Q3 2019 Earnings Call
Calls today are great case, Chairman Chief Executive Officer, acute Jory, Executive Vice President and Chief Financial Officer, and Carolyn Vice President Investor Relations.
Call is being carried lie on the Internet and there was a presentation available for download from UTI sees website at www Dot UGC Dot com.
Please note, except where otherwise noted the company will speak to results from continuing operations, excluding restructuring costs and other significant items.
Non recurring and or non operational nature.
Referred to by management, Oh, there's significant items.
The company also reminds listeners.
The earnings and cash flow expectation and any other forward looking statements provided in this call are subject to risks and uncertainties.
Yes, he sees FCC filings, including its forms 10-Q, and 10-K provide details on important factors that could cause actual results could differ materially from those anticipated in the forward looking statements.
In addition in connection with the proposed Raytheon merger to be discussed today, you can see has filed with the FCC.
A registration statement, which includes a prospectus.
<unk> <unk> proxy statement you do you see in Raytheon that contains important information about UGC Raytheon merger and related matters.
The call becomes open for questions. We ask that you want your first round one question for color to give everyone the opportunity to participate.
Mass further questions my Reinserting yourself into the Q as time permits. Please go ahead Mr. Hayes.
Okay. Thanks, Daniel and good morning, everyone, we start out by apologizing for the consistency.
Calls for the last year or so but you guys saw the press release. This morning. It was another really good quarter for for U T X.
Reported adjusted Vps of $2.21, and that's up 15% versus the prior year a continuation of the performance that we've seen for the last year.
Sales were up 18% organic growth of 5% and importantly margins expanded that each of the four segments.
Free cash flow.
$2 billion on a quarter really really good number.
So based on our year to date performance, you're going to raise our outlook for the year. Once again and we now expect adjusted EPS of $8.05 eight hours and 15 cents for 29 team that's up from our prior expectation of seven they need to eat all five kill we'll take it through the puts and takes to that and just a minute.
Well, we're going to raise our free cash flow out what can we now expect 5.3 to 5.7 billion for the year.
Yeah, that's up from our prior expectation before and after 5 billion.
Just to note 500 million of that increases from a portion of expected portfolio separation costs, primarily the tax related payments will probably get pushed out into 2020. The remainder is good news from operations.
So no surprise here 2019 is shaping up to be a really good year for U T C and the businesses are focused on driving results in meeting customer commitments.
Beyond delivering on the current year, we continue to execute on her strategic portfolio initiatives.
Those of course include the integration of Rockwell Collins, the separation of Otis and carrier in the Standalone public companies.
And lastly of course, the merger with Raytheon.
So looking at the results in Q3 columns continued to deliver great performance with legacy Rockwell once again exceeded our expectations.
Adjusted EPS accretion in the quarter from legacy College was 16 cents.
The full year, we now expect to see around 60 cents of accretion from Rockwell Collins, that's up about 10 cents from our prior expectations and about 25 cents up from our outlook coming into the year really good performance.
This performance is really highlighted by accelerated cost synergy capture which only strengthens our confidence in our ability to realize at least 600 million and acquisition related cost synergies by year for.
The team is also targeting a pipeline of <unk> billion dollars in sales synergies.
Which over 175 million already been captured in orders.
Okay, maybe just a second on the spend we continue to make good progress on day, one operational readiness and the public company management teams are now largely in place.
As I said last month, we continue to target April 1st as the spin date for both businesses.
That is of course subject to the time, either the tax rulings from the U.S. and Canada, which we continue to expect to received by year end or shortly thereafter.
However, no surprises with the portfolio separation, we remain on track.
Finally earlier this month, we were very pleased with both UGC and Raytheon shareholders overwhelmingly approved the combination of aerospace business and Raytheon.
Well, we continue to work closely with regulators for approvals required for the transactions and we're making good progress informing the management teams for Raytheon technologies no surprises, so far which is really the good news.
I remain very excited about the opportunity the mergers going to create for a best in class technology, driven global aerospace and defense system provider.
And we continue to expect the transaction to close.
Currently following the completion of the portfolio separations.
So with that let me turn it over appealing Carol will take a good results and I'll be back to wrap it up and then we'll take some QNX.
Mr jewelry.
Thanks, Greg Simon slight due.
For the third quarter deported shades of 19.5 billion what up 18%.
Including 5% organic growth and that's on top of 8% organic growth last get into third quarter.
We also had 14 points on M&A benefit mainly that Arclight Cogs acquisition.
Foreign exchange was a one point headwind in the quarter.
Adjusted EPS was too dark 21 cents up 15%, especially the bride he is.
On a GAAP basis, EPS was $1.33 down 14%, what's it's Brian you had an included six cents of restructuring and 82 cents up net nonrecurring charges, the largest which was 73 cents related to the portfolio separation activities.
Free cash flow for the first nine months of 2019 was $4.7 billion up 48% on a proxy making went into half billion dollars compared to 2018.
This strong year to date performance gives us confidence in the increased free cash flow outlook for the year that Greg mentioned earlier.
As a reminder, we expect significant outflows in Q4 from the facts and transaction costs related to the portfolio separation actions.
Overall, there is no change to our estimate of two and a half the $3 billion for the total onetime portfolio separation cash costs. However, within that backs cost will be lower than the 2 billion people expecting earlier.
And debt redemption, and other transaction cost will be slightly Hyatt.
Turning to slide three you see the drivers <unk> organic growth in Q3.
Looking at the commercial businesses first.
In the Americas sales were flat.
It's up low single digits and Gadhia down slightly.
