United Technologies' CEO Hosts Investor and Analyst Meeting (Transcript)

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United Technologies Corporation (NYSE:UTX)

Investor and Analyst Meeting Call

December 12, 2013 17:30 ET


Louis Chenevert - Chairman, President and Chief Executive Officer

Greg Hayes - Chief Financial Officer and Senior Vice President


Good evening. Welcome to the United Technologies Investor and Analyst Meeting. This presentation is being carried live on the internet and there is a presentation available for download at utc.com. Please note that company will speak to results from continuing operations except where otherwise noted. They will also speak to segment results adjusted for restructuring and one-time items as they usually do. The company also reminds listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results. UTC’s SEC filings including its 10-Q and 10-K reports provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

Louis Chenevert - Chairman, President and Chief Executive Officer

Well, good evening. It’s nice to be back at the Asia Society. It’s hard to believe it’s already been a year. It’s always an honor to run a company like UTC with such great people, superb products and great customers that create opportunities for us every single day. Just seeing overnight, we have a larger cross-section of our leadership that’s here in attendance. So maybe what I do is I ask them to stand up and turn 180, so you see where they all are. We have the usual business unit Presidents. We have some of my key staff and then you got some players on the view, so third row, fourth row, just stand up and turn around. Thank you for your great leadership for a great year and for taking on the challenges of the future. So you get a chance to interact with some of them later on.

So we got a great year. We got, if you look during the last 12 months, we integrated the transformational acquisition and divestitures that we have set out to do. As I look at the portfolio changes, I am very happy with the large acquisitions I did of Goodrich and IAE. I am also very happy with the process of divestiture that we took on. It’s clear to me as I stand here tonight, Goodrich and IAE delivered better results than I expected on the date wise again with Marshall Larsen on the September 21. It really helped us deliver solid results in ‘13, 15% earnings, EPS for the year, that’s despite what’s been a slower macro environment than we expected.

The key as I take this transformational acquisition enable us to focus really on the core, core aerospace and building systems business. They truly positioned us well for the future. My key message for tonight UTC has a focused portfolio that positions us really to capitalize on two powerful megatrends, which is urbanization and rapid growth in commercial aviation. Of course, I will walk through the ‘14 plan. And as usual, as you will see, we have stretch plans for the BU, but I have the confidence that this team has the ability to deliver our mantra is simple, under promise, over deliver. And as you see for ‘13 that’s what we did.

So let me start first with a quick recap of 2013. I now expect EPS of $6.15, which is growth of 15% and sales of $63 billion. If you thought as we close the year, it’s clear to me we had a softer recovery than we expected this time last year. Well, we still deliver them a high end of the original range that we portrayed a year ago. We accelerated the restructuring and cost reduction to make sure we are positioned for growth, because we know the volume is coming. So we are going to make sure the company is well prepared. In the second half of the year, we saw traction in aero aftermarket and between us we had multiple discussion on well, where is the aero aftermarket, when is it coming. And all along in the first half of the year, we said well the cycles are there, the hours are there. If the planes fly, we know it’s going to come. And it came through in the Q3 and it continued in Q4.

We also saw stability in Europe. Europe is bottomed out stabilizing and we will talk some more about what we see in the outlook going forward. It’s a slow recovery, but it’s headed the right direction. Overall, a very solid year, great execution at the business unit level, question I get all the time, we had a discussion last year on this topic, which is the famous CMH, a figure I take it head on. Picture is worth a thousand words. We got helicopter doing flight training. And you could see on the lower right quadrant, two helicopters ready to be deployed for training as well. The current status says we have four helicopters at the Canadian Force Base and Shearwater that are being utilized for initial training. We got six more in Plattsburgh. We have 28 helicopters in build process, which is the totality of the helicopter commitment. The aircraft maintainers are training. We have started preliminary operational testing and evaluation. We are allowing the pilot and the maintainers really to learn more about the aircraft and its capabilities. We are continuing to have productive discussion with the Canadian government and we maintained for this year our placeholder for 8 aircraft in ‘13. We will also have 8 aircraft in ‘14 and 8 in ‘15.

Obviously, there will be EPS upside if those helicopters are not sold this year, but the 8 and 8 and 8 that we described before still holds true at this point in time. So we have made good progress. There are several other key accomplishments across the businesses for ‘13. On the commercial side, you all recall when I gave Joe, a big goal of 15% for the combination of the two BUs of Carrier and Fire & Security. It’s big goal is 15% by ‘15. I am proud of Joe and the team. They have accomplished 15.5% by ‘13, two years ahead of schedule. This is the power of the team and the power of the integration, the synergies and what’s been done and I am very, very proud.

Otis resumed organic growth. They have some key wins. We won 255 units with the Tianjin 117. It’s the largest, tallest building in Tianjin. We have a superb win in Hyderabad in India with 670 units, the largest single elevator/escalator contract in the history in India. I think it clearly highlights the synergies that are the potential for BIS going forward, because what happened with this is Carrier had a long-term relationship with Larsen & Turbo for probably two decades. Otis had no relationship with Larsen & Turbo and through the Hyderabad Metro opportunity, we leveraged the contact and the skills and we created the opportunity, which is converted now to the largest elevator/escalator contract. And this is I think a great indication of what can be accomplished in the future by leveraging relationship within the BIS portfolio.

