United Technologies Corporation's (UTX) CEO Louis Chenevert Presents at Electrical Products Group Conference (Transcript)

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United Technologies Corporation (NYSE:UTX)

Electrical Products Group Conference

May 20, 2014 11:30 AM ET


Louis Chenevert - President and CEO


Unidentified Analyst

If everybody could take their seats, that'd be great and close the doors. I know you all want to get out and enjoy the weather later. So we're trying to stick -- keep this on time. So thrilled to have Louis Chenevert, Chairman and CEO of UTX with us. Louis thanks a lot for joining us again.

Louis Chenevert

It’s a pleasure. Steven thank you very much. It’s certainly nice to be here. The pieces are in place at UTC. It’s a great time to be leading such a remarkable company. There’s three key messages here today; number one, we have a solid start to 2014. The momentum continues from the backend of ‘13. We’re confident in our 2014 guidance. We have the right portfolio, the right organization, the right leadership team, the right strategy for sustainable growth.

So let me start with just a brief recap on the first quarter this year. So we delivered EPS of $1.32. That’s up 10% excluding restructuring and gains. Organic sales accelerated. As you saw, 5% organic growth in Q1 up from 4% in Q4 ’13. That was a little better than what we expected early on, growth in all five segments. Overall order trends remain positive across the portfolio. We got continued strength in Otis new equipment and commercial aerospace after market. And at Sikorsky we got a commercial backlog that hit a record of $3 billion. So overall a very strong start to 2014.

We got solid organic sales and orders momentum. As I speak here today we’re half way done through Q2 and I would say everything continues basically on the trends that we saw in Q1. So that positions us well for the rest of the year. As you saw we raised the low end of the EPS guidance on the Q1 earnings call. On the CMH program, rather than just wait for question I figure I’d give you an update. The negotiation process is nearing completion. We agreed to a new timeline with the customer and phase delivery approach for the most capable maritime helicopter on the planet. So we now expect, as Greg said in the Q1 earnings release to record a charge, once the amendments are finalized and approved by both party. It should happen in the next 30 days and it will probably all wrapped up before we wrap up Q2.

Recall we had a $120 million placeholder for the 2014 guidance on Sikorsky helicopter delivery and we anticipate that other items basically will be offset by incremental -- the incremental charge will be offset by one-time gains. So basically we are going to put it behind. We are confident that we’ll provide you the details as soon as it’s final in the next five, three days with all the terms that we agreed to, but this project is moving along. I want to make it the last time we talk about CMH ever.

I remain confident in our EPS guidance range of $6.65 to $6.85 with a good back to the high-end on sales of $64 billion. We continue to target free cash flow equal to net income and that’s despite a $2 billion investment in CapEx to meet all the challenges of the ramp up that’s in front of us.

And I would say there is also an opportunity side which is I’m unhappy with the inventory. I think while we got to secure the position for all our customers to deliver all the Neos and the CCCs et cetera. I think we have excess inventory that needs to be better managed. I’ll talk about it in the context of really taking a different approach for the supply chain, to make sure we have total predictability so we could really minimize that inventory as we go forward.

There is really two mega trends that will drive growth over first next 20 plus years for our company and that’s urbanization and commercial air-travel. Middle class today is a quarter of the global population. It’s expected that by 2020 it’ll be two-third of the global population. And our products really support growing middle class with enabling of urbanization, commercial aviation. If you think about it, it links all these new cities and city payers and we like that segment a lot as well. We’re the only players that have elevators, HVAC, FNF system that are key to modern cities if you think about it. We transformed our portfolio with some of the acquisitions we made, like Goodrich and IE and we’re well positioned to take advantage of these mega trends.

And we’re more focused today on aerospace and commercial building. 53% of portfolio is aerospace and two-third of that is in the fast growing commercial aerospace and Goodrich and IE obviously increased our capabilities and we today have unmatched value creation for the end customers. 47% is in the industrial and building system. We have tremendous opportunity with our new BIS organization and strong market presence in these emerging markets. So the capabilities and scale of UTC drives significant competitive advantage.

