雷神技術公司 (RTX) 2019 Q4 法說會逐字稿

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

On the call today are Greg Hayes, Chairman and Chief Executive Officer; Neil Mitchill, Acting Senior Vice President and Chief Financial Officer; and Nathan Ware, Senior Director, Investor Relations.

This call is being carried live on the Internet, and there's 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 their earnings and cash flow expectation and other forward-looking statements provided on this call are subject to risk and uncertainty.

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

(Operator Instructions)

Please go ahead, Mr. Hayes.

Okay.

Thank you, Catherine, and good morning, everyone.

So a couple of new folks on the call with me this morning: Neil Mitchill taking over for Akhil Johri as our new Senior VP and CFO; and Nathan Ware taking over for Carroll Lane, Head of Investor Relations.

So a little bit of change here, but no change in terms of the results as you would have expected.

So really, a solid quarter and, more importantly, a great year, record year, in fact, of financial performance.

This morning, we're going to cover 3 topics.

We'll, of course, go through the fourth quarter and full year 2019 results.

But I'm also giving an update on where we are with the UTC portfolio transformation, including the Rockwell Collins integration; the separation activity around Otis and Carrier; and of course, the pending merger with Raytheon.

And finally, Neil will take you through the 2020 outlook for Pratt & Whitney and Collins Aerospace.

Just a word on the cadence of our outlook disclosures for the year.

It's going to be a little bit different this year given the separation activity and given the pending merger.

We recently announced that Carrier and Otis investor meetings are scheduled for February 10th and 11th, respectively.

This is when Dave Gitlin and Judy Marks, along with their senior team, will give you guys an overview of their respective businesses and provide their financial outlook for 2020.

So we're not going to preempt those -- them today and go through their guidance, but you can look forward to talking and quizzing Dave and Judy in early February.

Also, you'll notice that we're not going to provide EPS or cash outlooks today.

We'll come back and talk about all of those metrics and the full year outlook for Raytheon Technologies following the completion of the merger, which we expect to close early in the second quarter.

So as you expect a different timeline this year given the various transformational events underway, but again, we'll get it all out there in due course.

So let's start on 2019.

For the year, we reported record sales, adjusted EPS and free cash flow.

Adjusted EPS, that was $8.26, and that's up 9% versus last year.

Sales, $77 billion.

That's up 16%, and importantly, organic growth, 5%.

And that's on top of the 8% organic sales growth we saw in 2018.

All 4 businesses contributed to the organic growth.

We saw good margin expansion at the aerospace business as well as a return to earnings growth and margin stabilization at Otis.

At Carrier, the team closed out a challenging year on a positive note, slightly exceeding the most recent outlook for the business.

Free cash flow for UTC was $6.6 billion for the year, and that included approximately $400 million of onetime cash payments related to the portfolio separation activities.

The cash performance was about $1.1 billion better than the midpoint of our latest outlook due to the timing of separation tax payments, most of which will take place here in the first half of 2020; and of course, better operational performance from each of the businesses.

In total, we continue to expect about $2.5 billion to $3 billion of onetime cash costs associated with the portfolio separation.

So strong results for 2019, above our expectations coming into the year and above our expectations as late as October with each of the businesses well positioned as we move into 2020.

Okay.

On the webcast, this is now onto Slide 2...

In addition to the financial results, we had several notable highlights, and we've made significant progress on the transformational initiatives that we've been working for the last year.

Let me give you a quick update on a few of those.

At Pratt & Whitney, the GTF and F135 engine output continued to ramp in 2019.

We continue to add to the order book for both programs, including yesterday's announcement that Wizz Air had selected the GTF engine to power its next lot of 166 aircraft, adding to an order book of more than 10,000 firm and option engines for the GTF program.

While durability issues on the GTF continue to be addressed, it's clear our customers see the value of the engine, which continues to meet or exceed all the key performance metrics, including fuel burn, reduced noise and emissions.

And with -- we now have more than 700 GTF-powered aircraft in service, about 4.3 million flight hours.

Since October, Pratt has also secured contracts totaling more than $7 billion for the production of more than 400 F135 engines and the related program support.

So a very strong backlog at Pratt & Whitney.

This past quarter, we also celebrated the 1-year anniversary of Rockwell Collins.

Throughout the year, following close, the Collins team has delivered outstanding performance.

We achieved approximately $300 million of acquisition-related cost synergies and captured about $200 million of sales synergies in our order book.

Adjusted EPS accretion from the Collins acquisition was $0.66 for the year.

Now you'll recall, going into the year, we had estimated about $0.35 of accretion.

So a very strong year from Kelly Ortberg and the whole team at Collins Aerospace.

We continue to see clear line of sight to the $600 million of cost synergies that we started out with, but more importantly, over $1 billion of sales synergies we would expect from the acquisition.

Okay.

Let's turn to the separations.

For both Otis and Carrier, they are substantially complete from an operational standpoint.

That happened on January 1, where we cut them off from the corporate systems for the most part, and they are now operating independently.

Both companies, as you see, announced their future Board of Directors in December and are looking forward to their pre-spin investor meetings in early February.

