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

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United Technologies Corporation (NYSE:UTX) Investor and Analyst Meeting Conference Call Transcript March 14, 2013 1:00 PM ET


Louis Chênevert - Chairman and CEO

Greg Hayes - Senior Vice President, CFO

Mick Maurer - President, Sikorsky

Pedro Baranda - President, Otis

Geraud Darnis - President, CEO, UTC Climate, Controls & Security

Alain Bellemare - President, CEO,UTC Propulsion & Aerospace Systems

Mike Dumais - President, Power Controls & Sensing Systems

Curtis Reusser - President, Aircraft Systems

David Hess - President, Pratt & Whitney

Paul Adams - Chief Operating Officer, Pratt & Whitney

Benoît Brossoit - Vice President, UTC Operations Worldwide

Shane Eddy - SVP of Operations for Sikorsky

Cindy Egnotovich - President, Customer Service


Louis Chênevert

Well, good afternoon. And welcome to the York. It's always a pleasure to have this event. It's one of my favorite annual get together with the investors. We have a nice agenda today, we had to start with Greg. He's going to give you a brief financial overview then we'll go into the divisions, it's going it's going to be Mick that goes next with the Sikorsky story. Followed by the Commercial division, we'll hear from Pedro, for Otis we'll hear from Geraud, with CCS.

And then we're going to take a short break, I think it's important to note for the first part we're going to take questions after every presentation and then we'll come back after break and we'll hear from [PTS] there'll be Alain first, followed by joint effort between Mike Dumais and Curtis Reusser.

And what we're going to do afterwards is we're going to go to Pratt and Dave Hess is going to give you the snapshot of the Propulsion Systems, for that group we'll take questions after all the presenters are done. There'll be a slightly longer period of a question for all of PAS. And then there will be final wrap up by me and you'll get again more opportunities to ask questions. This is always the important part of these exchanges, the Q&A period.

And look forward to a very productive discussion this afternoon. You'll have the opportunity also today to meet some of our key leadership that that this team is not used to seeing but a couple of extra leaders that really have an important role in all these different businesses. And I think it's important to basically to note, why don't you stand up one by one as I identify you.

Let's start with Paul Adams, I was the New Chief Operating officer of Pratt with me, and then we have Benoît Brossoit who is the Vice President of UTC Operations Worldwide. And then we have Shane Eddy who is the SVP of Operations for Sikorsky. Then we have (inaudible) who is the Vice President In-Charge of Operations for Otis. And as you can see we have a lot of people that are here today, involved in the operations.

You also have (inaudible) basically is the president of the Americas for UTC Climate Control and security and finally got Cindy Egnotovich, President of Customer Service for UTEC.

So welcome to this event, we thought it would be important to show you some new faces and how strong the leadership team is in this company today and we keep growing it as we move forward, so thank you very much. Maybe a couple of comments before I turn it over to Greg, you know we're focused at this point in time on integration and execution our transformed portfolio is very well positioned, in our core markets of Aerospace and commercial building. And we have good long-term growth prospects that are really lead by two large megatrends and that's urbanization and that's commercial aerospace growth.

You know we're focused on cost reduction every day at UTC, it's in our genes and we're driving best-in-class margins through our ace operating system. I would say we're seeing tremendous momentum and traction especially post acquisition of Goodrich. I'm very enthused about all they've embraced. The ACE operating system, you'll hear more from Alain, this afternoon on the Goodrich integration. But I'm impressed from it very well, it think Alain has a couple of most comments to make about synergy momentum that's developing and a big bold target.

We continue to be a company that drives strong cash generation every day, we're meeting our commitments to pay down the debt, Greg committed -- last year we'd pay a third of debt, we did. And we meet our commitment at UTC, it's a way of life. We're also committed to returning two thirds of the cash flow to shareowners and I would say that we're well positioned to continue that journey.

We're well positioned in general for a top line growth as I look at the markets that we are in and they're powerful force that drive the markets where we play. Our ongoing focus on costs, the effective cash deployment and the leadership team that we have has really positioned us very well, for double digit earnings growth and with that let me turn it over to Greg, with the financial piece. Greg?

Greg Hayes

I'll avoid the marker or there'll will be a water drib later. Sorry, what a difference a year makes right. Last year we stood up here and we talked about a lot of things that were going to happen in 2012. We talked about the acquisitions that we were going to complete, we talked about the divestitures that we were going to make, we talked about how we were going to finance all these deals, we talked about the underlying financial performance of the company.

I think the best thing to say about this year is there is no news. We're on track to deliver what we committed to, what Louis talked about back in December, and you're going to hear that from each of the presidents of the business today that we are on track to deliver the commitments that we've made.

And as Louis said portfolio is set, the strategy remains the same, top line growth, cost reductions, margin improvement, and disciplined cash flow redeployment. As we take look into portfolio today here we go, a little bit different but not really, What you see of course is commercial and military aerospace a little more than 50% now the UTC portfolio.

Still very a important 46%, 47% of the business is in the commercial side. We would like the balance that we have and we like the ability that this portfolio gives us for future growth. There's five industry leading franchises and the aerospace piece is now about $7 billion higher than it was as a result of the Goodrich acquisition.

We take a look back at 2012, obviously there were a lot of accomplishments, obviously the transformation is first and foremost, but as we think about, it CCS one of the most difficult integration efforts that nobody talks about was bringing the fire and security and carrier businesses together and realizing -- or recognizing over $100 million of synergies last year.

On top of that Geraud and the team delivered margins over 14% and you're going to hear about the 15 x 15 today. We know that it's going to be faster and so a great you have a carriers and fire and security bringing those two businesses together.

On the other side, we maintain industry leading margins above 20%. We've done a lot of transformation in the factories with a new factory Chongqing. We're consolidating our factories from Bloomington in Mexico into Florence and South Carolina. Again all of the idea is to position ourselves for future growth and to maintain margins above 20% for the long run.

On the aerospace side, again we talk about the acquisitions all the time, the IAE would have been one of the biggest acquisitions in aerospace history except the course we did in Goodrich, but again the IAE acquisition is doing very very well we're integrating that in the Pratt's Commercial Engine Business and we're getting big synergies that we had expected.

UTC Aerospace Systems of course you're going to hear about that, you're going to hear about the synergies story today for from Alain and for Mike and Curtis. Btu I'll tell you its all good news and then we heard a lot of criticism last year about the price we paid for Goodrich, but I have to tell you with what -- the financing after tax was about 2.2% about $15 billion last year paid down the third of that. And we're re on track to exceed the synergy target that we laid out.

On the Sikorsky side, a very good year, right. I know we talk about CMH, but really CMH is the tail wagging the dog at Sikorsky, the real issue is on the military side we signed multiyear eight, give us five years of production -- continued production and the Black Hawk we also certified the S-76D and we're doing great job on the 53K program. So again, a lot of accomplishments across UTC last year. As we think about 2013, think about the macro story.

As you think about 2013, if you think about the macro-story in the U.S. and then I have been uncharacteristically upbeat, and I apologizes for that for the last couple of months, just you know, my wife wonders what happened to me. But the fact that the matter is the U.S. economy is better and is going to continue to get better. Consumer sentiments you know is trending upward.

We saw consumer spending tick up again last month we saw unemployment start to tick down, I think over 300,000 jobs created last month, it's at 7.7% and only good news I would tell you on unemployment is that the Fed has said they're not going to raise rates until it gets down to 6.5% or so. So I think we've got another year and half or so probably of the low interest rate environment, which we can hope to capitalize on.

Housing starts, we'll hear Geraud, we think up over 25% this year to just under a million still a long way to go of a recovery. Household formation is still above 1.2 million on average so getting that room to run in the recovery. Construction activity, the ABI architecture of billing index has been over 50 for the last six straight months. And you see that in Otis' order in North America up a very strong, we're off to a very strong start here in 2013 after a solid 2012.

Maybe the one question mark out there, the question on everybody's mind is sequestration. The good news is the world did not end on March 1st, just like the protestations of the administration that it was going to. I think we need to keep all of this in perspective and we talk about UTC in a second but if we think about it DoD spending since 2007 is up to $216 billion in five years that's up 53%. Total government spending is up over $1 trillion, up 39%. So to think about taking $46 billion out of DoD spending this year, think about that in the context of having added $216 billion over the last five.

Now, we don't like the sequestration, we think it's kind of a crazy way to run the government. But the fact is we have to get the debt under control, we recognize there will have to be spending cuts and hopefully they'll come to a solution that's not quite (inaudible) as sequestration, but we understand it's going to happen and we're positioning the business through run with a the smaller military base.

I can't tell you today what the impact is going to be at UTC. We've done some rough order math we do about $4.5 billion of aftermarket with the DoD every year. We've assumed about 20% cut there, a 20% margin level for three quarters of the year comes out to about $0.10 impact to UTC.

We've got letters from our customers telling us cuts are coming, but they don't know what those cuts are going to be at. I don't think we're really have good handle on those probably until sometime well into the second quarter. But just for bookkeeping purposes as I think about our contingency out there, about $0.10 about allocated to sequestration and it will hit each of the businesses a little bit differently, we're seeing it already on the military aftermarket little bit where orders are little soft because of the uncertainty in Russia people aren't spending the budget but I don't believe it's going to be a big deal for UTC total DoD business is about $9.5 billion for UTC, just to put in perspective out of 65, so again well weather through this.

As we think about the rest of the world, a mix story obviously Europe is out there it's a concern about 30% of our profits come out of Europe. We have seen an impact obviously of the slow markets there we saw that last year at Otis, especially in Southern Europe where we had a lot of pricing pressure, margin pressures. Nothing is actually gotten better, but nothing is to be actually got worst either.

Obviously the bright spot probably in Europe is going to be the emerging economies, we think about Russia last year commercial orders were up over 30% year-over-year. So there are some bright spots, I think the other thing we're just talking about the equity markets are actually back to 2008 level. So there is some reason for optimism the easy money policy that we see in the U.S. is playing out in Europe as well. So again cautiously optimistic and you will see that as we go through the presentations today, no big recovery in Europe, but no big downturn either.

On the emerging markets still a good news story. All right, we think China GDP will be up 7.5% or 8% this year, we have a very strong start to the year in China on the commercial side. And property transactions in the first two months were up 55% year-over-year. The cooling measures that the government introduced in early March probably no surprise trying to keep a lead on prices but we still see very strong fundamentals and we'll talk a little bit about that, really it's the same in the rest of Asia in the emerging economies still very strong solid growth.

On the aerospace side it's a – let the good time is in role. What we have continue to see is very strong RPM growth, since 1960 RPMs have escalated at a compound annual rate of 5%, last year was 5.3% and importantly for the last three years the airline industry has made money and the AEA forecast is for the airlines to make money again this year. I can't remember the last four year period where the airlines actually made money every single year, so pricing discipline is out there the market is good.

On the OEM side, about 1,500 aircraft to be delivered this year that's up 12%, again we're well positioned with the portfolio to take advantage of this. Maybe one soft spot on the aerospace side is Bizjet, Bizjet departures is still flattened out, we haven't seen earlier recovery there a frac canada business is going to be up slightly in the Bizjet side but not a robust recovery, maybe the one good news to point out there as we've seen the used inventory for business jets drop from 18% in 2009 to 13% today, it still once to be about 10 or 11% before we're going to see a big return there, but again pretty good news on aerospace.

We think about expectations for 2013 Louis laid this out back in December, and really not much exchanged since Louis talked about this. Commercial aftermarket and aerospace again we show expected recovery, we think that recovery is going to be in the back half of the year, you will recall we said fair up around 5% mid single digits so there it and then the UTEC's business up around 10% or so.

The order trends beginning of the year kind of what we saw in the fourth quarter to talk a little bit more about that but we have not yet seen a robust recovery but we know with the airlines flying, put in the miles on, put in the hours on the equipment, we will see this fair is come back and again no panic there.

On the military side that's really just sequestration and we think it was going to happen we thought it wouldn't grow over the fiscal cliff I guess we went halfway over but the fact is it was probably a little bit of headwind there. Rest in the business commercial infrastructure and infrastructure North America looks good Europe is about what we expected an Asia about what we expected.

Pension tax is affects a little bit better remember we picked up some good news of the tax expenditures at the end of the year. Pensions a little bit better than what we expected because discount rate was a little bit higher than plan returns a little better, affect our plan today is 88% funded, we've got no funding requirements through 2015 for our U.S. domestic pension plan.

So we're in good shape there obviously there's headwinds and the base business is about $225 million this year, but after we get past this year, pension will be good news for the foreseeable future. FX I think back in the January we were on the call the euro was about $1.33, $1.34 today to $1.29, $1.30 so still better than what our plan assumption is which is $1.28 and we'll see where that ends up.

As far as cash again, Louis mentioned this last year we paid down a third of the Goodrich debt. We have a lot of cash and this is a good thing. We've got about $5 billion of cash on the balance sheet at the end of the year. Free cash flow is (inaudible) equal to the net income this year it's another $5.5 billion. We've got a couple of investors that will happen yet this year, they'll give us another $1.5 billion after tax so, we've got about $12 billion of available cash this year.

Now there's some calls on that cash obviously there's about $2 billion that goes to the dividend, we've got a 18 months floating rate note it comes due in December for $1 billion. We'll do $1 billion of share buyback and $1 billion of M&A, $5 billion out of $12 billion. So as to handicap these numbers I would tell you that M&A number is not going to be $1 billion it will be lower than that, maybe up to half of that. We'll see there's -- quite frankly not much in the pipeline right now form an M&A standpoint. As we're more focused on execution than acquisitions this year.

We'll pay down more debt, we'll probably pay down another $1 billion of debt, we've got some high coupon debt from Goodrich, that's out there in 2015/2016 that we'll probably call this year. It's a right thing to do economically so we'll pay that down.

It may be take share buy back up a little bit this well, I know Louis would like to do, a couple of billion dollars, and we'll see how that progresses. We did about $350 million so far on the first quarter we'll do a similar amount probably in the second quarter and then early in the third quarter, we'll decide where we take the share buyback. So that's the cash story, it's a good story, we've got a lot of flexibility, acquisitions still on the horizon it's just further out and we're well positioned to do something as we go into '14.

So think about the themes for today which what you're going to hear. You're going to hear about integrations and execution. Right, and to set the Otis side we're going to hear about what's going in China what we're doing, we're going to hear about the new transformation in the supply chain and CCS, Geraud will take us through the portfolio transformation and where we're going with that business and the margins that are potentially out there.

And the Aerospace sides, again it's about execution, flawless execution on the big programs, GPS, JSF, CH53K, the international Blackhawk, there's a lot going on. But again a lot of it positioned us for feature growth. As Louis mentioned three pillars to UTC strategy and the first is top line growth. If you think about it, UTC's products enable urbanization.

We think there's roughly 300 million people urbanizing every five years. 60 million plus a year moving from the farms to the factories that means the elevators, they need air conditionings, they need their security systems, both electronic and fire security. Those are the products that are going to benefit from this urbanization trend.

On top of that you've got the commercial Aerospace business which again will also benefit from the urbanization trends. RPM's up 5 % every year since 1960, that's going to continue there's a need for 30,000 new aircraft over the next 20 years. That's a big number of 30,000 aircraft. On top of that you've got energy resources, that are going to be necessary to support urbanization, that first in very nicely with mix business because you need vertical lift helicopters to get you out to the platforms that's the S-76D and the S92. So again the megatrends supports what we're trying to -- what the product sets can do.

We're also investing though in the products. We'll invest about $4.5 billion this year in E&D. In the last year we talked about E&D is actually going down at the UTC level this year and I can show you with what Pratt & Whitney as we've now certified the CSeries engine, E&D is coming down probably $75 million may be $100 million of E&D reduction at Pratt.

The good news is we're still investing on the UTEC side though, and as we have a full year now of Goodrich in which you see is about $300 million of additional E&D year-over-year because of the Goodrich E&D. But again game changing technologies Otis continues to develop and on the gen2 low cost versions for each individual market, Carrier again making bigger investments to ramping up R&D as to focus on energy efficiency. And of course you've the Aerospace side we all know the GTF, we've got the first A320 engine to test, we've just had a big win at Embraer. The guys are busy.

We also of course, I think Mick will talk about our teaming arrangements that we have with Boeing on the joint multi role again an opportunity for future organic growth.