On the aero side, UTAS did a great job, Alain and the team with the integration, accelerating synergies, you will recall, we took the synergies from $400 million to $500 million. And I would say that the execution of the whole Goodrich integration, the people side, the process side, the product side has been done in a fabulous way. Sikorsky signed a joint multi-role agreement with the Boeing Company for the next generation helicopter that will eventually replace the Black Hawk and the Apache. Basically, what’s happening on the helicopters side a decade or two from now is very similar to what the Joint Strike Fighter is which is a similar platform for multiple services. And that’s where the helicopter market is going long-term and we are proud of having the best two helicopters company’s joint efforts to produce very best in class helicopter obviously leveraging our S-97 X2 technology.

Pratt & Whitney and UTC supported the first flight as you saw in the opening video of the C-Series, a game changing aircraft. We are there already to deliver for Bombardier all the products, the systems, the engines and it was a flawless event. If you look at the E-Jets, the E-Jets win in 2013 I think it’s very indicative of what PES will do in the future on new platform. Not only that the GTF win in the big way with basically positioning us now in the regional market in a solid way we got Bombardier C-Series and we got the Embraer E-Jets going forward. As we pulled along the south thrust reverser, electric system, wheels and brake, so this is the new thing within PES and we are dealing with this from the Goodrich is we have the potential to go get more base volume on every single aircraft. I think these wins reflect great program execution and strong leadership by the team. We have been very customer focused. We tailor our solutions for the end customer and we have component systems and propulsions like nobody else has in the industry.

Now let me take a moment to recognize the leadership of Dave Hess. As you know Dave will be retiring at the year end after 35 year career. I want to thanks Dave personally for his many accomplishments. Dave had a brilliant career at HS. He is the architect of the big win on 787 with the biggest content in the history. I gave him a big job at Pratt and then he went on to execute the strategy on GTF wining five key platforms, selling 5,000 engines during that period of launch of five GTF platforms. He helped proceed with the IAE acquisition. And I think we have positioned Pratt if you look at the future where Pratt in the commercial segment is a very different company today. So Dave, please standup. Thank you for your great leadership. We appreciate all that you have done for this great company. And I wish you and Laurie all the best in health especially as you transition I know in your heart forever as you got the UTC stem. So we are in good shape.

As I look at the future UTC is extremely well positioned for growth. We have a portfolio that’s focused on the right market. We invested in products that deliver real value to our customers ACE continues to be the common language across UTC whether it’s commercial aerospace or now Goodrich’s integration or i.e. ACE is the common language that drives productivity, that drives additional cost saving and now that drives also supply chain to a new level of performance. And we will continue to effectively deploy our cash flow. So again we are confident our portfolio is positioned for growth confident in the strategy we have mapped out, confident in this leadership team to execute and deliver the earnings growth momentum.

Now as I take a closer look our top line growth opportunity, of you look at the UTC portfolio in 2020 that’s two mega trends that drives growth which is starting with urbanization, urbanization creates tremendous need for elevator, HVAC, Fire and Security system. And what else as these megacities come together the need for reliable predictable cold chains which also drives good momentum in the Transicold business. Urban growth has been growth also drives demand for commercial aviation connecting commerce, connecting the population between these big cities as their middle class growth is a huge opportunity. And you have seen the forecast from Boeing and from Airbus forecasting basically that’s the fleet size is going to triple in the next 20 years. Now when you have a lot of content for aircraft this puts a smile on your face. The worldwide fleet will double during that time period. And the actions that we have taken to position the portfolio says we are going to really take the advantage of these substantial opportunities.

After the divestitures we are entirely focused on aerospace and commercial building, good return i.e. increased our capability in commercial aerospace. I said two years ago the deals would be transformational. And I am happy to say I am seeing the results in a big way. And as I look back it’s always important to take a look back to what has been accomplished. I love the acquisitions. I don’t miss any of the divestitures we have done. I can’t say that there is any of these divestitures we have done I wish we would have kept at this point in time. I think they were all good decisions. We delivered in 2013 and we will continue to deliver in the years ahead.

Now if you look at the portfolio where the transformation is done, we are now 54% aero, two-thirds is in the fast growing commercial aero market that grew 8% year-to-date. If you look at buildings and industrial system now representing 46% of portfolio, we got good order momentum as we exist 2013. And we also got a very good emerging market presence. The reason why I am optimistic is the per capita data highlights the opportunities still ahead on HVAC and Fire & Safety. These markets spend a fraction of the developed market and we know that code enforcement and urbanization is enhancing the opportunity to put more regulation that demand our products, the same is true with refrigeration and security. Today, two-thirds of the elevators in China are new. Many of them still in the warranty, but they need to transition to active maintenance and with the enforcement of code etcetera and the kind of service we can provide in the future. This is a huge opportunity. We know the elevator penetration on service is still low in places like China, but Joe and Pedro and the team are working aggressively to make sure that we can capture the upside that is created with the elevator maintenance in the future.

There has been a big shift in China as you know the coastal are for long time was developing at very rapid GDP growth. This has now become more like zero to 2% Costal area and Central and West is probably more like 10% to 12%, 14%. I remember launching a new factory in Chongqing with Pedro two years ago. Our people were saying why are you doing a new factory? Clear, I mean first of all Chongqing is almost 1600 miles from Beijing and away from the factories but more importantly the growth in the area we have seen in Chongqing for example 12.5%. So the factory that we launched just two years ago produced around 8000 elevator this year, will be at full capacity next year. And that’s the big change that has occurred in China and we got the right mechanics, the right people trained to take advantage of these opportunities.

On the aerospace side RPM rates are still relatively low in developing markets. As I speak here tonight only 16% of world’s population has yet flown on an airplane at least that’s with 84% of people wanting to fly one day, big opportunities. So we need the right organizational structure as we move forward with some of these big challenges. And that’s why launched building and industrial systems is to write customer focused structure going forward, it builds on the past success of combining carrier and F&S. As you can see from the blue bar the largest commercial building systems provider in the world, by far, we could leverage our scale. We have unmatched portfolio and we could provide unique customer solutions that create value for them.