Importantly, we've received both U.S. and Canadian tax rulings for the separation, and we're currently working through a few final legal entity restructuring activities required to stand up the businesses as independent companies.

Again, we're now targeting early in the second quarter for the spin of both businesses.

So no surprises there.

Portfolio separations remain on track.

Finally, on the merger with Raytheon.

Our goal is to have the combination of UTC's aerospace businesses with Raytheon closed concurrent with the portfolio separation in early April.

That's, of course, subject to receiving all regulatory approvals.

Integration planning is well underway, and we're already working a detailed list of items to generate the $1 billion of gross cost synergies that we're targeting for the transaction.

I also remain very excited about the technology synergies that will result from the combination and the opportunity this merger presents to create a best-in-class premier aerospace and defense system provider.

Okay.

With that, let me turn it over to Nathan to take you through the fourth quarter results, and then Neil will walk you through 2020 outlook.

And I'll be back to wrap up at the end.

Nathan?

All right.

Thanks, Greg.

Moving to Slide 3. As Greg said, Q4 was another solid quarter for UTC.

Reported sales of $19.6 billion were up 8%, including 1% organic growth and 8 points of M&A benefit driven by the Rockwell Collins acquisition.

Foreign exchange was a 1 point headwind in the quarter.

Adjusted earnings per share was $1.94, down 1% versus the prior year on a difficult compare.

You will recall we saw a 22% adjusted earnings per share growth in the fourth quarter of 2018.

Within the quarter, segment profit growth was offset by expected higher corporate items, including interest expense and higher share count.

On a GAAP basis, earnings per share was $1.32.

That's up 59% versus the prior year and includes $0.16 of restructuring and $0.46 of net nonrecurring charges, including $0.39 related to the portfolio separation activities.

The GAAP earnings per share growth was largely driven by the absence of a tax charge that you will recall we booked last year, partially offset by the portfolio separation charges incurred this year.

Free cash flow was $1.9 billion, up 54% or approximately $700 million compared to prior year and included approximately $200 million of onetime cash separation payments.

The quarter capped a strong year for free cash flow, as Greg mentioned earlier.

Okay.

With that, I'll move on to the segment results, and I'll be speaking to the segments at constant currency as we usually do.

And as a reminder, there's an appendix on Slide 17 with additional segment data as a reference.

So starting with Otis on Slide 4. Sales of $3.4 billion in the quarter were up 4% organically.

New equipment sales grew 1%, driven by high-teens growth in China partially offset by declines in Asia Pacific and the Middle East.

Service sales grew 5%, driven by growth across all regions.

Within service, maintenance and repair was up 5% and modernization was up 8%.

At constant currency, new equipment orders grew 3%, driven by mid-single-digit growth in the Americas and Europe as well as low single-digit growth in China as the region continued to benefit from favorable pricing and mix.

Asia Pacific was down low single digit.

Operating profit was up 3% at constant currency, driven primarily by volume growth and favorable price and mix in service partially offset by higher research and development and strategic investments in the business.

Service contribution also grew for the sixth straight quarter with all regions contributing.

Foreign exchange translation was a 2 point headwind to sales and a 1 point headwind to earnings.

For the year, Otis' sales grew 5% organically with mid-single-digit growth in both new equipment and service.

Operating profit was up $28 million at actual currency.

The benefits from service transformation initiatives globally and improvements in China led to margin stabilization during the year and establishes a solid base for Otis to build upon as they become an independent company.

Moving to Carrier on Slide 5. Carrier sales were down 2% organically in the quarter, driven by refrigeration, which was down 8%.

That's mainly due to hard compares in the North American truck trailer business, which was up almost 50% in Q4 of 2018.

Global HVAC sales are flat, and global Fire & Security was up 1% in the quarter.

Moving to orders.

Carrier equipment orders contracted 4% organically in the quarter, primarily driven by transport refrigeration, which was down 32%.

Within transport refrigeration, North American truck trailer was down 63% after being up over 50% in the fourth quarter of last year.

Fire & Security product orders were down 3% while global HVAC orders were up 2% with North American residential up mid-single-digit and global commercial HVAC flat.

Within commercial HVAC, EMEA was up 10%, offset by high single-digit declines in the Americas.

On a constant currency basis, operating profit was down 4% in the quarter.

Lower volume and adverse mix as well as headwinds from lower discount rates used for valuing long-term liabilities were partially offset by pricing benefits and material productivity net of tariff impacts.

Operating profit included the gain on a sale of an equity investment and a land sale, offsetting the absence of prior year similar items.

For the year, Carrier sales were up 1% organically, and operating profit was down $80 million at actual currency, slightly exceeding the most recent outlook for the business.

Turning to Pratt on Slide 6. Sales of $5.6 billion were up 2% on both an organic and reported basis in the quarter, and that was on top of 22% organic growth last year.

Commercial OEM sales were down 7%, driven by expected declines in V2500 shipments, partially offset by higher GTF engine shipments and favorable engine mix at Pratt & Whitney Canada.

Commercial aftermarket sales were flat in the quarter.