On top of that of course what UTC does best, and that is cost reduction and margin expansion and over the last five years we've invested about $2.5 billion in restructuring. That $2.5 billion investment has yielded in $2.2 billion of run rate savings. That's a pretty good investment. The fact of the matter is without that earnings would have been down, because of the headwinds around E&D, pension, as well as the declining markets, but in fact we have been able to grow earnings over this period because of this relentless focus on cost reduction.

On the right side of this chart you see product costs of sales which is about $31 billion about $22 billion of that actually comes from our supply chain and you can see about half of it still comes from high cost locations. So it remains a target rich opportunity even on the 22% or so of the pie that is labor the majority still comes from high cost locations so.

So the restructuring journey is not over and it won't be over for quite some time it continues to be opportunities to invest and restructuring at UTC. And the supply chain especially through the implementation of ACE rolling out the ACE Supplier Gold program we've got the ability to help our suppliers improve which means lower cost, higher quality for our customers.

Cash generation, nothing new here, we expect free cash flow to equal and receive net income this year as it has done almost consistently since 2004. You'll see that CapEx is up this year we expect to spend about $1.7 billion on CapEx last year we spend $1.3 billion. Additional CapEx is really going towards the investments that we need to make in supply chain to ensure that we can meet the requirements of our customers as we ramp our production and we are seeing this primarily on the aerospace side, but we still see additional CapEx investments at Otis and CCS again to meet the emerging market demand.

Having said that cash will be a little bit attention in cash flow this year with the $1.7 billion of CapEx and depreciation and amortization about $1.2 billion so a little bit of attention but we feel confident that we are going to get to 100% of free cash flow net income.

Hallmark of the UTC is as Louis said our goal is to return two thirds of free cash flow to investors every year. The dividend again which raise at last year expect that we take it up again on the fourth quarter of this year as we typically do every five quarters again very very consistent we are looking to a payout ratio of about 3.5% so again half through share buyback and half through the dividend.

So what you're going to hear today, again this is the plan for UTC for 2013 is about integration and execution how we or can deliver sustainable organic growth now we are going to continue to flow obviously execute on product development how to produce best in class margin how we are going to continue to deliver strong cash flows. And again this is not a story about 2013 this is a story about rest of the decade and I think again as you see the plans this is -- seven in place a lot of confidence this is not just a 2013 recovery story, there's a runway and the tank through the end of the decade.

Through that let me stop and I'll take just a couple of questions if anybody has any. Let's see. Get a microphone.

Question-and-Answer Session

Unidentified Analyst

Thanks. I just had a question on the assumptions on the emerging market growth you said that China has started well and that was some expected cooling measures more recently are you expecting the China growth rates in the commercial businesses will decelerate in the second half or you think you will have an tailwind from market share.

Greg Hayes

Well I think in fact what you're going to hear from both Geraud and Pedro is there is this tailwind because the order rate were good coming out of last year they remain pretty good here in the first quarter but we expect growth to again despite the cooling measures, we expect the growth to continue at least 7.5% or 8% in China and probably similar rates across the rest of Asia.

Unidentified Analyst

Just a question on cash related items Greg I think in Q4 CapEx kind of ramp stronger than you thought and you were suggesting it might be up a little bit I think a 100 million in 2013 now you are up substantially do we continue to ramp beyond 2013? And what exactly what's actually going on there why that number moving around so much?

Greg Hayes

Last year in the fourth quarter I think we spend $600 million on CapEx, we've spend $700 million through the first nine months frankly I didn't believe the $600 million was a real number. The plans did roll up to a much higher number about to about $1.7 billion. I'm clearly, we're going to spend about $1.7 billion this year obviously, Louis and I are pushing back a little bit on this. Most of this investments really seem to make sense. So I think there is pressure out there you'll hear about it in terms of customer demand we need to then supply chain as the ramp continues in the aerospace so there will be a little pressure so again the budget would say it's $1.7 billion maybe $100 million less maybe $150 million but there is a pressure out there on CapEx.

Unidentified Analyst

Should we assume the roughly $5 billion in offshore cash is basically not productive usable? From the share we purchased at point

Greg Hayes

Okay yeah I used it every day I think the company went in just, so actually some of it is accessible and last year we talked about bringing back about $4 billion of cash we actually brought back about $2 billion so there is still some of that cash it's going to comeback this year that will help or could be utilize for your idea of productive and productivity.

Unidentified Analyst

Thank you, I am sticking with it cash questions just did you remind us that $1.5 billion in after tax proceeds from divestiture expected this year are those are all on announce deals or is there anything that has not been announced.

Greg Hayes

No those are all the deals that have been announced so if you think about we're going to close I think on (inaudible) divestiture is the legacy Goodrich engine controls then it should close I think on Monday as couple of $100 million coming from that we have got the EPS as the electric power business that will close here in the first quarter too. Then you've got Pratt & Whitney power systems which should close on the second quarter and help me what's the last one?

Unidentified Company Representative

[Rocket Dyne]

Greg Hayes

[Rocket Dyne] thank you. So, I knew this, you know, a lot of deals going on, anyway so all of that should happen by the end of the second quarter. So I think that's all alone in the pipeline. Yeah, Mr. [Nadal]

Unidentified Analyst

Just on the as you go forward beyond 2013 and you think about the balance sheet and you have mentioned this year to might be some additional opportunity pick up debt some high cost debt some high cost debt but there you had this 2% rate on much of that you took on. So what do you think 2014, 2015 conceptually, how much more attention you're going to pay to debt versus share of purchase, how much can a share of purchase get ramped up?

Greg Hayes

Well again, we're targeting 70% of free cash flow to net income, we're coming back to share owners every year. So again is the top line gross bottom line gross where that number can go. You know there is no debt repayment in 2014 at all. If you take a look at the maturity later there is about $2.5 billion in 2015 and probably $4 billion of that is into this year. Cash is not going to be initiative for us. I think again, I'll be around capital allocation we'll have plenty of options and of course one of the best options in my mind is always share buyback. But there will be other competing usage for that cash as well but I think we'll have plenty of flexibility beyond this year in 2014, 2015, 2016 to take up share buy back as well as other acquisitions.

Unidentified Analyst

And real quick one on this and thanks for the map on this year. Have you started through about quantifying in future years with the tale might be or is that which is too early to say?

Greg Hayes

How is way too early to say I think again, if you think about the map, we're going have to cut some big programs. I think this idea trying to cut everything across the board by 10% so really it's you know it was political fees above way to sale the solution I think but not the right way to do it. So, some programs will be impacted, we like the programs that were on I think you know mix fee these retailers to be solid at JSF that I'm not going cancel that. Again I think we'll just have to see how this whole budget negotiation Washington foresees over that. Again we feel pretty good about but it's truly to our forecast. I' going to stop there and lots of questions here, but we're going to turn this over to Maurer, President of Sikorsky.


Mick Maurer

Thank you, Greg, good afternoon. It's an honor to be here representing Sikorsky as we celebrate our 90th anniversary this month and we're ready for another 90 more. To summarize where we stand today, we're heading our marks. When it comes to operating performance, execution and predictability with one exception that Canadian program, we'll talk about that later, customer satisfaction is very high across the board and 2012 was a record year for new orders and we're well positioned for organic growth over the next 5 years.

Recapping 2012, margin expansion continued with operating profit SG&A were $100 million driven by higher commercial S92 volume, restructuring, aggressive cost reduction measures and improved execution on our international military programs. Sales were down 8% versus the prior year driven by lower military volume in the fact that we delivered 4 aircraft in 2011.

Adjusted ROS was up 250 basis points to 13.6% essentially achieving 14% ROS 2 years had a schedule, a clear sign of healthy performance across our portfolio. This was in spite of increased year-over-year pension expense and first the 6 months of the multiyear 8 margin research. Speaking multiyear 8, we signed that contract in the middle of 2012 so we'd find next 5 years of U.S. military black hawk and sea hawk business. We delivered the first 4 S76D aircraft following the October 2012 FAA certification. NS92 cabin production is at full rate with our partner TATA at the new facility in Hyderabad, India after a transition from Japan.

The 53K heavy lift program continues to perform very well with delivery the ground test vehicle for the test program and we remained on track for first flight in 2014. We expanded our operation in Columbia to ensure sustained support for operations of the Columbian arm forces. We took delivery of 5 international black hawks freeing the total fleet to more than 90 aircraft. We're one of the heaviest operating in the world. So overall, strong year in 2012 and so I a summary of 2 key operational metrics for the moving in the right direction.

Aircraft deliveries are on schedule with consistent improvements in quality. Significant customers escape decreased by 40%. Our customers have noticed and are very happy with and so our customer satisfaction through all of our core programs. And given budget climate by the U.S. government the competitor pressure on all of our customers it's a good time to be high performing. And it's no coincidence that our orders are increasing as operational performance improves.

Looking at some of our operational performance, you can see slide 3 where we highlight continued improvements in operational efficiency and productivity. Sales for employees up 11% over the past 2 years as we continue to size business appropriately. It made great progress in shifting the labor mix towards lower cost locations like Poland and India and the supplier goal driving cost reduction across the board. This has helped to lower cost per aircraft, that's an very matured products over the past few years.

Multi Year 8 present the same challenge and the same opportunity that we show in Multi Year 7. As this typical of Multi Year contracts we have a cost base negotiation with the government, they creates headwind in the early years. But it's a firm fixed price contract where Sikorsky keeps 100% of the costs savings over time. So we have the right incentive for the customer and the company to reduce costs and expand margins as we progress through the new five year contract.

Lead time on our products typically runs two to four years, so the lower sales volume that we are experiencing in 2012 and 2013 is the result of the dropping orders that we experienced falling the economic crises in 2008. With that said you can see on the orders chart that we've had three consecutive years and significant grow with over $11 billion of new orders in 2012 that's a record high. And that puts our backlog at $14.4 billion also a record high. We are well positioned for the organic growth story well I am going to cover today.

Okay. 2013 outlook, for 2013, we see tailwind on the commercial side S-76D is now in production with $700 million backlog the nearly sold out through 2014.S-92 is our hottest selling product with a $1.5 million backlog. So we see the commercial business for grow by about $500 million in 2013. Despite tough times of the U.S. government there are number of new rotorcraft programs and with well positioned on all of them. On the negative side we see drop international military sales consistent with 2009, 2010 deepen order that you saw on the last chart. There is continued pressure on U.S. defense budgets with or without sequestration especially giving lower operating samples. And we will experience for margin reset typical to start of a new Multi Year H60 contract as I mentioned earlier. Because we started delivering on the Multi Year 8 contract in the second half of last year we expect to see higher year-over-year margin impact in the first half of this year. And you're all aware of the pension headwind that we're dealing with right now.

Factoring in one time CMH charge at the end of 2012, times remain consistent with what we shared last fall, where sales up low single-digit and operating profit down $100 million to $150 million.

Our guidance includes the place holder of eight CMH aircraft deliveries in the second half of this year and our overall sales profile was also waited more heavily toward the second half of the year.

I should also mention that this guidance is without sequestration, Greg gave you an overall UTC estimate and we'll share more as we were more about the details of sequestration implementation from our customer.

Okay, now move on to our strategy for organic growth. Here the primary elements of that strategy. First, we have three very strong franchise is to make up our core business in the H60, the S-76 and the S-92. The CH-53K will be came with fourth pillar franchise eventually becoming bigger in sales than the H-60 Blackhawk.

The U.S. DoD is still the big driver on new programs, there are only a handful of platforms, so you win for decades or lose for decades ,the stakes are high. Using our franchises to expand share internationally, in over the next 5 to 10 years this is our biggest growth opportunity. change and how we go after business, with less reliance on help from the U.S. government and an approach closer to what you see in United Technologies or the commercial businesses.

In technology investment will continue to be critical through our long-term industry leadership, so of course the starting to move ahead of the competition on innovation. I will talk more in a minute about where things were headed there. So it's important to note that as we pursue major new start programs, expand share internationally and invest a new technology, partnering will be a critical element of our strategy. Partnering helps for an affordability perspective to share the investment costs but even more importantly partnering is needed to expand out footprint as we increase market share around the world.

Okay, I am going to spend a couple minutes talking about each of our three businesses; the first one being Sikorsky Military Systems, our military OEM business. Second Sikorsky Global Helicopters so these are our commercial OEM business. And then Sikorsky Aerospace Services which covers aftermarket for military and commercial including non- Sikorsky rotary and fixed wing products.

Sikorsky Military Systems is our biggest business unit. We see a decline in sales there this year driven by DoD budgets, however, with high customer satisfaction we've seen growth in our international aircraft backlog, particularly in the Middle East and Asia. The 53K is coming along well and I will talk about new DoD starts in a moment. And I should also note that we now track the CMH program is part of our military business.

On the next slide CH-53K heavy lift helicopter is the largest development at Sikorsky, no surprise there. But it might surprises to learn with the fifth largest weapons program in U.S. Department of Defense. In fact if you look at all the weapons programs in DoD Sikorsky has two of the top seven in terms of dollars plan between 2012 and completion of the program. And when near that aircraft programs we have two of the top four.

So going forward the 53K program is actually bigger than the Blackhawk program when it crucial to our organic growth strategy, program execution is good, the customer support is very strong and that's critical to keep in this program sold.

We recently finished assembly of the ground test vehicle monitored to the testing in West Palm Beach on schedule we'll fire up the engines and start doing the transmission this summer and we remain on track for first flight in 2014.

Slide 9, highlights three upcoming U.S. government programs in three different service branches. First, the air force Combat Rescue Helicopter, it has been reported that the competition did not bit. We submitted our proposal for 112 H-60 derivative aircraft in January and hope to be selected latter this year. I should note that even if there are no other competitors the procurement regulation permits our selection after a cost based negotiation.

Second, it appears that the Presidential Helicopter Program is back. We are taking a much more pragmatic approach this time around with a desire to use an air vehicle already in productions with modifications mainly to the communications emission system. We are team with Lockheed on this programs and the requirements appear to be shaping up in our favor. Still [a ways] to go, but the S-92 is looking very good.

The third program is the Armed Aerial Scout. This one is gone from a long shot to the point where the army is giving very serious consideration to a new start in order to gain the type of capability that would come with this new technology. It's a real testament to the X2 Technology and the Company is set on (inaudible). We absolutely have their attention. The customer is weigh a life extension of the current aircraft versus a new start and they are very excited about X2 Technology brings to the table.

As we mature X2 with raider, the answer to the question they have about cost and development schedule and risk are getting better all the time. So as we see overall decline from the legacy program new starts will be vital to future organic growth.

On the international military side, while we see some softness in U.S. military side – military sales the international military segment looks strong. In fact we project in the next five years or so international military sales will be on par with U.S. military sales. Sales funnel is healthy. So in the near-term major pursuits are shown on the right here and we are seeing interest all around the world.

India remains the highest potential country outside the U.S. The Indian navy contract worth about $1 billion has been delayed while their government investigates procurement irregularities and other contracts. However, we feel confident that we have the winning bid once the open the envelope.

Okay, update on the Canadian Maritime Program. Regarding the development program itself the air vehicle is essentially complete through tests and qualifications. The mission systems specifically the software that goes into the black boxes help find submarines, process threats, launch weapons etcetera, that's behind schedule. So we continue to advance product development and the aircraft build as far as practical given the contractual deadlock that has stalled us for many months now. We have a contract that no longer matches the programs and the process to amend that contract is very complicated.

Given that we were unable to negotiate an amendment in 2012, we had to assume that the program will be completed under the current contract as is and that's to say delivering a fully capable aircraft much later on. We therefore took a significant charge at the close of 2012 based on our estimate to complete the contract. We believe it's in the best interest of all parties to amend the contract and align it with the program requirements.

As such we propose the program approach developed with the customer which separates the mission systems software and delivers it in phases with increase in capability over time. That would let them search the trained sets in use of products in parallel with software developments and ultimately allows replacement of the old Sea King aircraft about two years earlier but if they continued on the current path. Our discussions continue.

We have proposed an approach that would allow pilot training that commenced in a matter of weeks. I am confident that once their pilots start flying these aircraft there will be a natural pull and will pick up momentum to move forward and resolve the uncertainties that is frustrating to us all.

Okay, over to our commercial business, Sikorsky Global Helicopters. We are seeing significant growth in our commercial helicopter business with a very strong backlog. I was at the Heli-Expo conference last week where we celebrated the S-92 achieving 0.50 million hours since entering to service in 2004. That aircraft is performing well and the operators are raking up the hours and raking up the orders. Growth is also coming as we ramp up the S-76D's.