On an encouraging note award activity for Otis in North America remained strong in the quarter.
On very high levels already.
Got it transport reputation was down it'll that he had off a high compare.
Within EMEA sales, but also flag in the quarter.
Economic outlook across Europe remains mixed and because they're not expectations coming into the year.
Activity levels in the Middle East remained very low, but both guy didn't notice.
In Asia sales were up 7%, China sales went up 11%, including me beans growth at Otis.
Importantly, this was the eighth consecutive quarter of positive price mix and Otis new equipment orders in China.
On the aerospace side commercial OEM sales were down 1% driven by Collins, aerospace, which was down 8% done on organic basis.
Growth in new platform sales, there was more than offset by the expected declines in legacy platforms.
And with me commercially at OEM sales were up 13% organically.
What commercial aftermarket sales were up 11%.
We continue to see healthy air traffic and strong fleet utilization.
At Goblins aerospace commercial aftermarket sales were up 20% organically.
For listening for the legacy you pass business was up over 30% driven by continued macro demand and airline activity.
I didn't Whitney saw commercial aftermarket growth of 6%.
Organically military sales went up 15% at Pratt and Whitney and 14% to Collins aerospace driven by both OEM and aftermarket strength across keep platforms.
Now before I hand, it over to kind of just a few comments on an updated 2019 outlook and the moving pieces.
As you saw the have improved adjusted EPS and free cash flow outlook range for 2019, we have also tightened I see is range for 2019 and now expect total reported sales of 76 to 76.5 billion West is our pride outlook of 75.5 to 77 billion.
Updated sales range reflects the adverse impact of the stronger U.S. dollar.
As bad as a reduced organic sales outlook for Caddying.
More than that in a minute.
You'd be sea level, we continue to expect organic sales growth of 4% to 5% given the strength in the aerospace businesses.
Now at the segment operating profit levels reduced outlook at got it is offset by the continued strength at gardens aerospace like last quarter. We've included a chart in the appendix on slide 12 with updated sales and profit walks for both those businesses as a reference.
So what's happening it got it.
In Q3, we saw continued weakness in orders in the refrigeration business.
Hi distributor inventory in the U.S. residential HVAC channel.
And a softer EMEA market.
We now expect organic sales for gatti, it would be down low to mid single digit into fourth quarter.
With low double digit decline in the reputation business.
We have reduced guardius food when he or she has expectations by approximately $500 million and profit expectations by the corresponding approximately $125 million.
The change in profit also includes nearly 25 million of negative impact from the significantly lower discount rates used for evaluation up long term liabilities, including wanting to be.
However, looking beyond the short term challenges fundamental growth drivers for carriers end markets remain intact got it continues to have significant value creation opportunities to they focus on innovation DNA adoption and portfolio optimization.
On the positive side, we see a 125 million dollar improvement in the full year adjusted operating profit outlook for Collins aerospace.
Even by continued strength in commercial aftermarket both at hate you Das and Rockwell Collins.
Hi, military sales and high synergies from integration efforts.
Both orders and Pratt continued to perform them and we have raised the low end of their respective operating profit growth outlooks.
Below the segment operating profit lines, we now expect a full year tax rate of approximately 22.5% compared to our prior range of 23% to 24%.
There are other puts and takes that that's slightly negative.
Significance, we realize the pension curtailment gain of 98 million in the third quarter that was adjusted out of earnings as you saw however, as part of those actions, we but also to quite a true up the 2019 pension expense discount rate based on the discount rate, which resulted in a four cents headwind to our non service bench.
An income for the year, mainly in the fourth quarter.
With that let me turn it over to count.
Okay. Thanks Akhil.
I'm on slide four I'll be speaking the segments at constant currency as we usually do.
And as a reminder, there's an appendix on slide 15 with additional segment data you can use as a reference.
All right starting with Otis.
What is sales were 3.3 billion in the quarter, it's up 4% organically.
New equipment sales grew 2% high teens growth in China was partially offset by low single digit declines in North America and EMEA.
Service sales growth was broad based and it was up 6% in the quarter.
New equipment orders grew 6% in the quarter with growth across all major regions.
Orders in the Americas were up 10% I was driven by the timing of major project bookings in North America Asia.
Asia, excluding China, and Europe , so orders up mid single digits in the quarter.
And China orders grew 5% as the business continues to benefit from favorable pricing and mix and that's the six consecutive quarter of value growth in China.
Operating profit was up 7% at constant currency driven by strong volume growth.
As well as favorable price and mix in both new equipment and service.
[noise] this marks the fourth consecutive quarter for operational profit growth at Otis and it's largely from consistent improvement in the profitability of the service business.
Foreign exchange translation was a two point headwind to sales and earnings.
Given the strong year to date performance, we expect that Otis will finish at the high end of their constant currency profit growth range, that's up approximately 75 million.
Profit growth, an actual FX will be in the range of zero to 25 million.
Turning to slide five carrier sales were flat organically in the quarter.
Transport refrigeration was down 6% container down more than 20% and commercial refrigeration down 5%.
Global each HVAC sales were flat with North America residential down, 1% and global commercial HVAC up 1%.
Global fire and security was up 2%.
Carrier equipment orders contract at 11% organically in the quarter as primarily driven by a decline in refrigeration orders.
Transport refrigeration orders were down 68% driven by higher than average cancellations cover coupled with tough compares in North America truck trailer, you'll recall that orders for transport refrigeration were up more than 90% in Q3 of 2018.
Commercial refrigeration orders were down 5% in the quarter.
Fire and security product orders were down 2%.