And just to confirm since there is going to be lots of questions and we have already received some, Greg has received some, we are going to continue to look forward Otis and CCS separately as segment. You can see a lot of script is what we expected this is what we are going to do. A few more words on BIS, when you think of the value creation of BIS you should really think of three things capabilities, scale, synergies. The capabilities truly are unmatched. We are the only players with elevator, HVAC, FMS automation. In developing markets with central planning and the speed of construction that work a solution that they could repeatedly apply to different cities and we are going to be the supplier of choice, the partner of choice as we move forward. And we have the ability to combine solutions to really take advantage and drive superior top line growth. We got the scale. When you combine these businesses we have 2500 plus branches that could better serve customers across wide geography, synergy opportunities, leveraging sales network. The fact that people windup under one roof creates huge opportunities just in dialogue discussion, get early signs of a job of opportunity, I know this customer. This is something we could do together. I gave an example earlier with Hyderabad Metro Rail. There is a lot more to come. As you see Joe and his team in March, Joe will have multiple stories that duplicate what I discussed with you on the India Metro.

Now turning to aerospace organization, we created propulsion and aerospace systems just two years ago. I am seeing a lot of benefits. I give you the example with the E2. It’s going to be similar in BIS. We are the largest aerospace provider today in the world with over $27 billion of sales. There is opportunities to leverage our scale, to leverage the supply chain on many of the products that are ready to enter service and the volume that’s in front of us for the next two decades. The next two decades 30,000 new aircrafts will be entering service. Two-thirds of that volume will be single aisle and regional. And we’re very well positioned with five GTF platforms both in the regional markets as well as in the narrow body. Pratt is going to return to producing about 1000 commercial engines by the end of this decade. This is volume we have not seen since the early 80s. It produces a lot of leverage, lots of opportunity for us to do things differently. I am proud of the fact that UTAS has doubled the average content they have per aircraft to $3 million per aircraft that they serve. Goodrich and IAE are truly the perfect fit. We saw the leverage on Embraer E2, the great wins. We are now focused on execution for our customers because its nice to win 5000 new engine is nice to win all these content on aircraft. When customers sign with UTC they expect a lot of execution. That’s why they come to us and that’s what we are committed to do and that’s our reputation to always deliver on our promises.

We also have growth opportunity at Sikorsky. We have strong momentum in the commercial side of the business. We have the best backlog with $2.5 billion of backlog for our commercial products. Oil and gas remain very strong as they shift more and more to deeper water, bigger range and the right products are available for our customers in the 76D and the 92. On military side we have been gaining traction on the international sales. We see solid opportunity for 2014 and have recently delivered some international Hawks to Brunei and there is other countries that are really excited, interested in that product line.

We never lose focus on DoD. DoD is our largest customer at Sikorsky. We have the opportunities that are created in the future and that’s to our radar effort, self funded, X2 technology radar. We created the partnership on JMR. We also have the only new helicopter program that is fully funded at this point in time, which is the 53K, the program is being developed. It’s on track for first flight next year, $15 billion of potential revenue for the 53K. We continue in the out years to deliver a 100 plus Black Hawks every single year between the Black Hawk and Naval Hawk. Those growth opportunities reflect the investment that we have made in game changing technology. We invest $4.5 billion in R&D this year and we are focused on three things products that convert to top line growth, products that address local market needs and fully leveraging the design capability around the globe.

A couple of examples, we designed this new battery-powered gen 2 switch. As you know the power in India not always very stable, there is lot of spikes. So the battery powered inverter offers us the capability. It has a very robust reliable product that can still cycle and there is a short-term power outage. It’s has been very successful in India and guess what. It’s getting traction as well in Europe. Joe and the team has the design of the new 19XRE chiller our of Shanghai design center. It’s a fantastic product, best in class efficiency. It’s now manufactured globally. That same China designed chiller is being produced in Charlotte, North Carolina. The S70i, the Black Hawk that’s assembled in Poland is also sold on the international market. And then UTAS designs and manufacture out of Bengaluru with 7200 people basically designing these new world-class products that serve global markets. I also look at our past investment in GTF Common Core platform as paying off in a big way.

Engines, has performed flawlessly on the C-Series first flight. There is lot of focus on fuel burn, but I will say this is the first C-Series flight, noise reduction is getting more and more traction. I got a cool animation here to share with you tonight that illustrates some of the benefits of this GTF technology. So let me set the stage. You are standing at the end of the runway. The aircraft is on the threshold at the other end and is going to come towards you and take off, pass over you and we will compare the difference of best-in-class today, narrow-body versus a GTF. It’s pretty cool. So let’s roll the tape.

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Pretty cool. Isn’t it? This is why the GTF changes everything from a fuel burn perspective as well as noise signature and noise equals value for the airlines and the airlines are going to need a lot of new airplanes. This is a great example. You see on the left side over here, this is a traditional aircraft, best-in-class, you could see basically the 95 dB area exceeds the threshold of the runway and you could see how big the 75 dB which is dialog level, how big it is. With GTF, you could see that we contained the 95 dB to the runway itself and look at how small the blue section is, which means all these communities around the airport. We don’t have to live with these curfews and noise-abated routes and all that. And I will say there is a real buzz in the industry with the airline, because they say this is worth something for us as we go forward as we modernize our fleet. So very exciting technology, very exciting time for PW and I am convinced as these airplane enter service, it’s going to even accelerate more of the momentum and the traction of these products.