One of the biggest factors in the commercial market is offshore oil as Greg mentioned before. That accounts for about three quarters of our commercial business and the trends in that segment are very positive. First, the demand for oil keeps growing, so demand for offshore oil transportation is going up in general.

Second, the highest growth is coming from developing markets and we like that because that general means a need for new equipment, new technology and open competition in places that do not already have their own rotorcraft industry to support.

The third trend is continued shifting towards deeper water drilling operations that are further offshore. The bigger the aircraft and the further you go offshore generally the better it is for us. So offshore oil will lead the way as we see mid-teens growth in the commercial segment over the next five years.

Turning over to the Sikorsky Aerospace Services and aftermarket business, we had essentially flat sales this year and expect to grow on average in the mid single digit range over the next five years. We will see growth in our partnership with U.S. government such as a Navy Fleet Support Center Patuxent River Maryland and with our international customers like the Columbia in army were explaining our training business.

The three common operating is environment shown on the top right captures an interesting synergy between the commercial and military businesses. From a very first S-92 commercial delivery, we've included health and usage monitoring with the data download every night for the fleet of S-92s around the world. It's been an extraordinary valuable tool to improve reliability in aircraft availability. The Marine Corp studied S-92 and they've decided to do the same thing with the CH-53.

Our aftermarket and OEM growth strategy includes partnering internationally as I'll talk about here. It used to be that international military sales came along with industrial offset projects triggered by a win. We still see some of that but success today requires local industrial presence independent of any particular campaign. So we're developing partnerships in key markets, we're using our franchise platforms and customer pedigree to gain competitive advantage.

And we get added benefit of reducing labor cost as we add the labor in places there's typically lower cost areas. The other thing that's happening, is expansion of the aftermarket pie by using the same resources and partners to provide services on non-Sikorsky rotorcraft as well as [fixing] aircraft. And we made great strides in Poland, India, China, Turkey, Columbia, and United Arab Emirates. Areas where we expect to focus next include Indonesia, Mexico, Brazil, and Saudi Arabia.

Okay. When you add all this up you and up with a top line forecast shown on this page mid single digits for the company overall and as we look at our sales profile over the next five years we expect much of the growth who come outside of U.S. government business will be a small decrease in U.S. government OEM sales was a two Naval Hawk products go out at production in 2015 and 2017. And then that start to come back over the next five years as a CH-53K (inaudible) production. Aftermarket is up a little with declining U.S. government sales offset by increases in the commercial and international military segment.

In the near term, we expect the highest growth that come from commercial and international military. Commercials propelled by the introduction of the to the S-76D. Growth in offshore oil and recent developments would make the S-92 the preferred choice versus a competition in that weight class. International military starting from relatively low base in 2012 is projected to grow to approximately half of all of our military OEM sales by 2017. 2014 is when we we'll start to see that big surge 2012 orders turn in increased sales. In fact, we already have more international military aircraft sold for delivery in 2014 then we have in 2013. Overall, Sikorsky will experience mid single digit compound annual growth between now and 2017.

Okay, lastly I'm pleased to report that on January 13 Boeing and Sikorsky signed an agreement to team on future vertical lift. This is a very important strategic move. Future vertical lift is a program that is intended to ultimately replace for black hawk utility Apache attack helicopters, what promises to be the biggest rotorcraft program in history. By teaming with Boeing we bring together the leaders in utility and attack provide the best combination of utilities for capabilities for future vertical lift and make the investment much more affordable particularly in the early years.

With U.S. government spending on new technology on the decline the customer stands to benefit from the combined resources and innovative solutions that our two companies bring to the table.

The first major event is what's call the joint multi role or JMR technology demonstrator. The team submitted our proposal last week that demonstrate a program include the full scale flying prototype. Almost three times the gross weight of (inaudible) so we will demonstrate that actual technology can be scaled up to the roughly 30,000 pound gross weight needed for this mission and ultimately there will be a fly up between at least two competing platforms.

The teaming agreement with Boeing is 50-50 in every respect, investment is 50-50, the work split is and the returns will be shared equally. This is a game changing strategic move and we're very excited about having such a compelling and combative solution for future vertical lift with Boeing as our partner.

And that I'll be happy to take any questions you may have.

Question-and-Answer Session

Mick Maurer


Unidentified Analyst

Hi, you had mentioned changing some of the strategy in pursuing international markets doing less with the U.S. DoD can you just give us some examples of what you are doing? What kind of investment you need to make an order or make that happen and where the first success we will see from that strategy?

Mick Maurer

I think we have already seen some success. I'll just give a couple of quick examples one is Turkey, years ago we formed a joint venture with (inaudible) is called [Elp Aviation] where we reproduced components for Black Hawk transmissions and in fact now we are also producing parts for the joint strike fighter engine there.

By having that industrial presence in Turkey that's helped us, we also work with a couple of other major Turkish industrial partners TAI in a sale fund that helped us, get selected on a major recent major program, we've not yet contracted on that but that's been successful because we get essentially a second source for certain key components in a lower costs area, and we're considered a local company when we compete for aerospace business. We were doing a following similar path in India, there is no offset requirement, yet for us in India at all having said that we've transferred all of our production for S-92 cabins, from Japan to India with our partner TATA, that's been very well received by the customer there. We're very big in Poland, so we're – what we're doing is independent of the campaign happening in any certain time in places where we see a big market, or establishing presence that allows us to have an advantage there in terms of being part of the local industry. Ped?

Unidentified Analyst

Yes, could you tell us what percent of your aftermarket service is military and give us a little color on the trends in both commercial and military aftermarket with respect to population as well as pricing?

Mick Maurer

That trend see in the population part of that.

Unidentified Analyst

Well, I mean presumably the number of population of helicopters in both market is increasing?

Mick Maurer

Yes. The reason is

Unidentified Analyst

Yeah, sequestration AMAT two in the military side.

Mick Maurer

Okay, we're about 60 to 70% military, of that we've got some the – we've got the U.S. and then outside the U.S. so as I said the U.S. military is getting soft right now partly by driven by sequestration partly just in general we're going to see that downward pressure in that market, we're seeing the international military come up or seeing a commercial increase. And in terms of fleet size, yeah the last five years of growth that we've experienced means that we've populated with – we have a bigger and bigger installed base which is yielding higher aftermarket business particularly on the commercial we tend to retain a higher percentage of the aftermarket services on our own products on the commercial side and tend to have a little bit healthier margins on that side of the business.

Unidentified Analyst

Two part question Mick, I think you showed unit are declines in costs to build UH-60 in the range of about 8% over the first or the last multiyear on seven, as I understand that usually you need 10% it's order to get the next contract so what sort of changes did you make to relatively mature program in order to do that and I am sure Mr. (inaudible) and Mr. (inaudible) there with the margins and then the follow on part to that is that I believe the contract has arranged of units that can be purchased. So how you thought about that in terms of your assumptions for forecasting?

Mick Maurer

Okay, I will start with the first part where I think you might have mixed a couple of things. The 10% difference that you need that's with the – that's typically what the government looks at to justify a multiyear versus a single year contract. So that's not what the year-over-year price differences that's the price difference between a long term multiyear contract in a year-to-year contract. So typically they won't enter into a multiyear, and so there is at least in our case it was quite a bit more than a 10% difference between the two.

Second is how do you drive down the cost over the course for that multiyear and I would submit that there probably aren't too many big programs like ours but actually on a real total costs basis are actually driving down the costs over time and I attributed to a couple things certainly volume helped but as we increased that volume, we increase, we changed the mix of where we were doing production both inside Sikorsky and with our supply base to lower cost locations. Without making major changes in our – I will say the legacy factories that we're part of the aircraft production and what they did with by not having that disruption, we didn't disrupt deliveries and we also were able to keep those folks engaged and in those factories improve productivity significantly.

So even in the higher cost areas, we have better productivity, you combined that with the shift in the mix to lower cost locations and that combination yielded in overall change in product costs over time. And then the question on the quantities the way the multiyear contract is structured, but maybe has a fixed quantity they can always by more but they're – there is a set number, the army part of that contract allows the army with advanced warning advanced notice to go to as low as 80% of the sort of the 100% number that we contracted for the first two years we know we're going to be at 100% we'll see where we go beyond that. One more?

Unidentified Analyst

Okay, thank you. As a follow-up to the prior question could we just broaden that out because if I look at the chart of sales growth over the next five years. While it may look at steady there some pretty vibrant changes in terms of mix production programs coming on and off, what's your take on how is the margins evolving over the next five years at Sikorsky?

Mick Maurer

We expect them to improve somewhat because to the extent that we have more and more commercial business, we essentially were through the development stage on the DE we're really now in the stage where we can start to earn some money on that program, the 92 is doing very well. So, to the extent that the commercial side of our business grows including the aftermarket that comes with that, that's going to give us some tailwind.

On the military side, yes, we're going to see some declines on the U.S. government side in particular and then the international military, the real trick for us is to try to be as successful as we can in selling what we've already invented. To the extent that we don't have to do major development customization for some of those international customers, we tend to do better on those programs. So, that's really the balance is trying to be able to use the portfolio that we have, okay. I'll turn it over to Pedro Baranda, President of Otis Elevator. Thank you.


Pedro Baranda

Thank you, Mick. Until he just reminded me, well, first good afternoon everybody, he just reminded me I have to share would be a milestone too. Because ultimately with the 160th anniversary of the Otis Elevator Company and I think I can freely speak for the 62,000 employees of the company but I will tell you we're proud of our history and our legacy and of these milestone. So, it gives almost six months since we last spoke with some of you at Mirabel. And finally 2012 is behind us and it was quite an Otis like year than we show with the other figures. We ended within the guidance we gave you then.

Our sales were down 2%, so, flat of cost and currency and the profit goes down to $112 million, more than half of that coming from currency fluctuations and the remainder basically from weakness in Europe. As a consequence, the margin declined by 100 basis points to 22.2%, almost ended up 2% of cost and currency. Now the half of the year when we spoke at Mirabel, we had been down 6% in the first six months of the year. So, we saw some improvement in the back-end of the year with two solid quarters of order intake to have remained by China and the Americas, that's good news as it should drive some organic growth in 2013.

So, Europe, Europe is full today, the largest region for the sales, but very rapidly challenged by Asia-Pacific and I think probably it will be overtaken this year, maybe the first year in a history where Asia-Pacific overtakes Europe in sales. Now, the situation, the economic situation in Europe, mainly Western Europe took a turn for the worst in 2012 with a deepening of the sovereign debt crisis, but things have been really more stable now.

Now, its mean the fourth year in a row of weak economy in Western Europe and you can see the affect we have had in our after-market business, the maintenance business, the growth in the maintenance business loss being -- three years after the debt pay new equipment because the conversions which is the main source of organic growth start at the weekend. And also during the period, we saw shrinking in our repair and mod business and some of our customers were less in client to invest in this tough economic environment.

As I always say, the portfolio is still growing and continuous to age over years, so, things will change, will it be in 2013? Well, we see in Europe right now it's a mix picture, we see strength in Eastern Europe, we see some momentum in Germany, but still weakness in France have mainly in the south. So, it sort of mixed bag and we do not Europe to be a contributor of the profit growth until the '13, I don't expect it either to be the [dragged vault] in 2012.

China has another geography that attracting at all a lot of attention last year at least a lot of mine certainly for China. At the end, the market was stronger than we have anticipated and we estimate it grew by about 10% with the strength a little much in every segment and we expect 2013 to be strong again. Right now, we're forecasting 5% growth, but we have to we calibrated that the end of Q1, it may even stronger than that.

Now, [diminishing] 2012 try to tell was our performance in China and when I spoke to you in September, I'll tell you it was feeling better about the order intake. And I think you can see it in the chart, we saw some recovery in the third quarter and in the fourth quarter and I can tell you again that Q1 will be another stronger quarter for orders in China. So, we continued to invest in China to find a middle market for us and China will be a source of growth in '13 and beyond.

So, we continued to earn industry leading margins, but 2012 was a challenging for us because we did not grow in the growing industry and I think that highlights the importance of pretty more attention to growing our top line at a less sustainable path for earnings growth. And I was let me insist, we're in, I think we're in a good industry, you can be in our core business because we're in a good industry, it's driven by urbanization and by accessibility.

We were talking about demographics before. By 2050, the population of the world will have grown by 2.3 billion people, but urban population, will have grown by 2.6 billion people. So more than 100% of the growth will come in cities at the expense of some decline in urban -- sorry in the rural area. 2.6 billion people that's about 300 cities like this one like New York.

And not only are we has more places I think we are getting old I was walking down there this is news for me. Now I have to carry this gadgets around to -- move this print. So it's not just me. By 2016 I think almost what will be about 60 and like a 2 billion people. It's three times the number of people over 6 billion's in the world today.

And that drives to meet our cities more acceptable live the living standard. So giving by those two megatrends our industry has grown by about 7% a year in the last decade and we believe we will grow by about 6% for a year in the coming decade. So there's no need to look out where I think we the industry that's point of growth the link grow at 6% a year we will be very close to becoming a $20 billion company a $ billion company by 2020 and I think we can close the so we'll like to set a target for our sales to become a $20 billion company like 2020 we are working very hard into approaching to funds to all those margins as we are today about 20%.

And that's the ethics of our strategy. Stop line goes in our core business and we see the opportunities ready to emerging markets and some segment without service for better growth and also in service mainly for improving the conversion rates and some and in modernization of repair not talk to about that. All the while working very hard to fund to make sure we hold that margins and I'll talk about and the (inaudible) way are the call of transformation placed in the factories close to our customers and driving our reductions in the efficiency and also leveraging our sales to get optimization and profitability of.

And I will talk about the of this priorities in the next two minutes. Let me start with the growth opportunities and to have the most droves of us in emerging markets we have to find the different words but this goes when you got the chart those four big countries are already to search of the business so they are not emerging anymore I'll find the new word for your next presentation but it's clear the momentum is where and by the way the rest of the world is being kind of in 2008 but we see the live, in North America in Latin America in the middle East we like to everywhere by investing in southern U.S so I think that great line is being turned up again.

And the run way for the emerging market is which is very large. Look at the headwinds against of this debts it depends very much on the lifestyle so we see a high number like 10 or 11 in countries of highly urbanized our partner dwellers that's a worst in Europe in the U.S highly urbanized but small it lower for China its evolving very rapidly into a highly developed society of apartment so that number of China will be soon somewhere between Europe and the U.S and partly close at the Europe. So I think China has the runway to include which is still based by over the next few years.

And then there is India. So evolving the emerging markets we have a good opportunity to go on new equipment sales and we estimate that where we can get 40% of the incremental sales we need to become a $20 billion company by 2020. We also some activity with the new equipment business and would should be another level for organic growth one is the highlight segment which is place for high growth in the rest of the market and we have made the investment of the central effects in shanghai high rise support sales support teams in the around the world and also in engineering. To develop and features that I specifically fails with this market.

So I am pretty confident that we can grow better than the average elevator market in this segment and then there is also eight countries where we can find specific of alternatives we'll go but I want to illustrate with the one. Turkey now turkey has 75 million people which is very pretty interesting market. And it's going nicely Otis is over the largest company in turkey elevator company in turkey and we have less than 10% on the market and I am convince for that that's the where expectations and if in quality standards increase our market is close for consolidation and invalid environment we stand to grow effectual in the market.

So with this means of opportunities we think we can gather another 16% of the incremental revenue we need to reach our 2020 target. And then there is service, in business in the back loan of our company provides the ability in the down side of supportive structuring like business and I think it's a source of good opportunities for our top line growth. By materials 1 is modernization and repair this even in the of the elevator industry one-way modernization and replacement will outgrow in the equipment. We estimate far from that but the potential is there and the technology gap between the 30, 40 years ago and we can do today is really very very large. You can see it in the picture we already see good traction in the Americas and in Asia that – not in Europe, I will comeback.

And then there is a special opportunity of improving our conversion rate in China and it seems some important in 2012 is still far – it should be and the keys there are market coverage we continue to work on that we will add 50 dots in the map you see by the end of this year. And also the go to market strategy and we have done a – of the situation have to find the strategy to improve in that regard it's a project we'll start rolling out in 2013 four to five years and I think it should yield sustain improvements in our conversion rate and I think the opportunity at the end is to grow our portfolio by 30 to 50, 000 additional units every year. So it's a very distinct opportunity, and we think that surveys could provide an another 35% -- from middle sales we need to reach our 2020 target with the remainder 10 to 15% incremental sales coming probably from M&A we'll work on that.