Early GTF shop visits as well as higher Pratt & Whitney Canada and V2500 volumes offset expected declines in legacy programs and the absence of prior year contract adjustments.

Military sales were up 12%, driven by continued ramp of the F135 program and higher aftermarket sales across all key platforms.

Operating profit of $456 million was up 34%.

Drop-through on higher military sales, favorable commercial aftermarket mix and growth at Pratt & Whitney Canada more than offset commercial OE mix headwind and the net impact of contract adjustments.

Results also benefited from lower engineering and development expense in the quarter.

For the full year, organic sales were up 8%, driven by higher GTF and Pratt & Whitney Canada engine shipments and higher military volume.

Operating profit was up $239 million.

All right.

Turning to Collins Aerospace on Slide 7. Sales in the quarter were $6.4 billion, up $1.5 billion on a reported basis and 1% organically.

Operating profit of $1 billion was up $236 million versus the prior year.

You'll recall that the fourth quarter of last year contained about 5 weeks of results from the Rockwell Collins acquisition.

On a pro forma basis, including results for Rockwell Collins for the entire fourth quarter of 2018, Collins Aerospace delivered operating profit growth of 8% on 4% higher sales.

The pro forma sales growth reflects continued strength in commercial aftermarket and military channels, partially offset by commercial OEM volume.

Commercial aftermarket sales were up 11%, driven by continued strength in initial provisioning and demand for modifications and upgrades.

Military was up 10%, driven by F-35 volume and overall aftermarket growth.

Commercial OEM sales were down 6%, driven by expected declines on legacy programs, which more than offset growth in new platform sales.

Operating profit growth was driven by the contribution of 2 additional months of results from the Rockwell Collins acquisition, drop-through on higher commercial aftermarket and military sales and synergy benefits.

The growth was partially offset by lower commercial OE volume and unfavorable mix as well as higher SG&A and engineering and development.

On a full year basis, Collins Aerospace delivered 6% organic sales growth and over $1.8 billion of operating profit growth, driven by contributions from the Rockwell Collins acquisition, solid execution and synergy capture and strong end markets.

Pro forma operating profit growth was 16% on 7% sales growth.

With that, I'll hand it over to Neil who'll provide more detail on the 2020 outlook.

Neil?

Thank you, Nathan.

I'm on Slide 8. As Greg said, I'm going to talk about the 2020 outlook for Pratt & Whitney and Collins Aerospace today.

As you think about both businesses, let me begin by highlighting a few of the dynamics we see impacting our outlook before I go through the specific numbers.

Starting with the positives.

Revenue passenger miles are projected to remain solid and grow over 4% in 2020, which will continue to support growth in the underlying aftermarket demand at both Pratt & Whitney and Collins Aerospace.

I'd say we also have clear line of sight to continue growth at our military businesses, driven by higher F135 engines and F-35 system content as well as strong aftermarket demand across key programs, including the F117, F119 and F-35 programs.

And lastly, we will see continued synergy benefits at Collins Aerospace as they enter year 2 as a combined entity.

We expect to capture approximately $150 million of incremental cost synergies from the Rockwell acquisition, and that's on top of the $300 million that we realized in 2019.

On the challenges side of the equation, no surprises here.

We anticipate headwinds at Collins Aerospace driven by the suspension of the 737 MAX production as well as an expected decline in volume associated with the ADS-B mandate as the deadline for compliance in the U.S. was the end of 2019.

We do see some ADS-B demand in 2020 driven by the midyear European deadline, but substantially less than levels we saw last year.

So turning to Slide 9. You will see the 2020 segment outlooks for both Pratt & Whitney and Collins Aerospace.

As usual, the appendix has a detailed sales and operating profit walk for both businesses.

At a high level, we generally see these outlooks in line with our S-4 projections, excluding the impact of the suspension of the 737 MAX production, the expected impact of divestitures associated with the merger with Raytheon as well as costs to achieve synergies at Collins Aerospace.

Okay.

Starting with Pratt & Whitney and the outlook there.

We expect mid-single-digit sales growth in 2020.

Organically, commercial OE will be up high single digit as GTF volumes will continue to ramp and we expect to see higher Pratt & Whitney Canada OEM sales, driven by business jet and helicopter engine shipments.

Commercial aftermarket is expected to grow low to mid-single digits, primarily driven by continued V2500 growth and GTF activity, partially offset by declines in the legacy engines.

The military business will continue to see benefits from higher F135 engine shipments and continued aftermarket demand as it is expected to grow mid-single digit.

On the profit side, we expect Pratt's operating profit to increase $225 million to $275 million, driven by drop-through on the higher commercial aftermarket and military sales.

Commercial OE profit is expected to be flat year-over-year.

So now turning to Collins Aerospace.

Reported sales are expected to be down low single digit, including approximately 5 points of headwind due to the suspension of the 737 MAX production, lower ADS-B mandate volume and the divestitures that I just mentioned.

Organically, commercial OEM sales will be down mid-single digit as declines in the 737 MAX and legacy programs more than offset the ramp of other new programs.