We are truly positioned for growth. We have a hidden gem in the company, which is UTRC. Though UTRC allows us to fully leverage technology advancements across the company, I got a couple examples. On the aero side with combustion obviously Pratt has some of the best combustion engineer, there is around the globe. It’s helped us as we share some of the knowledge for UTRC improve the efficiency of gas furnaces, makes our gas furnace customer very happy. This is one good example of sharing the technology. Elevator engineers recently have helped Pratt lead some challenges with power electronics and volume etcetera.

We have leveraged the Otis talent to help the aerospace company make a step beyond and go faster as far as how they source, how they expect the product. These are just couple example of what UTRC could do for us. The research center also coordinates advanced manufacturing activity initiated amongst the division on additive manufacturing, looking at performance material that will improve performance and processes, Michael McQuade expect to hear from them more about the benefits of UTRC as you get a chance to meet with them. And the real end result is when I see people flowing from the business to UTRC and vice-versa there is lot of pull these days for UTRC engineer to go back to the BUs to implement some of the new technologies.

So turning now to cost reduction, which is obviously the hallmark of UTC. With the aero ramp ahead of us, increasingly productivity through ACE is more important than ever. Several of you had the chance to see and moderate what ACE has really done to drive the business through a new level of performance. Today, 70% of our BUs are silver and gold across UTC. And that’s with the new higher standard. Goodrich has embraced these in a fabulous way. I am very excited. I am very pleased actually with the traction we have had. They went from their Goodrich operating system to ACE with no pushback. I mean, the workforce is embraced. And today, we have more than 100 plus sites that have been added with the Goodrich acquisition, 90% of them are already qualifying or runs and that says that we have a lot of nice momentum developing.

We also raised the bar in the supply chain side, because it’s clear to us that if we are going to meet the requirement of the ramp up, we need all our suppliers to deliver right on time, their quality of product, the predictability that we are looking for. So we added 500 plus suppliers to their program in large part because of all these new suppliers that came with the Goodrich acquisition. We have retrofitted with Goodrich back to 38% of our suppliers are Gold and Performing. And we’ll be achieving by the end of this year about 50% and that is with the new standard of delivery, which is you got to deliver 95% of the time on time to meet the requirement of Performing and Gold. So great progress, but there is still lot of runway and this is what we are going to do is exercise this runway, because we need the suppliers to be there for us. We are focused on win-win solutions with our partners that secure the capacity and the volume for the future.

We got two big initiatives. UTC’s Smart Choice is focused on non-product stem. Our goal, we have $10 billion non-product spend on UTC is to reduce the spend by 5% with no inflation, so 5% net, net of inflation. We are consulting logistics, facilities management, plant consumables and we are seeing benefit, guess what when you had IAE and Goodrich, you have a bigger part to play with and you have authority when you go to the players. And what we have seen for example is on transportation and logistics, the cost is coming down by 10%. So this is a good example.

On product side, which is what we call UTC V2, we have $18 billion of spend. And there we are looking for 5% reduction net of inflation. Obviously, it’s challenging, because we can’t move everything to low cost, but this is where we work ACE with the traditional supplier base to create that value and that predictability in supply chain, because there is great momentum that develops when we can synchronize our production processes and not have any rework or delays. There is more automation and focus on strategic sourcing as well as we engage in development. You probably heard Pratt sign a new 3-year contract with the IAM last weekend. We are very pleased with that. We have signed the contract with the no workforce disruption. It’s a good result for the employee. It’s really a win-win. We are going to be moving some of the material handling functions to the supply chain. So they have full accountability to deliver to our new production processes on these GTF and new product lines.

Now, let me focus for a little bit on effective cash deployment. We have deployed over half of our cash in the past 6 years to M&A activity, these transformational deals that I have talked about. I stand here with a proud record of 77 years of paying dividend and you saw this year, our increase of 10.3%. We bought back $12 billion of shares since ‘07. As you know, we took a path in ‘12 but resumed share buyback in ‘13 and will be at $1.2 billion of share buyback. We are targeting 100% free cash flow to net income. But as we have said in the couple of conferences, some pressure as we invest in the future. We expect the CapEx to peak next year at almost $2 billion to position the company for JSF ramp up, GTF ramp up, all these new programs that we have in front of us.

Now, obviously we will adjust with program schedule. If there is any programs that move around, we want to be capitalized properly, but not too early. If you look at 2014, we got placeholders for $2 billion a dividend, $1 billion share repurchase, $1 billion of debt pay down. It will require to bring back $1 billion of international cash, which with the current tax policy makes it a little costly. You probably saw that there is on the horizon the possibility of a budget dip it’s going to be probably voted in congress maybe to night, hopefully in senate tomorrow. I think that there will be good momentum to avoid the uncertainty that we saw nobody wants to see the kind of challenges we encountered with the debt ceiling. And I think Washington environment I have been there often recently, we want to do the right thing and the two year budget deal are perhaps not perfect to create some certainty. We also saw that the Chairman of the BRT tax committee, it is clearly the number one priority for the BRT. Number one is tax, number two is integration. But I think we have a unique window and a bunch of deals that could happen going forward and have a new structure of facts that’s more global that will positioned America for a brighter future and for certainty that creates more employment and more opportunities in the future. So we are driving hard, hopefully the budget gets resolved and we are driving hard to get a tax solution.

