United Technologies Corporation (UTX)
September 27, 2012 8:30 am ET
Gregory J. Hayes - Chief Financial Officer and Senior Vice President
Geraud Darnis - Chief Executive Officer of Climate, Controls & Security Systems and President of Climate, Controls & Security Systems
Pedro Sainz De Baranda Riva - President of Otis Elevator Co.
Michael B. Maurer - President of Sikorsky Aircraft Corporation
Louis R. Chenevert - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Finance Committee
Alain M. Bellemare - Chief Executive Officer of UTC Propulsion & Aerospace Systems and President of UTC Propulsion & Aerospace Systems
David P. Hess - President of Pratt & Whitney
Carter Copeland - Barclays Capital, Research Division
Joseph Nadol - JP Morgan Chase & Co, Research Division
Howard A. Rubel - Jefferies & Company, Inc., Research Division
Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division
Cai Von Rumohr - Cowen and Company, LLC, Research Division
Gregory J. Hayes
Previous Statements by UTX
» United Technologies Management Discusses Q2 2012 Results - Earnings Call Transcript
» United Technologies Management Discusses Q1 2012 Results - Earnings Call Transcript
» United Technologies Management Discusses Q4 2011 Results - Earnings Call Transcript
Just a couple of housekeeping details before we get started this morning. Should there be an emergency, and I don't expect one, there is an exit door right to our -- to your right, to my left here. Follow me, but don't get in my way.
Secondly, for those of you who need restrooms, they're located right down the hallway to the right. Also, you should note, this is being carried out on the Web at utc.com, and all the materials are also available on the Web.
Just a quick overview of the day for you here. I'm going to start out, just give a brief overview of UTC. We'll take a couple of questions. And then we're going to go hear from the commercial companies. We're going to start with Geraud, talk about CCS. Then we're going to hear from Pedro. We'll take a break about 10:00, then Mick will come back and talk about Sikorsky. Alain will come up and talk about the PAS, and then you'll hear from Dave. And then lastly, Louis is going to close it out around 11:45 or so. He'll have some closing comments, as well as take your Q&A. So save all of your good questions for the boss.
Lunch will be at about 12:00. There will be a tour at 12:45 or so, led by John Saabas. Is John...
Up there in the balcony.
Gregory J. Hayes
There's John. Hi, John. John is President of Pratt & Whitney Canada. Most of you know John. He'll lead the tour around the facility. And we'll depart for the airport around 2:45. So again, that's the day.
Okay. Just a quick reminder. Of course, all of the forward notices -- there will be forward-looking statements, which are, of course, subject to risks or uncertainties. Actual results may differ materially from what you hear, although we hope not. And all materials and SEC filings, of course, are available at utc.com.
Okay. All right. So why do we invest in UTC? What's the thesis? It's actually quite simple. Right? And we've talked about these things for a long time. Global franchises positioned for growth in both the developed and the emerging markets, market-leading franchises in all of our businesses.
We also, today, will talk about the focused portfolio. Right? We are focused on commercial aerospace, on military aerospace and on commercial office and infrastructure projects. All right. We'll talk a little bit more about the transformation, but the key is this is a much more focused company than it was, just 12 months ago.
And we have the ability to leverage global scale. Why does UTC stay together? Because of the ability to leverage the scale of 227,000 employees around the world in technology, in supply chain and, importantly, in leadership, as we can move people from business to business and share best practices, all of that with the idea of delivering value to our customers and our shareowners.
Innovative game-changing products. You'll hear a lot about that today from all of the businesses. We make big investments, but we do it for the long term. And of course, last but not least, strong cash generation, consistently at 100% of net income or higher. And over the last 10 years, we've returned more than 65% of that cash to shareowners in the form of dividends or share buyback.
So importantly, as we talk about the transformation of UTC, I would tell you, it's been a busy year. It's been a confusing year, too, I know, because of all the changes. But the good news is we're just about done. We're done with big deals. We're almost done with the divestitures. And as we move into '13, what you're going to have is a more consistent, more easily understood UTC.
And we've done 2 big deals this year, 2 big acquisitions. You -- we all know about Goodrich, a great business. You're going to hear about that from Alain and company. A great, great deal, and a deal we like better today than we did even a year ago.
And probably one of the biggest aero deals ever, IAE, that nobody ever heard about. And we don't talk about it much, but it really is a great, great acquisition. And you'll hear from Mr. Hess as he talks about the benefit of IAE, truly transformative on the acquisition front. But I think, as you've heard Louis say in the last couple of months, I think we're done on the left-hand side in terms of big deals for now. Got a lot of work to do to digest these, but we're on track.
As far as the divestitures, again, a busy year. The Hamilton Sundstrand, the industrial businesses will close around mid-December, we believe. $3.5 billion sale price. A good multiple in a very tough marketplace, in fact. Great businesses. We love those businesses.