We have broad global reach, world class ace operating system, which is the common language now across the Company. It’s becoming also the common language with some of our suppliers. We’re deploying expertise and leveraging our scale and engineering across the enterprise, across operations, across supply chain and I have to say, I stand up here today, very enthused about the progress that is being made aggregating all these operations and supply chain initiative across the enterprise and re-leveraging basically the ramp up that’s in front of us on JSF on GTF et cetera.

We have the financial strength and flexibility. We have a strong balance sheet. We have the ability to make long-term investments. And if you think about our success today, it stems from the fact that in some of the tough times we never travel back on investing on game changing technology and today approved of basically these investments as we move forward. And we have the leadership team and bench strength; we have basically world class talent to deliver in a very high performance culture.

On the Building Industrial Systems that I launched late last year, we’re the largest in the industry. Our capabilities are unmatched because we have the combination of these elevators and HVAC and security and automation and building. We have -- if you think about it, addressable segment grew fivefold during the last 25 years and we anticipate continued global momentum for these BIS segments.

It’s a great platform. We have a track record of performance, industry leading margins. The strategy to capitalize on our scale and unique capabilities to accelerate growth, you saw the big goal I gave to you on March, which is targeting $50 billion of sales by 2020 with 20% return.

If feels good and I can see Geraud smiling as I have my exchange with him. Because Geraud has a demonstrated track record on CCS, on transformation of carrier and he has built a team that has the skill set to go basically execute and demonstrate that will achieve these big goals. So I see tremendous momentum at BIS. I also see tremendous momentum in the commercial aerospace company.

The airline profits are improving. Traffic is expected to grow again 5% per year for the coming years. The flight line says 25,000 commercial airplanes will be delivered in the next 20 years. On the defense side we’re well positioned and on the right program. If you think about JSF, if you think about the tanker with Boeing, if you think about the rollout of the 53k, it was just General Amos just two weeks ago, this will be eventually $2 billion a year of revenue starting at about late ’17, ’18. And we’ve recently won as you saw the presidential helicopter. So we’ve flown the President since Eisenhower and we’re going to continue to fly the President for generations to come. This is something we’re very proud of.

And I think we’re fairly well positioned on this CRH. This is the army search and rescue helicopter. We also have seen good benefits from international customer. You saw we announced the agreement with Turkey on the TUHP for 109 helicopters. We have said late last year that there were big opportunities internationally for sales and they are materializing. You also saw in JSF, we had Japan announce early last year and then early this year we had Korea on top of Israel. So aside from the eight partner countries, there is more and more countries interested in buying Joint Strike Fighter. So in my view, I’m very optimistic about the prospect on sales of these content and JSF, not only engine but all the systems that we provide to UTAS. So I think we’ve made the right moves in the portfolio and we continue to invest in game changing products to win basically in these markets. And Alain has built a solid team and I will say that we’re delivering on our commitments.

So looking at R&D, we’ve invested $4.7 billion in R&D last year. We’re fully leveraging our global capabilities. We’re developing really products that address local markets and drive top line growth. The common core in GTF is a great example. We’ve reduced the cost of developing five engines in parallel and we also create tremendous value to running a gear with a cool core that provides good operating cost. You probably saw this morning, Pratt announced a truss pump [ph] for customer that at high altitude operation to 35k and that’s going to basically help do new city deals as well as bring more passenger or more gross weight. So that’s going to continue to differentiate us on the A321.

You probably saw that the AquaEdge cooler, a chiller that was designed in Shanghai is now manufactured globally and that’s getting very good traction with district cooling. We also got the 10 year smoke alarm that we had launched last year that’s gaining very good traction, with regulation and many states across the U.S. and many cities across the U.S. So good success with the combined R&D effort and the more focused R&D. E&D for the year should be flattish to just a touch down and then it starts and then it starts coming down as we put behind those big programs which by the way touchwood every time have been executed flawlessly at this point in time no surprise.