We also got $1 billion for M&A I would say unless again the tax policy gets relied, it’s very attractive to make these M&A activity more with international cash flow received. So let’s take a look at the other pieces for next year. Starting with our view on what’s the macroeconomic environment as we see it from the UTC perspective and how the world behaves. We see modest improvement in GDP. We see a range anywhere from 2.5% to 3.5%, North America’s recovery led by housing, we are excited about housing it continues to ramp up. More importantly I think the surplus of houses in America continues to deplete. There are some bright spots in commercial construction. There are some signs of stability in Europe. The November PMI is the highest it’s been in two years.

And although Southern Europe remains challenge, I would say, we are seeing that other areas within Europe are gaining pretty good momentum as well. China continues to be the bright spot in Asia with GDP over 7%. The construction starts are up 7% year-to-date. The property transactions are up 23%. On the aerospace side, defense budget remains under pressure. Now with the budget deal there is a possibility that things could improve a little bit, because I think the effect of sequestration will be abated for the next two years. Commercial remained strong. RPM are up 5% year-to-date. They will continue to take about the flight line. The demand is going to continue. I am very pleased to see that the airline profitability estimates continued to increase. They just got revised $19.7 billion for ‘14. We like for our customers to be profitable, because then they can make sound decisions on procurement of new equipment as well as aftermarket support.

So overall 2014 is looking a little better than ‘13. And you see this reflected in our sales assumption. Overall, we expect 3% to 4% organic sales growth, 4% to 5% growth if you exclude U.S. government, which will be a point of headwind after what’s been a very difficult 2013. Now, we knew the op tempo was going to reduce in the case of Afghanistan drawdown, but sequestration added to the drama and especially for Sikorksy was a huge headwind where we saw almost 50% aftermarket contraction. So we think that we are in the place, where we have appropriately sized 2014 and there could be at some point some upside if some of these big issues get resolved.

We see mid-single digit growth in North America with continued strength in resi and improvement in commercial. We expect slight growth in Europe, continued strength in China. We are actually planning for 10% growth in China based on the backlog that you already know and the opportunities in front of us. We are planning on 10% growth in commercial aero. OEM is a little stronger than aftermarket. 2% to 5% decline in U.S. government, but we are seeing traction with international military to compensate for some other. So with all of this, our outlook is we expect to deliver earnings of $6.55 to $6.85, solid growth of 9% on 3.5% organic sales growth as the midpoint.

The business units will deliver $0.50 of growth before pension and U.S. government. The plan assumes FX flat with a euro at $1.33. Pension will be up $0.30 tailwind with a discount rate assumed at 4.8%. I want to remind the group we have taken the tough action, but we still encounter $400 million of costs to the pension on an annual basis. The good news is we don’t have to fund pension until 2017 now. Pension benefits are offset by $0.12 of U.S. government, $0.10 of taxes, which is the extenders and $0.08 of commercial aero OE, because we are in the early phase delivering all these new products, early in the learning curve. It’s a challenging period.

We are continuing to invest in restructuring. We got a placeholder for $200 million offset by gains next year. Tax rate will increase by a point as I said earlier due to the absence of tax extenders. We are almost in the same place as we were last year. We didn’t know about tax extender approval at this meeting and then in January we got approved. I don’t know where the crystal ball is going to sit in January. I am hoping budget maybe brings nice squeeze there. If extender pass obviously and we have more visibility to the top end of our range that I just described of $6.85. The debt pay down will reduce interest expense by about $20 million. We got $1 billion of share repurchased that will offset the option activity, which means we are assuming shares count remain flat at 970 million.

As I turn to segments, sales and our profit growth across all Bus, mid-single digit organic growth at both Otis and CCS, BIS sales up low-single digits due to the impact of divestitures at CCS. Otis with strong order momentum in 2013 as they exit the year, we expect low-teens growth in new equipment, low-single digit growth in service. CCS growth driven by North America and Asia and for the totality of BIS up – profit up 325 to 400, two-thirds from CCS, one-third from Otis. The profit was driven really by conversion on organic sales, productivity and pension benefits, that is offset by the headwind from pricing and divested earnings.

On the aero side, PW sales up mid-single digit, driven by large commercial engine and PWC. Op profits up $175 million to $200 million, benefits of volume, pension and restructuring more than offset by commercial OE headwind. UTAS, sales up mid to high-single digits. Strong growth in commercial, military flat, profit up $300 million to $350 million, 15% driven by volume, synergies and pension. Sikorsky sales up low-single digit, it includes eight more CMHP. Growth in commercial and military, international military, declines in U.S. Government. Profit flat to up 50. Pension benefits and cost reduction partially offset by U.S. Government. We have stretched plans on all the businesses, but we know we can deliver.

So let me wrap up before I take a couple of questions, a very solid 2013, 15% EPS growth, the high end of our guidance. Good progress on development program, really no surprise on these five key platform in development as well as the 53K, all our development programs are humming in the right direction. We got a lot of key wins for the future. We got a focused portfolio and an organization with superb talent, unmatched in the industry. We are well positioned to take advantage of the two megatrends. We are preparing for really what’s a ramp in aero that we have not seen in 30 years. I am confident, we will deliver long-term earnings growth and we know the story of the price always follow and our mantra is simple, under promise and always over deliver, which is what we did in 2013. And at this point there is still a lot of question mark uncertainty, but I know we will deliver on our promise and more.

So, with that let me take a couple of questions.

Question-and-Answer Session

Louis Chenevert

Yes, microphone right here.

Unidentified Analyst

Yes, Louis thanks. Just a couple of quick ones, one it looks like the pension tailwind for next year is a bit bigger that what you were referencing down in Mexico. I was wondering if you might be able to clarify what happened with that? And then secondly, if you could speak to there, if there is any contingency whatsoever in the numbers at the midpoint?