I came, of course, from one of those places, and it's hard to leave them. But they weren't scalable, and I think, again, we did the right thing for shareowners in terms of realizing that value. We also announced, of course, the Pratt & Whitney Rocketdyne sale to GenCorp. That's pending regulatory approval, should close early in the first quarter of next year, we would think. We also talked or announced that we're in the process of selling our UTC Power business. And of course, we have sold the Clipper business. Clipper is gone. It's out of the portfolio as of early August.
We'll talk a little bit about Climate, Controls & Securities portfolio transformation. That's the piece that's not quite all done. I think Geraud will tell you, we've done about $350 million of divestitures, but a few more things to do there. But again, for the most part, by the end of the year, all of that will be done.
So what does UTC look like? This is UTC restated for 2011, taking out the discontinued ops, putting in Goodrich, putting in IAE, went from a $58-billion business to a $65-billion business. And of course, we've increased the aero mix by just over 50% now with the acquisitions of Goodrich. Again, focused on the core commercial buildings and aerospace.
Just a quick update on the Goodrich financing. You know we went to market in late May and early June, had a very successful debt offering. We also issued about $1.1 billion of mandatory convertible units priced very, very well. Average cost of the financing, all in, is about 2.8%. So on the $16 billion -- or $15 billion or so that we actually borrowed, a very, very good rate and, obviously, a lot better than having to issue $4 billion of equity on top of the debt. So at the end of the day, you can see we added about $18 billion, $19 billion of debt. That includes the Goodrich legacy debt of about $3 billion.
Now, of course, that was $2 billion. Then you write it up in purchase accounting so you get to $3 billion. But the plan is, in the next couple of months, we're going to pay down $7 billion of debt. $4 billion is going to come off the balance sheet from our foreign operations. Another $3 billion is going to come from net divestitures, primarily from the industrial businesses. You'll notice that the Rocketdyne is not counted in there. That'll happen sometime next year, give us the opportunity to pay down a little more.
What you also don't see on this chart is the IAE deal, which we closed on June 30. It took about $1.5 billion of foreign cash off of our balance sheet as well. So we've been able to mobilize the foreign cash that's on the balance sheet. We're on track to meet our commitments with the rating agencies in terms of the debt buydown -- debt takedown, and I think we're well, well established.
So let's talk about 2012 for a couple of minutes. Back in July, we updated the guidance for the year. We took sales to $58 billion -- to $59 billion. That's organic growth of 0% to 2%. We talked about EPS in a range of $5.25 to $5.35, recognizing the slowdown in spares that we've seen on the commercial side, as well as some of the challenges that we've had at Otis. And, of course, we had also talked about free cash flow would be very strong again, at least equal to, but probably greater than, net income.
So since mid-July, when Louis and I were on the conference call for the second quarter, just go back and take a look at the key assumptions here on the left-hand side. From an end-market standpoint, the China new equipment market, both at Otis and CCS, is about in line with our expectation. And you'll hear more about that. The commercial aero aftermarket remains a question mark. It remains challenging. And we had expected a second half recovery. We haven't seen it yet, hear a little bit about that from Dave.
North American residential HVAC, about in line with what we had expected. Global economic outlook, I guess that's as big of a question -- perhaps a bigger question today than it was 2 months ago with the European situation, QE3 in the U.S., additional ECB bond buying. None of it seems to make much of a difference, because we haven't attacked the structural issues underlying the problems in Europe and the U.S. So again, China is slowing down, we think, but still a question mark.
Goodrich dilution, we're right on track with that. That's the $0.30 we've talked about. Commodities/E&D, right about on track. And FX, actually, has been a plus. Remember, at the beginning of the year, we had assumed EUR 1.35 to the dollar. Proceeded to see that go down to about EUR 1.20, so we revised guidance. We took euro all the way down to EUR 1.20. You can tell we're not very good currency traders because it's at EUR 1.285 or so this morning. So again, a little bit of good news out of FX. I assume that's going to last -- I think the average rate for the third
markets. Most of the developed markets still are between 30% and 40% below keep, and there remains a big opportunity for growth just to get back to where we were in 2007.
We're also going to capture a lot of organic growth, and you're going to see that from Dave Hess, just through the new game-changing product innovations. I think Geraud also has a good story here in terms of the commercial HVAC, what we've been able to do from a product innovation standpoint and how that's, today, driving solid, organic growth.
We've got productivity and margin expansion. All right. We talk about this all the time. The key for us is flawless program execution. We're making big investments in new technology. We've got to do that on time and at the right cost.
And of course, continuous cost control. So far, this year, we've initiated $500 million of restructuring, almost $2.5 billion over the last 5 years. We went into the year, I had no idea that we'd be anywhere near that. I think, again, as the economy has not recovered, we've identified more gains, we've taken the opportunity to take more cost out of the business. And the good news is there's always something more to do.