So with all of that growth coming mainly from new equipment we'll see margin headwind going forward. Remember that every point of -- in the mix is about 30 basis points of market headwind so it's very important that we continue to work on productivity to hold our profitability and the key opportunities there or – specially the product cost and there is two elements there – projects and also – rationalization. Factory transformation is really a big effort we try to place our factories close to where our customers are and modernize I mean we are almost done with the first space. – in production is helping with our customers in west China which is a fastest growing geographical segment within China, Bangalore is ramping up we're completing the expansion – is ramping up and we are completing the expansion of Bangalore and we are moving to the new factory Sao Paulo next month.

Now we are also ramping – facilities in Europe and developed Asia and the legacy facility in North America so at this point in time we have the new and the legacy so that sets up our cost structure and that all should be behind us starting in Q3. And then there is a – rationalization, the idea is to converge our products into a high into a few global platforms – rates specific market by global platforms with high volume we have done a big effort this year once in two key – province in China and – which is – for the social housing markets. – in Europe the point there is to achieve the – surface special of an given available space. We – have improving accessibility in - buildings that is mainly in Europe and there is a switch battery powered.

Expiry power continues to operate in a blackout and – to any single phase 500 watt plug in anyone in this room, just plugged it in the thing is it's a very nice addition to our – well received in the market – which is substantially Southern Europe, Latin America and India. So last year 40% of what we shipped– we should see a rapid increase in that number moving forward and I should mentioned that the architect behind this strategy is – who should be here in Investor Day and will be available to take your questions here in the talkative session.

Okay another portfolio which is to improve our productivity its – if we converge the common platform we can deploy global installation network that have been highly optimized and undergoes continues improvements and that's very important because our efficiency is very widely very broadly around the world and it could be up to 30% of the new equipment cost. And for service the labor content is even higher, so its key to continue to drive productivity and I showed a few examples of what we are doing the point global mobility tools now which we'll allow the mechanic to have the information in his palm so I will have to go to the office so expend most of this – against facing customers and maintaining their equipment which is – value added work we have to do for the mobility tools which is advance software that will allow us to reduce travel time or – which is basically a technology to put available the best available expertise to service elevate which is wherever they are and that reduces the response time and eliminate necessary travel.

So better service better productivity we'll have to continue to work on this and the opportunities are improving our – efficiency as a company. -- the word restructuring because the effort we did last year was impressing – and this should be – for us in 2013.

But also we started a project to develop a global ERP system and a global survey system thanks to the expertise of our – show with other – companies and we have an – and we are very proud of this efforts. We should be ready to -- this out in Q4 for 2013 and you will open up the opportunity for consolidations and back-office office optimization projects along the world mainly mid size and small size companies which should level our scale. So this is the essence of our strategy going forward. Now I guess now I have to I talked about this 2013 or may be one. Okay here it is, how is it working, not big changes as we've spoken here about, but it looks a few more positives and negatives this year with some China should continue to be strong in 2013. I also see that the recovering North America has mostly the rigidity numbers which suggests, maybe I can talk about that in Q&A because it's an interesting phenomena and also -- is going to be continue to underperform into the other this year. So overall mix that over the few more positives and negatives. So going back in 2012 and as we pushed towards growing organically with the industry as a market grows, we have seen some steady improvements over the retail, you can see it here we started to -- in the first half we have seen 2 consecutive quarters or double digit over the growth and I'm pretty comfortable that Q1 is also going to be a strong quarter of all the retake and driven by China and driven by the America. So this should be the -- to show better top line growth in 2013 and who will compete to welcome productivity to make sure that we defend industry margins and reception of course. So with this background the guidance for 2013 you can see it here just to go our top line mid single digits. You have to pick that mainly Asia and the America and go to the profit $150 million. You see Q1 be in -- for the year and profit to start improving as we move along the year base in two things. First, better sales as we convert on our stronger older book and second the completion of our factory transformation programs that we'll leave us with a rider cost structure starting in Q3. So, overall despite the continued economic difficulty in Europe, I think better about 2013 which should be a better year for Otis and our company would be a year in which we'll return into a path of sustainable earnings well. And that I think I'll stop there and take some questions of also .

Unidentified Analyst

Thanks, yeah just on the restructuring within Otis you know spending once up almost the $100 million last year, you know how much of that go down this year and do you think that because of the changed mix going forward in terms of those more after market that would mean the trend restructuring spend has to be much higher fees than it was historically?

Pedro Baranda

Okay first about the restructuring, I think this year we will continue with the restructuring, but partly not at that level. That level is quite a bit on the factory transformation programs. So we have some factory rationalization in Europe where we can definitely what we did was one less factor, without adding any resources elsewhere, we have the factory rationalization in Asia and the issues in North America. Now of course, as you grow you productivity in country where portfolio is going significantly you have to adjust the cost to manpower adjustments, no need to accretion and if it's not enough from restructuring. So we'll have to continue to invest in restructuring so we'll have to continue to invest in restructuring certainly mainly . We'll continue to be certainly a, it's about part of our culture and strategy but perhaps 2013 we will see it lean at the level we've been in 2012 or that it will still be significant effort.

Unidentified Analyst

Just a quick follow up, on the U.S. business is it fair to say that region has the most kind of competitive dynamics versus Europe and Asia?

Pedro Baranda

Well, I'll talk about U.S. government the market in U.S. is no, as I said is no robust rigidity sales would suggest, there is strong commercial business coming and also one interesting thing but that we were looking at the other day is this change in the housing trend in the U.S. Talking in 2006 the number of homes, home and the number of own homes tracking down at around 70s something 75% 2006 already, while the number of rental continue to increase of the significant pays. So right now I think own homes are almost just doubled, rental homes which is something it didn't happen very different. Now what that may be doing another stat there is a rental prices have continued to growth with inflation, while the homes have declined, home prices have declined substantially. So the returns on rentals -- pays the 10 year bill, one is about 8% something like that. So when we see the thousand recovery it seems to driven investments have jumped on the opportunities, so this has to be recovered right now because to be driven by multi property developments in the rental market and we start thinking that this is low to use to be and that maybe what's behind the peace in the recovery in the North American market. So we with this every time we see a good market. Normally the company's environment is little more denying.

Unidentified Analyst

Hyderabad, look at your chart with sales and margins and didn't listen to everything you said which I pretty much did, you know you within flat at $12 billion for five years and I heard that the $20 billion in a 7 years from now and all I think conspires to get the company from a growth standpoint the last 5 years but you put into context I mean if we're just looking at this I can come to very easy conclusion that this is not a growth business any more. How do you knock me straight from coming to back conclusion?

Geraud Darnis

No, I think I will go back to what I just said, I think we're in a growth industry and I think you would agree with me that the industry is a growth industry not double-digit growth industry you know, it's going to be 5% to 6% I'm pretty sure with the 6% number is sustainable for industry going forward and I think we have the problems to franchise, to coverage, and the brand to support growing inch by inch, which is the target we set for ourselves and we that we can sustain our market margins at about 20%.

Unidentified Analyst

Can you may be just to push a little more print the context what's happen to your sales mix the last five years, the cycles within your business obviously the big pictures, commercial construction cycle, you know things have gone up and down to get to that flat level, but is they are indicating that we're reset now separately and note for the sectors for the lower level?

Geraud Darnis

No, let's make the thing I think as you say, we look back at few years 2008 was a turning point in the sense with we saw a decline in the western markets and develop markets which were the big market took a tumble some of them drop 40%, some 60% and most of them haven't recovered till that level since. We start to see the U.S. turning back now. So the 40% below that level alright and then we had the other economies versus Russia, China they had a very steady recover and we saw the market come back very, very strong.

Now the industry because Russia good portion of the growth, came from China, China grew in the rest of the market, but going forward I think it would be China will continue to be strong and we have the emergence of India and the recovery in what in core that we'll have to be and that sustained us at 6% and we have to hold the ground in that market, I mean talking about market share grabs nothing like that grow with the industry and that's going to be in my mind initially 6% that will change the mix, as I said, there is no question of changing the mix because is coming forward are the recovering equipment, the service business that are little more in Russia and that's why it's important to work on the about the pricing to hold our margin.

Unidentified Analyst

Thank you. I'd like to go back to China and this is one of the data point we've got today is the recovery because it was a year ago there was lot of about orders in China in the snap package is pretty impressive but if we could just take a few what have been the key drivers, how much of this came from by saying how much of this was a repair or coming out of the family box with the government, how much of this was a benefit only from the stimulus spending that the government has done? If you could just you know maybe decompose the source of the recovery for us.

Geraud Darnis

Okay, I think clearly if you took the look at the overall aggression last year and we saw a strong rebound the second half of year were driven by delivering better set of approach we launched at [indiscernible] in China around June-July and also improving our communications with our customers with different channels to the normal media channels but also social media in China has this proportion and the brand image conversation so we have paying more attention to that, we also open the factory to serve the fastest growing market which is the west and focused on our selling efforts when we saw the growth which is really no longer the two cities in the coast and two cities in the west that has helped come back and we're pretty confident that they to continue driving and we see gain confidence in the customer base in the media and also with the team and it's also important how our team company and things look much better today.

Unidentified Analyst

And just one follow-up please follow-up is on, this is kind of debated issue for a long time in China about the reluctance of the Chinese to attach a service contract with new equipment sales and if you just post this on any change there and what the expectation is over the next couple of years?

Geraud Darnis

Okay, the one change we are starting to see is that the government is taking interest in ensuring some quality standards and safety standards in industry, so they are doing some pilot programs in some provinces particularly and we will follow that very closely. We think that it's a good step in the right direction and we also see that generally the market is converging towards big brands and that's also a good sign.

So overall we feel good about China and we can talk more about this in the break. I mean, I'll be available to take your question so that (inaudible) afterwards. So with that I think I'll stop here and introduce the President and CEO of UT Climate Controls and Security, Mr. Geraud Darnis. Geraud?

Geraud Darnis

Thank you. Good afternoon. I have four messages for you today. First, our strategy is working. Our execution is strong. We will deliver 15% approaching margins this year, that's two-years ahead of schedule. Second, the combination and Carrier and [Fire and Security] is delivering results. The Carrier momentum continued. Fire and Security is improving and the combination transcends the organic growth prospectus by the unlocking of synergies in the building system space.

Third, organic growth will resume this year. While the ramp up maybe held back a little bit, by some weak economy in Europe, I am confident that we'll deliver on our guidance of $150 million to $200 million of earnings growth this year.

Fourth, I say that our investment story has improved. Solid organic growth prospects to spendable leap in margins, more synergies to come in the building space and feature possibility of adding to and including the strong foundation with disciplined M&A in the quarter.

So we could to go to break or I can take you through my 14 chart. So first the refresh of what is climate control and security, again its first year of operating, last year as a combined entity. This is what we do. I would like to say we make the world a better place to live and we are really in the indoor environment making it more comfortable, efficient, healthy safe and secure and we also are unsure that the global food supply is transported and stored for safe consumption.

Doing so customer entrusted us last year with $17 billion of product and services we sold them, (inaudible) by 60,000 employees around the world and we delivered in the process $2.4 billion of earnings to our shareholders at 14% EBIT ROS.

How do we do this? We focus on being the best at delivering innovative products and services in three key segments. First in homes; comfort, safety and security and that's mostly in the U.S. that's 20% of our revenues. Second, the non-residential, that's mainly buildings, but also some infrastructure, about 60% of our revenues and it's about efficiency safety and security. Finally, food safety whether transported or stored it's about 20% of our revenue.

So what you see is a breakdown of our revenues and it's very well balanced. You see in the U.S. that 14% of the revenue. about a third in Europe and the remainder in Asia and the rest of the world. Top right, you see the balance I just talked about; residential 20%, food safety 20%, 60% is the rest. Then below you dig a little more and you see HVAC is 40%, with about a third in residential, two-third in global commercial. Fire and safety is about 40%, that's a little more in field than in products and then food safety is a remainder 20% with a little more in transportation than in stationery.

First, a word of last year's performance, which was again our first year of operating as a combined entity. I told you last year I had three priorities, continuing to carry momentum, improving fire and security, and positioning for organic growth, we delivered on the first two. The pro forma analysis of our margins on the fire side shows more than 200 basis points, 15 points largely for carrier last year.

Fire and Security partially improved earnings by about 10% year, that's when adjusting for some positive one timers that's way on F&S in 2011. Then organic growth was mixed, it was actually flat. You can see here about a third of our business, the first three were U.S. Residential, Fire and Security products and in the U.S. was up.

Those three segments were totally offset by the row at the bottom that is TransiCom, which was down double-digit driven by very weak container business and the rest was about flat. So that was for last year. Those are the guidance for '13, same as we discussed in December. We talk about revenue that's flat and that really 4% to 5% mid-single digit organic growth offset by the impact of divestitures and operating profit growth of $150 million to $200 million that's about the 100 basis point of margin expansion.

Going for cost reduction restructuring pretty good at its benefit of business transformation and our assumption has not yet recover. We again starts with the so we always have employment cards going out so it will be a pension and also some divestitures earning as part of our transformation.

Segment -has own ways and pretty a wide range depending on the segment but you notice one thing that the last year there is nothing in the right where soon everything goes up this year. And not surprisingly how the low end of the range even if I never see the in Europe. Now Europe commercial -your trader presently too good right now. Also you see U.S. trader you know growing low single digit and finds a pretty products. We assume U.S. commercial a little better. We tend to lag audits, so I think you are on the big step we see better news later that it's up. U.S. residential mix single digit comfortably and the China has the assumption of a recovery compared to the last year both on -security and then off the chart on the good side container which was off the chart on the bad side last year so is up.

Well, see the map and you see that the organic growth assumption that I have just talked about is keys to delivering on our earning this year because if you do the map you take 4% to 5% of daily growth like 23% drop so we get about $175 million earnings coming from that. Then on the productivity, we assume $100 million net the structure --increasing on -to be get about 100 million a year. Net commodity price we think no impact this year. A pension we assumed about 60 down and -about 60 down and what you see what change in December on the right.

We see good about our restructuring productivity target. We see good about the commodity packing were about 85% hedge for the year and about the same process last year for couples which we see divestitures are those should be we know surprise. We have heard from Greg that pension will be better. Well each number should probably be the half better and foreign exchange should also be the little better.

It really good when it come down to what the organic growth will do and as we stop the year Greg has yet feel at least 5% organic growth assumption we made and we plan for that and we cannot drive organically. -as you see the profile of our revenue and you can see that its tramping up with for the year was about 12th growth rate in the second half than the first half, 6% was second half, but 3% in the first half. And what holds us back coming into Q1 these are very top European markets coming out of few four and again sustaining into run and also slower than plan.

It is slower than plan sequential improvement on the -core side which you recall afterward very strong in Q1 was improving but in Q2 will going to up. The Q1 is weak and loan cost more than 2 -of organic growth negative in Q1. So again Q2 that's right now is the minimally . So -profile of earning growth going to be best comfort on the back -were this one third on the first of first half and referral approximation one fond of organic growth in our business represent 40 billion of earnings with a bottom line. So give you some -but again with chronic change pension pretty better you know we can afford to have may too less of organic growth and we have planned and still deliver on our guidance or may be better.

So let's get back a little we can talk about strategy and growth. As said earlier our strategy delivery results and that you see that on the right shot and key to our strategy is being the transformation of our portfolio. They are making a series of through the line of competencies to the market customers product and services that fit and having the discipline to exit non co-activities commoditizing businesses all over margin businesses and doing so really unlock performance in the core both have an operational standpoint and organic growth standpoint. Finally, strategies of further integration other activities in the building system and we should think provide further opportunity and let's review those very quickly. First is our portfolio transformation, so here you get some example of some of the activities would execute noncore, low margin, man guarding, again noncore fire holes, fire trucks, room AC plans commoditizing all activities that residential distribution best serve by in partnership with distribution experts like our partner good partners . And then in turn focusing all about current investment resource to -on what we do best and this is what you see on the right. Markets where we have leadership position, where we have good and strong technology. The customers pay for technology and higher value and also where the growth prospects are solid and strong.

And doing so again, has transformed the company by unlocking true performance improvement in our core. We are sure the earnings growth from about three years on the core. And you see that the [air terminal] which was from acquisition on F&S a setback from divestiture on the [fire] side, were very small part of our increasing earnings, $900 million over the last few years.

We grew 60% organically, or profits in the core. And that was driven you see on the right by very strong, $1.7 billion all of which again was very strong [drop too]. We did better than markets pre natural and which means we gained share and our [loss] improvements you can see that's two third of it coming organically.

