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

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United Technologies Corporation (NYSE:UTX) Investor and Analyst Meeting October 1, 2013 11:00 AM ET


Greg Hayes - SVP and CFO

Geraud Darnis - President and CEO



Good morning, welcome to the United Technologies’ Investor and Analyst meeting at the UTC Climate, Controls & Security site in Monterey, Mexico. This presentation is being carried live on the Internet and there's a presentation available for download at utc.com. Please note, the Company will speak to results from continuing operations except or otherwise noted, they will also speak to segment results adjusted for restructuring in onetime item as they usually do.

The Company also reminds listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from anticipated results. UTC's SEC filings including its 10-Q and 10-K reports provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements.

With that, let me introduce Senior Vice President and CFO, Greg Hayes.

Greg Hayes

Thanks, Doug and good morning everyone. Just to -- first of all I want to say a thank you to Jose for organizing the tour this morning, outstanding view of the factory, it's amazing the progress you guys have made here, and congratulations to you and the whole team, I think everybody was clearly impressed. You've got some of the best factories I think we've seen around all of UTC, it's not just within CCS, so congratulations to you and the team.

I'm going to do a couple of things this morning, I'm going to go really quickly through '13, just hit a couple of highlights just to recap the year as we come to a close here. And then the leaves are turning in wind and so we’re also going to talk a little bit about 2014, as we start thinking about what that looks like out there from an economic standpoint, so just as you go back to 2013, again this is guidance for the year, there are no surprises here, okay. We're confident that the guidance is $6 to $6.15. I've been talking about that since July, I think consensus on the sell side remains about $6.15, rather clear path to $6.15. I have a clear path to 6.15, but again not without its probsand I'm reminded as the government shut down today there're a lot of bumps in the road.

We got a call from the folks at Sikorsky and the Black Hawk lines have been slowed down significantly, because DCMA who was required to do in-process inspection of our helicopters as they are manufactured have been deemed not essential, so they've gone home. So hard to build helicopters when they can't be inspected. So things will be fine, but there's always these little bumps on the road in balance works at UTC.

As we think about the overall segment guidance that we talked about earlier in the year, I think everything is on-track with just two exceptions; on the revenue side we talked about Sikorsky being up low single-digits. I would tell you right now as we see here today, based upon what we're seeing in the military aftermarket with orders down about 50% year-to-date and little prospects of recovery here in the back half of the year, I would expect Sikorsky's revenue to probably be down slightly as opposed to up low single-digits, so little pressure at Sikorsky. Probably we will still be in that range, I think they are 100 to 150 down, probably at the low-end of that range, 150 down, a little pressure because of the military aftermarket. So again a little bumpy and we're not going to know much until I think we get this Washington mess sorted out in terms of what the fourth quarter at Sikorsky looks like.

The other guidance that I would just give a fair warning is on the Otis side, again top-line we talked about 4% to 6% and the top-line looks good, orders have been very good, what we have seen as I've mentioned is that couple of times in the last month there is pressure on the bottom-line because of the transformation and the move from the Gallos, Mexico and Bloomington to Florence, South Carolina, has been some significant bumps in the road, all the good things that you saw here today in Monterey, probably weren't repeated in that process at Florence unfortunately.

Good news is Mr. Sanford [indiscernible] is going to be going down to Florence next week and we will get it sorted out and quite frankly I think the Otis team they have got it under control but it has been a significant headwind to the year for Otis and it will drive, and it'll probably cause them to miss their guidance which is out there at 75 to 100 so pressure there. And we'll talk more about that at the third quartet conference call. And cash flow, net income still on-track to do that I guess no surprises and just overall, again bumps in the road here, a little bit of Sikorsky, a little bit of Otis balanced works, the guidance is still intact, no drama for this year.

As you think about where we were back in March, we talked about a couple of things that we needed to do this year. And it was integration and execution, integration of good rich execution on the synergies, execution of the continued on the CCS side, organic revenue growth, continued game changing product development, best-in-class margins, strong cash generations. I would say we're on-track with all of those. Sustainable organic growth, first half was lighter than what we expected clearly, but the order rates that we've seen on both the commercial and the aero business here for the second quarter and into third quarter now continue to support a resumption of organic growth in the back half of the year.

Again a little bumpy because of some of the military aftermarket, Europe although it's stabilized hasn't come back quite as much as we expected but we still expect to see a return to organic growth here in the third quarter and stronger into the fourth quarter. So no big-big change there, game changing product development for those of you who didn't have a chance, take a look at the CSeries first flight, you can see the first GTF-powered aircraft taking off, it's a marvelous sight, not just the fact that the engines work, but that the noise signature is everything that we had expected as well as the fuel efficiency, so again making progress on all of these fronts.

And cash generation, we'll see cash equal to net income this year despite CapEx ramp to about a 1.7 billion this year, versus what was about a 1.3 billion blustered down next year. If you can think about it and we talked a little bit about this before, but on the CCS side clearly as Geraud and team have a done a marvelous job here in the last four years. And we had margins below 9%, the goal just two years ago was to get to 15 by ’15. We’re going to be north of 15 this year phenomenal, phenomenal progress.