Global HVAC orders were up 6% with both North America residential and global commercial HVAC up mid single digits.
At constant currency operating profit was up 1% in the quarter pricing benefits and material productivity net of tariff impact were partially offset by lower volume and mix.
Foreign exchange translation was a one point headwind to earnings.
As a kill reference volume is expected to be down in the fourth quarter and as a result, we are lowering carriers outlook for the full year. We now expect organic sales to be flat with operating profit down 100 to 125 million at actual currency.
Okay shifting the Pratt and Whitney on slide six sales of 5.3 billion were up 11% on organic basis, and 10% on a reported basis.
Commercial OEM sales were up 17% on higher Pratt and Whitney, Canada engine shipments and a favorable mix of large commercial engine sales.
Commercial aftermarket sales were up 6%.
Early GTF shop visits contributed to the growth as well as V 2500, overhauls, returning to expected levels with inductions up 10% versus the prior year.
Favorable aftermarket content at Pratt and Whitney Canada also contributed to the growth.
Military sales were up 15% driven by the continued ramp of the F 135 program and strong aftermarket demand.
Operating profit of 471 million was up 15%.
Results benefited from commercial engine mix continued GTF cost reduction and drop through on higher commercial aftermarket and military volumes.
These tailwinds more than offset the absence of prior year commercial aftermarket contract adjustments and higher Yan DNS DNA.
Looking ahead, we expect pride and we need to grow full year operating profit by 225 to 250 million.
Turning to Collins aerospace systems on slide seven.
Sales in the quarter were 6.5 billion up 2.5 billion on a reported basis and up 7% organically.
Operating profit of 1.2 billion was up 568 million.
On a pro forma basis, which includes results for Rockwell Collins in the third quarter of 2018 Collins Aerospace delivered operating profit growth of 23% on 6% higher sales.
The pro forma sales growth reflects continued strength in the commercial aftermarket in defense channels.
Partially offset by lower commercial OEM volume.
And commercial aftermarket sales were up 17%.
Passenger traffic investment passenger traffic as well as investments and initial provisioning and demand for modifications and upgrades all remain strong.
Military sales were up mid single digits, driven by higher F 35 volume and aftermarket demand.
Commercial OEM sales were down low single digits, driven by declining volumes on legacy programs as a killed referenced earlier.
Operating profit growth was driven by the contribution from Rockwell Collins drop through on higher organic sales as well as synergy benefits and this growth was partially offset by mix headwind and higher SGN a spend.
Given the continued end market strength and solid execution at Collins, we now expect full year reported sales growth of approximately 55% with organic sales up mid to high single digits versus our prior outlook of mid single digits.
And we now expect Collins aerospace operating profit to be up 1.85 to 1.875 billion for the full year.
That's an increase from our prior expectation of 1.7 to 1.75 billion.
And with that I'll hand, it back over to Greg.
Great. Thanks Carol.
So as always a few moving pieces, but overall I would tell you. We're very pleased with our third quarter results and we're confident in our improved adjusted EPS and cash outlook for 29 team.
Well the macroeconomic environments shows varying degrees of strength for our commercial businesses, depending upon the region, we continue to see growth in commercial or traffic as well as favorable trends in defense spending.
The combination of which bill benefits, both print and combs aerospace as you've seen this quarter.
We do have some near term pressured carrier, but I'm confident that they've got low and team are taking the rate actions to position the business to drive long term shareholder returns.
We see solid long term growth fundamentals on the commercial end markets driven by urbanization growing middle class and regulatory changes all drivers that will translate into growth for carrier as well as orders.
Across to all of UGC, we remain focused on the key priorities, which remain unchanged first and foremost its executing on customer commitments.
Continuing to innovate continuing to take cost out and to be disciplined capital allocation.
I remain very excited about the future for Otis carriers Standalone public companies and for the future review, TX as we merge with Raytheon to become Raytheon technologies.
Okay.
So before we go to Q in a just a couple of personnel announcements something we don't typically do here I think if some of you probably have already heard Carol Lane.
This is his last earnings conference call. After about three years in the seat done a great job Carol coal signed Queudrue for those of you that follow that type of thing will become president of our commercial engine business at Pratt and Whitney reporting to Chris Kallio and that will be effective but the first to the your somebody with him go ahead.
Girls on a great job I hope all of you have a chance to thank him for that and we wish him well as we entered the keys to the future Whitney.
Good luck.
Secondly, just and perhaps more importantly aqeel.
Sure, we will be stepping down as CFO of UGC November onest.
For kill this caps, a 31 year career PTC.
Well, everybody I'm sure, we'll miss him I will personally miss him well for his sage advice as well as for his calming influence.
Our goal however is to make you missed some not so much by ensuring a seamless transition.
We feel as you know has been instrumental in the transformation of the you to see portfolio.
And he's been a great partner.
If there is a better CFO in corporate America I haven't met them.
It includes me so we feel thank you and good helps to you in Shashi in return and I'm sure you guys would keep busy best of luck.
So with that effective November 1st Neal Mitchell.
Currently the Chief Financial Officer, Pratt Whitney will assume the job of.
Acting CFO , Neil will hold that role until the merger is complete with Raytheon.
Sometime early next year shortly after the.
Separation of the commercial businesses and Neil joins US joined US in 2014 from Pricewaterhouse, where he was a senior partner.
Many of you know Neal from his time at.
At Pratt.
And before that as controller UGC, So again, we wish bone, Neil well and the whole team as we go through these transitions. Our goal again is to make this as seamless as possible. So best of luck to all of you and with that let me open up the call for questions.
