UTX
#<UNK>, that is an interesting question.
Am I satisfied with market share.
Of course not.
I think we have sacrificed market share for margins for a number of years and it is not just in China, we have really done that globally.
But we have got this great business, Otis, which has 20% kind of margins, $12 billion business.
But we have to grow.
And I think that has been the Achilles heel of Otis, that we have not seen bottom line growth in about five years.
So, we have to think about it differently.
Philippe Delpech is the new President of Otis, he has got a great team in place and we are going to focus on kind of the basics, if you will, of how do we get back to long-term sustainable earnings growth.
Part of it is going to be by gaining share because, again, it is that market share that ultimately provides the elevators that we are going to service.
And it is also by improving service productivity, making service more sticky to the customers, showing the value of Otis service versus the others.
So I think there is a lot to do.
Will margins suffer in the short run.
Yes, perhaps a little bit.
But, let's just be clear, this is not a pricing war I am talking about here.
I am talking about targeted market share gains where before we perhaps were not always being as aggressive as we could in pursuing some of these opportunities.
And so to your point, Kone has gained share on us in China.
We are not happy, we are going to go after that and not just China really, it is globally.
And you see that in the US especially.
Last year we grew Otis orders about 40% in the US, this year we are up about 20%.
We know how to do this.
It is about having great product and a great service team and great leadership.
And we have got that across the board at Otis today and I am confident we're going to be able to regain share without sacrificing a lot of margin.
And, <UNK>, if I might add to that a little bit.
The loss in China market share to some extent was driven by a conscious decision on our part not to play in certain segments.
So the low cost social housing segment we had underrepresented or under played that market.
Gaining share in that market doesn't necessarily have to come with price, it also comes with the right innovative, highly cost-efficient product and we are working on that.
<UNK> and Philippe have been talking about increasing some R&D investment in Otis to get the right products for the right market segments.
And I think by attacking market segmentation we have seen this strategy play out in Korea, we will do that in China as well.
It is not just about dropping prices to gain market share, it is about putting the right products in the right segments at the right value.
Well, I think you hit on exactly the right part, Jeff, which is we are trying to balance the cash in terms of keeping the rating where it is today, as well as where the cash is generated into the future.
Clearly we have been out with the rating agencies, we have talked to them about the fact that we want to continue to do share buyback, we want to take share buyback up.
And we still want to keep our powder dry to do M&A over the next couple of years.
So this was a number that we felt in working with the agencies gave us enough coverage to do aggressive share buyback while at the same time preserving a little bit of powder to go out and do M&A.
And if the M&A it doesn't happen we can do more share buyback.
And it really will depend upon how much of a disconnect we continue to see between intrinsic value as we believe it to be versus where the market sees us today.
So, there wasn't a magic number here.
I would tell you the $6 billion, that is the net proceeds from Sikorsky, we have talked all along about how we are going to reinvest that.
But it is really the confidence going forward that we see in the long range forecast that gives us the ability to go out and talk to the rating agencies and say, here is what the cash flows are going to look like not just for the next two or three years but out beyond that because of these investments.
As they start to tail off cash becomes very, very strong in the out years.
And we can afford to take out a little bit more leverage.
We don't want to be down in BBB from a rating perspective, but we did take a downgrade by a notch.
And I think that is appropriate today.
The capital markets are pretty well recovered from 2009.
And we felt like we didn't need to keep the A1 P1, but we still want to maintain some flexibility.
And, Jeff, the decision to buy back shares was pretty straightforward.
I am sure like you have, and many of the investors have, we have a 10-year cash flow model as well.
And when you look at that and the [virtual] assurance that some of our investments are going to deliver in form of great cash flows when the engines come back for aftermarket and when the UTAS systems come back for repair and overhaul, etc.
, the cash flow strength of this business is phenomenal.
The Otis business generates over 100% of net income every year as cash flow.
So given the strength of our cash flows over the long-term, clearly our discounted cash flows give us a much higher value of UTX today than the share prices.
And in that situation it is very easy to make that call.
Sure.
Think about ---+ the good thing, Jeff, is that unlike the aerospace business, we don't need to spend $1 billion to create innovative products in Otis.
The beauty of the Otis model is targeted investments in R&D of $10 million to $20 million can give niche product which can attractively easily attack market segments.
And that is what we are talking about ---+ increasing Otis R&D investment by $20 million to $30 million can allow us to capture the share and segment that we had vacated earlier.