I think the business [indiscernible] you'll hear from them today, there's always opportunity to
new facility in Chongqing. We'll talk a little bit about that. But we also have big facilities in Monterrey, Mexico. CCS has big facilities in India. Pratts got the engine center in Shanghai. Sikorsky and the rest of the aerospace business has very big presence in Poland. We have presence around the world, and we're taking advantage of low-cost sourcing opportunities, as well as our ability to sell into these markets.
I think, importantly, even in a very, very difficult year, we continue to invest in technology. So this year, we'll invest about $3.5 billion. This is just the legacy UTC business, ex Goodrich. We'll talk about that in a second, but I think it's important, we're going to spend about $150 million more in E&D this year than we did last year. About half of that comes out of Pratt & Whitney, but we continue to make investments really across the portfolio. The mixed Sikorsky business that we're making it on the commercial side and we're making, of course, with Hamilton. The good news is this is the peak year for E&D in the base business. And I say that because by adding in Goodrich, we'll add about $300 million of E&D this year and about $550 million or so, $600 million next year.
So again, the number will go up. But what you will see at Pratt & Whitney, especially, E&D is going to start to come down as we certify the CSeries engine this year and the others over the next couple of years. So peak this year at base business, but we'll still go up as a result of Goodrich.
Okay. So that's the organic side. I think we're well positioned. Emerging markets, great products, great franchises. Let's talk a little bit about my favorite subject, cost.
We have the great ability to put process into our businesses. Back in 2006, Louis laid out this big goal to get the business to be 70% ACE gold and silver. I can tell you, we have exceeded that. We're about 82%, above our 80% goal for this year.
We've also been -- or had a big focus on our supply base. You can see, back in 2008, only 34% of our suppliers were at the Gold or performing level. I mean, only 34% of the suppliers were delivering on time with a good quality. That, today, is at 71%; again, exceeding the goal. The beauty of this is we can take these same processes around ACE, in the supply base and ACE in our factories, and we'll roll this out throughout the Goodrich organization. And you'll hear Alain talk a little bit about that.
As a result of this, I think the true measure of the success is what's happened to the cost of poor quality? And you can see, we're down 25% in the last 6 years. So again, good, good progress there.
We also have opportunity on the supply chain to leverage the scale of UTC. Right? The key, of course, is achieving our target cost on all of the new platforms that we have out there. Aggressive pricing, but we have plans in place to actually get the target cost as soon as the engines go into service. We have a lot of work to do.
The other thing is we have to make sure we have capacity. You recall, in 2006, the last ramp in the commercial aerospace cycle, capacity was an issue in the supply base. You'll hear more about this from Alain. We've actually put in place processes with our suppliers to assure capacity in this next ramp up.
We're also taking a look at non-product cost. And one of the benefits of the Goodrich acquisition, we actually went in and took a hard look at Goodrich's non-product costs, which is about $1.1 billion of spend. We add that to about $9 billion of UTC spend, we've got a $10-billion bucket of cost to go and attack. And what we found, of course, going into the Goodrich detail, is there were opportunities for both Goodrich and the rest of UTC to reduce cost. And we have a team in place that's actively looking to take out about 5% of the cost in the indirect non-product spends. So big opportunities over the next 3 or 4 years.
Okay. Lastly, strong cash generation. We talk about this all the time, but it is a hallmark of UTC. Generate free cash flow equal to or better than net income. And you can expect the same this year, and you can expect the same next year.
The key, of course, is what do you with all that cash? Well, over the last -- what is this, 5 years -- we've spent about $26 billion on acquisitions. Obviously, that's a little tilted because of the Goodrich and IAE deals. But yes, we made some other good deals over this period. The GE Security business, very, very good business. Noresco, Marioff, GST, all strong franchises and good places to invest our dollars.
As we've said, I think we're done on this side of the equation for a while. The key now is on the right-hand side, is to resume share repurchase, and we will. Next year, we'll target at least $1 billion. If cash is better and we're able to pay down debt faster, I think you'll see us -- see pressure on that number to go up. I know Louis wants that number to be much bigger. I'm going to be a little bit more reserved on that, but at least $1 billion, and we'll see where we go. And again, this is more to do with the rating agencies and maintaining the A rating on the debt. But we feel very good about the prospects over the next several years to buy back and resume share repurchase at an even higher level than what we've had historically.
Okay. Let's talk about 2013. It's what you guys are all here for, right? First of all, a lot of things going on. There's a lot of pluses out there for '13. There are some question marks and, of course, there are some things that are going to be headwinds next year. But let's focus on the positive first, shall we?
Obviously, we're going to get good news out of Goodrich and IAE. We will get $0.50 of accretion next year from Goodrich, as well as the absence of the transaction costs this year, which will add about $0.70 of earnings to our base business year-over-year.