Similarly on UTC Aerospace Systems side, Elaine and the whole UTAS team a great job in terms of executing on the synergy plan. We took the synergy number up to 500 million on Goodrich we will be at 200 to 250 by the end of this year with clear line of sight to that 500. So again integration, execution all going extremely, extremely well.

Next to talk a little bit about top-line growth, again the key here is the megatrends that we continue to focus on and again quarter-to-quarter you’re going to see variations. We saw that with the commercial aftermarket where we were down for about six quarters at Pratt. It has comeback in the second quarter. It’s continued to be very strong in the third quarter. The trends speak for themselves, right. Commercial aerospace RPMs, Revenue Passenger Miles, continue to be work about 5% a year. They have been doing that since really early 60s, this chart doesn’t go back that far, but we continue to see very, very solid growth.

We believe the Boeing and Airbus forecast there will be 30,000 large commercial aircraft delivered in the next 20 years. That is the opportunity that is why we did the Goodrich acquisition, that’s why we remain committed to the commercial aero side. And on the commercial and industrial side, the urbanization, the trends continue right we see that with strong order growth in China continuing. Urbanization trends be it in China, be it in Vietnam, be it in India wherever you go in the developing world urbanization is a real fact of life. Almost 60 million people we think urbanizing and that is the opportunity that really Geraud is going to go after with this new BIS organization and I think that’s why we put the businesses together as to capture the growth associated with that urbanization.

Talking about cash generation again, the key here is returning money to shareholders. This year we’ll be about 55%, it’s down from our70% target but we’ve had a good year. Where we paid down $2.5 billion of debt, where we bought back about $1.2 billion worth of UTC shares. And again we’re investing for the future, continuing to invest to ramp-up on the commercial aerospace side with that 1.7 billion of CapEx and in spite of that cash remains strong.

Talking about next year, we’ve got a placement with probably$1 billion out there for share buyback and we will do $1 billion of debt pay down next year. So again all kind of what we had talked about with the renting agencies are really on-track, by ’15 we’ll pay down another $1 billion of debt and then we’ll be probably out of the debt pay down mode for a while and share buyback should go up.

Then talking about the dividend here but you can expect a dividend increase again here in the fourth quarter as we do every five quarters, so again no surprises on cash flow. I would mention that we’re getting good news as we pay down the debt on interest expense. I think this year we had about 950 million due of interest expense, further down to 930 next year and it seems like not much of a reduction given the debt that we’re paying down, but the debts we’re paying down is relatively low cost but still good tailwind coming on the debt reduction and interest expense, and that will take me to my last slide which is 2014 and what we’re seeing out there in the marketplace.

So lots of pluses, couple of question marks and three minuses and again I think we all believe that emerging markets, the trends will continue. We’ve seen a slowdown this year in terms of equity markets for developing world has not been great, but the fundamentals still works. On top of that we continue to see the U.S. economic recovery despite the best efforts of Washington to stall out the recovery, we think that we’re actually going to see growth again next year accelerate we saw especially this year in the interest rate sensitive sector to the account of what you saw in autos we’ve seen it in housing.

Housing starts will continue and again where we’re seeing some of the good news in the residential business this year is the result of the U.S. economy picking up, that trend should continue.

Commercial aero aftermarket again we’ve seen the recovery not just on the narrow body fleet but also in some of the large valued legacy Pratt’s business which we continue to see a recovery at the Otis business so we feel good about that. And cost reduction, yes we will do almost $500 million of restructuring this year I think 450 is the guidance that’s out there today, probably a little north of that. We will get a couple of $100 million of additional savings next year from restructuring action, so again restructuring cost takeout is a way of life. We will do some at CCS, we will do some at Otis, we will do some across all of the businesses next year.

And you can expect Louie to give you guidance on the exact number when we get to December. Pension; it’s good news, as I sit here today the discount rate I believe is 4.8% versus 3.9% last year in December. We will see what it is as we strike the line December 31st, but there is obvious tailwind and we think somewhere between $200 million and $300 million of tailwind. Different bookkeeping purposes about 45% of that benefit goes to Pratt & Whitney, another chunk goes to the other aero businesses and then a small piece to the commercial businesses, but it is real tailwind.

And if you think about UTC this year are all in GAAP numbers that $6 to $6.15 includes over $0.60 of pension headwind, 850 million globally of pension expense, so all in numbers we’re going to see good news next year. And importantly I think we have taken -- there were very tough actions on the pension plan. Some said, the final average earnings plan back in 2009 and we’ll stop recruiting after 2014, everybody goes to a cash balance plan essentially, you get all good news I think for the long-term we have done the things to right size the cost structure for the business over the long run.

In terms of question marks the Eurozone. It’s 20% of our business and I think as you will hear from Philip in a little bit, we are not quite out of the woods yet, stabilization in some markets, we have an improvement, yes but not out of the woods yet and of course there is still lot of uncertainty in terms what happens with the financial situation in Europe next year so it’s a question mark and that of course follows along with FX.

This year, we had an FX assumption of euro at 128, it’s going to average about 130 that’s all very good news for us. Unfortunately, we also had yen assumption of 80, I think it’s going to average about 100 yen to the dollar, so in fact FX is a minor tail or headwind this year, who knows what happens next year, we will figure that out in early December as we give guidance.