So I think it is not about increasing huge amount of investments, it is about the right pricing decisions, as <UNK> said, it is about the targeted R&D investments.
And the other thing to keep in mind is Otis has the largest scale of any elevator company in the world.
So our ability to reduce costs day in day out at Otis is bar none.
And we have to be able to take advantage of that to keep our margins at levels where they are.
Will they come down temporarily short-term.
And that is the right trade off to make.
But it is not going to be a 500 basis point margin reduction, it is maybe 100 or so.
You pretty well hit on it there, Rob.
Look, we still want to do acquisitions.
This year we will do about $1 billion of acquisitions, some smaller things mostly on the commercial side of the portfolio.
But there remains an opportunity, both on the aerospace systems side as well as on the building side of the business.
We have not seen or found an asset of the quality that we like quite yet, but we continue to look.
And it ultimately comes down to can we buy a business and create real value for the shareowners without having to give all of that value to their shareowners in the form of a very high takeover premium.
So we are going to be disciplined; we are going to keep looking.
And quite frankly, I think this slow down that we've seen in the stock market over the last six months gives us opportunity going forward to be selective and to find targets that are out there.
I think what is off the table today is the bigger deal.
We will do deals in kind of that $1 billion to $5 billion range, things that we can finance with existing cash or cash flows or what we have on the balance sheet.
But any type of deal that would require us to use UT stock ---+ UTC stock ---+ in my mind is off the table, simply because of the disconnect.
I don't want to use a devalued currency to do a deal.
So over time as this UTC share price recovers back towards where intrinsic value is, we may think of a bigger deal.
But for right now, we are thinking about kind of that $1 billion to $5 billion range and we will continue to look.
And I give the team credit, we have been close on a couple of deals.
We have walked away because the value wasn't there at the end of the day after we did due diligence, and we did the right thing.
And we will continue to have that kind of discipline going forward.
Sure.
So let me take that, and I am sure <UNK> will add to it.
But on the disc ops, it is a fairly straightforward situation.
There was about $0.16 of nonrecurring items in the quarter related to pension curtailment for the Sikorsky employees and income tax adjustment for taking away of the APB 23 assertion that we had for Sikorsky.
Those will be offset by the gains when we have that in Q4.
Operationally Sikorsky did what we expected ---+ it is on track to hit the full-year numbers, but the quarter was weak particularly on the oil and gas side and the shipments were down significantly on the S-92 and the S-71 platforms, as you would imagine.
But nothing inconsistent with what Bob Leduc said at the ---+ in the June Paris air show.
We are on track with the roughly $0.40 of operating income from Sikorsky and about $0.10 of separation costs excluding the restructuring type of items.
On the planning process, <UNK>, I think again, we have been spending a lot of time this year working in details with the business units trying to make sure we fully understand and agree to the assumptions that are being baked into the plans.
We will make sure we lay those out for you all to understand clearly as we stand up in December.
And at the same time we will be back in the mode of putting some contingency at the UTC level to make sure that we are ---+ we do not surprise.
That is the number one priority for us to make sure we live up to our commitments and deliver what we say.
If anything we want to get back in the mode of under promise and over deliver.
Yes, let me just go on top of <UNK> there.
I think the new structure gives us the ability to dive deep into these individual businesses.
We have got four guys that are running these businesses and we are in lockstep with them in terms of the planning process and the key assumptions that they are making.
So I don't expect any surprises going into next year because we didn't understand what the assumptions were or it wasn't clear what the assumptions were underlying the plan.
And obviously when we get to December we are going to have those four business unit leaders there with me.
We are going to go through each of their plans, we are going to go through each of the key assumptions that make up the plan.
And there will be no surprise with investors next year.
Obviously we were too aggressive this year on commercial aftermarket.
Again there was a reason for that, it proved to be not correct, but we are going to make sure we don't have that mistake again.
So we will be a little more conservative, we are going to have adequate contingency at the UTC level and we are going to make sure that everybody understands all of the key assumptions that go into our plan.
There are things we can't control like what happens to currency and what happens in individual markets, but we are going to get the cost structure right and we are going to make sure we have got the right organization in place to deliver on the commitments that we are going to make.
Yes, let me start with CCS and then I will let <UNK> or <UNK> pile in after me.
But very confident in the CCS outlook for the next few years.
If you think about it, <UNK>, we have been big investments in R&D; in fact, I think we doubled the R&D budget at CCS over the last five years.