And we keep investing in the future, developing next generation technology for UTC. So overall we’ve made the right moves and the right investment. I feel confident in our ability to deliver top line. So over the past few years cost reduction and capital deployment drove most of our earnings growth. Those will continue obviously but accelerating top line is key going forward. We should see 5% plus organic growth across UTC from now through 2020, almost double GDP and that’s driven really by the big segments that we’re in and the mega force that kind of propel UTC going forward.

Commercial business in Sikorsky should grow above 5% CAGR for that period and stronger growth as well at PAS with the demand on commercial aviation. So with that we also continue to leverage our scale and drive cost reduction and that’s why ACE and cost reduction is still key to us. We’re working with our suppliers, deploying ACE in the supply chains. So we show up with solutions to help supplier give us better performance, on time delivery, better cost. We’re focused on win-win solutions with our partners. We also are focused on making sure we secured a capacity, because we need to make sure we’re flawless in the ramp up on programs like C-Series, like Neo, like JSF. Think about it. JSF is going to be 4x the volume that we have today just three years from now and Neo is going to be ramping up to a volume that we’ve not seen since the 80s. And basically we continue to invest in the restructuring. We continue to invest to make sure the organization is shaped for the future. You saw last year $480 million [ph]. This year we’re lined up for $375 million. We’ve had great results and I would say it’s probably a good time to just mention - I’m sure I’m going to get the question too on PFS so I’ll take it upfront as I talk about partnership.

I am very pleased to report that we have found a path for a win-win with the Boeing Company and we’re going to grow our 80 year partnership for the next 80 years. So we’re going to fly together for the next 80 years. And I think when you look at the capabilities of PAS between Propulsion and UTAS and the Boeing Company which always delivers superb product, we have unmatched partnership, unmatched capability and it feels good that we could find the right agreement. So we move forward with the continued success. And we invest in technology that’s attractive today and we also invest always in creating value through cost reduction and that’s what this partnership is going to continue to do for the next 80 years.

So, the final piece of our growth strategy is effective cash redeployment. UTC consistently generates free cash flow in excess of net income. As you know we deployed over half of our cash on transformational deals in the last couple of years. And I would say, I look back, there is no regret. I love Goodrich even more every day. Every time I see investors are like it more. The synergies are coming together, the results are good. I like IE a lot. If you think about the fleet, that’s now -- basically average age of the fleet eight years. Half of the engines have not yet seen the first overall. So it’s got a nice revenue stream coming in years to come. So feels really good.

If I look at in the next several years, through 2020, we should generate an incremental $50 billion of cash. Number one priority of UTC is dividend, Sacrosanct. 78 years in a row - we’re in the 78th year of delivering dividend, no excuse, no apologies. We always do dividend. We always grow dividend with earnings. It’s clearly aligned. And then the rest, basically there is about two thirds, that’s there for M&A and share repurchase. I look to wrap up share repurchase as we move forward. We’re basically going to wrap up second quarter with about two thirds of our $1 billion placeholder, that’s going to be applied to share repurchase.

And then we’re opportunistic on M&A. As I said before we’re going to be focused on core. We’re going to be focused on deals. I see nothing big. There’s couple of small things that add-on to our tremendous capability. And obviously this also says that we could be moving some M&A dollars toward share repurchase if the deals don’t materialize like we’ve done in the past.

In my view, until the U.S. tax policy is revised, not just tax extenders but the reform of tax policy, it makes it very attractive for us to invest on acquisition overseas. So that’s kind of where the focus is at this point in time and we’ll see how things materialize as we move forward. I think there is still some hope on tax extenders being approved between now and year end. But as you know, it’s not baked into our guidance. So we don’t have to apologize if it doesn’t happen. Basically our guidance holds as it, $6.65 to $6.85.

So let me wrap up and it’s clear that EPS versus share price growth, I am confident in the 2014 guidance. We’re focused, we have a portfolio basically and an organization with superb talent that is well positioned to take advantage of the mega trends that I described. The key for us is always to remain very focused and you saw in our annual shareholder report, top is focus and that’s what we do for living. We’re focused on core markets, we’re focused on core execution. We have a lot of win in the market. What we’re going to do is make sure we deliver on all our promises to customers and top line is going to come naturally.