Ladies and gentlemen, I ask the question you will need to press star one on your telephone.
To withdraw your question press the pound please standby, while we compile the Q and a roster.
Our first question comes from Carter Copeland nucleus research your line is now.
Hey, good morning, guys and congratulations Carol on the the move and Aqeel. It's it's been an absolute pleasure to work with you over the years. So we.
I wish you the best in retirement and you will be missed.
Thank you thanks guys.
Just.
Some clarification around the aftermarket strengths, Greg I mean, obviously 80 SP and that mandate has had a big impact on.
Sales growth this year.
Can you give us a sense of what your updated thoughts on that contribution are and I wonder if you have any insight there's clearly some indirect sales benefit for.
That that that upgrade cycle, where you have an airplane in there and you do some other work while you do that mandate work and I wondered if you might have any insight on how much indirect benefit you had from 80 SP. In addition to the direct thanks.
Thanks, Carolyn first of all Whats important is you look at the third quarter results at Collins.
SB mandate actually was not a driver of growth. It really was provisioning in support of aircraft that are already out there. So we saw a decent parts growth ats be was relatively flat.
But provisioning as we drove this is the strength, which is again its episodic so I wouldn't get excited about 30% provisioning growth, it's not going to repeat itself here in the fourth quarter.
The same time the ABTSP Mandiant certainly is driving growth it's been a key driver of some of the good news. It was not really expected on the columns acquisition. This year and keep in mind that a DSP made it has to be completed in the U.S. here by the end of the year in Europe by June of next year, So, we'll get a little bit of a benefit, but that's a pretty tough comps.
There is we think about next year for Collins, Bofa ABS be as well as just the overall strength in the aftermarket so again.
No drama I think it's all what we had expected.
As far as.
Ancillary business associated with the DSP mandate again. This is kind of a one off thing we really haven't haven't seen anything that would indicate that we're pulling through a lot of additional work is this.
Is this a mandate mandated changes that have been occurring so I think it's really just it goes to the fact theres a huge.
Demand for spares and for provisioning as people are looking for capacity.
Capacity is at an all time high and with the 737, Max continuing to be grounded people are flying older planes a lot longer.
We expect obviously that trend is not going to continue once the Max gets back in the year. So again good news for us this year, but a little bit of headwind next year.
Great. Thanks for the color Greg.
Sure.
Thank you.
Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Your line is now.
Hi, Good morning, guys. This is kristine liwag, calling in for Ron.
There are news earlier this week about the Airbus eight to 20 program can you provide any details on how we should think about the progress of the engine on that program and the problem and the progress of the success.
Yes, Hi, Chris is maybe just a just a quick word we did have a couple of we've had an issue that we found the.
GTF engines on the.
Eight to 20, that's the.
1500, PW 1500.
It's the same engine. This on the Embraer 195 as result of.
This issue, we're actually had a mandated inspection period for the airlines and so what you saw earlier. This week one of the major operators actually put their fleet for about a day to have to go through an updated all the inspections.
That went off without a hitch should we continue to to heavy accelerated inspection and this engine keep in mind. This has nothing to do with the Athree hundred 20 fleet, which is the PW 1100, which is the vast majority of the fleet is probably about 100. These these engines out there and service today, we're working through the root cause.
Analysis, I don't have anything to report or the fact that.
We remain confident in the engine.
Clearly you've got an issue like this.
We're on top of it you guys are working through.
It's not a safety, it's not a safety issue first and foremost that's an important thing to remember. This is just increased inspection routine that we have there is a 80 out there for that and Pratt has instructed our asked the operators we'd be feel badly about what they're going through but they still have to just have increased inspections on for this issue, but not no.
Other concerns at this point.
Great Thanks to the color.
Excuse to.
Thank you. Our next question comes on Julian Mitchell with Barclays. Your line is now open.
Hi, good morning, and I wish carried on the Q hold the best and thank you for the help.
In terms of I guess my question really around the outlook in Korea.
Sales and guided to be down in Q4.
Finally down through much of next year, just given what will happen.
For duration business.
So just wondering what your outlook was for that revenue line in the coming courses and also do you feel that you're doing enough on the cost base MISO restructuring spending was up almost double in the nine months a carrier.
You got a pretty big EBIT decline in Q4.
Should we see even more acceleration in restructuring coming up in that business.
So first just to give you a.
Bridge for what has changed in catty edge.
Isolated largely due to businesses one is the transport the definition business in total, but transportation specifically Julian if I was to break down to 500 million dollar decline in sales from our prior outlook.
100 million of that did just FX dollar has been strong that 200 million is on that if we today in business and about 150 on the residential HVAC business, we just going to be flattish now compared to our expectation a mid single digit growth so not a decline just.
Mitch.
Flat growth profile that transport reputation is it had the biggest drama is and that's because some of it is just because we had tougher compares some of it is just declines in the backlog that we have seen both on the container in the North American truck trailer side and some weakness in Europe truck trailer that business I'd lived through that at least for short cycle.
In the in the last 2025 years and I'll tell you that goes down sharply, but it comes back pretty choppy as about the redeeming feature of that business is that the underlying growth of refrigerated could trade continues unabated at 3%, but he had type of levels.
Even if you believe that this Chuck them perturbation, we are seeing I'll give you just one example, and it can apply to contain that as well, but if you look at the North America truck trailer market today, it's about 46000 units, we expect but they see it 15 years ago that market on average what somebody in the mid Thirtys 33 to 35000 units that would suggest a combined.
Growth rate up 2% in terms of capacity or the market when the underlying create has been growing at 3%.