Louis Chenevert

Okay. First of all, on pension, the picture has improved throughout the year. Obviously we took the tough decisions with the FAE sunset. Next year is the last year on the pension basically. And what is happening also as you will recall the discount rate was much lower. Last year, we have seen progressive improvement and a part of it comes in the $0.30. A big mover is the 4.8% assumption on discount rate. I don’t know Greg if you want to add anything else to the pension. I mean we are very proud of our plan performance, everything that’s occurred in the company.

Greg Hayes

Yes, I would just add, I think we were in Mexico back in the first of October, we thought about our 4.6% discount rate, so that’s a piece of it. And then the plan performance is a lot better. I think right now, we are at about 9.6% return through the end of November. So returns are better. Our funding is what we said we are going to be funding going out there and the international plans all look pretty good. So it’s a real $0.30 at 4.8%. So unless something happens to the markets dramatically here, which should be really good news.

Louis Chenevert

Do you have comment on contingency?

Greg Hayes

No – yes. So as we put the plan together, there is a small contingency at the midpoint of the guidance range. And I would tell you I think the upside here is as we look at it to get to the top of the range is pretty simple. I think FX obviously we have taken a relatively conservative view at $1.33, if you see it today $1.37, $1.38. So there is upside there. Obviously, with this budget deal, assuming this gets past or some upside, I think you will get a $0.12 headwind from sequestration baked in and that obviously could be a little bit better. And I think the economy in the U.S. feels a little bit better over these last couple of months. I mean, as we see GDP, third quarter is a little bit better. So although we don’t have a lot of state of contingency, I feel pretty good, midpoint of the range very achievable and even top end of the range if things go, especially with tax expenditures, we get those. I think we are going to be in the top just close to the midpoint.

Louis Chenevert

Let me just add to Greg’s comment. Hopefully, you saw my enthusiasm through the presentation that I feel that we have a plan that’s very achievable. And there is a couple of big elements that could move the needle fairly rapidly, but we don’t have certainty on those elements then certainly 2013 came out to be disappointing from how the opportunities develop and we still overachieved on bottom line results and we will again, I promise you. This is what this team knows how to do, but I think we are very well calibrated at this point in time. Okay, question right here and then we will go right up there.

Unidentified Analyst

Yes, thank you. I was hoping you could comment on and quantify the savings from restructurings done in 2013 where that is in the bridge, is that in with the individual businesses, but if you could share with us those expectations?

Louis Chenevert

Obviously, restructuring is an important core competency at UTC. And we have done some very good restructuring. The BUs continued to show up with projects, with great conversion, with the great payback and that’s why we accelerated. Given the lack of growth in the first half of the year, we saw an opportunity to accelerate the restructuring. And I would say, it was very well-positioned to do these changes now ahead of the tremendous growth that’s coming. As far as benefits, we have about $200 million, Greg I have baked in the results on this restructuring that specific breakdown of the restructuring if you want to give some of this number, aerospace versus commercial.

Greg Hayes

Let me just give it to you high level. There is about $500 million of restructuring this year. We get about $200 million of benefit this year, a follow on $200 million benefit next year. Now, about $100 million of that is part of the synergy piece out of the Goodrich acquisition. Next year, there is $300 million, most of that $300 million is already projects that we have identified and we will go to close some of the tasks that are in the business units. So I wouldn’t be running up the number on additional synergy or on additional cost savings, but we clearly have plans for that $300 million that are pretty well baked in already into the business unit guidance numbers.

Louis Chenevert

Yes, that’s what I said earlier, the $300 million will be offset through gains totally. Let’s go to guy in the back there.

Unidentified Analyst

Yes. You said that you are assuming (indiscernible) this year or next year, but unless you can renegotiate the contract by the end of the year, you won’t deliver 8. So essentially like how do you explain that?

Louis Chenevert

Well, it’s a very simple explanation at this point in time. And I think it’s inappropriate for me to comment too much. We are in advance discussion with the Canadian government. You have seen the picture I said thousand words, the airplane is flying, people are training. Obviously, it’s binary. I mean, everything gets resolved, they deliver, if not they move into next gen. We know exactly what the nat will be, but at this point in time, we are planning 8, 8 and 8.

Unidentified Analyst

Okay. And then secondly, what’s the disconnect between organic and reported growth that perhaps was mid single-digits?

Louis Chenevert

It’s – I was going to say that the biggest element is power system divestiture that we did basically in the Q1 of actually it’s in the Q2 last year or this year.

Unidentified Analyst

Thank you.

Louis Chenevert


Unidentified Analyst

Thank you, Louis. On the commercial headwinds for next year, just a fine point, I think the rough guidance was a dime and you are now looking at $0.08, but is that volume-related, but the bigger question is just how do we think about that going forward when you – the ramp you have in front of you that the D&A clock turning on, on all this CapEx, the margin impact of the OE ramp, is there some way to get our head around that from a multi-year standpoint?

Louis Chenevert

Well, number one, we are proud that we won. We are proud that we have the right technology. We are also leveraging multiple platforms with a common design, which believe me if we did it the way Pratt used to do program, the bill for R&D would be much larger, the complexity and the ramp would be even more. So I am very pleased with what’s been accomplished. The fact that we ran from no GTF sales, I remember that’s a while ago people used to challenge in is the GTF ever going to allow us and here we stand tonight 5,000 engines order later. We are going to do this ramp up. We are committed to a piece of CapEx in ‘14 then it’s going to decline slightly. As I said, we are going to adjust to the volume if programs like that are right, etcetera. Just to remind you, MRJ, Aeroquip, C-Series, Embraer, Neo, and I think the order for EIS is C-Series Neo right after and then there is a program. Obviously, the Neo is the big mover. The Neo is the one that has with it a lot of volume, because we will transition from V to GTF. And I would say that program is on the track going full speed. It’s a minimal change for the aircraft and I have high confidence that this will again exercise the way it’s mapped out. So what’s going to happen is we are going to launch this different production capability with our supply chain, with ourselves and be ready for this ramp. Airbus expects us to be perfect. The customer will want us to be perfect. They want this engine that you saw. I mean, when people are at the initial rollout, people are wowed by how transforming it is. So the good news is going forward is you got not just the next couple of years, you got 30 years of bright future.