Commercial aftermarket is expected to be up slightly, and within the commercial aftermarket, provisioning is expected to be down mid-single digits after being up over 20% organically in 2019.

Military sales will be up mid-single digit on continued strength in the military end markets.

Operating profit for Collins Aerospace will be down $275 million to $325 million versus 2019, including approximately $550 million to $600 million of combined headwinds due to the 737 MAX, the ADS-B mandate and the required divestitures.

These headwinds are partially offset by drop-through on higher military sales and the $150 million of incremental cost synergies I referenced earlier.

Lastly, before I hand it back over to Greg, just a few comments as you think about UTC in the first quarter prior to the spins and merger.

Starting with sales.

We expect Q1 2020 reported sales to be up slightly versus the prior year.

We expect low to mid-single-digit growth at the aerospace businesses despite the 737 MAX headwind, and this growth will be partially offset by Carrier, which is expected to be down driven by tough first half compares for the refrigeration business and some FX headwind.

On the earnings front for Q1, at the segment level, we expect operating profit to be flat, including the 737 MAX and ADS-B headwind as well as some incremental costs at Otis and Carrier as each business staffs to be a stand-alone entity.

Below the line, we see a few moving pieces.

First, we have some FX pressure due to the portfolio separation, interest expense and other corporate costs, which accounts for around $0.10 of headwind.

And second, non-service pension income will be lower by $0.03, driven by the discount rate impact we discussed last quarter.

In addition, the absence of a prior year tax gain, which you will recall was related to the legacy BE business, as well as higher minority interest adds another $0.06 of pressure.

And finally, share count will be higher than last year.

On the cash front, we expect Q1 free cash flow to be an outflow, and that's driven primarily by the approximately $1.6 billion of portfolio separation payments expected to occur in the first quarter.

So with that, I'll hand it back to Greg.

Okay.

Thanks, Neil.

So some moving pieces, as always, but a really strong performance in 2019.

As we look to 2020, I would just remind everybody that the priorities of our businesses remain clear and consistent.

We're focused on executing on our commitments to customers: driving growth through innovation, cost reduction and, of course, remaining disciplined in capital allocation.

At the same time, we continue to monitor the macroeconomic environment.

The U.S. remains strong.

Asia, of course, continues to grow but at a little bit slower rate, and Europe remains a watch item.

Overall, the aerospace and defense end market remain robust, and we feel very good about our ability to deliver in 2020.

That said, we're also keeping our eye on the developing coronavirus situation, any impacts that could have to all of our businesses.

And while 2020 marks the last chapter for United Technologies as it stands today, it also begins a bright future for Otis, Carrier and Raytheon Technologies as stand-alone public companies.

I'm excited about the future of each of these businesses, and I'm confident in the teams that we've put in place to drive sustainable, long-term value creation that's going to benefit customers, employees, shareowners and our communities for decades to come.

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

Catherine?

(Operator Instructions) And our first question comes from Jeff Sprague with Vertical Research.

Feeling a little nostalgic here.

This is the last call but -- good ride.

Thank you.

Yes, it's amazing, isn't it?

It really is.

Greg, I was hoping you could unpack a little bit to some degree kind of the Collins Aerospace headwind between what is MAX, what is ADS-B and what is tied to the divestitures.

And does that assume kind of a full year halt on production?

Okay.

So let's start with the 737 MAX.

That's probably the easiest part for everybody to understand.

So we've assumed roughly a 90-day production delay, which is consistent with direction that we've received from Boeing.

So if you think about that each month, if you add up both the OEM, the aftermarket provisioning that you're not going to get, that costs you about $100 million in revenue and about half of that in operating profit.

And a big chunk of that operating profit is coming from lack of absorption in our factories.

So think about it 100 -- over 3 months, that's $300 million of sales, plus about $150 million of op profit.

And then in the back half of the year, we've essentially cut production in half from the rate that we had.

So from 42 to 21.

So you can double that in the back half of the year and you'll get roughly $600 million and $300 million.

We've also, in the guidance, added in some money for some supplier disruption.

So we think, overall, the impact could be somewhere between $350 million and $375 million to the year.

I hope that's conservative.

We hope, again, that the production resumes more quickly, but as we sit here today, that's the best outlook that we can give you.

The ADS-B mandate, I think we've taken you through that number before, and again, it's north of $100 million of earnings that will go away.

And the other big piece, of course, is the divestitures.

So 2 divestitures, one was the military GPS business at Rockwell -- legacy Rockwell Collins out in Cedar Rapids.

That's a great business.

As you guys saw, BAE bought that -- or signed a contract to buy that.

That will close some time, we think, in the back half of the year.

And then on top of that, our business in Danbury, Connecticut, our ISR business, military optics, space optics, that will also -- will probably sign here in the next couple of months, and that will also close in the back half of the year.

So that's the additional headwind that we see both on top line and bottom line.

So again, you're only going to see about 6 months impact from the divestitures this year.

You'll see a full year, obviously, next year.

Obviously, the good news is we'll get another shot at this guidance in probably May.