And then third part is that the combination of F&S I see deliver results we've already delivered some results but there's more opportunities, by putting those two organizations together we unlocked some synergies, we saved $100 million last year, and we've got a lot of efficiency, from on an employment side across the world -- we can now efficiently many things, but again there's a lot more opportunities on the right.

We call that fire and security was a -- for a many acquisition but 51 from -- 30 or 40 entities, but you know some times 260 plus companies a lot of them still operating in silos, with the tool -- doing the full value chain, design manufacturing and sales. And by providing some scale to some of the activities in key segments we can unlock synergies in similar activities of across factories, across design centers, simplification of product portfolios and improved go to market efficiencies.

Means more to come, you see the overheads rise on F&S much higher than the correspond when I started our carrier in '01, that was at 26% so we can down -- probably going to come back somewhere in between because there's more field operations on the F&S side on the carrier side that again more opportunities.

Now, let's talk about growth. We think we can grow organically by 50% between now and the end of the decade, but 5% per year, that's $8 billion of organic growth rate, and we believe that because what you see on the right we have strong market fundamentals some of our markets are due for rebound because it's still way far.

We have leadership in product innovation and marketing in our industry, and we can deliver more than markets and then we have superior emerging market presence in CCS. So let's talk about those. Strong market fundamentals, urbanization we heard it from Louis, from Pedro, from Greg, it's real. 67 million people move from fields to cities every year, and you know that drives requirements for our products, on efficiency, confidence, safety and security, penetration in increase, our products wear and tear eventually ready to be replaced. 75% of the markets in developed countries are replacement.

So we need to replace those and as we replace them because of regulatory environment with a lot of focus and concerns on efficiency and other environmental things that [represent] there is some times an acceleration of the replacement process and also it can't -- we value given to higher technology, you know, better efficiency and therefore more value in the replacement. And then finally with urbanization, food safety, life safety, security are important drivers and you see the penetration of those going up. Those are real and it's good to be on those markets.

Now market recovery, we're pretty much below peak prior markets in still many of our markets, we did some math. If we look at our OS members before today on those markets where we're still are plane we're about only 60% back. Now we all know but housing in the U.S., it dropped 75%, got it coming back up, it is going to go back for a while.

Commercial construction in the U.S. is still 20% below prior peak. So we see index going up for a while. We see some new indicator of Otis, those things are going to come back as the economies are going to come back. And we have several markets in this position.

Now, third on products, our renewed focus on the core, has enabled us to increase our investment in technologies and products. We've actually increase ratio or R&D to sell by 60 basis points over the last few years. We've revamped most of our key product lines around the world. And as we did that really I think steppe up the game in the number of those products and technology.

And we have a lot of good things going on across the segment security, fire, transport, pretty much all across and that really enabled us to gain some share in a number of markets and we feel good about where we stand and we continue to nurture this product innovations opportunity.

Then finally emerging market I talked about this so common scene, we came into China and India about 25 years ago, 25 years ago. Today we're consolidating China about $1.3 billion of revenue. If you add some of the joint ventures we have, it's about $2 billion. We grew 14%, annually over there two years. And here you have two colors on the map, the east and the west. So, for west front, the west part grew at twice that rate over the last two years. It's still small but is growing faster. We have a big footprint, consulting, and for and factories, good base and we know we're going to grow for a long, long time.

India is earlier in the cycle but something from growth rate, we're closer to $0.5 billion if we add our joint venture partnership but 1500 employees on the ground and a good position.

Now we all know about those two. Which we don't talk much about is what we do outside of China and India, outside of the BRIC and this chart shows you a little bit why I say our superior presence in emerging markets. We at CCS, have about $7 billion of revenue, oops, because I don't want to go -- yes, $7 billion of revenue in emerging and developing markets, Pedro if you're looking for the next word after emerging, developing.

And you see that the BRIC is about only 40%. Now we consolidate about half of those, the other half are done from some of our joint ventures and you can see that we are in many other markets. Our strategy has been to come in early, build distribution, very often enter into a joint venture setup, increase the footprint, hire local talent and eventually localize production when it makes sense. And we are not only in the BRICs, not only in the emerging market that everybody knows, Turkey, Mexico, but we also in many parts of the world that you will think about, and here I show some example, Ethiopia, Arcadia, Bahrain, we are in 157 countries and again the need for our products are very good. And one of the luckier synergies we see is a lot of those things are achieved through carriers and we accelerating the penetration of F&S through the position of carrier in the building space.

So, finally, if you look at the last decade, it was a lot of revenue growth in Climate, Control & Security and a lot driven by the Fire & Security acquisition. But you see that the margins didn't move much and carrier this year of trouble and market down in commodity. The last three years, change in strategy and you can see significant improvement in margins and profit, flat revenues which are actually increase in organic growth, the broad market rate offset by divestiture to transform the portfolio. The next part of the decade will show solid organic growth rate and the benefit of that our portion of leverage with sustainable mid-teen margins and probably some pressure upwards.

On that, turning to you and take any question. Yes?

Question-and-Answer Session

Unidentified Analyst

Just want to dig into that pressure to the upside margin because if you look at your Brazil, your U.S. commercial business, containers had a big down drop in 2012. Sounds like you got off to nice volume tailwinds next couple of years, two or three years so sounds like about 15% could have lot of pressure to the upside. So, just wondering are there any offsets in terms of R&D investments, growth investments that we should think about.

Pedro Baranda

Yeah, it's a good point. There is a lot of activities where the business has come down. So, we have some factory in our pool and when the volume comes in you've got leverage and we already have good margins that can get better. I think where it ends up depending on where we grow faster. If you go in emerging market, faster it comes down with a little lower margin. If you grow faster in some of the field activity, particularly on the Fire & Security side, it also come down with lower margin. So that's why I'd say trying to up but there is more potential no question that as we grow when we want to grew, I think depending on where we grow faster, we hold it back a little bit but the direction is up means beyond where we are. Yes.

Unidentified Analyst

Thank you. On the integration of the two businesses, clearly a big host of opportunity, looks like you've done very well on that. Are there actually commercial revenue synergies in putting these businesses together and if so can you give us some examples and how do you know there is not commercial dis-synergy, trying to kind of squeeze these businesses together and bring cost out of them.

Pedro Baranda

Good question. There is – there are synergies from a revenue standpoint, give you some example within the Middle East a couple of weeks ago. In the Middle East, we have 1.9 billion, part of the 7 billion in revenue. Some of it not consolidated because again we have joint venture partner that we've established years ago with 49% equity, so you don't consolidate and 90% of that on the carrier side. So, as you starting to look at with one organization, we're starting to align some of the channel's market presence, very strong again partnerships we have to accelerate the penetration of Fire & Security and we're seeing that and we have that also in Asia.

Now part of building systems play, also you're going to emerging market you're more in a position to go to some large customers and settle more from be a capability so by going together we see a lot of examples where we actually captured things that we are not sure that we are captured on the separate way. On the second part how you sure that you are not going to create some negative synergies where we are very cautious about that and I think all companies issues we are talking about we at the management level, we are at the manufacturing level, we are at the functional level and the engineering level.

We do very cautious to keep the keen focused on either of the brand, the channel or the vertical, that's right that's very important.

Unidentified Analyst

Yeah I just wondered the within the Trans how much is the delay in the recovery because it sounds as there's a big new competitors coming in the last 12 to 18 months as this counting us 30% versus you in some merging, is I really having a presence in the market or it's a still price small.

Pedro Baranda

I think you are making a reference to one of the large shipping company that started making their own taking care of their own need is a vertical integration. So that's kind of showing could be vertical market and they have not been very active on the market the recovery is simply the last market was very strong and in Q1 and so by comparisons we are going to be lower sequentially we actually going to be the level to already better in Q1 there were in Q4 in the matter of Q4, was better than Q3, was better than Q2. But happening in the shipping industry is over capacity a lot of big ships competitors are in build when everything was good and when the market collapse but well then you'll see pricings coming down, losses in the shipping industry it'll be similar to the airlines and then you have those new ships coming in for the

For showing price but then we'll combine. So that's why this market is over the long term trend as really a factor of how much work for you is good you transport. And those numbers are always being up it was only one year I think it was in 09 08 or 9 already you went down the little bit by 3% or 4% but the transact typically 5% growth for yours now what it is as you transport more and more food across the world, and as the world urbanized you do that. So we were down last year we will be up this year and I think it'll be up this year as much as it was down last year and we see leverage strongly (inaudible) in the market and think good about the profits.

Unidentified Analyst

And just very quickly on that, your European business we heard in the past week from European building products companies in making like sold at some loss some sell on and I definitely sounds sort of more cautious today than the three months ago is your European ordering stays in today's in line this what you sold?

Pedro Baranda


Unidentified Analyst

I guess two choices thank you. On a year ago you focused a lot on may be 20% to 25% of the portfolios throughout the was not going to make your standards have you part of clear as you invested some of those businesses, have you raised bar for the remaining businesses so that how come you can continue to show some progress in some of those core businesses and then also and may be this businesses are you looking at in terms of dollars or that only one (inaudible)

Pedro Baranda

So on the transformation on the carrier side we pretty much don't. and carry to the back (inaudible) if you go 4 years to 5 years on the (inaudible) sides I think last year we told you about $860 million its probably we buy (inaudible) out can tell you that's today we almost 240 down but 500 we'll be grow by the end of the year now other ways we continue to look that's how we would find our portfolio to make sure we focused on the greatest opportunities and where they grow for strong not in growth but pretty much we are on track will be grown by the end of the year which we identified last year.

Unidentified Analyst

Are you going to raise the bar, with some of those other group (inaudible) what will be the (inaudible) today.

Pedro Baranda

The question because the mike push not on how are you going to raise the bar and I think you (inaudible) about raising the bar so kind of (inaudible) so raise the bar and I do this thing.

Unidentified Analyst

Talking that giant how you scoping with the wage inflation you are getting sufficient price increases or is that going to be a margin worry this year?

Pedro Baranda

(inaudible) in china are want to improve compare to last year which is good margin pressure very inflation pressure but we the kind of work force we have tends to be a pretty highly (inaudible) very good work force for the value we do so the pressure as lets there in other words the pressure is really where there was very low wages in southern industry than this (inaudible) of those are in all tons we typically get 7% to 8% per year its double sometimes the little beyond that difficult develop markets for not saying out of the not increasing so margins why actually we'd made a lot of improvements through our product activity and also leveraging of our capabilities in China for no big concern there.

Louis Chênevert

Yes, okay times up.

Pedro Baranda

So thank you and I think we to the break 20 minutes and we'll be back with the Aerospace growth which is going up like a rocket right?

Louis Chênevert

Thank you.

Pedro Baranda

Thank you



Alain Bellemare

Okay so I think that we’re good to go, good afternoon everyone. Well 2012 was a year of really incredible transformation for UTC Propulsion & Aerospace Systems. Now 2013, as you have heard from Louis and Greg earlier is a year of operational execution and performance. So I have with me today our past leadership team. We have Dave, Mike and Curtis and together we’ll share with you how we have transformed and positioned our business to take full advantage of the significant commercial aerospace growth ahead of us.

So as you know we have made big strategic moves in 2012. And our biggest accomplishment was the successful closing and integration of Goodrich. Again this is the largest in the UTC history from an acquisition standpoint and the biggest in the aerospace industry. So that was a big deal for us. We also completed the IAE transaction. Great deal for Pratt as it strengthened our position in the narrow body market.

We divested several non-core businesses allowing us to be laser focused on aerospace moving forward and at the same time we have continued to gain significant traction with our many new programs, which Mike, Dave and Curtis will cover later.

So as a result of these strategic moves we are now a $27 billion business with the broader suite of aircraft, engines and systems. We have strong franchises. We have leading edge technology. We have a superb aftermarket network and we continue to invest between customer funded and company funded E&D more than $3 billion a year in new products and services to create long-term value for our shareholders and customers.

We have made the right investments at the right time to fully benefit from the coming aero up cycle. So we expect passenger traffic to be up about 5% per year for the next several years very consistent with historical trends and also supported by mega trends like globalization, urbanization and a growing middle class and emerging markets. To support this strong demand as you all know Boeing, Airbus and other aircrafts OEMs are planning for a significant increase in production rates.

On the defense side which is about 25% of our business, there will be a pressure, especially coming from the impact of sequestration. But as Greg mentioned we will manage it as soon it as we better understand this and we get more clarity on this because up to now I mean it has not yet been defined what the impact is really going to be. Now that said we are very well positioned in this segment of the market with very strong content on all new military applications like JSF, the Airbus 800M, the Boeing Tanker, the Sikorsky CH-53K and The Embraer KC-390.

So, Goodrich also brought a great ISR business, which should continue to do well. So overall, I mean we like our mix and we like the balance that we have between commercial OE aftermarkets and defense. Our wins today will generate more than $700 billion of future revenue driven by these new programs. This will drive powerful growth for a next several years.

Pratt is really reemerging as a world leader in aircraft propulsion with new engine families for military application, for business aircraft and for commercial programs. Also our IAE deal has given majority ownership on the successful V2500 program. By the end of this decade Pratt will be producing engines at rates last seen in the early 80s. So we’re in real good shape there.

On the system side, we have very strong content on the new aircraft. At HS we had almost double our average content per platform from 800K to $1.4 million per subset. Now with the addition of Goodrich, we have more than doubled again with an average value of $3 million for subset. So very strong content, and this will fuel our OE and aftermarket growth for many years to come.

So after a year a significant transformation we are now focused on four key priorities; first, flawlessly executing all of our new programs; two, driving excellence in our own operations as well as in the supply chain; three, providing the absolute best support for customers and finally developing the next generation of technology to keep on winning new applications.

We have more than 30 active programs in the development pipeline today and our teams are actively working towards achieving cost performance and scheduled targets, making significant progress. All of these programs are fully staffed and properly funded and the key ones will be covered in more detail by the team. Now that we are eight months post the Goodrich close and have a better understanding of the opportunity we are raising our guidance our 2016 synergy targets from $400 million to $500 million. Bow you gave heard Louis say that before, there was a lot of pressure on us to do better and we wanted to take our time to see where the opportunities were and if there is clearly some very good things that we can do and that’s the reason we now feel confident to take it up $100 million.

This increase is largely coming from higher savings in SG&A and general procurement and with our global footprint consolidation. It’s also being driven by very strong operating performance. We are leveraging our great manufacturing and engineering network and our trading global centers of excellence. We have a very strong highly energized operation team not at UTC that is providing strong leadership and working very closely with the business units to increase capacity and reduce tasks in the supply chain. And with Goodrich we have reset the ACE base line trading new runway to further improve cost, quality and delivery performance. So we have a solid game plan in place to drive productivity across the board for many years to come.

On the customer support side, with acquisition of Goodrich we now have the largest and most comprehensive aftermarket in the industry. We are in fact twice as large as our dealers competitor. We have more than 10,000 customer services employee, about 100 MRO sites around the globe. We have 24/7 technical support worldwide and we are now supporting thousands of systems that are flying everywhere around the world. And our game plan is to optimize this new extended network to bring more value to airline customers.

On the technology front we have the ability to innovate and integrate in ways that no one else can. We have great capability in advance material, in electronics, in sensing and in system integration. Our win at Embraer on the generation E-Jet is a real good example of the type of value we can create for our customers. We work selectively to provide a full integrated propulsion system including the engines, the (inaudible) and the controls. I mean this program we are going to generate about $95 billion of revenue. The (inaudible) alone is about $12 million and none of it was included in the Goodrich business case, it's all up [tight].

About an hour before coming into this meeting we got the approval for Embraer to basically announce that we have been selected on the E-Jet, the next generation E-Jet for wheels and brakes, for the ATU and for the electric systems. And you will here from Curtis later how critical that is and specially the wheels and brakes win is a big deal for us, so all of these systems will create even more value. So again that is the benefit that we can bring now in working together at the pass level.

For 2013, we are committed to deliver on the guidance that we laid out in December. At Pratt we see sales up mid to high single digits, with operating profits up $100 million to $150 million. At UTAS we expect sales to be in the range of $13.5 billion to $14 billion with operating profit of $2.1 billion.

So as you can see we actually strengthened our aerospace system – our aerospace business with better and stronger system and great engines, and we’ve a very impressive product offering. We have game changing technology and we have a fantastic best in class team. So as you can tell as always I am very excited about the potential of this new business.

So on this, I will turn it over to Mike and Curtis and they will cover UTAS after that Dave will cover Pratt and at the end we will all come back together and we will take your questions, thanks.