So even if there is some short term adjustment and there is some decline that happened in North America directly led next did it will come back whether it's the second half of next year. Let me just when do you want but just come back and come back strong. We saw the same phenomenon containers I'm not too worried about that the good news on the residential HVAC side is I think the fundamentals by end market remain pretty strong.
Team.
I've been impacted more by the two step distribution that we had so the inventory in the channel is higher than what would have liked what we would have liked and that's impacting shocked.
Got it sales.
Overall again not to be consign and restructuring certainly is being ramped up yeah. Let me just pile on their little but a couple of points. So we have been taking a lot of costs, we've reduced over a thousand headcount at carrier.
The last few months and that will continue on is.
Mr get living company adjust the workforce to the size of the market.
Obviously, it's a it's a challenge when sales are dropping.
These very profitable businesses.
And we know the sales will go back as a kill says the fundamentals remain very strong and I think even of the U.S. Rosy was was essentially flat in the quarter.
Off of a pretty tough compare from last year, where we saw pretty good growth of that market. So theres no panic cured carrier business remains strong I think the thing to keep in mind is margin still expanded by 30 basis points even with.
All of the the drama in the marketplace and just as importantly, as the market in China, we actually saw a decent growth.
I think thats like 5% growth in commercial which is.
Pretty solid Otis the same thing we saw really good strong growth in orders and even the so positive.
Sales again as we've talked about so the fundamentals of both the commercial businesses remain really good and I hate people to get too worried about this refrigeration piece, which.
Through kills point, it's very cyclical, but it does come back whether its container or whether its truck trailer Europe or the U.S. and begin the high confidence in Dave and team will work through this.
Great. Thank you.
Thank you and our next question comes from Steve Tusa Jpmorgan. Your line is now open.
Hey, good morning.
Thanks, Steve.
So just on this 80 SB thing it I'm not an aerospace analysts maybe I'm not as much of an expert as the other guys but.
Honeywell talked about it as being like extremely minor like less than maybe 50 basis points of of growth on their total aerospace business over the last couple of years I mean, you talked about it as being a tough comp, but is that you guys or maybe even a bigger aerospace more diverse aerospace business. So.
You know a is that kind of the right.
Got a framework for how big that is because it just seems like it's like being talked about it just should not be that big of a deal.
Yes, the Ats be mandate is driving about $250 million to $300 million of sales. This year with good margins. So thats. What you have to assume I think on a normal basis, you would probably see $60 million to $70 million of sales from that.
Aspect of that product line.
So that it so it is significantly higher Ed.
Again, I mean, you can do the math better than I again in terms of the total aerospace.
Back, but that's the level of sales that we had expecting some of that we'll continue next year as well as Greg said because that is still the European.
Mandate, which which go through till June of next year, but we will see a step down next year, and then see a little bit more of a step down the normal levels in 2021, yes, so like maybe like a little less than $100 million a year for the next couple of years have stepped down.
Yes next year, yes next year could be a little more than that in 2020 . Because you may go from like 300, 200, 850 type of an but again, we'll give more guidance and specificity Amgen Buddy.
And the it off that it would be more somebody in the 60 to 75 type of range in 2021, Okay. And then just just pick on carrier here, a little bit Lennox yesterday reported 20% growth in their independent channel.
And our checks kind of suggest that there are kind of aggressively moving in that direction, because having a hard time kind of regaining the share they lost at the high end.
Are you guys you know.
Seeing any of that I know you guys are mostly independent and I mean, Dave attack to you before and like commercial so.
Are they trying to kind of pick away at some of your semi or independent fair is that partly the reason why.
You guys are kind of more flattish in kind of into the fourth quarter little more cautious.
No I think it's more a function of you saw the watsco to does as well I think those deposits went that different from say the Linux is out in terms of the quarter are the distribution out into in the different end consumers. The thing I look back at Steve is the how does that market share doing right ultimately thats the reinvest off what that we are winning or not in them.
Okay, We've got a pretty good position and the good news in the U.S. residential market. As you know is that there is good data available edge out I provides us with the total industry shipments we know our shipments we don't know what other people's on but we at least know what the total industry is doing and what we ugly and as that when we look at that on a 12 month rolling basis.
Elements.
Yes, because the part that may or may be up or down, but when you look at our 12 month basis.
Total splits business update and ductless is up about 15 basis points in terms of share from up reasonably high level already on the furnace is we have probably down a little bit 30 basis points are sold 30 to 40 is what I've seen so it's I think it's not it's not like we odd.
It is spectacle what the others may be doing are seeing we certainly know what we are seeing and from that perspective. The shares are not that different than what we have but we've seen solidly and actually is a pretty good in that market right. When we're just very quickly just to clarify this 80 SB headwind I mean, there's plenty.
To offset that Theres other products that are ramping and I mean, you guys are obviously absorbing the Max way better than others that are calling it out as more of an excuse. So theres. Obviously other things that will offset this 80 SP is got to not to be isolated in the context of other platforms that are growing fee that's correct.
Yes.
Yes, that's exactly right to 2020, we use would still expect to see growth and commercial aftermarket with pounds I'm going to stop right, there because I'm not going to give guidance for it but I would say VSP mandate is just part of one of many moving pieces and what is a very large commercial aftermarket for Collins great. Great. Thanks, a lot guys. Thanks any tells Alice.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is now.
Thanks, Good morning, guys.
Yes, I think Weve CODI DSP.
The depth.
So I think you visible thankful to help you be missed and good luck with the next next move.
One of move too.
Yes, and touch on the service strength, 6% growth and services.
