Start Time: 09:07
End Time: 10:04
United Technologies Corporation (UTX)
Q4 2013 Earnings Conference Call
January 22, 2014 09:00 AM ET
Greg Hayes - SVP and CFO
Jay Malave - Director, Investor Relations
Carter Copeland - Barclays
Samuel Pearlstein - Wells Fargo Securities
Julian Mitchell - Credit Suisse
Doug Harned - Sanford C. Bernstein
Jeff Sprague - Vertical Research Partners
Cai von Rumohr - Cowen and Company
Howard Rubel - Jefferies
Peter Arment - Sterne, Agee & Leach, Inc.
Myles Walton - Deutsche Bank
Joe Nadol - J.P. Morgan
Noah Poponak - Goldman Sachs
Nigel Coe - Morgan Stanley
Robert Stallard - Royal Bank of Canada
Good morning and welcome to the United Technologies’ Fourth Quarter Conference Call. On the call today are Greg Hayes, Senior Vice President and Chief Financial Officer; and Jay Malave, Director, Investor Relations. This call is being carried live on the internet and there is a presentation available for download from UTC’s website at www.utc.com.
Please note, the Company will speak to results from continuing operations, except where otherwise noted. They will also speak to segment results adjusted for restructuring and one-time items as they usually do.
The Company also reminds listeners that the earnings and cash flow expectations and any other forward looking statements provided in this call are subject to risks and uncertainties. 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.
Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue and we will answer as time permit.
Please go ahead, Mr. Hayes.
Thank you, Stephanie and good morning everyone. As you saw in the press release, UTC reported 2013 earnings per share of $6.21. Our integration of the transformational deals and solid execution drove 16% earnings growth despite a slower than expected recovery in our end markets.
For the full year of Goodrich, UTC Aerospace Systems generated over $2.1 billion of operating profit. The addition of IAE or International Aero Engines along with aggressive cost reduction helped Pratt & Whitney grow earnings by a $177 million and Climate, Controls and Security, also delivered a strong 2013 with 9% earnings growth and 15.7% operating margins.
Even with the investments we’re making for the ramp in aero, we delivered strong free cash flow at a 102% of net income for the year. Gross sales for the year were $63 billion, that’s up 1% organically, and as you see on Slide 2, strong momentum as we exit the year.
Organic sales were up 4% in the fourth quarter after being flat through the first three quarters. In the commercial businesses we saw 7% growth on the Americas, driven by a continued U.S economic recovery. Europe was flat and Asia grew about 4% with ongoing strength in China, where sales were up 9% more than offsetting weaknesses in the other Asian countries.
In aerospace, continued weakness in defense was more than offset by a very strong growth in our commercial OE and aftermarket, where overall sales increased 14%. So it’s an accelerating top line to go along with improving economic environments.
In the U.S., consumer sentiment and spending continue to improve on strength in the equity and housing markets. Europe is also seeing moderate improvement with the PMI expanding for six consecutive months and return to modest economic growth. And in China construction starts and property transactions were strong for the year, giving rise to solid backlogs across our commercial businesses.
Okay, Slide 3. In addition to the accelerated organic sales growth and an improving economic outlook continued strength in orders decision us well as we enter 2014. At Otis, new equipment orders were up 8% with broad based strength around the world and the Controls and Securities global equipment orders grew 5% with double-digit growth in the Americas. In the aerospace business, commercial spare orders were up 20% in Pratt & Whitney and 19% at UTC Aerospace Systems.
Okay, taking a look at fourth quarter earnings on Slide 4 now. As always a few puts and takes as we close out the year. Earnings per share of $1.58 included a $0.11 of restructuring charges, partially offset by $0.02 of gains from tax settlements and the ongoing portfolio transformation CCS.
Absent restructuring and one-time items in both years, earnings per share increased 29% versus prior years and that was driven by a few different items. First of all, very strong performance at CCS and Pratt & Whitney and UTC Aerospace Systems which all delivered profits in excess of our guidance to you.
We also had the absence of a $100 million of inventory step-up cost that we recorded in the fourth quarter of last year related to the Goodrich acquisition. We also saw a lower tax rate this quarter. It was $0.06 better than last year and $0.04 better than what we had expected back in December. And of course lower Canadian Maritime helicopter program charges this year.
On Sikorsky, operating profit grew 10% including the absence of the 2012 charge related to the CMHP. Sikorsky shipped 77 large helicopters in the quarter and 240 for the year with 100% on time delivery to the U.S government. As we said in the press release we did not recognize revenue on any of the CMHP helicopters in 2013 resulting in a net $0.06 benefit versus our expectations. That’s $0.08 from the lack of deliveries, partially offset by a $0.02 charge for cost growth associated with the delay.
As we reported in the press, Sikorsky concluded a principles of agreement with the government of Canada on December 31. This is a positive step towards replacing the aging Sea King fleet. Preliminary pilot training is ongoing in Shearwater, Canada and it will be completed as planned this month, which will allow for the start of operational testing by the Canadian forces shortly thereafter.