So solid organic growth as a result of the decisions we’ve made. We continue to invest in game changing product and I think the strategy to invest in basically technology readiness so we don’t have surprise in big product development is paying off in a big way. And we leverage our global scale to drive margins and generate strong cash. So we know ultimately that this is what drive shareholder value. So this is UTC, as I speak here today. As you can sense I’m very confident in our 2014 outlook and I look forward to your questions.

Question-And-Answer Session

Unidentified Analyst

Louis, let me just start with a question from the audience, which is our Otis 2014 revenue and margin expectations at risk, given that China construction markets are not improving.

Louis Chenevert

It’s a great question. And I would say the answer is no. I feel very good that Otis is a 20% plus business. There is a big disconnect right now between what I read in the paper and what I feel from an order perspective. Basically you read the paper you get all the press, China is coming unglued and it’s slowing down dramatically. I don’t see it. Orders in Q1 were up 27% for Otis new equipment. So I would say this shouldn’t feel to you when you got 27% up like things are slowing down.

The big change as I’ve said before is that the order that came for a long time from the coastal area is now kind of more subdued but the orders that come in from big infrastructure project and central and west has accelerated and that continues. Some of these cities, when you know Central and West have a GDP of 12% to 14% where the coast is more like 0% to 2%. So that’s the big shift. I like our orders in Q1. I would say I stay here today in mid-May, I like our orders in Q2. Obviously the compares get tougher as we roll through the year but so far so good.

Unidentified Analyst

Two questions. First, just on PFS. Investors have obviously worried that PFS is kind of a euphemism for Boeing extracting a pound of flesh from the suppliers and you’re suggesting you’ve reached some kind of mutual agreement. I just wonder if you could elaborate a little bit more on the nature of that and how would you think about that and then I have a follow-up.

Louis Chenevert

Well, first of all, Boeing and us have been partners for 80 years. And we’ve had, like any partnership, you work hard to make sure you always deliver on the expectation, and I would say we have done that. If you look at 787, the 787-8, the 787-9 and then eventually 787-10; those are very exciting remarkable platform. Boeing does a great job in introducing product that kind of changes the game. So we are like that a lot. We have bigger content on the new platform than we did on the old one. And we’re focused on making sure we deliver on time always for them, making sure that any little glitch that might show up is secured and fixed. So that -- when they choose us, they don’t have to worry about execution. We’re always going to be there for them. And that’s been kind of the relationship.

Partnership for success brought new dynamic and I would say that it created some tension in the family. Any long-term relationship, sometimes it is bumpy, right? I would say that’s what happened. And you heard some of my comments. My goal always was that UTC is a solid financial company, who is not to transfer our shareholder value to others. And I would say we have found a path going forward, that is really a win-win between the Boeing Company and us and we’ll continue to work on, number one, what we do always for Boeing is have the very best technology. Number two is always be there on time, and that’s a lot of value for them as well. And if we work together with our engineering teams to find paths, to improve the product performance and cost; then it’s really a win-win. I would say the whole agreement that we finally came to does exactly that as we move forward. So it feels good. I would say that I’m happy those tensions are behind and I think it’s symbolic also of what could be achieved when two partners really come together and focus not on just the issues, but what you could do as you move forward. So we’re flying together as we go forward.

Unidentified Analyst

And separate but maybe somewhat related, the kind of tick down that we’re seeing in E&D, it’s kind of central to kind of maintaining margins in Pratt as GTF ramps up. Do you see other OE programs on the horizon that may interrupt that calculus for you, whether it’s a 57 replacement or other things? How do you see that playing out over the next couple of years?

Louis Chenevert

That’s a very good question, Jeff, and basically at this point in time I think we got -- as you know we got a full plate and we got C-series certified. We’ll have the Neo engine certified later in back half of the year. First flight is scheduled somewhere I think in Q3 for the Neo. So that’s a big milestone for us. We also are working the 800 core for a potential long-range business shift. And I think that’s also progressing well.