But then it's very very strong kind of staple based across geographies. So maybe just touch on what's driving that how you view the durability of that kind of growth rates and then maybe touch on Europe , which tells us elements in it as a growth what we've seen in terms of price and volume in that region.
Yes, that's actually the most encouraging part of the Otis story. The improvements we are starting to see in the service side, which has made a lot about investments were focused.
In terms of digitalization off that business overall are starting to bear fruit and the the best thing about Nigel as you said was the broad based nature of the growth incentives. It goes across geographies. It was across all major countries and it's across the three categories maintenance repair and modernization all grew and I think the credit.
Goes not just.
The focus that duty and the team have put on it but also the investments that we've made in ensuring that the mechanics that finally into the modern age with the digital tools that they need and have that are bad business is doing particularly well.
And that that's again part of beat the tools that given the new app that the team has put in put forth, which makes it easier for both the customers and our mechanics, and our said we salespeople to offer value added suggestions to improve the performance of elevators in buildings and all that is starting to show in the numbers. So.
Productivity was pretty good in Europe by State. This has been now the second quarter.
All that we've seen actually profit growth in Europe . After several years of decline as you know so John I is now four quarters. The profit growth. After a few years a decline in Europe two quarters of profit growth. It will that he had after many years of profit decline. So it's all pointing in the right detection.
Yes, so just a quick follow on obviously, the 30 Bips and margin expansion Otis is very good news, but with positive price mix in China posted mix on aftermarket.
The steel prices why can't margins expand more than 30 basis points going forward.
The new equipment growth clearly margins the growth rate. It is coming is on the bad in the modernization side to that is a little bit up a mix and negativity if you will in the.
In the Otis service side. The service contribution is growing in absolute dollars and margin is expanding as a percent, but we also are continuing to make strategic investments that you know right that the there is still more of these hand tools being given to additional service technicians that is still some pricing pressure on the new equipment side as we.
We've talked about.
So I think China is seeing price mix improved but in North America on the other hand on the new equipment side that is certainly increasing pricing pressure. So we're happy that Otis is showing profit growth. That's the first step and margins expanding I won't get too far ahead of ourselves in stock. We expect hundred to 200 basis points of margin expansions look I think just to be very clear we think.
Your margins can expand it continued to expand market, leaving today were like a 15.5% this quarter.
Actual FX so good good progress, but through fields, where we still have investments to make we still have.
ERP systems is that need updating we have digital tools of need updating and I think again steady margin progression is the store that you're going to here for orders for the next several years ago Judy's out.
Talking about the OTA story for the coming years, I think that will be a key messages.
We will get margin expansion, but most importantly, we're going to get topline and every time you sold elevator your service that 80% of the time and Thats. The annuity we want to continue to invest in so.
The fundamentals are strong.
But we're not going to get ahead of ourselves here in terms of particularly investment just to pump Ross for.
Year to and again steady progress is the word.
That's great thanks very much.
Thank you.
Our next question comes from Sheila Kahyaoglu with Jefferies. Your line is now open thank you and congratulations for killing Carol.
Thank you Thats you.
Maybe this question for you on since you're taking over this business. How do you think about what's going on with the GTF, maybe if you could update us on.
What.
How is the business trending as commercial deliveries were down in the quarter what engine models for driving that.
Well look it's the GTF program overall is doing extremely well, we've got over 4 million revenue flight hours.
On the engine dispatch reliability of 98, 99.8%. So overall feeling very good if you think about the the shipments you can look at the quarter, but more importantly year to date.
Shipments to customers up nearly 30% GTF, so feeling very good about our progress there feeling very good about our cost take out on the and on the engine that is clearly an ingredient to our success going forward. So I think overall and Holistically, we're feeling good about our market share good around the cost takeout going around the.
Profitability and when we've got plenty of work to do and supporting our customers but.
Pretty positive at this point.
Great. Thanks, and then maybe just a follow up.
Im not an elevator analysts said on I would ask what are you seeing in the service portfolio.
What are you seeing in terms of attrition rates and maybe investment needed there Gregory.
No the attrition rates actually have been part of the reason why we're seeing growth in the portfolio that often talked about before Sheila I think the first step is to ensure that the portfolio keeps growing quarter. After quarter end. We added two point. Please close to 2.5 million units now at some point Judy the stars rounding that up to 2.1.
But.
Just a little shy from that but the good news is that the portfolio grew across geographies. The only place we had via being a little more selective right. Now is in China, maybe have adopted a strategy of smart service growth. We're trying to make sure that we are not just taking service contracts for the sake of service contract, but that they had profitable service contracts over the long term and we have.
Continuing to look at the portfolio carefully from that perspective, but really encouraging news is that is good service growth. If you exclude China the growth in portfolio.
From Q2, Q3 compared to last yet almost similar levels and kind of thing and Thats that that's the basic secret sauce.
Thank you install elevate there so that you can keep servicing them for years to come.
Hey, Thank you.
Thank you. Our next question comes from Jeff Sprague with vertical research partners. Your line is now.
Thank you good morning, everyone. Congrats Carol acutely ill be very much mess.
Hopefully, we see on the beat somewhere else.
On the beach.
On the beat around the beef cattle no I don't want I don't want to see him on the beat the theme on that.
Okay.
Hey, a couple of questions from me.
So there's kind of continued discussion of investment Otis and carrier and obviously.
Today, we're going to have their own decision to make once they're fully independent but.
Should we think these businesses are exiting the portfolio at kind of a representative run rate of investment required relative to kind of there.
They are forward plans or should we be thinking about the need to step up investment. Once these businesses are separated.