The $89 million of liquidated damages associated with late deliveries were fully reserved in prior years. We continue to work with the Canadian government on a final contract amendment and we’re going to maintain our place holder of eight aircraft for 2014.
Okay, enough on Sikorsky. Let’s go back to the fourth quarter. All sales increased 2% and as I mentioned there was 4% organic growth, which is offset by two points of headwind from ongoing divestitures at CCS as well as Pratt & Whitney’s Power Systems business which was divested earlier in the year.
Free cash flow of 136% of net income in the quarter and we paid down an additional $1 billion of debt. It’s important to note in the last 18 months we’ve now paid out approximately half of the debt associated with the Goodrich acquisition. We also bought back an additional 200 million of shares in the quarter, which brought us to a $1.2 billion total for the year.
We remain confident in our growth outlook and we announced a dividend increase of 10.3% in October. The businesses continue to reduce their cost structure in 2013 and identified solid payback restructuring projects, totaling almost $500 million for the year. Restructuring was offset by one-time gains and spread across the business units. Pratt & Whitney led the way with over $150 million of restructuring. UTC Aerospace Systems, CCS and Otis each spent close to $100 million. And we continue to see pull from the businesses for additional restructuring as we entered 2014.
So strong close to what was a good year at UTC. I will be back to talk about 2014 in a few minutes, but first let me turn it over to Jay to take you through the segment results. Jay?
Thanks Greg. Turning to Page 5, Otis sales improved 4% organically in the quarter with new equipment sales up 10%, including double-digit growth in China and the Americas and modest growth in service. Operating profit was flat to constant currency with profit growth in Asia led by China is largely offset by continued factory transition costs in North America.
Profit in Europe is stabilizing. New equipment order growth remains robust, up 8% to constant currency with mid teens growth in China and the Americas and strength in the Middle East. New equipment backlog ended the year up double digit versus the prior year. For the full year, operating profit was flat at 4% higher sales.
On Slide 6; climate, controls and security increased profits 12% in the quarter and a 1% increase in sales, resulting in another sharp increase in margins of 150 basis points from prior year of 15.2%. Organic sales continue to steadily improve and were up 4% in the quarter.
The geographic mix was consistent with recent trends. Europe was flat, China was up high single digit while Asia overall was flat though mainly by a decline in Australia. Americas was up mid single digit driven by 18% growth in the residential HVAC business. Transicold was up 22% with solid growth in Eastern European truck and trailer business and a robust recovery in the container market after a weak quarter last year.
Profit growth in the quarter was driven by strong conversion on organic sales, restructuring savings and net productivity, which more than offset headwind from divested earnings. Orders for global commercial HVAC equipment were up low single digit in the quarter. Orders for global fire and security products were up 10%, although that was largely offset by a decline in the fire and security field businesses.
Global commercial refrigeration orders were flattish while Transicold was down mid single digit following a 70% increase in the third quarter. For the full year, CCS grew earnings by 221 million or 9% and a 1% organic sales increase. Operating margin of 15.7% was up 160 basis points from the prior year and comfortably above the 50% margin target set for 2015.
Turning to aerospace on Slide 7, Pratt & Whitney delivered strong results with 23% profit growth and 5% higher sales, resulting in margin expansion of 170 basis points. Organically, sales were up 14% reflecting growth across the businesses led by high teens growth in the large commercial engine business where aftermarket was up over 20%. The military engine business was up low double digits driven by a higher JSF program sales while Pratt & Whitney Canada was up mid single digits.
On a reported basis, sales were up 5% as the organic sales growth was partially offset by the power systems business divestiture. Profit growth in the quarter was driven by the benefits from higher organic sales and restructuring savings as well as lower E&D which more than offset headwinds and adverse large commercial OE mix, power systems divestiture and higher pension costs.
For the year, Pratt & Whitney delivered profit growth of 177 million exceeding its prior expectation of 150 million based on a seamless integration of IAE, solid execution of cost reduction and restructuring and improvement in the commercial aftermarket.
On Slide 8, UTC Aerospace Systems delivered a strongest quarter of the year with operating profit of 544 million and sales of 3.5 billion. Sales were up high single digit with commercial aftermarket up high teens and commercial OEM up 10%. Overall, military sales were flat to the prior year with mid single digit growth in military aftermarket, offset by a low single digit decline in military OEM.
Year-on-year profit growth was driven by the absence of last year's inventory step-up costs, higher aftermarket volume and continued synergy traction. As Greg mentioned, orders for commercial spares grew 19% on a year-over-year basis.
UTC Aerospace Systems delivered strong results in its first full year with operating profit slightly above to 2.1 billion and integration remains on track towards delivering solid growth in 2014 and beyond.
Turning to Sikorsky on Slide 9, operating profit increased 10% and 13% lower sales. The sales decline was driven by lower international military OEM, the military aftermarket volumes, which were partially offset by higher commercial shipments. During the quarter, Sikorsky shipped a total of 77 aircraft including 58 based on military platforms and 19 commercial.