Once we close with Raytheon, we'll come back in early May, probably a month after the merger and give you full year guidance for RTX and give you an update on the MAX and everything else that's going on.

And just one more and I'll pass it on.

What was the MAX impact in the fourth quarter?

It was -- it really was not significant.

Again, we were -- Boeing was still taking at a rate of 42.

Again, our original guidance had assumed it was going to be 56, I think.

So there was a little bit of an impact.

You can do the math, but it wasn't significant.

And most of that was made up by additional aftermarket in the other -- for the other aircraft that are flying.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Just to continue on the MAX.

This has been a pretty favorable environment for the GTF in general, and Airbus recently announced a new allocation between CFM and Pratt with a higher share for CFM.

So I guess when we think about GTF, how does that change the trajectory in terms of production?

How do we think about annualized losses?

You mentioned -- was there -- are there other opportunities to take some share?

So let me just put GTF in perspective.

I think I mentioned it as we started out.

We've got about 10,000 GTF engines in backlog.

And as a program to date, we've got about 40% share on the A320 family, higher share on the A321 than on the A319 and 320.

If you think about it in the last 12 months, we've won about 50% of the orders that are out there.

We just announced Wizz Air obviously.

I think that came out yesterday.

As you think about it, going forward, I think the opportunity is even better for GTF.

As you think about the XLR, the long-range version of the A321, that requires a higher-thrust engine, which we'll be able to deliver for Airbus and for their customers.

And again -- we think more production going to the higher end, even just the basic A321, where Pratt has got probably a stronger offering.

Having said that, we are, I would say, production constrained in terms of how many engines that we can build.

I think loss provisions last year were about the same as the year before, about, I don't know, $1.1 billion or so.

We expect that number will probably continue at this rate.

Costs came down roughly 8% to 10% last year.

We'll continue to take cost out, but we're trying to be judicious in terms of which customers we choose and which customers we elect not to make offerings to.

You'll note in the discussion before there were some contract adjustments at Pratt in the quarter that obviously relates to some of the durability issues that we've seen on the GTF, specifically in some of those very difficult operating environments.

But again, very good performance and a very good future, I think, for GTF.

Thanks, Greg.

I will add a comment to that on production.

Sheila, the numbers that you'll see in our external documents here are combined GTF and V2500.

Obviously, the legacy engines production is coming down substantially.

If I look at the production sequentially Q3 to Q4 on the GTF, it was up over 30%; on a full year basis, about 20%.

And we'd expect that same kind of rate going into 2020.

So the numbers you see are aggregated, but we're supporting Airbus in 2019 and we're aligned with them in 2020 to deliver the engines for their airplanes.

And our next question comes from Steve Tusa with JPMorgan.

Echo Jeff's comments.

This is kind of a silly question, but have you guys gone back and looked at what possibly kind of could happen here with air traffic?

I know it's early on with this whole virus thing.

But just looking back at past events like this, what the risk -- kind of frame the risk around that.

Yes Steve, we actually -- we obviously went back and took a look at 2003 and the impact of the SARS virus.

And as you'll recall, air traffic slowed down significantly for about 3 months, and really, there was about a 6-month impact overall in the aftermarket.

I would say there are 2 major differences today.

One is the airlines are a hell of a lot healthier than they were in '03.

You were coming off of 9/11 and airline bankruptcies and nobody had any money.

The fact is air traffic remains pretty strong, but there will be a blip in Asia this quarter as a result of this.

The second thing is the flu, it happens every year.

I just -- we went back and we're looking -- on the last full flu season, we had -- 960,000 people in the U.S. were hospitalized with a flu, 80,000 people passed away.

So as we think about this, you got to keep it in perspective.

It's a big deal, obviously, until they get it contained.

But the Chinese government, I think, is doing a much better job today in terms of being proactive in containing this.

And while we expect there will be some impact to the commercial aftermarket, we don't expect it will be significant.

Again, back in 2003, we saw about a 20% drop in the aftermarket for that -- for 2 quarters.

I don't expect it's going to be that bad this time.

Right.

And then just one last one on the MAX here.

When you look at the kind of the $8 billion-plus cash target, obviously, this is somewhat temporary.

You guys seem to make, obviously, a lot of money on --- I don't know what you're supplying to them, so it's a little bit different than engines where you might be loss-making.

So lack of deliveries would be kind of a positive from that perspective.

But any change to kind of that $8 billion target and kind of that '21 time period from...

No.

So look, there's clearly a cash impact.

This year, it's probably in the, let's call it, $400 million range at Collins Aerospace.

And I would tell you that's within the -- that's contemplated in our overall guidance for the year.

It's not going to change the $8 billion target.

And again, it is temporary.

Next year, I think that as MAX production ramps back up, that abates.

So I think, again, it's a onetime issue.

And part of it, of course, as you know, Steve, we're trying to keep the supply chain going a little bit here.

And any time you have these production disruptions, you always worry about the supply chain and some of the smaller suppliers out there.

So Collins is doing the right thing here trying to manage that proactively so that we don't have a problem as we start the line back up with suppliers who can't meet the new demand.

And our next question comes from Carter Copeland with Melius Research.