We have got this great new commercial product line, we have been seeing very solid growth.
I think orders in the quarter were up 8% on commercial HVAC in the US.
Continue to seek good positive momentum on the residential side, sales are up about 7%.
So we are seeing good momentum.
The other beautiful thing about CCS is it is not just a US HVAC business, it is a global business but it has got fire products, it has got field, about 30% of their business is service.
It is really ---+ it is a global building systems portfolio.
And there is going to be growth in a lot of markets.
So we think clearly China will be down next year, we have seen that in the order rates this year, but the rest of Asia still looks very promising.
Europe, we would expect some recovery there next year.
We are not talking about 5% or 6% growth, but just modest recovery in Europe.
And I think what Bob McDonough has focused on is continued cost reduction and cost takeout to ensure that he can grow earnings next year.
So make no mistake, when we talk about three of the business will be challenged (inaudible) earnings, Bob will be challenged, but we are going to challenge him to grow earnings as much as he can.
On the cash flow side, <UNK>, we certainly expect cash flow for next year to be better than this year.
Keep in mind we have a 5 point impact on the German tax payment this year, right, which hopefully won't be there next year.
On the ---+ in terms of the makings of cash flow, we will still have a couple more years of pressure on the CapEx side because the aero ramp is not fully done yet.
We still have capital investments which are continuing to be made in both Pratt and UTC Aerospace Systems.
Obviously we will try and control that to the best we can.
And then we should start to see some improvement, we have also had build up of inventory as we get ready for the ramp.
So I think some of those factors will over time start to dissipate, but definitely just the fact we won't have the German tax payment disconnect should suggest a better cash flow to net income next year.
<UNK>, let me start and just talk a little bit about the New England logistics center.
First of all Pratt this year, I think third-quarter this year versus last year was about 55 fewer engine shipments, about 6 of those were on the military side, the other 49 were commercial.
If you do the math that is a little over $500 million in sales that we missed year over year.
The New England logistics center, you guys have heard all about it, we had some startup issues.
The good news is today we are about 94% on time with the kits coming out of there, the kit fill rate.
We should be at 97%, which is the contractual target, by the end of this month.
And we should be able to make up almost all of that production by the end of the fourth quarter.
So again, one-time thing, expect a very big fourth quarter.
And I think the learnings out of the NELC, like everything else, we treat these as an opportunity to make sure we don't do things wrong in the future.
But also it is good learning in terms of process.
So the Pratt team is focused on right now delivering to customers and getting back on track.
The rest of the working capital, <UNK>.
Yes, I think in addition to the fact that <UNK> just talked about, if you think we missed effectively the August shipments, right.
And timing of shipments is absolutely critical, as you know, because if we ship early in the quarter we can have the receivables collected within the quarter that converts into cash right away.
In the absence of not being able to do that in Q3 it left us with a much higher level of inventory and we weren't able to collect the receivables that got shipped for late in the quarter.
<UNK>e holds for Q4.
We expect to recover most of it.
The Pratt team is working very hard to make sure they can recover most of the shipment misses of August early in the quarter so that we can collect it within the quarter.
But that is the thing that we are continuing to work on.
The second point I mentioned earlier was, again, as the cut over to new programs is starting to happen at both UTAS and Pratt, there is some additional inventory which is being built.
It is almost like what CCS went through with the SEER13 transition last year, right, where you build some inventory, some safety stock and make sure that you can meet customer requirements.
So that is again a temporary short-term investment which hopefully goes away as the next year comes around.
Right, so GTF, Geared Turbofan, is really five different programs.
I think the biggest program is obviously the A320neo program.
We continue in the flight test program with Airbus and we expect to have that aircraft certified later this year.
The good news of course is we are hitting the targets that we set out to initially, about 16% better fuel burn, about 50% reduction in emissions and a 75% noise reduction.
So we are right on top of what we told customers we would be six years ago when we started the program.
You have also of course got the GTF going on the Mitsubishi regional jet, we expect first flight probably in the next week or so over in Japan on the MRJ.
That will probably go into service in 2018.
Again, core is performing great and we are on track with the performance.
Bombardier, I think they have got six airplanes in flight test today.
We continue to see very, very positive results of that.
It is a great little airplane.
I think you have heard that and it is targeted to that 110 to 130 passenger market.
And we continue to support Bombardier.
I think we will do what we can to help Bombardier, we all read about some of the challenges that they have had.