Commodities and pricing always a question mark I think again in some markets we have seen pricing traction this year, in other markets like China continued pricing pressure. Commodity same story again I think you will see from the CCFT that had good tailwind from commodities this year that is an uneven story, copper is good but in fact copper is coming down as a percentage of what we buy here down to €45 million I think Rick told me this morning that we are actually buying this year Carrier remember back in 2005 with over €100 million so and copper is important but not as important, there is aluminum, there is steel and everything else, we will see how that comes out again as we stand up in December we met again in March with the business as well had a better view on pricing traction.

Then lastly, let’s talk about just three minuses and there are a lot of other questions out there, but I only pointed these three because they are big, DOD spending represents 18% of our business, obviously it impacts Sikorsky it’s 75% of their business. I think Sikorsky will be challenged to grow earnings next year with sequestration and I have yet to hear a scenario out of Washington that does not include the impact of sequestration which is a $52 billion reduction so there will be headwind for the sequestration. This year we think it was about $0.10, it could be another $0.10 plus next year depending upon how the budget negotiations go in Washington over the next couple of weeks.

Commercial aero OEM, we got a little bit headwind at Pratt as we start delivering CSeries engines, we are at the high-end of the learning curve, was going to be negative engine margin as that dissipates overtime, we are going to start getting negative engine margin from the Neo again all of those things, little bit of headwind, not just for next year for Pratt but for the next several years as the engine deliveries pick up, we are going to continue to see negative engine margin.

And then lastly on taxes, you remember in January of this year they passed tax extenders for 2012 and 2013, right now it does not look like we are going to get tax extenders for next year. It’s about $120 million benefit to us, about a point and a half on the rate. So if you think about the tax rate at 29% this year, probably 30% and 30.5% absent tax extenders, so there is three on the right, it’s about $0.30 of headwind give or take. And I think again as we get towards December we get more clarity in terms of what’s going on in Washington, and what else could impact taxes, and what happens to DOD spend we will have more clarity but just from our own bookkeeping standpoint, we have got about $0.30 baked in.

So with that I am going to stop and I will take just a couple of questions before I turn it over to Geraud.

Unidentified Analyst

Couple of things, just to wrap-up on’13 I mean there are two things you highlighted, the change were both negatives. So what are the offsets there? And then on the Otis pressure, could you sort of size it and also is it going to be done by the end of this year, is it going to be fall into ’14?

Greg Hayes

Yes, so again a little bit of pressure on -- at Sikorsky, a little bit of pressure on top-line and the bottom-line for Otis. I think again restructuring benefits that we have done, we have got more restructuring going into the year than what we expected. I would expect that Mr. Darnis, the CCS business will probably be at the high-end of their guidance range, I think UTAS will be at the high-end and I think Pratt will be at the high-end which should offset the pressure that we are seeing on the Otis margins.

The charge for Otis this year, I’d put it somewhere around the $50 million of cost range. Again there is a lot of issues there in terms of the transformation, it was the right thing to do, it was poorly executed. From a system standpoint, we didn’t have our systems in place, we didn’t have the supply chain in place all the things you heard today that went right here, I think they are elements that went wrong as part of the Florence transformation. And again we will get our arms around it, I think again we are shipping units today, there was a couple of months that we are shipping very few units.

On top of that the real drama happened because the market picked up at Otis and we redesigned the product line, we went from seven to three different products, great market acceptance, great orders and then we couldn’t fulfill them. So again, a lots of pressure there in terms of getting that factory back online, again I think by the end of the year we certainly hope to have it back up and running to the expected levels.

Unidentified Analyst

Just on your sort of initial comments on the buyback for next year, as you said it was slightly lower number than this year. How much has had to do with kind of your current share price and how much is to do with the sort of M&A pipeline that you see right now?

Greg Hayes

It actually has little to do with either. In fact it really has to with available cash. I think about next year we’ll generate about $6 billion of free cash flow, about 2 billion will go to the dividend, we will paid down about $1 billion of debt all that’s U.S. cash and half of our cash comes from outside of the U.S., so lot to repatriate cash to be able to do share buyback and we will find a path to do that billion. The real issue is that most of the cash is trapped overseas. We are going to make place forward for next year, this year we started about at a 1 billion, I think it’s probably going to be well short of $0.5 billion. Nicolle has already been doing much since she got there. So our hope is that next year that we will take that number up. But I will tell you right now that there is not a lot in the pipeline.

It’s not that we don’t have an appetite; there is just not a lot in the pipeline. Share price again, we are buying the stock back at 105 or 110 is still very, very accretive, and really just a question of cash availability.

Any other questions, Nigel maybe last question here?

Unidentified Analyst

[Indiscernible]. You took up reception from $450 million to $500 million for this year, firstly is that covered by gains? And second, you mentioned $200 million of cost saves for next year. I think 80 drop in to this year, so it’s 120 for next year, is that correct math?

Greg Hayes

Yes, it’s alright, yes so the gain [Balico] with restructuring, I think we had 450 of this, we would probably and in fact since the third quarter is over, I will tell you there are a little few more gains coming. You will see that on the tax line. We had a tax settlement. That’s going to take the gains up to around 500. We got additional restructuring, lots of appetite across the business do it so. And gains equal restructuring, Louis committed to it. We are going to find a way. And restructuring in the sense of OI for UTC, and we would like to take the opportunity, onetime gains to offset it because frankly you guys don’t pay us for the onetime gains.