Greg, I wondered if you might expand just quickly to clarify on that cash impact.

That is -- how much of that is payments to suppliers versus inventory you may build that's higher than the rate just to keep the production healthy?

Well, you can do the math on terms of the lost sales, right?

We're talking about $600 million roughly for the year.

So most of that is going to be cash we're not seeing from supplier -- or from our customer.

But there's a small piece of that, that the Collins folks have identified as going to the supply chain.

It's not -- we're not talking hundreds of millions of dollars here.

We're talking probably less than $100 million.

Yes.

So it sounds like you're not planning on building inventory in any substantial amount above whatever the agreed-upon rate is.

Yes.

So it will be, I would say, more surgical than just we're going to bring all the inventory and we're going to do -- we're going to bring inventory where we need to.

I'll tell you the other opportunity here is, to the extent that we were behind on certain programs, Collins does have a pretty significant backlog of things that they can work on.

There is still disruption costs in the factory, as you can imagine, and absorption issues.

But we think we've captured all of that in the guidance numbers here.

And do you have any -- just as a final point, do you have any cost actions built into that or whatnot?

Or are you basically just going to eat the stranded cost?

We're -- we do not anticipate any layoff.

I think that would be the easiest thing to do, but quite frankly, given the scarcity of talented aerospace workers out there, we're not going to be laying anybody off for a 90-day delay here.

I think we're going to work on the backlog.

We'll try and keep everybody busy.

But it just doesn't make sense to lay people off for 90 days and try and bring them back.

There is probably some offset here.

And again, on the aftermarket, haven't really been able to quantify what that is given the late-breaking nature of this change, but with -- there's probably some upside in the aftermarket from what we've got baked into the guidance today.

But we'll see what -- how that whole thing shakes out as the year progresses.

Our next question comes from Ronald Epstein with Bank of America.

Could you walk through some of the kind of where we stand on the durability issues on the GTF?

You alluded to it being challenged in some of the more, I guess, challenging operating environments.

But like where do we stand?

What's going on?

And how should we think about it?

So I think -- let me just categorize.

There's no new durability issues on the GTF.

We've had 3 issues that we've identified over the last couple of years that have required retrofits.

The biggest issue today is on the third turbine blade -- third-stage turbine blade.

This was a problem -- or an issue that we identified early on in the program.

Originally, that blade was made of a titanium-aluminum material, which proved to be way too fragile for the operating environment.

And so we've moved to a nickel-based alloy.

That change was made a couple of years ago.

All the new engines have the upgraded blade.

Unfortunately, some of the issues -- or some of the early engines, especially those in India at IndiGo and GoAir and some of the other Asian operators still have the older blades in there.

As you get FOD through the engines, this blade tends to fracture and causes in-flight shutdowns.

So in a, I would say, to be very cautious, focus on safety first, we're doing some accelerated inspections and accelerated retrofit to get this older design blade out of the market or out of the fleet.

So that will happen mostly in India in the first half of the year, again, in very difficult operating environments, and we're monitoring that around the rest of the world.

But probably, all of that -- that retrofit is going to take through the end of this year to get complete.

The 2 other issues that we've always talked about, one was the auxiliary gearbox, where we had a gear that needed to be replaced.

We were getting some resonance and some early fatigue on that.

That retrofit is underway.

And lastly, of course, the combustor liner, which again, has been a problem since the get-go, especially in these difficult operating environments, given the temperature that this operates at.

So that will -- again, we've got a retrofit program in place for that.

That -- the latest version of the combustor, the D, will be out sometime in the, I think, June time frame this year, so we'll be retrofitting that.

So no new issues.

But I'll tell you it's causing our operators pain, especially in India and China and, again, some of these more difficult operating environments.

So as a result of that, again, we're trying to be very cautious here.

We don't want to put anybody at risk, so a lot of inspections, a lot of time on wing or a lot of time out there trying to get all this fleet upgraded.

And it's just going to take us probably through the first half of this year to get most of that work done.

Okay.

Great.

So you do expect to get it mostly done through the first half of the year?

Yes.

Our next question comes from Julian Mitchell with Barclays.

Just a question around Pratt.

So you do have those legacy programs weighing on the aftermarket growth.

Maybe just help us understand what headwind you're dialing in for legacy aftermarket sales declines in 2020 and what the scale of that legacy piece now is within Pratt.

And then perhaps switching tack slightly within Collins Aerospace.

Maybe give any color around the cadence of organic sales as we go through the year, please, within that down slightly guide, how we think about first half, second half.

Julian, thanks.

It's Neil.

Just a couple of comments on the Pratt aftermarket.

Clearly, the legacy programs are starting to trail off, but they're still a pretty substantial part of the profit going forward in Pratt.

We've had some headwinds, we talked about that earlier this year, and some contract adjustments.

But think about the V, though.

When we came out of the fourth quarter here, very strong inductions.

So we saw about a 6% increase quarter-over-quarter in induction activity on the V. We're well capacitized to deal with that level of inductions through 2020, and we'd expect the underlying demand to be there.

Keep in mind though, in order to overhaul an engine, it needs to come off of the wing.