Curtis Reusser

So, good afternoon. I am Curtis, so I along with Mike Dumais are going to talk about UTAS and I think what you’ll see today is a nice mix of the combination of the Hamilton Sundstrand business and the Goodrich business, a lot of effort on the integration effort that has gone forth. A lot of excitement, we’re already seeing a lot of great benefits, we’ve really hit the ground running after a pretty long integration process. They’ve cumulated up with the transition last – end of July last year.

So talk about the businesses, 13 great businesses, you can see from the product portfolio here ranging from you know large structural on the sales, integrated systems, landing gears, wheels, and brakes down to air data probes, ISR systems and everything in between. High value systems providing critical functions to aircraft and safety systems, typically a lot of investment in technology upfront, which has a little pressure to invest upfront, but has a very long aftermarket tail, so we control most of all the aftermarket and we’ll talk quite a bit about that.

You can see here we split into basically two segments, I manage the aircraft systems, which is primarily mechanical, structural but does have some electrical systems that we have been able to take the expertise from Hamilton and really supplement what activities we had going on. Mike is managing the power controls and sensing businesses that are focused mostly on electronic type systems. You will see later on we leverage across both segments together, but two very good segments about the same size, roughly about $12.5 billion in sales last year, but a really great mix of different businesses.

So I’ll talk about balance, a nice balance across the market segment both commercial and military. Nice mix between OE and aftermarket and a great disparity or distribution in customers. We have no one customer that’s more than about 13%, 14% is our largest customer. And again a great mix of both OE and aftermarket about 40% of our business is aftermarket which is a nice mix and a great technology positions.

They are also in different stages of maturity you’ll see a lot that are on high growth platforms like A320, we have got fantastic content on 787 and you’ll see Mike has got a chart that talks about all the different programs we have just recently won. So pretty exciting portfolio of businesses and provides a nice mix really weathered by whatever kind of environment they were in the marketplace.

I’ll talk a little bit more about the organization. We have mentioned this before if you look at this if you know some of the faces here we have really taken a mix of Goodrich, Hamilton and UTC executives a lot of deep experience. We did a lot of planning upfront so that when we did the integration process we would hit the ground running.

So all the organizations in place we have working together as a team and you can see the organization there typically focused on SPU’s. We have 13 different SPU’s with P&L’s attached to each SPU. In addition to that though we have got a very strong customer facing and support groups. So we have really taken the best of both worlds of taking strong accountable SPU focus as well as having good strong functional support where we leverage common processes and really taken the best processes from both UTC and from what Goodrich had and trying to leverage that.

On the customer service side we have two organizations one that is outward facing to our OEM customer. So we have a consistent face to our OEM customers as well as Cindy who was introduced earlier is representing our aftermarket, so all the customer facing that we do to the airlines, we have a consistent face there. We are leveraging things like EH&S and IT to get the best practices across a pretty broad group right now. Another focus is on ACE and quality and I’ll talk a little bit more about that in the next slide.

So we spend a lot of time on integration. I had a lot of questions about how has this integration gone. We spent about really almost about a year from when we announced this planning for how we are going to integrate what would be the largest aerospace acquisition. So we did a lot of work. Two great companies, each had their own unique and best in class processes. We spent a lot of time meshing those together and saying what could work well, what could be the best going forward.

So we spent some time on our operating principals, really focusing on key – on four key themes; people, because we saw that as one of our key assets, how we can go leverage the great talent from the companies. Integrity, both companies had very strong ethics, export control, EH&S programs how we could take the best of the best. They are merging them together.

Ideas not only technology, but from processes on how we could leverage that. On the performance side obviously hitting the financial metrics but also how do we take really what was two – I think organizations that had great CI cultures and merging them together. So at the bottom there you’ll see a couple of examples. On the Goodrich side we use a policy deployment process, a very strong strategic planning process and then drove that down for accountability down to each business unit needs functions, we’re retaining that.

A lot of lean, so our CI focus is mostly on lean so we had a lot of folks that were really engrained in the CI process and we brought that together with UTC had obviously a great lineage with the ACE operating system. We were absolutely able to hit the ground running. So you can see there we have, we say a date, that day we had over 4,000, in fact there are closer to 5,000 legacy Goodrich folks. We are able to take their lean background and convert that over to ACE Associates.

We have been able to take the footprint and the model that UTC has in their factories and apply those to the Goodrich factories. A very keen focus with ACE gold on the supply chain side, so a lot of that we are able to take again the best of the best between the two systems and really mesh those things together.

So I am going to turn that over to Mike. On the policy deployment side we use that process to slow down objectives and he is going to cover kind of our four strategic focuses going forward.

Mike Dumais

Thanks Curtis. Now even though we are a new organization we are really starting from a good baseline. We have market leading businesses and we have tremendous people and I was with Hamilton Sundstrand for a little over 10 years and now working with the Goodrich team for just about a year. It truly amazes me the knowledge, the professionalism and the openness to change of our people including our new Goodrich associates.

So with a strong foundation the question is how do we build from here. We really have four strategic priorities. First, new program executions, as a new company the best way to establish your reputation is to execute on the programs you have. So real focus on hitting schedule, delivery, quality and cost performance.

Second, operational excellence, and really two elements. We are going to make sure we deliver all the synergies inherent in the Goodrich acquisition, also going to drive ACE across the new organization. Third, customer service, Hamilton Sundstrand and Goodrich largely serve the same customer base, but what’s different today is now we have to combine support network.

Really unparalleled capability in MRO parts distribution and technical support and then finally technology innovation. Fundamentally we are a technology company, so continuing to invest in new technologies, but also taking the technologies that were developed in Hamilton Sundstrand, like electronics and motor drives applying that to Goodrich products, taking technologies that were developed in Goodrich like sensor technology and applying that across UTC. So a very exciting path for us.

A little more on program execution the 17 programs represented on this page generally haven’t entered service yet, but they will enter service over the next five years and it really fans all markets and all customers. These programs represent future sales of about $160 billion and they’ll fuel our growth for many years to come. So job one is UTC Aerospace Systems is to execute on these programs. A focus on hitting program milestones perfect quality, 100% delivery and hitting our target costs. So these programs not only drive the top line they also drive the bottom line.

Next, operational excellence, Alain already talked about how we now have visibility to $500 million in synergies by 2016. Really comes from four major areas. First global footprint, we are taking facilities in high cost areas and consolidating them. We are also looking to move work to low cost sites. Previously we had projected about $125 million, we now have a good line of site to projects with $175 million of savings.

General procurement, is getting Goodrich sites on UTC global contracts, but beyond that with our increased scale we are actually getting even better pricing from many of the vendors. Previously we had projected $100 million now up to $125 million. Product procurement $75 million, we have good line of site to the $75 million and you have to keep in mind this isn’t on top of already aggressive plans we had to reduce product cost and hit our new program of target costs.

Then finally our SG&A, we are targeting $125 million, good line of site, $25 million increase from when we last presented in (inaudible). In 2013 we are projecting growth synergies of $200 million and we have good confidence in all of this because we meet weekly as a team, we meet monthly as a senior team and we track key metrics. Here we reflect some of those key metrics.

Now this year we’ll announce restructuring projects that will take out 1.2 million square feet of factory space and we have visibility to take out close to two million square feet. This represents roughly 10% of our overall footprint. On indirect headcount we have already announced actions to reduce staffing by 1,800. Now whenever you put two large organizations together there are always redundancies and we are streamlining the organization, taking the actions solely effective going forward.

Now we’ll do some fine tuning over the next couple of years to target 2000 reduction in total. On general procurement, we believe we can achieve $60 million of savings this year. We are seeing opportunities in things like IT services, facility management and synchronizing travel policies. Then on product procurement $15 million this year, $75 million in total again above base plans and in our industry it often takes time to move parts to new suppliers, you have to do it right and you have to sometimes get it re-qualified, so this will take a little bit more time, but we are very confident in this roadmap.

Where we have two major tools to drive synergies and drive cost reductions in general. First, is our low cost global footprint. On this page there are 15 facilities that we have up and running in low cost geographies and this is really due to the combination of Goodrich and Hamilton Sundstrand. Hamilton had already established presence in areas like Puerto Rico, Poland and Singapore. Goodrich had strong presence in areas like Mexico and India, but now we can take advantage of the combined network.

Our objective is not to add a lot of brick and motor, but to load up these facilities and we have visibility to increase load in these facilities by over 50% by 2016. This is important not only for cost savings but will also provide vital capacity as we bring on new programs and ramp up production.

The other major tool we have is around ACE. We have roadmaps to progress all of our sites through ACE. We are projecting that by 2016 85% of our sites will be ACE silver or gold. Now 2013, is a little bit of a rebase line here. All of the Goodrich sites are starting at qualifying, but we anticipate they will progress rapidly. We also have toughened, tightened up the ACE standards. We have tougher standards on delivery performance, tougher standards on shop floor lean performance. So as our sites progress we are confident that they’ll be world class. From our UTC experience we know this works.

As sites progress to ACE silver and then on to ACE gold, we see dramatic improvements and delivery, quality and working capital performance. This is important not only for our factories, it’s also important the way we support our customers. Curtis?

Curtis Reusser

Thanks Mike. So he talked a little bit about the aftermarket, very important part of our business we brought together two organizations that had very good reputations in the industry coming together. It has been very encouraging to me that as we have gone out and seen our customers we really haven’t missed a beat here and as a matter of fact our metrics have gotten better rather than taking any kind of disruption hit. Part of that network obviously is to focus on responsiveness with our customers, we both had 24 hour technical supports, really I think Hamilton Sundstrand had a best in class effort there. So we have coordinated that, providing response time usually 99% or better on time support in less than a couple of hours.

We also have parts distribution networks globally around the world again we can look at how we leverage that best, but you can see, ship 3 million parts per year. A very strong MRO, out next to our MRO network, out next to our customers, we have over 62 MRO locations strategically around the globe. Really again there the focus is the turnaround time, great logistics to support the customers. We have got great care and asset management programs, we have long-term agreements with everyone of the top 20 airlines around the world, many of those are under flight hour agreements, which again is a way to offer both value and ease to our customers.

Lastly our field support network, Alain mentioned some pretty large numbers, we have got a great support network, Alain mentioned some pretty large numbers we’ve got a great support network out there, that can support all the new programs that are coming online and really breadth across all of our products around the globe. So again we not only use a lot of ACE tools to improve in our factories, but definitely this is an area where we continue to provide value to our customers and a scenario that we continue to focus on pretty correctly.

Talk a little bit about innovation, so not only is it important to service what we have, but we’ve had a great opportunity to go leverage the technologies of both the companies that we have, that both companies had in place. A couple of major trends there; more electric, more integrated, more intelligent across the board. It’s pretty exciting to be able to look at the technologies and how we leverage between Goodrich and UTC. Some recent examples of that have been at least on my side we have (inaudible) with some electric actuation, we are able to reach out and pull in experts from Hamilton Sundstrand to really streamline our development processes there. Also some great ideas we have working groups in the areas of composites and motor drives where we are able to go leverage across the businesses to be able to come up with new and innovative ideas.

So couple of areas here; three different areas, we start off with component technologies. This is really the key, kind of the cornerstone, we’ve got to have fantastic component technologies that can go out and win on their own. Alain mentioned one of those our work in on wheel and brake side pretty exciting that we are able to win at Embraer. We were able to bring great technologies there. Also Hamilton Sundstrand had great relationships there. So that was something we hadn’t been on a major program done at Embraer for a number of years. Great key customer and to be able to win that again I think that was something that wasn’t in the synergy models. So when UTC put that business case together. You’ll also see our (inaudible) there where we take a number of sensor technologies and bundle that with the computer, take out a bunch of weight, very high value system to the customers.

Next level up is we’re able to take a look at a little bit broader system where we integrate a number of components that is still there. Not only do we have entire to sell but we’re able to bring in the actuation systems, we’ve got the engine controls, in a lot of cases be able to offer a great system we'll talk about that on the next slide.

On the platform level, we always – to take that yet even a higher level, where we’re able to look at integrating with the overall system or aircraft and bring a number of our systems together to provide even higher value to the customer.

So I’ll give you a couple of examples. Integrated propulsion system, we provide and sell systems across the whole industry to all the major OEMs. We’ll also be able to bring together a number of technologies like engine controls, engine sensors bring in technologies like high temperature materials, weight reducing materials acoustic materials really to provide a lot higher integration on a propulsion system and offer value to the customer. So lot of great value that we can offer there again bringing in a number of different systems from both Goodrich, Hamilton and now we’ve been able to work with Pratt & Whitney on the G2 is a great example.

Another example of that is we’ve mentioned a couple of times today health and usage monitoring system, we’re able to put sensors across the entire airplane, bring in data from those sensors, analyze it on board in a computer to be able to feed that back to the airframe integrator and say when our things potentially going to fail and how can we proactively go out and maybe do some maintenance on an aircraft before we get to an inconvenient time. This has been able to add significant amount of more up time on some helicopter applications and we’re looking at how we can leverage that across other airframe platforms as well as other systems that both Hamilton and Goodrich add. So a lot of great opportunities there and again that just a tip of the iceberg as far as looking at sales and technology, but we’ll talk a little bit more about some of the recent wins and positioning for the future. Go ahead, Mike.

Mike Dumais

Thanks Curtis. Now since we brought the two companies together, we’ve had a number of noteworthy wins both in our OEM business and our aftermarket business. Probably the most notable is the new Embraer E-Jet aircraft. Where we’re selected for the nacelle and engine controls and so cut off the press we didn’t get into the slide but also selecting for wheels and brakes and the electric system, so very good platform for us.

We also continue to win smaller opportunities, so for example the upgrade program. On C-130 we have active upgrades. On wheels and brakes and on the propeller system. Our ISR business, recently signed major contracts for their DB-110 airborne reconnaissance camera, and they signed with Saudi Arabia and Turkey. I think this is noteworthy because even as we’re seeing pressure on some of the U.S. defense budgets there are clearly opportunities in foreign military sales.

On the aftermarket side, we recently signed a material management program with Lufthansa. This is a case where we actually have our employees inside a Lufthansa workshop, we manage the spare parts. We provide that service and in return Lufthansa agrees to exclusively use our spare parts, so it’s a real win-win. We continue to expand our total care program recently signed Hainan airline and we announced AirFrance, KLM as our most recent designated overhaul facility partner on 787. So these wins both OEM and aftermarket will continue to propel growth well into the future.

So let’s sum it all up, Alain had already covered that our guidance for the year is sales of $13.5 billion to $14 billion, EBIT of around $2.1 billion. So how do we get there? On the positive side we’re seeing double-digit growth in commercial OEM. We’re also projecting about 10% growth in commercial spares. This will be partially offset by a little bit of softness in defense and space, we’re projecting low to mid single digit decline in defense and space.

We also have a typical new program learning curve, so early production units tend to be a little bit higher costs, we’re ramping up new programs, so a little bit of headwind there, but more than offset by synergies $200 million of growth synergies, when you look at the net and year-on-year performance about $125 million pickup. From the legacy Hamilton side we have a little bit of pension headwind, but more than made up by the inventory rebuild amortization that rolls off this year, we should see about $150 million pick up. So all in all real good roadmap $13.5 million to $14 million in sales about $2.1 billion in EBIT and we’re very excited about the first full year of UTC aerospace system. So with that I think we’re going to wrap up and Dave Hess, President of Pratt & Whitney come up and then as a group we will take questions.

Dave Hess

Thank you. Thank you, Curtis. Thank you, Mike. Okay let my start by rebase lining you on the Pratt & Whitney portfolio, because we’ve got a number of changes going on at Pratt right now. As you know we’re in the process of divesting of both our rocktdyne business and the Pratt & Whitney power systems business both deals are expected to close in the second quarter of this year.

Going the other way we’re moving the UTC U-test APU business from U-test into Pratt & Whitney. So last year rocktdyne was not in our numbers, we had a full year of power systems, obviously we expect the half year power system this year. Then the AP will go from half year of the APU business last year to a full year this year.

So now we’re more focused on our three core engine business our large commercial engine business continues to be our biggest segment as you can see here, serving airlines and OEMs around the world. Next in terms of size is our military engine business, number one in the world in military engine business. And then finally Pratt & Whitney Canada, number one in the world in the small commercial engine business. Then as I talked about the APU business that has great synergy from an engineering and manufacturing standpoint with our three core engine businesses.