As far as new platform, I see nothing on the horizon at this point in time that is a new clean sheet of paper platform launching any time soon. So my hope I that anything that launches, that’s new is probably two - three years out, and then we’re -- with the big investment behind and we de-risked our position and I would say then we take on new platform. Like we do in technology, advanced technology readiness for large engine, like Pratt. We are doing advanced technology readiness for large airplane at UTAS and looking at what could we do with the combination of both to create a game changing solution, like we did on the GPS. And I would say if those program would launch in the next two to three years, you will see UTC standing up behind these program and supporting -- transforming both segments as well.

Unidentified Analyst

You mentioned the charge in 3Q and the gains, and you mentioned the charge gain offset.

Louis Chenevert


Unidentified Analyst

So is that offsetting back to 120 that’s in the plan. Or do you think it could offset the gain offsetting the charge?

Louis Chenevert

Okay. Let me make this, maybe a little bit crisper. So the CMH, the good news is we have a world class helicopter. We have redefined agreement that’s going to come together, that needs obviously different approvals. Just to put out a high-level perspective; so, number one, we have $120 million and building the plant at Sikorsky for the headwind caused by every helicopter that we have planned. Then you would have perhaps some transaction gains that we are considering that will materialize in the 2014 calendar year. And then we have some small tweaks on taxes. There’s always a small tweak on tax as we see what develops through the year with R&D et cetera. That will cause for us to have enough to cover what is going to be the ultimate CMH charge all combined. That charge, just to put in perspective, will be less than $0.5 million, in totality, everything all in, we put it behind.

And then going forward, because the aftermarket contract would be separate, what we will see, while there is going to be some small incremental costs perhaps in the years to come, it becomes offset by some of this aftermarket activity. So I think I’ve said enough that kind of puts the umbrella in the perspective of what it’s going to be. But until we do the final estimate based on what we’ve agreed to and everything is worked out and all the things are addressed, I think this is the right picture. I hope it’s helpful.

Unidentified Analyst

Yes Louis thanks. I was hoping you could expand on your comment about not being happy with inventory and I just recall over the years, there are occasions where you’ll say something along these lines. And maybe this is especially tougher in a big OE ramp which is a high quality problem with pressure on working capital. But you also said that it was part of the solution may be on managing the supply chains. So if you could may be just expand on what the issue is and what the solution and size as far as is you could?

Louis Chenevert

Sure, this is very good question, Dean. And basically if you think about UTC delivering it’s product, whether it’s jet engines or helicopter, we basically have all this inventory that will be captive in finished product; if you are number one, missing a screw, or you miss a test. So I would say developing robustness of the supply chain, where when we need the part, we always add it. It’s sad to have a $20 million helicopter on the ramp waiting for a couple of 20 bucks parts. It’s sad to have a jet engine that’s ready to go to test that is missing a $1,000 component. So we are working with the supply chain. Our solution really is in addressing the supplier performance, is to deploy our ACE team, to deploy our ACE with our masters but also with third party to help the suppliers achieve better performance through their shop, meet the ramp up criteria that we put in front of them. They’re enthused about all our wins but we got to go deliver.

Now one thing we’ve done in many cases, we’re dual sourced on some of these critical components to help us. But by deploying ACE, they will see the value and that’s how they’re going to deliver on their cost commitment to us at the same time. So addressing the top key suppliers -- if you saw there is also release I think today from Pratt saying they got about $10 billion of cost that they have signed up with that supply chain. Baked in there is the help on ACE, is the help on agreements that do a share of results together.

So this is really the solution for us, given the ramp up that we have and I would say the suppliers have been very enthused about the help we provide to help them help us always deliver. Nobody wants to say to their customers, sorry we couldn’t make it because we got this little part missing. Sometime it’s also us. I won’t say it’s just suppliers. Sometimes it’s our own shop. But basically with the targets we have on ACE silver and gold in our shops, I would say I can now look at the suppliers and say we’re only asking you to do what we have done. And by the way it works. So that’s really a big piece of the solution. And then once you get the comfort by the way, you could start removing some of the buffers that people put in the system today just to make sure they never miss a date. Those are expensive.