And with the 737 MAX situation, the legacy planes are flying quite a bit more.

And so -- and we've seen good durability on the V2500.

That said, still expecting to see growth there.

The network is recovered from the early blips that we had in 2019, so I think well positioned for 2020 on the aftermarket side at Pratt.

As for the Collins organic growth, I think we'll expect to see that fairly ratable through the year.

What I would say is that the first quarter will hurt a bit more from the 737 MAX headwind that we just talked about.

And you will recall that the first quarter of 2019 for Collins was exceptionally strong, especially given the Rockwell post-merger activity.

Our next question comes from Peter Arment with Baird.

Just you had some required divestitures with the Collins GPS.

And I guess, the optics business, I think you mentioned regarding -- that's going to still be closed here soon enough.

What about other divestiture activity just given the merger with Raytheon?

Are you thinking about other things?

Or should we expect other actions going forward?

I'm not going to announce anything today, Peter.

But let me tell you -- I don't want to get ahead of myself here.

But I think it's clear, when we get -- when we complete the merger with Raytheon, we're going to have a fairly substantial portfolio.

And I think as we typically would do at UTC, we're going to take a look at that portfolio.

And quite frankly some of it is investable and some of it probably is not.

But I think we'll take the first year -- Mike Dumais who heads up our strategy group here, he and I will go through the portfolio on both sides of the business.

And I think there'll be places where we might elect not to invest and to cash out and other places where we may want to double down.

But right now, I can't tell you what that's going to be other than the fact that we're going to -- as we typically do here, we'll take a dispassionate look at the whole portfolio and figure out where we think we can really add value over the long term and where we can't.

I appreciate that.

And just if I could just ask one follow-up quickly on the GTF.

Greg, are you changing the cash profile of that outlook just given some of these durability issues?

Or is that still kind of tracking to what you originally said back at the...

So it's -- look, we talked about a charge we took in the fourth quarter, it impacted the aftermarket because of some of these durability issues.

But again, it doesn't change the overall -- either the overall return on the program or the cash outlook.

Our next question is from Nigel Coe with Wolfe Research.

Greg, congratulations on getting this beast to the finish line --- well nearly.

Nearly.

Almost there.

So I just wanted to ask my first question on the Collins EBIT this quarter.

Obviously, fully in line with your guidance, but a big step down from the $1.1 billion to $1.2 billion run rate through to 2019.

So just curious, is that normal seasonality for Collins as it is now?

Or was there a mix differential?

Anything -- any color there?

Yes.

Look, there's a lot of moving pieces there.

I think, obviously, the aftermarket was still strong, but you also had some OEM headwind in the quarter and some additional E&D spend which impacted the quarter a little more than normal.

Keep in mind also, as we picked up the last 5 weeks of Collins last year, that was a very, very strong 5 weeks of activity, as you can imagine in any of these acquisitions.

So I wouldn't draw any conclusions from the fourth quarter compare at Collins.

I mean the business is doing great, $300 million of cost synergies.

Overall, the aftermarket for the year was up, what, 14%, with 20% growth in provisioning.

So it's just a solid quarter, and again, no drama there.

I fully agree with that, I would say, characterization of OE deliveries from Q4.

We see some of that coming back in Q1.

So nothing abnormal in the results there, very strong.

Thanks, very helpful.

And then, Neil, a quick follow-on for you.

You provided some -- I know that -- I know Otis and Carrier guidance will be in 2 weeks' time, but you provided some elements of guidance of the outlook for 2020 for the commercial businesses.

Can you just remind us on that?

I didn't catch all the elements there.

I think you said flat op profit, but maybe I'm confused there.

All I was talking about there was with respect to the first quarter.

So we do expect Carrier to be down a little bit on the sales.

That's a headwind we expected because of the transport refrigeration headwind and some foreign currency headwind on the sales side.

We also have a couple of -- some costs coming through in the first quarter.

Now that these 2 businesses are operating separately, there are costs embedded in their stand-alone business right now that are not incremental to the combined UTC, and so they won't be measured out.

So we have a little bit of headwind there, but that's as expected because we're ready to turn them on to be stand-alone companies.

Yes.

Just remember, Nigel, we always talked there's probably about $300 million of annual costs that the businesses have added between the 2 of them for stand-alone public company costs.

And that, of course, on a year-over-year basis, will be headwind here in the first quarter as I think both Judy and Dave have done most of the staffing, I think over 90%, in fact, of what we had expected needed to be added to these businesses.

So yes, it's just a funky quarter with all of these transition costs.

Some of -- we'll identify them when we're done with the quarter, but it's just -- it's going to be a little choppy.

Next question is from Myles Walton with UBS.

Greg, I think the last 6 or 7 quarters, you haven't done much restructuring at Pratt and, obviously, a big tick-up here in the fourth quarter.

So maybe was there something you saw there that you're taking action that you hadn't had an opportunity to do previously?

And then as you look out over the next year, not considering the kind of the integration, which sounds like you're going to keep the 2 businesses relatively separate with Raytheon, but what's the outlook for opportunity at both Collins Aerospace as well as Pratt?