Okay, just briefly to recap 2012, overall it was a challenging year financially for Pratt. We had close to $100 million in lift and the IAE acquisition that we’ve talked about. The military business was actually very strong, OEM sales were up 20% last year and aftermarket was up roughly 15%, Pratt Canada, so our engine sales increased roughly 10% and there spares grew mid single digits last year. And we benefited from another $60 million of restructuring activity. However, all this goodness was more than offset by the combination of legacy commercial spares that were down mid teens, while E&D was up a little over $140 million last year. As we continue to invest in the next generation product family of engines.

Then another year of pension in FX and that combines for another $140 million of drag on the business. So all then you can see $14 billion in sales generated $1.7 billion in operating profit.

Okay, so while 2012 was a challenging year financially, we continue to remain very focused on transforming the business and positioning Pratt & Whitney for substantial long-term growth and you can see just some of the highlights here. We continue to carry forward the PW800 engine again this is the engine that we launched under the Cessna Columbus program you will recall. The program was subsequently canceled but we continued to carry the engine forward as a technology demonstrator, targeted at the large business jet segment and we continue to make good progress there.

You can see in May we have the first flight of our MRJ engine, in June we closed on the IAE acquisition that we talked about. We had a big win in September, where the next generation military technology program to allow developed technology then we can think we can apply to not only next generation military platforms, but commercial platforms as well.

We fired up the first neo engine in December last year and by the way since December we actually have the second engine in test now that fired up last weekend. So we have two neo engines in test right now.

We ended the year by delivering our 87th Joint Strike Fighter production engines. January we started the year with a bang with a big win on Embraer that you’ve already heard lot about with our engine there. And then finally just a couple of weeks ago we’ve seen formal type certification for the Cseries engine, the first new large commercial engine that Pratt has certified in about a decade, net that for 12 months of work.

Okay, let me talk about the three engine businesses. Let me start with again our largest business first, large commercial engine business. There is really two big things going on here to talk about and this is one of them, obviously the development of the next generation product family of engines. Now with a big win at Embraer, we’ve got five new applications of the geared turbofan that are in development. They are going to collectively generate an access of $400 billion over the life of their program and say the airline funded $1 million in terms of lower fuel and maintenance costs as well as possibly potentially lower fees for noise and environmental emissions.

So if you look at the market reaction, it continued to be very strong in respect to order for the geared turbofan, you can see that we ended last year with just over 3500 orders for geared turbofans that includes firm and option orders up almost a 1,000 orders from the year before. Neo was clearly the biggest growth driver here, but we also had growth from the MRJ program with their big order from SkyWest for 100 firm and 100 option aircraft and Cseries as well ended the year with a couple of nice strong orders one from Baltic Air and also another undisclosed customer that combined for 50 airplanes to end the year.

Now, as you know we’re the sole source engine on the MRJ the Cseries, the [recruit] program and now the Embraer program. So when they sell an airplane we sell an engine. In the case the Neo obviously we’re dual ports there. But in the case of the Neo where Airbus has sold and airplane and there has been an engine selection, we won about half of the orders there. There is another 700 airplanes where they – airlines have placed order, airlines or leasing companies have placed orders with airbus where the engines has not been selected yet. So we continue to be very busy with new engine campaign on Neo.

Okay, you can see the customers have selected geared turbofan and what we like about our backlog is not just the quantity of orders but the quality as well. What you can see is a very nice distribution of premier carriers around the world in both high economic growth regions in emerging markets, and you can also see we got a lot of success with leasing companies we like because it helps to see new prep with new customers around the world as well.

Development program for the next generation a product family of engines continue to progress very well. We’ve actually come a long way and short time since our flight test demonstration program back in 2008 on the Airbus A340 and culminating just a couple of weeks ago with again formal types of certification on the CSeries engine again, the first new large commercial engine certified a Pratt in about a decade. With progress long the way with first engines to test or first flights in the CSeries the MRJ and most recently again the neo engines.

So today, we've now accumulated about 4,300 hours across these engines both in ground and flight testing, close for 13,000 cycles and with every hour and with every cycle we continue to gain more confidence on the performance of the engine. It’s doing everything that we have promised in the marketplace. By the way these are real magazine covers, these aren’t like the ones you get on stalls these days and your wife this is the work. World’s best offer, so I (inaudible) in fact in total between that week and some of the other lien and changeover we’ve now its GTF and its short life has been on the cover 20 times, so we have had more covers than all [Ms. Pearson] I think.

Okay, so that the first big thing going on a large commercial engine businesses and the second big thing is the – obviously the acquisition of Rolls-Royce’s share in IAE. As you have heard we have now delivered more than 5000 V2500 over the course of the program, but probably another 3000 that goes by the time. The A320 classic ends production again will have 8000 engines have delivered. I talked about the fact that it give us about $100 million in lift last year, you could about double that number for 2013.

Beyond the earnings growth, I mean, we love this business it has got great synergy with Pratt and Whitney. We've now been able to integrate our large commercial engine business with the IAE partnership and our new A320neo partnership into a single much stronger channel market and extend our reach to another 100 customers that IAE had served that Pratt had not previously served and in the process capture $25 million cost synergy. So we like this from a number of different angles.

Okay, let me talk a little about the large commercial aftermarket. I know you are always interested in that topic. You know Greg talked a little bit about, you can point out that you continue to be a mix bag. There is some good news and bad news here. Obviously, the airlines expect to be once again profitable in 2013 and actually at levels a little bit better than 2012, but as you can see that profit level is well below their profitability in 2010.

RPMs is good news. RPM are going to be up 5% to 6%. This year we expect, but you can see the jet fuel cost continue to run very high. They are kind of stable, but they are running very high right now and GDP forecast continue to come down.

So, we had on top of this, see frustration, continued struggles in the Eurozone, little bit slowing growth in Asia and you continue to have a very uncertain environment. All of the uncertainty resulted in our legacy portfolio being down last year mid teens as operators had very aggressive actions to differ and delay engine maintenance and go from big shop visits to small shop visits and try to differ maintenance costs wherever they could, in some cases taking engines off wing when there are out of time and putting the spare engines and continue to fly the airplane.

So all these things we expect to recover at some point. What we've seen in Q1 is about what we've expected and keep in mind that it's a tough compared to Q1 last year, which was our strongest quarter of 2012 and we continue to expect recovery in the back half of the year.

Okay, so why the operating environment continues to be uncertain compared to where we were a lit bit more than a decade ago to our – now our post IAE acquisition portfolio provides Pratt with a good foundation for growth in 2013 and going forward. Back in 2000 more than half of our commercial spares were coming from these declining installed base of JT8D and 9D engines. Since then not only has supply gotten bigger obviously, but the mix has changed dramatically. So now about half of our spares are coming from the rolling installed base of V2500 engines.

[Rather the], the first one was I think delivered in 1989 it’s still a very young fleet. If you look at the most recent model the A5 model, which makes up about 90% on the installed base the average age of those engines a little bit less than seven years and about only half of them have come in for their first short visit. So we know there is great aftermarket runway here. So our expectations again that spares will be up, the legacy portfolio will be up mid single digits this year on reported basis because we have a full year IAE now reported will be up about 25%.

Okay, let me share for the military engine business now. This business is in a transitional period. The OEM delivery rates for our legacy engines F100 and F-15’s and F-16’s, F117 and the C-17 are having declining production rates right now. They are largely military sales and we delivered unfortunately our last F119 production engine for the F-22 in December of last year.

So while the legacy programs are ramping down all the new programs the joint strike fighter the three variants that are in production today as well as the tanker program, which will start to deliver production engines in 2016 are ramping up. So the future looks great. This transitional period is a little bit of a challenge after we achieved record OEM engine deliveries in 2011. Engine deliveries were actually down last year slightly about 8% and we expect military OEM engine delivery to be down around 20% in 2013.

Now with respect to the joint strike fighter program, we remain intently focused on meeting our commitments to the DOD to the word fighters and to the American tax payer, you can see what we've done here on cost reduction. This chart illustrates the cost reduction plan that I committed to the DOD back in 2009. And that redline you see there is CTOL cost reduction plan and the blue line is the STOVL plan. Each of those dots represents the actual cost of an engine of an actual engine that was delivered and what you can see is everyone of that is on or below the cost reduction plan.

So we’ve been meeting our commitment since 2009 despite the fact the time that we struck the cost reduction plan the DOD has restructured the program and moved about 400 engines out of the horizon. But we've meet our cost reduction target. In fact if you look at the progress we've made we've reduced the cost of the engine when the first flight test engine was delivered, but they all reported as engine we delivered at the end of the last year by back 40%. And I think it's important to note that we've invested about $60million of our own Pratt where we wanted to you mind it to make sure that we core our way down this curve. So we are pretty proud of our progress here and we have not done the [NSG] as you could see we continue to drive towards the cost targets that the DOD has asked us hit.

On the right you can see the engine deliveries, you can see the we delivered about 46 engines last year, about double the output of the year before. If you look forward we're roughly flat deliveries we expect for the next three years or so before it starts to ramp. Again in 2016 as you can see the program record that’s forecasted out in 2020, roughly 240 engines in that year.

Engine performance, continues to do very well. Through the end of last year we had dispatched reliability of the flight test program at the target of 98.5% or better throughout this entire flight test program. We had a couple of issues that we have had to [dump] this year that did impact the flight test program, we had an actuation [hose solving] non-performance that sets the fleet down with [stable] fleet for a short time, that’s been resolved and behind us now. Then there was the issue with the turbine crack a number or weeks ago where again the fleet was down for about a week, but we have now had that resolved and as you know the fleet is up and flying again. That turned out to be basically the result of the fact that the engine and the turbine blade were being exposed to extreme temperatures as the flight test program pushed to expand the flight envelope for the joint strike fighter. So they are up and flying again.

Okay so the military OEM deliveries are down, but our installed base continues to grow and provides stability to the overall military engine business. Our military engine aftermarket represents about 40% of the military sales and the military aftermarket grew about 15 % this year. Looking ahead you can see the – it shifts a little bit from more F100’s to now more F119’s, 170 and has also (inaudible) eventually in 135, but the foundation and the install base continue to be very strong.

So going forward we expect to get some lift from the installed base as the install base continues to grow, but obviously we are going to see pressure going the other way from DOD budget pressures. So which is going to have impact on aircraft utilization flying hours and engine maintenance cost. So this year we are forecasting our military aftermarket to be roughly flat.

Okay we're already working on programs that will grow this business further in 2020 and beyond. I talked about the big win that we had on the AETD program enabling us to develop technology. We can apply both to next generation military and commercial platforms, so we are working on a new high efficiency core there. We are also pursuing the very large helicopter market and a joint venture with Honeywell to develop a 3,000 shaft horsepower engine targeted at the Black Hawk and Apache markets. You can see on the far right on the Northrop Grumman X-47B that’s powered by our Pratt engine. This is one of the number of UAV programs that Pratt is working on today.

All right, let me shift to Pratt Canada our third engine business number one in the world in the small commercial engine business. You have heard the story before that explosive growth through 2008, but really we’re hit hard by the recession and the worldwide economic crisis and the associated impact that it had typically on their Business Jet segment. So engine deliveries were down over the 3-year period starting in 2008 through 2011. Engine deliveries were down by about 33% over that period. However we are starting to see recovery in their markets now very slow in business jets, but there are other segments, the utility aircraft, helicopter and regional turboprops are picking up. So we – OEM deliveries we expect to be back up high single digits in 2012. Excuse me -- they were up high single digits in 2012 and we expect growth to continue grow their mid single digits in 2013.

The OEM delivery is just part of it. As you know Pratt has about – Pratt Canada has about 50,000 small engines out in the installed base across our various market segments. We continue to get lift there. We had aftermarket up mid single digits last year and we except that Pratt Canada aftermarket to be up high single digits in 2013. And with this business we expect kind of the combination of gradual market recovery as well as continued new product introductions that continue to make the Pratt Canada one of our growth drivers as we move through the decade.

Okay and you have heard this story before Pratt Canada continues to be a new engine development machine, you can see the number of 74 new engines certified since 1994 and that trend continues today. I talked about PW800 engine that we continue to bring forward and make progress. We have had some nice wins recently with the PW300 family. An assessment earlier in there so – and it’s not just business jets, we are very proud to be on mix at 70-60 with our PW210 engine, we had some great orders announced at the helicopter show last week and we have got applications elsewhere. As you know we are the market leader in the regional turboprop market and we continue to invest in technology today to assure that we maintain that market position.

So all these new programs and all these investments we have been making to position Pratt for long-term growth obviously require a significant ramp up in the E&D spending, you can see the curve here. We invested well more than $1 billion in E&D at Pratt last year. $460 million is more than we spent in 2009. All of which – and if you add on top of that $160 million pension headwind over that same period of time, all of that headwind to earnings growth of the last three years.

The good news is as promised, 2012 was peak year for E&D spending and as Greg talked about we expect E&D to be down $75 million to $100 million this year and that includes the Embraer program.

Okay certainly part of Pratt’s performance in recent years and our ability to offset much of the E&D and the pension cost headwind I talked about has been our hard work on restructuring. You can see here roughly $360 million in savings over the past five years another $100 million this year and we know that there is more to go as we continue to restructure Pratt with the legacy footprint, consolidate operations move from high cost to low cost and continue to lean on our cost structure. So we are not done yet, we know there is more to go.

You heard about the big ramp up at Pratt, Alain mentioned that in his remarks. We are forecasting that by the end of this decade 2020 would be delivering roughly twice as many engines a year as we did last year. So all that is requiring us pay particular attention now to the supply chain and making sure that we establish the global footprint to make sure that we are prepared to execute the ramp up flawlessly and get to the cost targets that we’ve committed, [cheese] to Louis, Alain and the Board.

So you can see some of our big operations here in Poland, China, Singapore, as well as big operations here in the United States in low cost areas as well like our forging operations in Columbus Georgia.

By 2016 we expect 35% of our total spend to be in low cost sources and in some cases these are outside suppliers, in some cases they are wholly owned Pratt operations, in some cases these are JVed operations that we have with parties.

So to sum up everything, I just told you for 2013 we expect about $75 million to $100 million in lift from the IAE having a full year now, recovering our large commercial spears with the legacy portfolio being up mid single digits. Second, OEM deliveries will be up mid single digits here and their aftermarket high single digits $75 million or $100 million of the E&D tailwind that we talked about and then another year of restructuring benefit to the tune of $100 million.

So in the other way I talked about the fact that the military OEM deliveries are going to be down about 20%. We have also got this relatively power systems going out and the APU business coming in that’s providing a little bit of drag and we’ll have another year of FX and pension headwind of the tune of about $125 million. So overall our guidance is earnings up $100 million to $150 million this year.

So you have heard me talk about this before. This is a very exciting time at Pratt. We were very really reinvesting the business and positioning Pratt & Whitney for significant long-term growth. As you can see here we are projecting sales will be about double what they were in 2010 by the end of the decade, roughly $24 billion business. But in the meantime in 2013 as I have committed to you up in Mirabel, we are looking forward to rejoining my colleagues here with UTC like earnings growth in 2013.

So with that I would like to invite my colleague back up Alain, Mike and Curtis and we’ll be happy to answer any questions that you have.


Unidentified Analyst

Thanks good afternoon. I guess this is really for anybody or everybody. Are you surprise at all that the aftermarket broadly, large commercial aftermarket hasn’t been turning a little faster, a little more sharply, you touched on traffic looking pretty strong, you touched on airline profitability looking pretty good, global macro data is getting better, the stock market is going up every day, airline stocks are going up every day. What is the customer telling you most recently with regard to flying patterns?

Louis Chênevert

Yeah I mean what I am saying is what I talked about. There continues to be this cloud of uncertainty. There is some good news, they are profitable, RPMs are up again, but again fuel costs continue to run very high. They are looking at GDP growth rates. They are looking at some of the issues around the world, sequestration, Eurozone, all that stuff, and so they continue to be worried about what’s ahead of them. So right now until they see recovery, stronger recovery, they seem to be taking actions to again, from at least from the engine perspective wherever they can deferring from heavy shop business, the light shop business, deferring maintenance wherever they can, and some cases again we have seen them take engines off wing when they have timed out and they are putting spare engines on to kind of keep the airplane flying. And it’s not just that I think was interesting to know, but I think I talked about it at Mirabel again. If you look at Pratt’s commercial spares compared to GE’s commercial spares, we were down identically through the third quarter of last year. So it’s not a Pratt phenomena as again I think as much as kind of macroeconomic phenomena and the airlines I think are simply still nervous about what’s ahead of them and we are still seeing that nervousness.