Alright with that I am going to turn it over to the President of BIS now, I should say CCS, but we are going to talk about CCS, but Geraud?

Geraud Darnis

Thank you. We have three messages today. One is that the strategy at CCS is working. Margins will be above 16% this year and it’s ahead of schedule by two years. Second message is that the combination of Carrier and F&S has delivered results, and it’s more run rate. We kept the momentum at Carrier strong, margins, traffic, and share trend. We reversed the trend at F&S, we steady the earnings and margin equivalent and the combination of both have started to unlock synergy in the building space in both revenue and cost.

Now my story is about the creation of BIS which is the next logical step in the transformation of United Technologies. Well it creates new opportunity to accelerate growth by leveraging with our unmatched capabilities and scale in the building space. So my goals are clear. Keep the CCS momentum, get Otis to resume its strong tradition of outperforming peers and delivering consistent revenue and earnings growth, and set the stage to capture the opportunity presented by the powerful trend of organization and building efficiency.

Now this field was set up before the creation of BIS. So this is a CCS day and my comments are going to be focused on climate, control and security. But obviously I will start giving you my first thoughts around the BIS agenda. So let’s talk about CCS. We make building environments comfortable, efficiency, safe and secure and we ensure the global food supply is transported and stored for such consumption, that’s what we do. Doing so, we generated last year, 17 billion revenues. It was about 14% of margin with 61,000 employees around the world.

So we do three things. We’re in the residential home, mostly in the U.S. where we do comfort, safety and security. It’s about 20% of the business. We are in buildings and industrial environment which is about 60% of our business, and the same, efficiency, safety and security. And then finally we are in the food safety business about 20%; transport and stationary. So the breakdown is lower than 50% in North America, but as for Europe, the Western Asia. As I said 60% in building, the rest in food safety and home comfort and we are about 40% in HVAC, a little more in commercial than residential. 40% in F&S, a little more in product than in field; and the rest split between stationary and transport refrigeration with a little more on the transport side that is Transicold.

And as I said our strategy is delivering results. We had a good run on margins despite market softness. That transit into very strong execution and that was really enabled by business transformation which enabled us to focus more on the core but the opportunity presented by the integration of Carrier and F&S and the beginning of unlocking revenue synergies. You heard Greg say our guidance is 135 to 200. And he has all expectation that we will get to the high-end of that range. And I will not contradict Mr. Hayes.

So let’s turn into how was 2013 for climate, control and security. You see the original and the latest guidance. If you go to the bottom of the chart you see what’s changed between the revenue assumption, industry assumption; originally and latest. And you see that with the exception of residential in the U.S., everything came in lower than we expected. And despite that what we we’re coming in at the high-end of our original guidance and we move the bottom in the last call and that was really delivered by stronger productivity, cost reductions, a little bit of tailwind from commodities and little less headwind that we anticipated from divested earnings and pension.

The good news in organic growth itself is that you see that on the backend it’s coming back. So we have two years to strong growth at CCS ’10 and ’11 after the drop of ’09 and then we had little tough environment last year in ’12 with a tough start to the year really driven by very weak queue up and also the very weak Transicold. Recall we exited last year with very low backlog particularly on containers and we started growing in Q2 and we feel comfortable with 3% in the second half of the year which is going to help us obviously on the number side.

But if you look at the businesses not adversely move the same way, on the first half we had very strong North America residential growth organically, double-digital and we had obviously -- you have such from Transicold but you see at the backend that Europe was very weak and we’re going to here from [indiscernible].

So the good news as you go to the second half and you see residential is still strong, still double-digital. Transicold has come back and is very solid and China and India are accelerating growth rates and we see some of order that’s ready, the first half transiting into more revenue in the second half and also pick up on Fire and Security products America, a little bit of light on the commercial market in the U.S. where we picked some improvement in trend and less of the headwind in Europe. So all that translates into getting finally a little bit of tailwind from the revenue side.

Now you are very smart people and you would wonder gee, you guys did $90 million of earnings also in the first half there was no organic growth, so if you’re going to get the organic growth in the second half, why will you do better than Europe high-end of the guidance. And it’s true that we’re going to get some lift from higher revenue on the second half but just to put in perspective we had about 100% conversion in the first half, we’re only going to have about 50% conversion in the second half.

And the timing of divestitures I think that is clearly -- in the first half we actually had some tailwind from divestitures as we divested some money loosing businesses from F&S and in the second half we actually divesting some businesses that have been making money so sequentially it’s about $50 million of shift. But again very strong productivity with a little more productivity cost reduction in the first half because of all the move we have got to do on F&S which we captured a lot of them and more of them in the first half and the second half. But again, very healthy conversion rate see that almost 50% on the second half.

So if we step back a little bit and look at the performance of the last few years we had truly a very strong earnings lift on the CCS side and mostly organic where we grew by $1 billion in earnings at 65% net M&A which was some Fire and Security acquisition, offset by some divestitures of the portfolio on the tariff side and it’s a little bit on the F&S most recently and it contributed about 100 million. And that was really driven by stronger than growth sales that came from Carrier mostly and Carrier 1.8 billion we actually generated better than markets across the board so we had some share lift. And the organic gross improvement is about 400 basis point over the period that’s a mechanical improvement by little bit of managing in business which keeps mix GAAP but again organically we’ll improve by 400 basis point on the numbers.