Unidentified Analyst

Just on Otis, it sounds like the volumes should be fine this year based on the backlog. But you had some operational issues in the U.S. If you could just confirm those are behind you. And then secondly I guess on M&A, the Analyst Day in March, it implied a more kind of BIS focus on deals. Is that still the case? Or do you have a more ambidextrous approach today?

Louis Chenevert

Very good question. Number one on the Otis operations, as Geraud explained in March, we have our best team, our arms around. We love the strategy going forward of the Florence factory and the integrated engineering operations. I think that’s going to pay big, big dividend. I think, as Geraud said, by the end of first half, this whole issue will be behind. If I look at the units overdue, if I look at the performance of the factory units overdue are coming down fast and furious which is what we wanted, so we could delight our customers and then the operational issues that have been costly are rapidly disappearing. So I think that’s all good.

As far as M&A strategy, I’ve said a couple of times, my focus was more on BIS because that’s where I see some of the gaps. I think it’s very important though to understand, lesson learned, Goodrich IE divestiture of distraction has made us more focused. So everything I consider has to be core. I often get comments why not consider something else? We’re not very good at considering something that’s not part of our core. That’s my experience analyzing the divestiture. So we got to remain very focused. BIS creates that big opportunity. And when I say international opportunity, I think you can imagine some regions where we can go acquire small plays that could be really additive and make a huge difference on our bottom line results for BIS. Not to say something won’t happen in aerospace but there is really nothing of substance that I need to do in aerospace. I need to execute in aerospace.

Fredric Stahl - UBS

Frederick Stahl from UBS. Can I go back to -- stay with Otis and go back to China. Under a scenario where the Chinese construction market dropped significantly, are you prepared to protect your profitability and give up market share in that situation?

Louis Chenevert

Well obviously we’re market leaders in China, and we have scale and I think we’re developing good robustness in that supply chain and we’re gaining. I don’t see that sharp decline that you’re describing. I think our big focus, beside the profitable OE deliveries that we do in China is clearly on aftermarket. Aftermarket is a fast growing business in China as they’ve regulated more and more. And as we set up ourselves for success --you recall two years ago we said we hired 1,000 mechanics in China and we’re training them to deploy to different cities that are new cities so we could get it from the get go with aftermarket.

So if you look at where we are today, basically we have about China versus the rest of the world. So Europe is 60% to 80% capture on aftermarket, China is at 17% now. And our new win rate is about 25%. So the strategy with these mechanics and the effort and the focus is actually working and that as you know is a very attractive business. So we’re going to continue. My goal is the next five to 10 years as the OE equipment will continue to ramp up but then flat now -- I want to be ready with a big portfolio of aftermarket to compensate for the basically flattening out of the demand on OE.

And I think based on the numbers, if you think about history at 17% capture, now we’re running about 25% and maybe potential to go by a couple of small distributors where we can capture more in different regions. China is a big country by the way and people think of China like a couple of big cities. Well guess what, there is going to be 200 big cities and you need to be equipped in these big cities with the right mechanic to take advantage of your opportunity when you deliver with the good mechanic with the service approach. And I would say regulation as I mentioned early on provided somewhat of the framework and tailwind also. Okay?

Unidentified Analyst

(Indiscernible). Louis, yes, we’ve talked for a long time about the opportunity within BIS across carrier, fire and security, may be Otis at some point, in terms of leveraging top line opportunities and creating growth beyond the control side, beyond just integrated controls. Can you maybe talk about how you see that opportunity playing out? Customer experiences where you actually are seeing some leverage between carrier, fire and security?