Unidentified Analyst

All right. I think Louis set aside the $350 million of restructuring at the moment and let’s see if you can find more gains in the course of the air. How of the restructuring do you think the organization will take Alain? Can you give us a sense of I mean you talked about some of the priorities, but are there some things that really give some other edge along the way by good pay backs?

Alain Bellemare

I’m sorry, you just asked four pretty steps right now, so we’ve got all the projects already in the pipeline and we’re acting on this. There could be a little bit more that we’re looking at with Dave and the team. But again I think that he has got a real good number of projects right now and there is always more that we can do and if we come up with better ideas I mean with short payback I’m sure Louis and Greg will support this.

Unidentified Analyst

There is one clarification question the C17 when did the last engine from you get delivered? And then the real question is for wide body application of GTF or getting Pratt back on new wide body aircraft, the press reports are 777 access, is moving direct sole source to GE. Can you confirm that? And if so, when is your next entry point?

David Hess

Well let me take think the first one it’s easier. C17, you know as we look at the forecast for C17 deliveries, it starts to get pretty thin around the middle of the decade and I know that Boeing and Dennis Muilenburg are very working very hard both for the international customers as well as the DOD, to see if they can continue to extend that production line and hopefully they are successful to kind of take that out a few more years, but it starts to get pretty thin around the middle part of this decade with airplane deliveries, which obviously drive our engine deliveries.

With respect to the question on Pratt entering the wide body, you know, quite honestly the air plate is pretty full right now. It’s been a while since we developed a large commercial engine and we’ve got five on our place right now that we’re working on, when we just complete its certification the C-series engine, but we got four more to go. I know you hear you know a lot of stuff in the press about studies we’re doing and, you know look we’re in the engine business and I use to tell you guys sometimes that we were in the batch of engine business were from a thousand pounds of thrust to a million pounds of thrust. I used to be able to say that when we had rocktdyne. I had to change my script a little bit now that we are saying it. But we are in the engine business, so consequently we do studies with everybody from business jet operators to helicopter people to big commercial airplanes makers and everybody in between regional airplane makes and that’s kind of the nature of our business. So when you here that we’re engaged in studies I wouldn’t get too worked up about it. We’re pretty [concerned] about what’s on our plate right now.

Unidentified Analyst

There is an R&D holiday coming?

David Hess

Look I made it very clear, we expect E&D to be down this year $75 million to $100 million and you can take that to the bank.

Louis Chênevert

Just on a E&D, like moving forward one thing that is critical, I mean we spend about $2 billion of our own money between UTAS and Pratt and I firmly believe that we will keep on fine tuning it and as they’ve mentioned I mean there was commitment at Pratt that we would bring it down. This is important that we keep on fueling our pipeline. So I wouldn’t expect like huge reduction in E&D moving forward, may be a stable E&D profile would be more appropriate.

Unidentified Analyst

Yeah thank you. So military aftermarket, Dave, you talked of it being about flat. I think in December you are hoping it was up. Can you tell us and may be also for the systems business? What, you know how far does your backlog go out and if flying hours are going to be cut back, which they are going to be, you know when would you expect to see that business [details]?

David Hess

Well again last year was very strong, military aftermarket for us which is about 40% of the military business portfolio was up about 15% last year. So we had a very strong year. We’re not counting on that this year. We’re assuming despite the fact their install base is up because of the DOD budget pressures. So in the other way we’re assuming our military aftermarket is going to be about flat this year. Now as we look at the backlog we feel like we’re in pretty good shape for the year. We actually had very strong bookings that go up pretty far in the year, and a lot of those are international aftermarket programs as well which will not be impacted by sequestration. So, I mean if you look at the, a little bit less than $4 billion in revenue of the total military business you know all but about 1.5 of that is obligated money or international money, which will not be impacted by sequestration now. Not clear whether some of the obligated money might eventually get hit, but I am more concerned about the 2014 impact to sequestration than I am about 2013 quite honestly.

Unidentified Analyst

For the system’s business?

Alain Bellemare

Well for the system’s business we are fortunate we are just about on every platform. So when you reflect the market to some degree most of the business we get is booked roughly 9 to 12 months in advance and we saw pretty good orders last year. We do have a portion that’s more sort of book and ship, that we need to come in as we go. So we are projecting the mid to low single digit down for the year, sort of visibility we have on that.

Unidentified Analyst

First question is Alain you have $100 million more in synergies around the 2016, but it looks like the P&L and the CapEx costs are identical to what it was when it was 400. So do we see the net savings also pull forward so that in ’14, ’15 and ’16 the net savings starts to improve as well?

Alain Bellemare

It could be. I mean, one of the thing that we’ve noticed by bringing the things together as we could do a bit more with a little bit less and that is. I mean it’s interesting you are picking on this. So it is not yet clear, I mean we have clarity on 2013 and we are – the teams are actually looking at 2014 and ’15 and what does it mean. So we will see. One thing that we might do is we might accelerate some of these projects. We are looking at like how can we pull them forward. So, again we are, I think we have a good plan in place for 2013 and we are doing everything that we can to better 2014 and ’15.

Unidentified Analyst

If I can follow-up with Dave, just on the F135 engine you talked about its flat for the next several years. Do we see that cost curve also flat now if those units stay along with similar line of 50 engines or so?

David Hess

The curve I showed you it’s going to be, it’s getting harder and harder to move down that curve as the production volume does start to flatten out. But we are not giving up on it. We know that that what our customers expect, it’s what the tax payer needs, it’s what the defense budgets demand so we are scrapping and calling everyday to keep moving down that curve and we are not using volume as an excuse.

Unidentified Analyst

Seem this is it.

Unidentified Company Speaker

Out of question.

Unidentified Analyst

No more, out of questions.

Unidentified Company Speaker

Out of questions.

Louis Chênevert

Okay, thank you very much. It’s been certainly a busy afternoon. Maybe before the Q&A couple of thoughts, you know you have heard the story from every single division from CCS, from PS, from Otis, from Sikorsky. I think it’s clear as you have seen that, you feel pretty good about the output for ’13 and more importantly as is our momentum developing as we move in to the future. This year the focus is really around integration and continuing sound execution, UTC start. There is also a big focus on top line growth. I think we are well positioned in coal markets. I mean, if you think about commercial buildings and aerospace, you know we got strong prospect as we move forward.

We got, I mean hundreds of millions of people moving to large city and when people move to large cities they need vertically lift, they need basic air condition, because people like to like where it is warm. They are also in these cities more adopt quickly; modern life, western world style, safety systems, so it’s good for F&S component of CCS, which is mostly (inaudible) in oil and gas is good for us with a lot of presence and basically making sure these platforms, making sure these pipelines are safe. The fact is as these big cities come together, as I speak here today I said that before only 15% of the planet has yet flown on an airplane. So this crowd is almost unthinkable that 85% of the people on the planet have yet to fly, but the fact is think about the upside, think about what’s ahead of us..

I love, I mean if you think about our businesses we’ve refocused on core and we eliminated distraction. This team is as good as a team UTC has ever had. We love the fact that every second our powered airplane takes off and land. I mean every time a airplane takes off the UTAS folks smile as well because it’s their max power to take off and then they slowdown the airplane with the flowing the thrust reversals with slamming the brakes. Its highly regulated it’s all good for UTC’s business and then every time they elevator go up and down I think the stuff is we move the world’s population every three days with Otis equipment and they happen to be in place, so they demand cooling a lot and they want to be safe. So, all that stuff for the portfolio.

We have best in class cost structure, industry leading margin that has yet lot of runway. I get excited when I see Geraud talk about he sees beyond 15%. I mean it’s the unthinkable, right. If you go back just a couple years ago, 10% was a nice target double-digit and now it’s all coming together truly leveraging ETC scale, leveraging basically our footprint and I would say what’s changed with the big acquisition, being Goodrich being IAE as it was a bold move. I am happy to see a sense in the room. He is trying to love Goodrich and IAE as much as I love it and that’s good for a while it was probably a tough tension between us, but I see the value you see today, the top line opportunity of leveraging our scale with more systems capturing the trust reversal on the G2 is a big deal, capturing the brakes also on the G2 is a big deal and there is a lot more yet to come in my view as we move into the future.

We are also now important enough to our partner, our suppliers, whether it’s in commercial or in aero. We speak with a big voice when it comes to, we could help with ACE. We would like to seek cost reduction, we would like to see momentum develop. That is I would say we are getting more leverage and more opportunities with that supply chain then we ever had.

For a while people talk about pressed down in the narrow body business, now they are saying we’re just passing the regional it’s in the narrow body. We are integrating stuff. In commercial companies we happen to use metals that are very similar between all this and CCF. There is lot of things coming together that is very different and that’s why I think we are seeing a lot of positive momentum that is being leveraged by this team in a big way.

Last the effective capital deployment, we have paid down a third of Goodrich debt. We’ll pay more in 2013. We love the ratio that we have of free cash flow to net income and the fact that we are committed to deploying two-thirds to the shareholders. I thought I heard Greg say 70%, but I can give you a glimpse that sometimes there is tension between Greg and I you know, two-thirds. I mean little bit I think you know like 70% too, but fact is we are going to deploy that cash judiciously.

There is lot of opportunities on the future to look at more share buybacks, that’s another tension between Greg and I. We have stuck with the $1 billion, because we talked to rating agency. The fact is we are just going to generate so much cash we can do a lot more. But then it’s a choice of what are the opportunities within our two core businesses being commercial and being the aerospace cycle.

The fact is we are well positioned, there can be a lot of momentum and you know long-term I think we are now poised to impress basically our customer with value creations as well as our shareholder with bottom line results that are UTC styled. So on this let me take a couple of questions before we go to the reception afterwards. Any questions?

Question-and-Answer Session

Unidentified Analyst

Louis when you talk about this $1 billion, $2 billion in share repurchases, what are you looking for mid-year that could give you confidence to go higher. There are obviously a number of things that has some uncertainty now in terms of macro and sequestration. Are there specific things you are looking for?

Louis Chênevert

Well I think it's, number one, it’s going to be the evolution of the M&A activity in the portfolio. At this point in time honestly we see a lot of small activities probably in commercial companies. All this aftermarket plays, a couple of things in [CCF], because if you think about the multiple geographies there is opportunity, but there is nothing big. So it could very well be that $1 billion becomes $0.50 billion and right there you got another $0.50 billion for share repurchase. Then I think we are pretty confident beside the big appetite for capital to fund some of the growth that’s ahead of us.

Greg and I are reviewing all these big projects and I think the presidents are very self disciplined as well. They only present to us projects that have basically nice requirement, good payback, if we have done everything we could leverage the current capacity, but the (inaudible) about ACE is as you drive ACE integration you also minimize capital deployment where you can get some free capacity and that’s also what we are teaching some of the suppliers with the ACE performing and goal. So there is lot of opportunities to do a lot of basic things that give us more cash availability.

Then of course, while there is always up’s and downs I would say generally I think hopefully what you remember from today if things feel pretty positive in many of our markets. I mean, the flight line from aero is there and basically things want to ramp up. You have got the resi business that’s is looking pretty good. You got basically the China market with the older book that’s now Q4 and Q1 for orders is feeling pretty good, that’s pretty good return business. The initial OEM and stuff all those if it continues. I think you can quickly overcome some of the negatives which is kind of flattish. It feels (inaudible) in Europe at this point in time and you got sequestration which is un-clarified.

A good example is of things that is upside, I think international demand for even Blackrock or for C-17 I remember Dave thinking the C-17 would end in ’12, ’13. I said David you are wrong, it’s going to go a lot further we are going to sell them to India and I was with McNerney in India for the business council years ago and there were 10 sold and then there was some additional dose of six. I think international demand on C-17 could be that 15 that today, Dave thinks it’s 15, my view is it could be very well 17-20. Now maybe not the rate that you see today.

So there is lots of opportunity to go after the conferences. I know it’s a long answer but we are going to do the right thing and I think there is a nice pipeline coming of strong cash and it’s a nice problem to have to make these choices all the way.

Unidentified Analyst

(Inaudible) So in terms of back half load this year you have got right Otis, sort of going through the factory transformating commercial spares recovering in the second half. (inaudible) kind of EBIT second half loaded. I mean, should we be expecting a much different sort of kind of play out of the year than you would normally see based on those things?

Louis Chênevert

Well I think it was portrayed in a different segment that we see some acceleration mostly on the back after the year indicate certainly out supporting justify that it will happen and by the way almost in a month and I receive the order work in many of our businesses suggest that we are seeing the moment on developing poor plan we had a stronger background. So I would say this for all the reviews we have internally and most like it's all on .

Unidentified Analyst

Yeah, relative to you know a typical you know UTC year I mean business in sale particularly unusual on time of the quarterly pattern .

Louis Chênevert

Well, I think that you want to make couple of promise as well as I think you want some time is little has been a stronger but we got this for example continues very strong last year in Q1 so this has compared but then again in the case of all other subside better give him the we have in Q1 last year.

Unidentified Analyst

Yes. Just again comfortable about the calendarization of the year and consent is out there looks a I think consensus is in the first quarter about a dollars early had looks a growth will be at this point and we talk all about these issues in the first quarter but we have known about this and we are talking about before surprises here. These are what we can talk about last December so I think we will give about those in the first quarter and you know it will grow during the course of year but first quarter is going to be fine.

Louis Chênevert

Yeah. Thanks.

Unidentified Analyst


Louis Chênevert

I will go back to Greg.

Greg Hayes

Yeah, over the next several years certainly your distance business is going to shrink and certainly going to shrink is a percentage of the total. Given that there may be a bunch of acquisition has come out in the next several years in difference because of that you got any interest in growing the defense business practice 20%-25% or keeping at the level it is today you are just going to focus on what looks like the better growth area.

I think definitely I mean this some opportunities maybe for international sales in the military side . Our ratio as you mentioned was to continue to change. I think it's not too long ago that DoD spend was 21% of the UTC sales. It's now 17 going for 60 and by contract if you think about the emerging market we use to be 15-16 is now 21 so. Then I would cross irreversible these market offer much higher growth than perhaps at the defense side of the business but then again this and in the ISR business that we sticks up with good risk.

Honestly I mean it’s a segment. I didn't know before we have tried that risk, I love it and it is fantastic business and it is not affected by some of the current structures are perhaps of the segment. Everything as we drive one of the secret also that with phenomenal technique that we have and we are brought down from the company to be able to do the kinds of GTS investment that we did for many people why we are doing all this and then a phase off. technology the same could be said about many segments on created for 60 million investment created the next step which was just 97 which created on the next basically GMR with some of the new products so that's demand that kind of technology that brings a partnership like - and Sikorsky today. So I mean there is a lot of things we could do on our own.

We might do that create a long-term good momentum in the company as well what you might want to do and then we have the right and new products, the right play in the military market taken down the JSF 53K black hawk GMR and C-17 packers. The list was on ISR and again every time they fly they do cycles, we motor, breaks okay. I think that helps you.

Unidentified Analyst


Louis Chênevert


Unidentified Analyst

Yeah just trying to go back to the topic of contingency just make sure were all clear. If I do the map right against consensus 2013 it looks like that consents of sequestration takes a sound is zero but there is still at the midpoint of guidance is the contingency looks like about the does not work out.

Louis Chênevert

You are about right and there is map is going to do talk about it’s a forecast but I think which is during consensus looks continues about zero assuming consensus badly without sequestration is that at the midpoint obviously pick up just about $120 million so during that range was a big current consensus with from sequestration about line to line.

First member as you stop the things which is we still ask plan as 128 I mean and so that there is still a couple of things depending - going to be that could get better or low a bit of market top line I mean continues to see good momentum I think it's going to be a very positive the conversion and then somewhere I mean I know this is topically covered earlier but the aftermarkets were I think the key thing at this point is the 4000 product line that's has been most impact of the long range wide . The cycles were happening to at some point maintenance I mean they are doing you know this business shorter business at some point back in I do believe someone in the back after the year you have no choice well the airplane continues to fly spare to put in 7 engine like they have mentioned, but what happen next.

Now we got an engine that's timed out and we got spare that is getting closely more so it's deferred and I would be more worried I mean on the as we are not making money and that's the cycle were not there, so I think those are things that give me great comfort, that is nice momentum to develop.

Louis Chênevert

Okay on this. I thank you very much and I will see you at cocktail and the theme will be available to chat with all of you. Thank you.

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