So, this strategy didn’t work and again its portfolio transformation, it’s focusing on our core business enabling us to make step change improvements on our core business and some integration benefit from the combination of Carrier and F&S.

From the portfolio side down on the chart side, it’s a little more than $4 billion in revenue are left since ’09 and on the F&S side probably going to be about a billion almost down [indiscernible] of February next year on the revenue side because of timing could be 300 million to 400 million that was basically done. We like where we are and we like where we are positioned. We’re positioned where we have market leadership where technology matters and we can make the difference where we can deliver high value content to our customers and also where there is strong growth prospect for the market.

I want to show you a little chart that basically summarizes what changed with the entire transformation. And some of you would remember on the top left the chart I showed back in ’08 and we started the transformation of Carrier and it was a pro rate of the earnings at Carrier and you saw that we have 62 what we call businesses. So business should be like birth [ph] acquisition or a residential acquisition or bottle coolers those are businesses that we can be worldwide and then geography.

The top 15 businesses accounted for most of the earnings in that margin about 14% and at the bottom you had a tail of about 37 businesses that basically generated about only 1% of the earnings. F&S is 2% about the same profile with some very strong businesses with actually very healthy margin at the top 78 businesses because of the 62 acquisition and the roll out of about 250 different entities and product lines and again the bottom lot winning comfortably.

So, on the right you see where we are today and we’ve observe first that the number of businesses on which we focused is being trend by third. We have 51 businesses and then we observe that the distribution of those businesses is not very balanced and all good businesses. The top 15 businesses have 15% margin and the next 10 have 17 margins and the next 10 would tell is also at 14% so the difference between all those businesses is just size. But the all good businesses where we have market leadership and we are positioned for revenue growth because of good market. So that kind of summarize what we did on the transformation.

We like the business we are and now we want to grow and we set ourselves some royalties targets on growth we think we can do it organically by about 50% between now and the end of the decade. It’s about 8 billion in revenue translated by 5% organic per year and really driven by strong market fundamentals, some markets that are not yet where they were from a peak standpoint. Some are increased focus and investment on innovation and new products and marketing and again our presence on emerging market.

So the some fundamentals are really powerful, organization we talk about it all the time 70 million people every year move from rural environment to an urban environment. I think two years ago 50% of the people on the planet were living in an urban environment and that’s up from about a third 30 years ago and the projection is that 2050 it will be only a third would be rural. So there is really a big momentum here.

And then the products in developed market need to be replaced as they replace we look for better, and more efficient products with concern on efficiency and environment, food safety is a very big driver on emerging markets for refrigeration and obviously organization also drive need for life safety and security. And we are still not where we used to be from a market standpoint residential in the U.S. housing starts that are upcoming back up, the market has been better. We anticipate it to continue. And on the commercial side we’ve also seen we start from each and we hope to see some continuing of the firming of the trends on the commercial building side particularly in the U.S.

We’ve continued to invest more in products you heard from Greg we have done significant investment and we’re getting more products out than we had in a long, long time. We had a smarter portfolio and we have put more of our dollars to work to get this one refreshed more frequently and continue to offer differentiated products that can help us swing on the marketplace with increased R&D percent to sale by 70 basis points while we were increasing margin and I would expect this to continue.

Now our presence in emerging markets is significant and it goes way beyond just a BRIC here I show $7 billion of revenue month this includes about $3 billion of revenue that we do not consolidate where we have joint ventures with partners here in the Middle East or Latin America where we typically have a 40% of our ownership to 49% so I don’t consider it revenue but we are there selling our products and putting them from our factory 7 billion in 157 countries and again in places Kenya, Utopia, Bahrain places that are not the traditional BRIC that you think about.

And that’s very important thing because we know how to do business there and we know how to position with strong partnership, good talent and eventually product localization can help us improve our ability to serve our customers over there.

Now the integration of Carrier and F&S is very good results we have talked about and it’s also created more opportunities. We have made good progress and we saved about $100 million last year from consolidation of staff and we’re on our way to continue to consolidate where we can and where it make sense offices from Carrier and F&S. We’ve combined 100 offices between Europe and Asia and what it does it gives us scale it has coordinated the marketing strategy better in front of the customers that most of the time end up being in the same building and we have no runway from a manufacturing standpoint because again we’ve a big footprint and you have got to do that carefully and with time but we've already made good progress as Rick mentioned early and our target is probably 50% reduction in footprint and it's going to take us few years to do that.

And then on the estimate side we really started the process of making the true integration of some of the great brands and businesses that were acquired by UTC. And what we do is that we try to move from a stage where many brands were in [indiscernible] to a model where with this scale around clinical segments and from a manufacturing operation and management standpoint we cut across all new designs.

And of course as we go sell those products, each brand has identity, each brand has a channel, each brand has a distribution network and their value to their customers. So we have done that and we are achieving significant benefit both on efficiency in front of new customers and marketing standpoint and also be more efficient on how we deploy our expenses.