Louis Chenevert

Steve, that’s a great question. What happens in the integration of BIS is pretty amazing. I mean CCS was a good testament to how we could basically meet big goals sooner and expand margin et cetera. Since we’ve combined BIS -- as you know we have 2,500 field offices and we have basically almost a 100 different R&D centers. The fact that Geraud started to put first of all leadership team that’s very focused on region and the fact that we started to aggregate under one roof; some of these people, has been almost a revolution. It’s not that we’ve changed a whole bunch of system. We put people in the same office. So that when somebody for Otis says I’m working with this architect on this new building, all of a sudden guess what, the carrier guy says oh okay I didn’t know about this, I need to start working on it. What kind of size, what kind of capacity do you have and then the security hears I mean its okay we need to work.

So it’s just the early days but I look at some of the wins. For example, we -- in Abu Dhabi one of the airport, not only Otis elevator but HVAC, but we also won security system. I would say in the past we had all these stories where Otis was a big winner here but Carrier was a big winner there. What we’re starting to see -- they still buy the equipment separate because it’s not on the customer side an integrated approach but we are selling more content to these customers. We’ve seen it in the Midfield Airport in Abu Dhabi. We saw it in a recent project in Turkey. We’re seeing it with a recently signed un-announceable contract in China.

So just by doing this change of people under one roof and the focus of BIS, people are actually excited as to what they could do growing top line and securing more content for the customer and the customers are excited because they look at UTC like a $110 billion market cap company that if we commit, I don’t have to worry, they’re going to be there for me. So I would say that’s a big plus in the BIS integration.

So more good news I think to come on what we could achieve for customers. It’s not everywhere but in these emerging markets where you build new cities, where you build big projects is our chance to materialize with across the board content and I would say if you talk to Geraud and his team, they say we just don’t want to win -- we want to win it all. That’s the jinx they have now on big project. They say all is good.

Unidentified Analyst

Louis, your predecessor made a commitment on the GTF took from memory, 10 years and a $1 billion of pretty much your own time and money. Under what circumstances would you make that kind of a commitment in the future? What hoops would you have to jump through differently to make something of equal magnitude and scale?

Louis Chenevert

It’s a very good question Cliff. Let me give you two part to the answer. First of all I’m very happy. I happen to be the guy going to ask and beg for 100 million every year to George as the President of Pratt and I am delighted he is supportive and the lesson is not forgotten. If you look at the Pratt UTAS effort at this point in time, I would say we’re investing yearly probably 50 to 100 still that I approve to do technology readiness on next generation gear for right body, to do technology integration between the cells and engine.

So we have continued, we have not stopped doing this -- seed money for technology readiness. And that’s why I stand here today confident when the next big thing launches, we will be ready. And the integrated architecture also gives us good confidence and reduced cost to do something new now. I look at five platforms that we’ve done and how they’re scalable and basically every platform is not the full effort that we will add under the old architecture. It’s really refreshing. So that effort has continued. I don’t intend to stop it. And that’s lesson learned is, good times or bad time; if you invest, this is not big money four UTC but it is transforming to top line in the future.

We are also doing some of that, by the way in this year. We’ve almost doubled -- if you look at the last two years between Otis, Carrier and Fire, Security, we’ve doubled the R&D effort. And this new Aqua chiller, that’s a global -- new technology that we have launched for certain product line in HVAC, resi, rooftop et cetera. The new Otis, basically Flex is the one that you plug-in. We created that invention by the way for India market, because the power is sometime unreliable and basically we figured with the region, if you have a 110 volts plug in inverter, you could do a 100 cycle if you run out of power.

Well the good news by doing this invention in India, it didn’t really launch like we thought it would in India, but it’s on fire in Europe. Because think about France, where you got a lot of building, five or six story, old configuration. There is no place for machine room. So machine room less where the gen2 works very well. And just the cost to convert the power in these old buildings to bring them to code is prohibitive. But if you could say: all I need is a 110 plugin and 8D battery of my inverter, guess what? We are starting to sell that product that we thought was the solution for India in Europe all over. So Philippe Delpech is all over this and that’s the beauty of investing in really game changing products. So yes, we always do and under my leadership you could assume that it’s the focus. We got the lessons learned.

Unidentified Analyst

Bad luck with the microphone. We still have some time.

Louis Chenevert

We’re not going to buy a microphone company. That’s not going to happen. We would fix it though, I promise.