To add to the challenge by the way, we can’t forget JSF in the military side. I mean, this is one solid program that’s seeing a lot of international demand that rolls out through Pratt, but also the UTAS organization. We are producing about 50 engines a year, I think is a fair number. And that volume is going to go 4X by ‘17. At the same time as aero commercial is ramping up also, you have seen Japan about 50, you see Israel about 19, Singapore wants to buy and now Korea has kind of had a change of heart. They would love to buy JSF. So you got eight parts of countries. You got the U.S. DoD, it’s the first time they have now. They are totally aligned. I mean, if you think about it, people thought a decade ago it’s not possible that the deal would be focused on one single platform that’s going to serve them.

Nobody is talking about Air Force loves the JSF, the Navy loves the JSF, they love disposal, the marine love their disposal, so those will come almost in sink and that’s why Alain the team and the procurement organization and Paul Adams and the UTAS as well are gearing up in a big way. And those programs by the way, if you think about the EMB and the risk that you normally see as a guy who leads the place. If you look at past program, the big risk is when something happens in development, you got surprise. So far right, our technology readiness agenda is paying off in a big way. We are delivering to the milestone with no rework. The EMB, I remember when Dave stood up last March and Dave says EMB is going to go down by 75 to 100. I would say, I see Dave smiling, he is well-positioned to do the high end of the 100 maybe a little more and Paul is now executing, but the execution that we have had is worth a lot as far as how brilliant the future is. Okay, is that helpful? Howard and then we will go here.

Unidentified Analyst

Thank you, Louis. Partnering for success opened up your eyes, I think maybe a little bit, there is one or two things that didn’t work out the way you might have hoped, but when you look at UTAS in the whole, there is a number of places, where you gained market share. Could you talk a little bit more about what you learned from that small one or two setbacks and how you are going to change that and some may either take advantage on the 777x? And also as you look at the year, there were issues with the electro system that’s now been solved you are going to start delivering initial spares, so can you kind of put in context, Goodrich one year later and the new combination?

Louis Chenevert

Sure. Well, let me do it in a couple of slices. First of all, partnership for success, we love Boeing as a customer. They are a very important customer. They created opportunities on platform like 787, where we took on a challenge on the electric system and all the systems that we won of more content for aircraft and at anytime in the history of our company. And we had a big role for integration. We encountered some small challenges through the cycle. I would say, the good news is for us and for Boeing we are a reliable, dependable supplier. I mean, Alain deployed 150% of our sources required to support the Boeing Company, to support the fleet, to get ahead of the curve with airline to make sure our stuff always works. And I would say I look at the dispatch reliability for components etcetera and we are ramped up to more mature aircraft. And this is what you get when you source with a company like UTAS and UTC.

The lessons learned is certainly we are applying to our supply chain early partnership, which is really centered around the ACE platform. What we do with our own supplier is really focused on expectation, but giving them the tools that they need to deliver to us and giving them also the skill set that enables them to reduce cost in their own process passing along some of those savings. And I would say we are on a good track. (indiscernible) and the team was driving hard on the product procurement, has taken some of these lessons learned. And we are driving a high level of predictability for our company as we move forward. So at this point in time, the businesses also have seen nice growth with other companies, other platform and I look at the big win we got on the A350 Landing Gear. I look at the big win we got on the 650 Landing Gear. So the fact is our performance and our delivery and our commitment to standby our customers and always be, they don’t have to worry about us is bring a lot of new business in as we go forward.

Unidentified Analyst

And so just, so then there is a lot of cost that we are involved in sort of getting where you needed to be, so we still have some opportunity, I mean, have you fully reflected all of that in what we see in UTAS’ numbers, because you could see lower R&D, you could see higher spares and some things like that in the upcoming year?

Louis Chenevert

Yes. Well, certainly, a point in time where the product that we have entered service with is a lot more mature. And there is less surprises. And we still have a lot of new platform though yet to enter service, think about the content on the 350, think about the content on the E2, etcetera. So there are still some challenges there, but I would say, our roadmap to execution takes them to account all the lessons learned and we have better predictability. And I think you will hear from Alain in March with lot of details, how confident he is with our ability to execute the programs and a couple of things hit the right way obviously. It’s going to be nice and positive, because these programs have a long life ahead. It’s just going to keep getting better in the years on the UTAS side. Okay, yes.

Unidentified Analyst

Thanks. I just had a question on the $0.50 of the segment profit growth, it sounds like about $0.15 of that is cost saving related, so there is $0.35 of other, is that simply volume or they have other things moving around in terms of price cost, mix in R&D that you think are worth calling out?

Louis Chenevert

I think it’s pretty much the volume increase that we see and also some – the pricing commodities and all that on the CCS side as I described with BIS is pretty much in balance at this point in time.

Unidentified Analyst

Got it. And then within BIS, are there any – is there anything you can share in terms of quantifying the savings from the formation of BIS that you learned from CC&S?

