll.

Akhil, you'll be very much missed.

Hopefully we see you on the beat somewhere else.

On the beach.

On the beat or on the beach, I don't know.

I don't want to see him on the beat.

I'm hoping to see him on the beach.

Hey, a couple of questions for me.

So there's kind of continued discussion of investment at Otis and Carrier, and obviously, Judy and Dave are going to have their own decisions to make once they're fully independent.

But should we think these businesses are exiting the portfolio at kind of a representative run rate of investment required relative to kind of their forward plans?

Or should we be thinking about the need to step up investment once these businesses are separated?

Well, look, Jeff, I think we made a conscious decision 4 years ago to step up investments in the commercial business.

E&D at Carrier specifically, we've taken it up.

It's over $500 million today.

I think that's a rate that's sustainable.

It's about 2.5% of sales, and they're going to have to continue on with that.

I certainly don't see any pullback there but I don't see a need for a big step-up in investment.

Frankly, what you're going to see at Carrier is 2 things.

One is a renewed focus on SG&A, and that is the biggest pool of cost that they have that they can work on and Dave and team has started working on that today.

The second piece is on the portfolio.

And again, more from Dave on that in the coming months, but I think optimizing the Carrier portfolio has a huge -- is a huge opportunity to create value for shareowners to get to a more focused portfolio than what we have today.

And again, you can quiz Dave on all those pieces and what they're thinking and it really is a decision for the next management team.

But I would tell you that in our view, significant opportunity.

As far as Otis, we had started again making the investments 4 years ago in the service tools and in the IT infrastructure specifically, the global service systems, GSS, to give us the data, give us the ability to service these elevators more efficiently.

And those investments are starting to pay off, but they're a long way from done in terms of the payback.

So I would expect the level of investment to remain about the same, but I would expect the payback to improve dramatically over the coming years.

And again, that's what's going to drive margin expansion.

Akhil hit on this repair.

Repairs were really solid in the quarter and part of it we can attribute to the fact that the service mechanics now have an app on their phone which let them sell repair directly to the building operator when they're out doing regular maintenance.

Those are sales that we probably otherwise wouldn't have gotten and I think that's just an indication of the opportunity set in front of us.

The other thing is and we touched on this before is improving the cancellation rate.

And the cancellation rate, 2 years ago, was north of 7% on existing elevators —- it's down around 6%.

That's a very, very profitable way to grow earnings is to reduce your cancellation rate, which means you don't have to replace them with lower-margin new business.

So again, I don't see that as an investment.

I think again -- or an additional investment, that's just a continuation of what we've been doing, which should yield benefits for the next several years.

Is there any evolving thought on how the post-separation balance sheets of Carrier and Otis might look?

And I kind of ask that kind of in the spirit of sure Refrigeration will cycle right back up, but we could be going into a little bit more challenging macro environment.

So look, let's be very clear.

As we look at the separation of the 2 businesses, there will probably be about $18 billion of debt between Otis and Carrier with obviously more of it going to Carrier because of its size.

But the goal is for both of those businesses to be investment grade coming out of the chute.

And one of the things obviously that we would be concerned about is can they survive in a potential recession scenario.

We don't see one, but we're going to make sure that they have the financial wherewithal that if we do see, I would say, a normal business cycle correction here sometime in the next couple of years, that they won't lose their investment-grade rating.

And that's again the key to the capital allocation to those 2 businesses in terms of the amount of debt, the amount of cash that they're going to have on their balance sheets, it's split.

So we're cognizant of that.

We'll be out with the rating agencies next month, the next 30 days, and we'll be back to you guys early next year with a final look.

(Operator Instructions) Our next question comes from Peter Arment with Baird.

Good morning, Greg.

Congrats, Akhil and Carroll.

Hey Greg, only one 6-part question here, no.

Just quickly on the -- on just -- if you could just update us on your thoughts how the B/E aerospace business is doing inside Collins.

And also just on the synergies itself, the UTC playbook has always been to exceed these targets.