And then we generated on the Carrier and the F&S side some revenue opportunities. These are starting to elaborate more sharing customer leads and jointly selling to key accounts. Some example on this chart where you have a good account that trusts European stability to service them with a branch of product or services in some markets and then you bring additional capabilities and more easily open up to spikey [ph] new capabilities beyond just the focus of either fire, security or Carrier.

So some key accounts have started to move more systematically with specs for us that goes beyond again just one or two of the product brands that we have. We have channel strength in certain areas and geographies where we can create pull through. We also have in emerging market the opportunities to make some of our systems work better together around building automation and some of the fire detection and HVAD systems and again mostly in emerging market and that will be a good boost to our capability there.

Now, the last one actually, the example on the bottom Larsen & Toubro; Larsen & Toubro is a good example because it's the largest contracting company in India and it's one that Carrier started developing accounts way back and because of good service and typically quick to respond to the customaries and deliver good value to the customer, being able to stand for our products, technology and quality, since [indiscernible], when we combine Carrier and F&S we naturally started marketing our capability on the F&S side and this large account started expecting most of the F&S products together on the same job.

More recently I worked with [indiscernible] and we have actually opened up the account to Otis and it continued the $100 million job which is 670 escalators and elevators for the Hyderabad metro in India. And that's kind of an anecdote example, but that is behind, it's exactly what the combination of police and fire security we planted into this new building and industrial system is going to try to achieve.

So let me give you a few early thoughts on the new organization and what it's here for. So first we combined the UTC capabilities in the building space, and we want to create a strategic growth platform but it's really leader in this industry. We have $29 billion of revenue with healthy margins and we can take advantage of this tremendous scale to unlock synergies in the building space. Some of the sensing we are on the climate control security, we think we can do on the larger portfolio of buildings. We have an incredible scale, 124,000 employees, more than 80 factories, more than 50 design centers and lot of capabilities to focus on innovation on the next generation of smart building and where it makes sense, integrated system.

We have an incredible presence in emerging markets. 40% of our headcounts is in emerging markets and about 30% of the consolidated revenues are in emerging market. We have an incredible seed presence mainly through Otis’ 2,500 branches, but an incredible field presence that fire and security field and Carrier field can benefit from. You can see areas where the scale will be enough on the fire and security or Carrier side to go to the branch in front of customers to service them but now if you have that scale, because you already have the Otis branch, you can see how we can leverage this and offer for more opportunities again to service our customers in wider geographies.

So just, if you roll out the numbers together you see a very balanced profile on the top left, little more than 30 in the American, it’s about 30 in Europe and Asia. So it’s pretty well balanced. As you see about 75% using billings, food safety and I'll call that industrial and homes in the U.S. which is climate, controls and security.

And then if you look at the breakdown by type of products, elevators is 40%. There is 60% in the service side, 25% on HVAC, a little less on regulation and noncommercial, about 15% in refrigeration and 20% in fire and security. If you look at those $29 billion and look at what's in the billing, you see it's about $22 billion and that is significantly more than the next players on the, our technology systems that are delivering to buildings, likes of Siemens and Johnson Control or the other elevator company, the Honeywell. We have a significant scale advantage which we tend to use to the benefit of our customers and obviously our shareholders. I think we have a unique opportunity to work with our customers to bring more innovation and more value for the smart buildings of tomorrow and specifically to some of the vertical segments from building, whether you talk about data centers, hospitality or retail or anything like this.

So just a perspective on the numbers if you present together and it's a very visual chart. You see that we've done well at separate businesses over the [indiscernible] profits more than doubled over the period but we also see with the accommodation of [indiscernible] we see that combination that creates no benefit.

If you look at the first stage '03-'08 you see very good sales growth and that was fueled by organic growth at Carrier and Otis and well as funds through the acquisition. The margins were kept in check because Carrier margins were flat and the acquisition of Fire and Security were diluted to the margin and only after the '09 collapse, we see a different profile, that's favorably flat as the organic growth rate that you show mostly on the Carrier side were offset by that $5 billion of divestitures that came out of the portfolio, but you see how the margin on the other hand rose sharply from its [indiscernible] the benefit of the consolidation of Fire and Security. So looking forward, the goal is to fire on all cylinders. The goal is to drive the revenue on upwards while keeping the healthy margin rates that we have from the delivering earnings growth and improvement in shareholder value. So on that thought I'll take any questions.

Question-and-Answer Session

Unidentified analyst

Lot of exciting things. Could you sort of boil it down a little bit into, when you talk about growth, could you talk a little bit about maybe the organic element of it that you might be able to see? Is it like twice GDP, if we looked at some of the markets, in some cases it's probably a little less and then maybe for a moment also address how some of the strategy in terms of lowering cost is enabling you to take share which also accelerates some growth.

Geraud Darnis

So on the growth, I should think you have a third in the U.S., its 30 Europe, it’s 30 in Asia. Well GDP in Europe doesn't look so special. So we can be twice GDP. You may do two or one. So, here, it's really a question of when Europe comes back. I think we seen a bit of improvement on Europe, less headwind.

But in Europe you can't count on too much GDP. On the other hand you go to Asia, most of the emergent market, you have very healthy GDP growth. Now China is still down a little bit but in skill very good growth rates and I would anticipate that this continue and I would anticipate that we'll grow faster than GDP over there. And then you know in the U.S. it comes somewhere in between and you should also see the resumption of organic growth in the U.S. driven by better, hopefully continued economic improvement in the U.S. we see started by residential and some improvement in commercial.