On profit; lower overall sales volumes, the unfavorable mix of aircraft and headwind from higher pension and compliance costs were more than offset by lower year-over-year CMHP charges. During the quarter, Sikorsky delivered its first fully configured S-76D aircraft into service. Customer interest in the S-76D is strong with backlog in access of 600 million.
For the full year, Sikorsky delivered 240 aircraft. Operating profit of 644 million was down 16% and 8% lower sales. Based on 2013 results, we are updating our 2014 expectations to flattish operating profit and high single digit sales growth.
With that, let me turn it over to Greg for wrap up.
Okay. Thanks, Jay. So a good year for UTC. In aggregate, the business units delivered solid margin expansions of 15.7% and EPS grew 16% despite a slower than expected global economic recovery. On top of the solid financial results, we continue to achieve significant milestones on development programs and security wins for the future.
At Pratt, 31 GTF engines have now completed more than 7,000 hours and 16,000 cycles of full engine testing including 750 hours of flight time. The C Series engine achieved certification in February of 2013 and successfully powered the maiden flight of the C Series aircraft this past September. The A320neo engine is on track for certification at the back half of 2014 and our customers recognize the value of the GTF and have now ordered over 5,000 engines including options.
We also quickly realized the benefits of the Goodrich acquisition. In our Propulsion & Aerospace Systems organizational structure in 2013 when Embraer selected UTC to derive a fully integrated propulsion system, that is the engine and the cell and the controls along with the electric system and wheels and brakes for its second-generation E-Jets. These combined wins highlight our ability to leverage our technology across our aerospace businesses to win more content on new aircraft while providing greater customer value with more integrated systems.
Sikorsky continues to see strong civil demand from deepwater oil and gas exploration around the world and has a total commercial backload now of nearly $3 billion. And the investment in X2 Technology has paved the way for our agreement with Boeing to co-develop a demonstrator for the next generation of multi-role helicopters.
New three and four-year labor contracts were also ratified by the union membership at Pratt & Whitney and Sikorsky, respectively, and these agreements had a good result for both the company and our employees.
On the commercial side of the business, climate, controls and security continued to see successful leveraging in combination of our carrier and fire and security businesses and delivered a record 15.7% operating margin. Going forward, we'll leverage the combined capability of CCS and Otis in the new building and industrial systems organization to accelerate top line growth.
Otis had several key wins in 2013 including the Tianjin 117 and the Abu Dhabi Airport. Worldwide, Otis new equipment orders were up 14% from 2013 including 22% growth in China. It's a good momentum that will allow us to deliver solid growth in 2014, and really no changes to the expectations that we laid out in December.
The solid organic growth in backlog exiting the year gives us confidence in our sales assumption of 3% to 4% organic growth in 2014 and we expect continued recovery in our North American markets, slight growth in Europe and solid growth in China.
Okay, looking at the DoD budget, the developments in Washington are encouraging but it's still a little early to determine the impact on our businesses for 2014. We're still planning for a 3% to 5% decline on our U.S. government aerospace sales which we mentioned in December, but that will be more than offset by strong growth in our commercial aerospace businesses.
Overall, we continue to respect total sales of around $64 billion this year including almost $1 billion of headwind from divestitures. As always, we remain relentlessly focused on cost reduction on leveraging our global scale. Last year we invested nearly $500 million in restructuring and for this year we expect about 300 million, all offset by one-time gains.
Restructuring spending in 2014 should be evenly distributed across the quarter, so expect about $75 million of restructuring charges each quarter, while the gains are probably going to some in the middle of the year. Strong operating leverage across the business should allow us to deliver earnings of 655 to 685 this year.
We remain confident in that guidance range with earnings growth accelerating during the year. Specifically in the first quarter, we had about $0.22 of headwind year-over-year. We recall that last year's first quarter had $0.11 of net gains while this year we expect $0.06 of net restructuring. We also had about $0.05 of good news at Pratt & Whitney last year which is not going to repeat in this year’s first quarter.
So wrapping up with cash flow we expect to invest about $2 billion in CapEx this year after investing $1.7 billion in 2013, and that $2 billion should be the peak. The timing of course will be dictated by program schedules. These are critical investments for our commercial aerospace business as we prepare for an unprecedented ramp in production. And while these investments of the non-cash pension tailwind creates some pressure on cash flow we continue to target free cash flow equal to net income for the year.
So in conclusion solid year for UTC and the momentum we have actually in the year gives us confidence in 2014. We got the right strategy and the right portfolio in both the developing growth markets along with an organizational structure and experienced management team that will capitalize on the continued global economic recovery and deliver sustainable earnings growth both in 2014 and into the future.
So with that, Stephanie, let’s open up the call for questions. Thank you.
Earnings Call Part 2:
- Company Earnings
- Pratt & Whitney