But is any of this just timing related and pulling to the left?

Yes.

So on the B/E Aerospace side, obviously, last year was a pretty tough year at B/E after the acquisition by Rockwell ahead of the close.

I would tell you that most of those issues are behind us.

We have seen really good progress.

Dave Nieuwsma, who runs that business, doing a nice job.

The orders that had been deferred last year are being fulfilled.

Margins are coming back to what we expected.

So that business actually is doing, I would say, even better than what we had expected for the year and part of this, the $0.60 of accretion that we're getting, obviously coming from B/E Aerospace.

As far as the synergies go, we are pulling synergies to the left, obviously.

We had a $600 million goal.

We'll be close to $200 million...

$250 million.

$250 million, rather, in synergies this year.

Now are we going to take up the synergy target beyond $600 million?

Not today.

I think this is the same playbook that you would expect from UTX, which is -- let us get our feet under us there's always more ideas out there to take cost out and I would expect as Kelly and team go through this process over the next 2, 3 years, there will be more and more ideas that will be generated.

But after 3 years or so when we hit the $600 million, everything else kind of flows into just normal cost reduction actions anyways.

But there remains a basketload of opportunities on the Collins Aerospace side with the footprint that they have and the product geography they have to continue to drive cost out.

Our next question comes from Doug Harned with Bernstein.

I wanted to look at Pratt, and you raised your outlook for commercial OEM aftermarket combined.

And can you talk a little bit about what led to that?

If we think about the legacy engine aftermarket growth, benefits from the Geared Turbofan, some of the early work on that, and then reduction in cost on the OE side, how would you balance those different pieces?

So the mix, Doug, is what is helping that particular line that you're referring to in the outlook and the fact that we are seeing a more favorable customer mix inside the GTF OE deliveries and the fact that costs are coming down as we expected or in line with our expectations is what is driving that growth to be slightly better than what we expected.

At the highest level, that's probably what it is, some better customers.

Carroll, anything else?

I mean, the aftermarket, Doug, remains very healthy.

So no real change to trend there.

V2500s, we talked about were up year-over-year.

Remember, we started in a bit of a hole on the V2500 with some operational issues in the network earlier in the year.

We are recovering from those.

We made good progress.

There's demand for well over 1,000 shop visits on the V2500.

Not clear that we'll get to serve all of them, maybe closer to 975.

So you think about the aftermarket in total, is probably more like low to mid-single digits as we kind of close out the year.

The legacy models, you know obviously shop visits were down, we expect those to be down in the 4s and the 2s.

But the content remains pretty solid.

So overall, very good aftermarket.

The other thing we don't often talk about is the strength in the Pratt Canada business, and that's also reflected in that line to some extent, Doug, and you'd see good shipments, engine shipments there.

We see good aftermarket growth there.

So all's good on the small engine company side as well.

So sort of all the way around.

And the Vs, I mean, you're really pushing capacity limits on MRO now, I would expect.

I mean this is -- should be a lot of upward pressure, I assume.

Well, you know it's a pretty tightly coupled system.

So when you start out in a hole, it's an issue of getting them through the shops but the team has made a ton progress on that front, and we're now up to the kind of monthly run rate for inductions than we would have expected, so that's good news.

Our next question comes from Robert Spingarn with Crédit Suisse.

Just sticking with the Geared Turbofan for a minute and Pratt.

You did mention the early shop visits you're starting to come through.

I'm curious how the wear has been there relative to expectations.

I know you're just getting into this at this point.

Then separately, was there any opportunity for the Geared Turbofan on this new Gulfstream aircraft?

I understand it's a derivative of the 650 and it uses that engine, but might there have been an opportunity since you're on some of the other products?

Well, let's start with the first part, Rob.

We are getting the engines into the shops as we bring up these, the prior configurations to current configurations, which is going to extend the life of the engine.

And so far, it is early, but nothing from wear modes or anything like that, nothing out of the ordinary.