Well.
Jeff I think we made a conscious decision four years ago to step up investments in the commercial business. Indeed carrier specifically, we have taken it up its over $500 million today.
I think thats, a rated sustainable so about two and a half percentage of sales.
And they're going to add to continue on with that as I, certainly don't city pullback, there, but I don't see a need for a big step up in investment what you're going to see that carrier is a two things one is a renewed focus on SG today and that is the biggest gould costs that they have that they can work on and Dave and team has started working on that.
Today, the second piece is a portfolio and the again more from Dave on that in the coming months, but I.
I think optimizing the carrier portfolio has a huge is a huge opportunity to create value for shareholders to get to a more focused portfolio. What we have today and again you can quiz Dave on all those those pieces and what they're thinking and it really is a decision for the next management team, but I would tell you that in our view.
Significant opportunity as far as OTA sooner, we just started again, making investments four years ago in the service tools will begin in the ITC infrastructure, specifically with global.
Service systems GSS to give us the day, they give us the ability to service. These elevators more efficiently and those investments are starting to pay off but there are a long way from done in terms of the the payback. So I would expect the level of investments or remain about the same whether we expect the payback to improve dramatically over the coming.
Here's and again, that's what's going to drive margin expansion.
Killed it on this repair repairs were really sold in the quarter in part of it we can attribute to the fact that the.
Service mechanics, now have an app on their phone, which let them so repair directly to the ability to operate or when the route to weed regular maintenance.
Those are sales that would probably otherwise wouldn't have gotten and I think thats just an indication of.
Opportunity set in front of US the other thing is and we've touched on this before is.
Improving the.
Cancellation rate and the cancellation rate.
Two years ago was north of 7% existing elevated as down around 6%.
That's a very very profitable way to grow earnings is to reduce your cancellation rate, which means you don't have to replace them with lower margin new business. So again I don't see that as an investment I think you get or an additional investment thats just a continuation of what we've been doing which should yield benefits for the next several years.
Is there any evolving thought on how the kind of post separation balance sheets of carrier Otis might look at I kind of asked that kind of in the spirit of.
Sure refrigeration will cycle back up, but we could be going into a little bit more challenging macro environment.
So, let's let's be very clear, where as we look at the separation of the two businesses will probably be about $18 billion of debt between.
Otis interior Raghu, obviously, more we're going to carry because of its size, but the goal is for both of those businesses to be in.
Investment grade coming out of the shoot and one of the things obviously that we would be concerned about as can they.
Survive in a potential recession scenario, we don't see one, but we're going to make sure that they have the financial wherewithal that if we do see a I was a normal business cycle correction here sometime in the next couple of years that they won't lose their investment grade rating and that's again the key to the capital allocation.
To those two businesses in terms of the amount of debt the amount of cash that they're going to have other balance sheets. It's split so.
We're cognizant of that we'll be out with the rating agencies next month.
The next 30 days and the moved back to you guys.
Early next year.
The final look.
Great. Thanks for the color.
Thank you as a reminder, ladies and gentlemen that Star then one to ask a question. We also kindly ask that you. Please limit yourself to one question.
Next question comes from Peter Arment.
Your line is now open.
Yes, Thanks, good morning, Greg Congrats.
Carol.
Only one only one six bar question here no.
Just just quickly on the just.
You could just update us on.
Your thoughts how the be aerospace businesses doing inside Collins and also just on the synergies itself.
You can see playbooks always been to exceed these targets, but if any that just timing related and pull into the left thanks again Greg.
Yes, so the be aerospace side, obviously last year was a pretty tough year at be after the acquisition by Red Rock go ahead of the close I would tell you that most of those issues are behind US we have seen really good progress, Dave newsman, who runs that business doing a nice job.
The orders.
Ben deferred last year are being fulfilled margins are coming back to what we expected so that business actually.
He is doing it was even better than what we had expected for the year part of this the 60 cents of accretion that we're giving obviously coming from the aerospace.
As far as the synergies go you we are pulling synergies to the left obviously, we as a 600 billion dollar goal will be close to $200 million.
Krwfifty rather synergies this year.
Now I will give and take up the synergy target beyond 600 not today.
This is the same playbook that you would expect for beauty X, which is well this is give.
Or feet under us, there's always more ideas out there to take cost out of.
We expect as Kelly in team go through this process over the next two three years, there will be more and more ideas that will be generated but yes. After three years or so we did the 600 million.
Everything else code flows and just normal cost reduction actions anyways, but the remains a.
Basket load of opportunities the columns aerospace side with the footprint that they have in the.
Geography, they have to to continue to drive cost out.
Appreciate the detail thanks, Greg.
We are.
Thank you. Our next question comes from Doug Harned with Bernstein. Your line is now open.
Thanks, Good morning.
I wanted I wanted to I wanted to look at Pratt and.
You raised your outlook for commercial OE and aftermarket combined and can you talk a little bit about what led to that if we think about the legacy engine aftermarket growth benefits from the geared turbofan. Some of the early work on that and then reduction in costs on the OE side, how would you balance those different pieces.
So the mix Doug is what is helping that particular line that you're referring to in the in the outlook.
And the fact that we are seeing.
More favorable customer mix inside the GTF OE deliveries and the fact that cost coming down as as we expected our inline with expectations is what is driving that growth to be slightly better better than what we expected.
That's at the highest level, that's probably what it is some better investment kettle anything I mean that the aftermarket Doug remains very healthy so no real change to trend there you'd be 25, hundreds we talked about were up year over year.