So we think 5% is kind of an aspiration organically on a sustained basis and that's more somewhere, less somewhere. Right now UCR is coming back with organic growth rate, that are not bad, pretty good, and then you see F&S and Carrier are about 2% on the second half despite headwind. So you expect good growth rates. We have good market fundamentals. So even if you have hiccups of economy from time to time, the fuel is there in the urbanization for long-long time to grow.

And your question on the cost side, I think the scale benefit that is offered by the combination of Otis and Climate Controls & Security, I think you’re going to look at it differently, whether you’re in Asia or whether you’re in Europe. Europe where you have no growth and we have a very strong presence because Otis is very strong, I think we can probably work more efficiently and with working more efficiently comes may be more aggressive and capturing a little more of the revenue potential over there.

Unidentified Analyst

Thank you, Geraud, I have got two questions. As you rollout this new organization, if we can call it new organization, I think to some degree it’s maybe a new approach, not a new organization, but how do you actually measure success when we were in the meeting maybe two or three years from now? What is it you’re going to want to be able to kind of burst about or really highlight and then kind of tied to that question, is there some meaningful change in the compensation on centers for people down in the organization to drive this? Obviously the idea of Otis and Carrier and F&S collaborating been around for long time, but how do you actually drive a behavior change in the organization?

Geraud Darnis

The goal is the revenue around needs to grow. The module line needs to stay healthy and we have got to capture more than our fair share of the growth potential that come with the trends of urbanization and efficiency. So we are going to continue to perform and carry our load for UTC. In term of how you’re going drive collaboration, the answer is different where you are, depending on where you are. You have some -- I think we’re going to be they to sharpen marketing approach in number of markets where Otis being more early in the building, they get speced very early. The cycle of delivery construction make up some of the other products; Climate or Fire & Security come much later.

If you’re engaged with the architect, the construction engineer, the building owner. Earlier, I think you can have a better chance to be speced on the jobs. So by having maybe some of our keys in some areas collocated, some of the sales team ready, I think that’s one of the things we seen on the Carrier and Climate Controls & Security side.

Now, the folks said early they’re going to continue to focus on the elevators and their customers and creating service opportunity, maintenance portfolio retrofit and winning on all the big jobs that are currently urbanization, no change. The Carrier force do their own things. If we get one organization, we can create a base for cultural more collaboration and in similar, always easier under one leadership to make people collaborate.

Unidentified Analyst

If I may follow on Jeff’s question, I just I don’t understand your explanation. After the Company entered Fire & Security I believe back then goal was to have United Technologies within all these buildings around the world and there would be always opportunity to cross sell and then maybe two years later the view was set by the Company that didn’t work. What changed? What didn’t work before that will make it work now?

Geraud Darnis

Okay, so again I will say what we see in emerging market between Carrier and Fire & Security, we’ve seen it work. We’ve seen that we’re getting more jobs specified with more products with some of the common customers mostly in the emerging market, we seen that work. If you refer to few years back when there was one leadership that had all the entities Carrier, Climate and Security separate, there was two goals on the revenue standpoint at that point; one was to see can we give it up integrated solutions by tying up around building controls a number of our capabilities in the building and credit benefit for our customers on site.

But there was some work done on that and we have learned through this certain things. It didn’t work so well. It was anecdotal to try to give it up something and try to push to the customer that I think problem from the other side, when you start from the customers, you start from a customer application and buildings are very different whether it’s data center, it’s a retail store, it’s a hospital, they have different needs and you start from a customer and you work with the customer on their specific application and you see how with your capabilities maybe you can create more value for the customers by doing things that little bit differently and when that fixed then you replicate that inverse with that vertical with that customer and we seen some of that between the Carrier and F&S side.

I believe we have that opportunity intact. So it’s a different approach. We have learned, but we also know what doesn’t work and we have also learned that it works in the emerging markets because everything seems to new and the job needs to be done faster. So you need more of those abilities quicker put together, whereas in developed market where the market is mostly replacement or retrofit, you don’t replace and retrofit every component or system to the building at the same time. You do it stage. One day you need to update the [indiscernible], another time the security system. So having a combined approach is more limited.

As a building automation side of the business in which we have been growing, but this combination is more difficult. Then the other one was trying to cooperate and get folks to work together more on the jobs and we have some experience. Actually India is a good example. We are under a new direction. We have actually put a kind of a BIS [ph] guy in India that coordinates all the key accounts of Otis, Carrier and Fire and Security, and beyond and he has been doing it for the last few years. The example that I just show you with Larsen & Toubro is his making and it’s worked and now we want to do that on a larger scale. We see we still have this opportunity.

Unidentified Analyst

Can you talk about some of the end markets, you’d mentioned how as you started the year, other than the North American residential everything was little bit weaker. You highlighted some of the improvement in the second half from transit calls and from North American commercial. How much of that is easy comps versus real improvement and can you talk a little bit more about Transicold and what’s happening in that market?