Yes.

So at Pratt in the fourth quarter, we had a early retirement program, which was, I would say, was well received.

And frankly, for the last 5 years, as we've ramped up GTF production at Pratt, we have added a tremendous amount to the workforce in the back office to support procurement, quality, manufacturing, et cetera.

And as Chris Calio is taking over there, we decided that it was time probably to turn that spicket off and to take some -- and get some efficiencies in the overhead pools.

So we've taken out over 1,000 people through the early retirement program.

And obviously, the payback is phenomenal on that.

And that's, in fact, what's driving a big chunk of Pratt growth next year, is that restructuring.

There remains other opportunities.

And I think we'll get an opportunity later this year to have Mr. Calio and Mr. Ortberg take you guys through some of the opportunities they have.

Chris is looking at a restructuring of some of the other manufacturing operations there, and there will be other things that we can do, I think, to drive efficiency at Pratt.

Collins is -- I think Neil mentioned we expect another $150 million of cost synergies this year.

That's going to slow down a little bit, but there are still, I would say, lots of opportunities on the facilities side that Kelly and team continue to look at.

So even though we haven't done a lot in the last, I would say, 6 quarters, we haven't forgotten how to do this.

I would tell you also Carrier, over the course of the last year, did a lot of restructuring.

I think they took out about 1,300 indirect heads during the year.

So we haven't forgotten our roots on cost reduction.

We're just trying to be judicious.

With the aerospace sales up like they have been for the last couple of years, there just hasn't been as much opportunity, but we certainly see more on the horizon.

Okay.

And just one clarification.

The GTF manufacturing or delivery profile over the last year, has that changed significantly in terms of your outlook?

Or is it roughly the same?

No, I'd say it's roughly the same.

And our next question comes from Robert Spingarn with Crédit Suisse.

I wanted to follow up on the question on the Collins cadence from a couple of minutes ago and focus in on the Interiors business.

We don't talk about it a lot.

But given that it's a discretionary-driven business, it behaves differently than the others, and I wanted to see how that was trending at the back end of '19 and what you're expecting there in 2020.

Yes.

I would tell you that the Interiors business, first half of last year and even back in 2018 was not doing as well as what we had hoped, but they have really picked up the cadence here in the back half and very strong backlog.

They've got some new products out there, both on the economy and economy plus as well as in the business class seating, and they've got a very strong backlog.

So if anything, I would expect some pretty decent growth coming out of the Interiors business this year.

I was just going to say the Interiors business was a major part of our parts and repair performance in the fourth quarter, so they are performing quite well.

Does the pressure from MAX on the airlines interfere with that discretionary spend?

Or is the idea that that's really narrowbody carriers really doesn't influence what is otherwise a widebody business?

Well, just to be clear, we still supply a lot of, I would say, economy, economy plus seating in the narrow body sector.

Now we haven't seen a big impact this past year, of course, because Boeing was still building the aircraft and still doing -- fitting out the interiors.

And keep in mind, it's more than just seating.

It's also all the galleys, where we've got pretty good share as well.

So when we think about that, we talked about $100 million of sales a month, a chunk of that will come out of the Interiors business here in the first few months as Boeing has this production pause.

But beyond that, the backlog still remains very robust.

We've continued to add folks, both at the Philippines at our factory there as well as down in Winston-Salem.

So I would say that business has turned around nicely.

And our last question comes from Cai von Rumohr with Cowen.

Yes.

Thank you very much.

I think I've followed UTC longer than most.

So Greg, you mentioned on the MAX that the 90-day suspension and then you're going to 21 in the second half.

Is that based on your estimate or with some rough guidance from Boeing?

I would say that we have been in constant contact with Boeing.

And so this is our best guess --- I'd say, Educated guess from working with Boeing about what that production pause will look like.

Obviously, we're working with them on the software elements of this.

But we think this is a -- the most reasonable view we could have in terms of what the impact will be to the year.

If it's better, you guys will certainly see it.

But for right now, we think that's what it's going to be.

But you mentioned that you don't plan on laying anyone off for 90 days, but it isn't really 90 days because your production rate in the second half by your assumption is going to be down 50%.

So could this very high drop-through of the decremental volume be lower?

I mean at some point, are you going to think of laying some people off given this goes for more than 9 months?

Well, keep in mind, Cai, this -- if you think about Collins, $26 billion in revenue last year.

You've got a lot of other programs out there.

You've got growing demand on the military side.

You've got backlog in wheels and brakes and many other parts of the business.

So will we work less overtime?

Probably.

But are we going to lay people off because of this?

No.

I think, again, it's just -- it hurts on the absorption front, but it's not significant in terms of the overall Collins business.

So I want to thank everybody for listening today.

I know it's a busy earnings day.

This will be the last earnings call for UTX, all things being equal, and we look forward to seeing everybody, talking to everybody with the completion of the merger.

And we wish our friends at Carrier and Otis very well.

And thank you, everybody, for listening today.

Take care.

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

Thank you for participating.

You may now disconnect.

Everyone, have a great day.