But it is a great program, it is a great product and the engines are performing really well.
We have also of course got the GTF engine on the Embraer, the E2 platforms, those are a little bit further behind in the development schedule.
Those go into service in 2018/2019, but again the same core as the rest of the GTFs.
So from a performance standpoint from reliability, it is all going really well.
The gear architecture works, they haven't seen any failures related to that in any of the flight test programs.
So, we're very confident.
Of course the challenge as you know, <UNK>, as you go through this is you have got not just the R&D investment but the negative engine margin.
So that will be a stress over the next three years as Pratt ramps up and I think I saw the latest schedule, about 1,500 engines we'll be delivering in 2018 ---+ or 2019.
So $1 billion of negative engine margin.
So the investment continues, but it is an investment that we know is going to pay off because we are going to have a very, very solid aftermarket revenue stream for the next 30 years.
So, GTF is doing pretty well.
So, I think if you are talking about total UTC guidance, <UNK>, it is (multiple speakers).
Otis will probably be at the midpoint of the range overall.
So I think consistent with what we have said all along.
I wouldn't want to give a point estimate for Otis.
But I think ---+ overall I think everything is on track with exactly what was said and communicated in July.
Yes, yes, yes.
Yes, it is a starting point of 20%, because for a long time we have talked about Otis margins at 20% or so on a sustainable basis.
And I think what I mentioned was a 100 basis points or so reduction in a transition period as we reinvest into the business through either more market share gain or through higher R&D.
<UNK>, just to kind of put a little flavor on that.
Otis spends about 1% of sales on E&D, about $140 million a year.
So we talk about additional product investment, and we will make a couple of these things, you're talking $20 million to $30 million.
You are not talking about more than probably 50 basis points of headwind from E&D over the next couple of years.
So these ---+ it is not like we are going to see, to <UNK>'s earlier point, 500 basis points of margin deterioration.
I think the 20% level is something that is our long-term goal to maintain.
It will fluctuate over the next couple of years, maybe come down as we make some investments.
But long-term we still see that 20% as a target that is achievable even with what we see from a competitive standpoint today.
And, <UNK>, I would just encourage you and others to kind of ---+ one of the things we have been obsessively focused on has been the margin at Otis which probably has forced us into some bad decisions.
I think what is more relevant is operating profit growth.
And I think that is what our focus at Otis is going to be to try and generate profit growth.
And if that means that the margins are going to be a little different than what I said or what you expect, that is okay as long as they are gaining organic growth with appropriate margins to get better operating profit growth at Otis.
No, I mean the good news is there is not a lot of skyscrapers in Wyoming and South Dakota, so the commercial construction market ---+ as you know, <UNK>, it is on the coast and it is in the Southeast.
And we continue to see very, very solid growth in commercial construction.
As I said earlier I think we are up ---+ Otis is up 20% year to date in orders in North America after being up 40% last year.
So it all looks pretty good.
And I know people talk about an industrial recession.
In the markets that we play in in the US we don't see that.
I think, again, the non-res piece and the residential piece is all very good and commercial aerospace remains strong.
So, I like the hand we have got here.
Well, not ours anyways.
So typically <UNK> what happens is you have got ---+ about 60% of current year sales come from backlog conversion and we have seen a couple of point reductions in that.
At the same time we have also seen order rates decline.
So the year-to-date orders are down about 13% for Otis.
We expect fourth quarter probably to be something similarly in line with that.
The expectation is that the Chinese government has been investing in infrastructure even though the property market has been weak, housing starts, housing completions have been down, but there has been investments in metros, in airports and Otis benefits a little bit from that as well.
So I think the overall view at this point ---+ again, this is early in the process; we will give you more specific guidance in December when we are up there.
And maybe our view might change a little bit between now and then.
But based on what we see today maybe orders down between 10% to 15%, some improvement through infrastructure investment the Chinese government is making, opportunity to gain a little share and the continuing growth in the service business which still continues to grow on the maintenance side in mid teens.
We do expect China at this point to be down between 10% to 15%.
Like what exactly it will be we'll tell you more in December.
No, no.
Thanks, <UNK>.
Okay, we are mindful of the time, our hour here is up.
<UNK> and the team will be available, of course, all day to take additional questions.
And we look forward to seeing everybody in December in New York, December 10 I think is the actual date for our 2016 outlook meeting.
And again, any questions please feel free to give us a call.
Thanks very much for listening, everyone.
Have a great day.