Unidentified Analyst

Good to hear. Just go back to the aero side, if we could and maybe give us an update on the aero aftermarket. Just what’s the dynamics are like today, between global flying hours, maybe anything structural in terms of the customers and how that reflects some of the changes in your mix?

Louis Chenevert

First of all, aftermarket has picked up a lot of momentum at the end of the year. It’s continued in Q1. I would say, as I stand here year-to-date, we’re looking at both on the Pratt side as well as UTAS side, double digit growth in aftermarket activity. The good news is the airlines are flying. The cycles are there, the hours are there. So we always said when we had the slump that they would come back, and it is coming back. Now obviously as we got on the back-end of the year, compares will get more difficult. But for now we’re up double-digit in Pratt, double digit in UTAS. And I see that continuing, because also -- if you look specifically at Pratt I think was your question; on the Pratt side basically the V-fleet is so young. We’re in the honeymoon period. It’s about to have a big wave of overall coming in for the V-2500. Of the 6000 engines installed, only average age for survival was eight years, I think I mentioned that in the speech. Only half of them have seen their first overall.

So this is all in front of us and I would say that PW-2000 fleet and the 4000 fleet have stabilized and recovered reasonably well. I saw recently some comments on AD-90 in a report. Just to put in perspective, AD-90 engine today is less than 5% of our aftermarket activity. It’s been addressed for a long time, it’s been reduced. And it doesn’t move the needle for UTC. What really moves the needle is for now V, and what’s going to move the needle in the future obviously is the GPF.

Also happy to report, if you think about FMP contracts on business, which plays an important role in our aftermarket business, I think the 2000 about 20% FMP, the 4000 is about 40% and so far on the different generations of GPF, we’re running anywhere from 60% to 80% FMP. So this is also game changing process and creates a much better model. So I would say I don’t feel, obviously always got these cycles, but when the airlines make money and they fly, I know it’s a matter of time the shop visits will come and I look at our new product offering, the fleet that Pratt will start growing, this is the bottom this year. Actually in numbers of engines installed, it starts to grow next year.

Unidentified Analyst

Really, that’s correct. You mentioned the chiller investment, North America applied has been an area that you needed to catch up a little bit on investment. I think your market share has not been quite where you wanted it to be. You now started to see some evidence of regaining that share with new products in North America applied?

Louis Chenevert

With the investments we have done Shannon, basically Geraud’s focus on the new rooftop line, the new high-efficiency products we have, the good news is we have a very competitive offering. We also have now a pretty good business case with many customers with the payback. The efficiency of the new product and what it replaces makes a huge difference. Your question was specific on North America, I think? Commercial?

Unidentified Analyst

Yes, more on the flight side. I think that was -- down in Mexico there is a lot of discussion about not having come out with a lot new products for a long time and now you need that new launch. I am wondering if you get any interaction.

Louis Chenevert

Well, we had some gaps in the product line which we’ve not closed and Bob McDonough and the team have done a good job to make sure we got full coverage on the segment and I would say we’re gaining traction at this point in time, as the market is recovering. And just to speak maybe, an extra comment, I see more and more application by the way if you live where it’s really warm. The payback on replacing your old unit, whether it’s a mid-sized building or even a large sized building with large chiller, often you are looking at 12 to 24 months payback under replacement of unit and energy saving. So 80% of that segment by the way is -- if you look at commercial segment, 80% is replacement, 20% only is new OE. So the replacement piece plays a key role and efficiency is a big theme for dialogue with these customers.

Unidentified Analyst

We have one more from the audience. She is looking for clarification on your earlier comment about the aero acquisition by Goodrich, in light of Goodrich success. Are there particular aerospace components or parts which sort of normally you just take right off the table and say this thing has characteristics that don’t interest us at UTC or are you pretty open to the full offerings that are out there.

Louis Chenevert

I would say there’s a lot of things that are in some of the discussion out in the market there that are absolutely of no interest to me at this point in time, non-core, without being more specific. I like what I have and I also don’t think I need tactics.

So, with that thank you very much and look forward to see you.

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