Geraud Darnis

So the Transicold, easy comp is obviously the big thing. I think the container, first quarter we were down 60% and that’s because you will recall last year in the second -- in the last part of the year we had like a period of two or three months we basically no order. So with the container market on a calendar year its actually going to be down a little bit versus we think it would be up, we are better than that. So in other words, it is not that you shouldn’t bid the cover in the second half and is going to [stop]. I think this market is choppy. The fundamental driver for this market is the amount of refrigerated goods that are being transported and that continues to grow by about 5% a year because people around the world, they want to have the frozen food or have access to strawberry in the winter in Connecticut or beef from the Australia or somewhere in Texas, I don’t know if they do that but looking on that front.

So container again is being down for the year, but compare makes it very strong in the second half. Don’t want to give guidance for next year yet, but--. Residential remains solid and I think the housing starts, improvement of the taxing of homes in the U.S., the unemployment coming down a little bit is easy -- the flow of new home being sold and then typically when you get into a new home you just start doing some work, you retrofit, you choose your grade. Europe showing some sign of improvement, commercial in the U.S. showing some sign of improvement. So again we exited the year in a better shape and hopefully will carry on from a market perspective.

Unidentified Analyst

So, Geraud, when you trying to effectively bundle these businesses -- when you effectively try to bundle these businesses together, is there a worry that you are going to have to give up margin to be able to do that? So how do you kind of trade that off?

Geraud Darnis

We don’t bundle an offering and think again. Think of it as you market your capabilities across some verticals or across some customers and you are in better shape when the bid comes in to get the job, if you do that earlier. You are not going to bundle in air conditioner or an elevator. It doesn’t work this way. So I don’t have that concern.

Unidentified Analyst

But don’t you think that there is any risk when you are going to try and win more business like that, if you wind up having to give up some margin to do that?

Geraud Darnis

Every job is an individual transaction. Every customer is an individual customer and we work with all of them to try to create enough value for them to want to buy from you and enough value for us to want to sell to them.

Unidentified Analyst

I don’t know if you have these numbers on the top of your head but I’d like to get an idea of the starting point and the opportunity. We know that Otis has approximately 20% share of large buildings worldwide. Carrier probably has about the market share and Fire & Security types of products and I know what the market shares are but if you look at what’s out there, what’s the overlap -- in other words how many buildings have been Otis elevator and a Carrier air conditioning unit today and where do you think you could take this by this effort.

Geraud Darnis

You got me, I don’t have the answer. I do not have enough days since the announcement of my new position a week ago to figure it out but I will go work on it.

Unidentified Analyst

Excuse me, it gives us the idea of the potential, and I think it would be very interesting.

Geraud Darnis

I will take your question and think about it thoroughly and maybe some answer in March.

Unidentified Analyst

I just wanted to know, within the building, as you said you have a pretty comprehensive offering. I guess power management is one area that seems to be lacking or smaller. Just wondered if you thought that was an area of interest for you in future. And also in terms of building controls specifically we think the automated logics, you haven’t really broken out kind of how big that business is today. Any color on that, and I guess what you see as the addressable market for building controls and automated logics?

Geraud Darnis

There is many components and system in a building which will not -- to the extent we find the opportunity in the future to add value by maybe going in to some of those because you can leverage your footprint or your technology or your sat force. We will always look at that, and think again. You look at our scale there, we provide probably more opportunity to add-on and we see as we move forward. And your second question was –

Unidentified Analyst

Around sort of automated building, how do you [indiscernible], how do you [indiscernible]

Geraud Darnis

When you talk about building automation, and you have some big numbers that are being quoted; about 70% of that is in labor and in some market we don’t go to the labor ourselves. We work through, we just have the high end technology parts. We’ve made very good progress in the U.S. I don’t want to give you a number or I could. Anything, no. But half a billion dollar of building automation we have seen in the U.S. We started when we brought the company at 48. That was six or seven years ago. So I think we have done pretty well. We really haven’t moved that outside of the U.S. yet.

We starting, the systems are different. The folk that are in place are in strong position and we can't really move those easily. But there is opportunity and we are able to starting on the emerging market of the [national] opportunity is there. So again, this has been a creatable opportunity in terms of creating a growth profile for UTC around an industry where we have very strong position, very good growth profile, we have very strong margins. So nothing wrong about adding to some of that which can benefit from skill. So that will be our new core. Okay, try one more and we’ve got to shift.

Unidentified Analyst

Just a question on, you mentioned stabilization in Europe and as I look at your chart on page 7, and then basically Europe in declining less. So talk to us a little bit about demand there, specifically you know the aftermarket. You had pricing pressures in Spain. Is that situation getting worse? Is it spreading to other countries? What’s it’s going to take to get Europe to come back.

Geraud Darnis

We have seen improvement in some parts of Europe; Germany and France started a little bit. U.K. started a little bit. Southern Europe remained very, very weak for obvious reasons because of some of their challenges from an economic standpoint and deficit. We [indiscernible] decline has been exacerbated by a strategy to focus on the higher value part of the field and F&S had a lot of businesses where they would go and take Jaguar, maybe you have 80% of company car stuff and 20% of higher value thing and we focus on the higher value thing and as we made this transition, we had some headwind on organic growth, probably four or six years ago one point each year and the bunch of that has been in Europe. So the [indiscernible] I am mentioning is you see a little more of activity in terms of new jobs, quotations, more or less time to come. They come down less in certain area and just started going up in others. I am totally going to leave it here. Thank you all for your attention.

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