I think pretty much as expected.

So that's something, that you know, over time you have to keep an eye on because those wear modes by definition emerge over time.

But at this point, we're feeling like it's pretty much situation normal there.

I would just add to that.

One of -- obviously, the biggest concern when we launched this engine 5 years ago was the gear system.

And we have seen a lot of these engines come back.

We've had an opportunity to go through those gear systems and I would tell you the wear is much less than expected.

In fact, much more robust design than was probably necessary.

But the fact is the gear system works as advertised.

And so if you're thinking about things to worry about with the engine, that ain't one of them.

Obviously, we're still working through the retrofits on the combustors and a couple of the seal issues.

But in terms of the actual long-term durability of the engine related to the gear, not an issue.

As far as Gulfstream on the 7000...

The 700.

700 rather, we did not offer an engine for that.

We do have, of course, the engine on the new 500 and 600 Gulfstream, which are going into service now, which is a Pratt Canada PW815 -- if I got that number right.

And we've continue to work with Gulfstream on additional opportunities, but we did not participate in the bid because, quite frankly, a GTF gear does not work on a long-range business jet.

And even the 815, while it's got the same architecture as the gear, does not have a gear upfront the way the rest of the GTF family does.

Our next question comes from Rajeev Lalwani with Morgan Stanley.

Just a quick one from me for you, Greg.

You talked earlier about $150 million-or-so of revenue synergies.

Can you talk about where that's coming from and then how that's looking and implications for RTX as we look forward and your confidence there?

Yes, Rajeev.

I'll take this.

This is Akhil.

I think these couple of examples which are very real and very encouraging is the forward-leaning organization that Rockwell Collins brought to the table, they have lots of -- thousands of people -- actually sitting very close to the airline customers and are able to pick up opportunities that may not have been possible otherwise for the UTAS organization.

And so one of the examples of this, actually, it's 2 large projects that we're talking about in the $175 million.

One of them was just simply now that we have a bigger bag of offerings that these salespeople have out of the Collins Aerospace, there was an opportunity which came up for a product that UTAS makes out of their sensors business before.

And when the airline was looking for that, we were able to offer that opportunity out of the heritage UTAS product line and that created sales which UTAS would not have seen before and Rockwell Collins did not have an opportunity to offer before.

So that's part of the thing that we saw as -- in the synergy bucket, and that alone is about $80 million of revenue we would not have seen otherwise.

And there are other example of that, but it's leveraging their reach, Rockwell Collins' reach, and generating additional business.

If you think about the Raytheon side, again, the thing that most excites, I think, Dr. Kennedy and myself about the merger is the technology.

And the fact is Raytheon has premier technology in cyber that is primarily dedicated to DoD and the military customer.

We see an opportunity to take that cyber capability and move it into the commercial aerospace arena, which today Raytheon would not have a channel to do that.

The same in terms of coordinating on the new air traffic control system with a shared GPS mixed -- or married up -- with Raytheon radars to allow airplanes to fly much closer together in air space than would be allowed today.

We're going to have to do that if we're going to see this air traffic growth that we expect in the U.S. And I think again those are the types of big synergy opportunities.

And there will be others, some of it will be in the ISR space, some of it will be in the material space as we think about hypersonics and other new defense technologies.

But again, they don't happen overnight, but what was encouraging about the Rockwell Collins synergies as the guys are out there and they're incentivized to find these things and Kelly Ortberg and team are driving these everyday, and we'll have the same type of organization at the new Raytheon Technologies to drive these technology synergies and revenue synergies near term.

Great, thanks and best of luck, Carroll and Akhil.

Thanks.

Thanks.

Ladies and gentlemen, this concludes our question-and-answer session.

I would now like to turn the call back over to Greg Hayes for any closing remarks.

Okay.

Thanks, Daniel.

I just want to thank everybody for calling in today.

Obviously, Carroll and IR team will be available all day to answer your questions.

Thanks for listening, and we'll talk to you guys early next year.

Take care.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.