Remember, we started in a bit of a hole on the need 2500 with some operational issues in the network.
Earlier in the year, we're recovering from those we made good progress theres demand for well over a thousand shop visits on the V 2500, not clear that we'll get to serve all of them maybe closer to 975. So you think about.
The aftermarket in total is probably more like low to mid single digits as we kind of close out the year. The legacy models in obviously the shop visits were down we expect those to be down the Pete the fours and the twos, but the content remains pretty solid so overall very very good aftermarket.
The other thing we don't often talk about is the strength in the Pratt Canada business and that's also reflected in that line to some extent, Doug and you'd see good shipments engine shipments that we see good aftermarket growth. There. So I was going on this one engine company side as well.
So all the way around and the vs. I mean, you're really pushing capacity limits on m. our own now I would expect I mean, this should be a lot of up upward pressure I assume.
It's a pretty tightly coupled system. So you start out in a whole is just them as an issue of getting them through the shops, but.
Team has made a ton of progress on that on that front and we're now up to the kind of monthly run rate for inductions, we would have expected so thats good news.
Okay, great. Thank you.
Thank you. Our next question comes from Robert Spingarn with Credit Suisse. Your line is now.
Good morning.
Just sticking with the with the geared turbofan for a minute and Pratt you did mention the early shop visits are starting to come through I'm curious, how the where.
Has been there relative to expectations I know, you're just getting into this at this point and then separately.
Is there any opportunity for the for the geared turbofan on this new Gulf stream.
Aircraft I understand it's a derivative of the 650 and it uses that engine, but might there have been an opportunity since you're on some of the other products.
Well I'll start with the first part.
Rob we are getting the engines into the shops as we bring up these the prior configurations. The current configurations, which is going to extend the life of the.
Of the engine and so far I'd say it is early but nothing from a from where modes are.
Anything like that nothing out of the ordinary I think pretty much as expected. So that's something that over time, you have to keep an eye on because those were modes by definition emerge over time, but at this point, we're feeling we're feeling like it's pretty much situation normal there.
Just a I would just add today one of the obviously the biggest concern when we launch this engine five years ago was the gear system.
And we have seen a lot of these engines come back.
We've had an opportunity go through those gear systems and I would tell you the where is much less than expected in fact.
Much more robust design than there was probably necessary, but the fact is the gear system works is as advertised and so if you're thinking about things to worry about where the engine that a wonderful.
Obviously, we're still working through the retrofits of Combustors and a couple of Lucille issues, but in terms of the actual long term durability the engine related to the gear not an issue.
As far as Gulf stream by the 7007 700, rather we did not offer in engine for that we do have of course the engine on the new 500 600.
Gulfstream, which are going into service, though which is a spread can be PW 815, if I got that number right.
And do we continue to work with Gulfstream, an additional opportunities, but we did not.
Participate in the bid because quite frankly, GTF a gear dose that work.
Long range business jet.
And even even the 850 well it's got to save architectures as the year does not every gear upfront the way the the rest of the GTF family dose.
Okay. Thank you Paul.
Thank you. Our next question comes from Rajeev Lalwani with Morgan Stanley . Your line is now open.
Good morning, just a quick one for me for for you Greg you talked earlier about about.
150 million or so of revenue synergies can you talk about where that's coming from and.
How thats looking and implications for our TX as we look forward and your confidence there.
Yes, Dave I'll take this this is our cable I think the couple of examples which are very real end very encouraging is the the forward leaning organization that drop quite Collins brought to the table. They have lots of thousands of people actually sitting very close to the airline customers and are able to pick up opportunities that may not have been possible other.
For the you pass organization and so one of the examples of this attributes to large projects that we're talking about into 175 million. One of them was just simply a now that we have a bigger bag of offerings that these sales.
People have out of the Collins Aerospace did was the opportunity which came up for a product that you das makes out of their sensors business before and when the airline was looking for that.
We were able to offer that opportunity out of the you. They hate that you guys product line and that created sales, which would which you guys would not have seen before and Rockwell Collins did not have an opportunity to offer before so that's part of the thing that we saw as in the in the synergy bucket and Thats that alone is about $80 million of revenue, we would not have seen otherwise.
And that it.
An example of that budgets leveraging their reach Rockwell Collins reach and generating additional business. If you think about the Raytheon side again, the thing that most excites I think.
Inter carrier myself about the merger is the technology and the fact is Raytheon has premier technology in cyber.
That is primarily dedicated to DMD and the military customer, we see an opportunity to take that cyber capability and moving into the commercial aerospace arena, which today Raytheon would not have a channel to do that.
The same in terms of coordinating.
The new air traffic control system with assured GPS mixed are married up with Raytheon radars.
To allow airplanes to fly much closer together and aerospace.
That would be allowed today, we're going to have to do that if we're going to see that air traffic growth that we expected in the us and I think again those are the types of big synergy opportunities and there will be others. Some of it will be in the is our space. Some of it will be in the material space as we think about Hypersonics and other.
New defense technologies, but again these are they don't happen overnight, but what was encouraging about the Rockwell Collins synergies is the guys are out there and are incentivized to find these things and Kelly Ortberg consumer driving these everyday and we'll have the same type of organization at the new Raytheon technologies to drive these.
Technology synergies and revenue synergies near term.
Great. Thanks Best of luck Carolyn Akhil.
Thanks.
Thank you ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Greg case for any closing remarks.
Okay. Thanks, Dale Im just want to thank everybody for calling in today, obviously, a carol and the IR team will be available all day to answer your questions.
Thanks for listening and we'll talk to you guys. The early next year.
Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.