Louis Chenevert

Less learned from CCS is that we can, we will do a tremendous job of creating momentum in the company. We know how to extract value, look at the margin story at CCS. I remember the day is not so far away where Joe used to get challenge on high-single digit could you ever achieve double-digit in the carrier business. Many of you recall that including Joe, we have 15.5% this year. There is no double Otis is a high margin business, but as we combine there is lot of nice synergies, but there is also lot of nice top line conversion opportunities. And we never are afraid of big goals. I used some of these events you could expect in March. Remember the nice picture frame that gives you all with the 15% growth. Well, I am sure we are going to have some discussion between now and then and as Joe presented we will have some nice big goal that we have embraced with esteem and that will be part of this deployment for ‘14. Okay, I see Joe smiling and enthused about the nice growth, it’s all good. Yes. Microphone there on that side.

Unidentified Analyst

In net earnings bridge, you didn’t breakout the aftermarket assumption, so what are your assumptions for the commercial aftermarket and the military spares as we look into 2014 and also the trend in R&D now that’s some of the GTF spending so to speak?

Louis Chenevert

Yes, well that’s a very good question. First of all on R&D, we said that we had peak last year. We are coming down in ’13 and we have. I think as we move forward it kind of flattens out a little bit. There is still opportunity to decline just a tiny bit, but we have got to bring those programs into service. And then you will see what’s after ‘14 you will start to see as the volume comes in and the maturity of product and the amount of EIS diminishes, you will see some more downside or upside in bottom line with the R&D. As far as the spares, we expect basically for the military side to still be challenging and that considers basically the fact that you don’t know exactly what the outcome is going to be on the budget we are hopeful. Sequestration if there is a budget deal we will not be applying it in ‘14, ‘15, so obviously that’s going to make things better because operationally the fleet readiness is at a low level. I would see the chiefs are not starting to be more vocal, you probably saw some statements in public, where they say that they are concern about the fleet readiness on the military side.

On their commercial side, we expect to continue to see continued momentum like we have seen on the back half of ’13 at this point in time. I think what bodes well is also our line profitability and always my big item is if the cycles and be honestly there and they are and they continued to go in the right direction. We could quantify the use for engines basically what that demand is going to be. So we forecast this to continue on a good trend for the ‘14 timeframe, okay.

Unidentified Analyst

I am a little bit surprised that the low numbers $6.55 as low as it is because really if you the $0.15 to get to $6.55 have all come out of segment operations which is like 30% decline, what seems familiar you have to have Europe starting to turn down, aftermarket would have to slow to low-single digit. So I mean what’s kind of your thoughts on why that number is low as it is?

Louis Chenevert

Well, first of all it’s early. Well, now in ’14 the last time I checked it’s going to start in a couple of weeks. As I said before twice I have taken my presentation upfront on the promise that we will deliver would we deliver to the low end of our guidance for ’13, no. We delivered to the high end. I look at 2014 I think we already see a couple of ideas, a couple of elements that could give us more of the high-end of the range. And I think it’s also important to be prudent as we position the company for this tremendous growth that’s coming in ’15, ’16 and ’17. And also some of the uncertainties I mean we have seen a more volatile work hopefully with Washington’s moved with the budget things will get stabilized more certainty, more tax certainty, etcetera, but those are kind of the big elements that move around as a company alone.

Unidentified Analyst

And then just one quick one for you Greg, if the pension tailwind looks like roughly about $400 million that is a break by the sectors roughly?

Greg Hayes

It’s about 45% of the savings goes to Pratt, what was the new tax is about 15% and then Sikorsky about 10% to 15% and the rest of the commercial businesses.

Louis Chenevert

Okay. Let’s go with one last question over there and then we wrap up. I get the slide here then its fine. Go ahead.

Unidentified Analyst

Yes. I just want to go back to BIS and the synergies which we noticed in CC&S. When you look at the revenue synergies, I mean, as you described that you have a really unique combination in terms of reps in this area, but what’s the timeframe and then which markets, do you expect to be able to see this value proposition really deliver and be able to expand your revenue base?

Louis Chenevert

Well, it’s a very good question. And I think it’s very different from market-to-market depending on the maturity of the install, maturity of the opportunity. It’s clear to me and I think it’s fairly clear to Joe that the urbanization is the powerful force and emerging market is a place of high opportunity, because as you build new city, there will be 200 cities of a million people plus couple of years out. All those offer huge opportunity for delivering the savings on energy efficiency etcetera combination that excites the end customer. The opportunities are still pretty good for certain types of structures building, if you think about large airport, large infrastructures, hospitals, etcetera, those also offer the opportunity for BIS. I guess often when I visit some of the customers they say UTC is fairly complex. You got three, four guys coming to see me, because I mean you simplify my life and I know as you all hear is the same thing from the customer. So we need to make sure we are positioned to cater to the customer. They want to buy elevators only. They want to buy F&S stuff only, but then I mean, if you think for example about the kidding relationship on Depot and they don’t want to buy each factor, mostly they want to buy fire suppression and fire system. So we sell it to them, but then on buildings, structures etcetera, where they want to see combination of our efficiencies, you got a single voice that will meet that customer.

So in March, I think we’ll have a lot of definition and clarity. There is already some great example. I was in Poland recently and the team was very happy to convey they had just one some university and some government building together. So I would say in certain countries, it’s going to be a lot faster than others and will adjust the pace to what the customer needs, but also make sure you understand the value creation that we offer, okay. So thank you very much. Great ‘13, I am excited about ‘14. And I think as the year rolls out by the time we get to March and the Presidents talk about their own segments we will create as usual lot of excitement in other promising and always over-delivering. Thank you.

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