Q4 2019 Earnings Call
Good morning, and welcome to the United Technologies Fourth quarter 2019 earnings conference call on the call today, Our Grech Hayes, Chairman and Chief Executive Officer, Neil Mitchell, acting Senior Vice President and Chief Financial Officer, and they somewhere senior director Investor.
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What's up call becomes open for questions. We ask that you limit your first round to one question per color to give everyone the opportunity to participate.
You may ask further questions by me and starting yourself into the Q as time permits.
Please go ahead Mr. Hayes.
Okay. Thank you Catherine and good morning, everyone. So a couple of do folks on the call with me. This morning, Neal Mitchell ticket ever for fuel juries are new senior VP and CFO , what they said, we're taking over for girls.
<unk> Investor relations, so little bit of change here, but no change in terms of the results as you would have expected to really solid core and more importantly, a great year record year in fact financial performance.
This work over three topics.
Of course go through the fourth quarter and for your 2019 results, but also give me an update on where we are where the new Tc portfolio transformation and could be the Rockwell Collins integration separation activity around notice and carrier and of course, the pending merger with Raytheon.
Finally meal, we'll take it through the 2020 outlook for Pratt and Whitney and commentary space.
Just a word on the cadence of our outlook disclosures for the years can be a little bit different this year, given the separation activity and given the pending merger.
And we recently announced the carrier at Otis Investor meetings are scheduled for February 10th and 11th respectively. This wouldn't do you get one Judy barks, along with their senior team that will give you guys an overview of their respective businesses and provide their financial outlook for 2020 .
So we're not going to free up those today and go through their guidance, but you can look forward to talk even quizzing, Dave and Judy.
In early February .
Also you'll notice that we're not getting provide extra cash outlooks today, we'll come back and talk about all of those metrics or the full year outlook for a Raytheon technologies. Following the completion of the merger.
Which we expect it closed early in the second quarter. So as you expect.
Different time line this year, given the various transformational events underway, but again, it'll we'll get it all out there in due course.
Let's start on 29 team for the year, we reported record sales adjusted EPS and free cash flow just of the P. S that was $8.26 and that's up 9% versus last year.
Sales 77 billion, that's up 16% and importantly, organic rose 5%.
That's on top of the 8% forgetting group sales growth we saw in 2018.
All four businesses contributed to the organic growth.
So good margin expansion of the aerospace business as well as a return to earnings growth and margin stabilization at Otis.
It carrier the team closed out a challenging year on a positive note slightly exceeding the most recent dealt with for the business.
Free cash flow for U T. C was $6.6 billion for the year and that included approximately $400 million onetime cash payments related to the portfolio separation activities.
The cash performance was about 1.1 billion better than the midpoint of our latest dealt with due to the timing of separation tax payments most of which will take place here. The first half of 2020 and of course better operational performance from each of the businesses.
In total we continue to expect about two and a half to $3 billion onetime cash costs associated with the portfolio separation.
So strong results for 2019 above our expectations coming into the year and above our expectations as late as October with each of the business is well positioned as we move into 2020.
Okay. Other webcast. This is now on to slide two.
In addition to the financial results, we had several notable highlights and we've made significant progress on the transformational initiatives working for the last year. Let me give me a quick update out a few of those.
At Pratt and Whitney the GTF an F 135 ended up would continue to ramp in 2019.
We continue to add to the order book for both programs, including yesterday's announcement that with their had selected the GTF engines to power. Its next one of 166 aircraft.
Adding to our order book or more than 10000 from an option engines for the GTF program.
Well durability issues on the GTS continued to be addressed it's clear a customer sees the value of the engine, which continues to meet or exceed all the key performance metrics, including fuel burn reduced noise and emissions.
And with we now have more than 700 GTF powered aircraft in service about 4.3 million flight hours.
Since October Pride is also secured contracts totaling more than 7 billion for the production of more than 400 F 135 engines and the related programs support so very strong backlog at Pratt and Whitney.
This past quarter, we also celebrated the one year anniversary of Rockwell Collins.
Throughout the year following close the columns team has delivered outstanding performance, we achieved approximately $300 million bag acquisition related cost synergies and captured about 200 million of sales synergies in our order book.
Adjusted EPS accretion from the Collins acquisition was 66 cents for the year.
Oh, you recall going into your we'd estimated about 35 cents accretion so were very strong year from Kelly Ortberg and the whole team at cones aerospace.
We continue to see clear line of sight to the 600 billion or cost synergies that we started out with but more importantly over a billion dollars to sales and synergies we would expect from the acquisition.
Okay started the separations.
For both Otis and carrier they are substantially complete from an operational standpoint that happened on January one you'll recall them off.
The corporate systems for the most burden there now operate independently.
Both companies as you see announce their future board of directors in December and are looking forward to their pre spin investor meetings early February .
Importantly, we have received both us and Canadian tax ruins for the separation and we're currently working through a few final legal entity restructuring activities required to stand up the businesses as independent companies.
Again, we're now targeting early in the second quarter for the spin of both businesses. So no surprises there portfolio separations remain on track.
Finally on the merger with Raytheon.
Our goal is to have the combination of UGC is aerospace businesses with Raytheon close concurrent with the portfolio separation in early April that's of course subject to receiving all regulatory approvals.
Integration plan is well underway and we're already working a detailed list of items to generate billion dollars of gross cost synergies that we are targeting for the transaction.
I also remain very excited about the technology synergies that will result from the combination and the opportunity. This merger presents to create a best in class Premier Aerospace and defense system provider.
Okay with that ultimately turn it over to Nathan to take you through the fourth quarter results. The Neil will walk you through 2020 or.
Now I'll be back to wrap up at the end Nathan.
All right. Thanks, Greg moving to slide three as Greg said Q4 was another solid quarter for you TC reported sales of $19.6 billion were up 8%, including 1% organic growth and eight points of M&A benefit driven by the Rockwell Collins acquisition.
Foreign exchange was a one point headwind in the quarter.
Adjusted earnings per share was $1.94 down 1% versus the prior year on a difficult compare.
You will recall, we saw 22% adjusted earnings per share growth in the fourth quarter of 2018.
Within the quarter segment profit growth was offset by expected higher corporate items, including interest expense and higher share count.
On a GAAP basis earnings per share was $1.32, that's up 59% versus the prior year and includes 16 cents, a restructuring and 46 cents of net nonrecurring charges, including 39 cents related that portfolio separation activities.
The GAAP earnings per share growth was largely driven by the absence of a tax charge that you'll recall, we booked last year, partially offset by the portfolio separation charges incurred this year.
Free cash flow was $1.9 billion up 54% or approximately $700 million compared to the prior year and included approximately 200 million of one time cash separation payments.
The quarter capped a strong year for free cash flow as Greg mentioned earlier.
Okay with that I'll move on to the segment results and I'll be speaking to the segments at constant currency as we usually do and as a reminder, theres an appendix on slide 17 with additional segment data as a reference.
So starting with notice on slide four sales of $3.4 billion in the quarter were up 4% organically.
New equipment sales grew 1% driven by high teens growth in China, partially offset by declines in Asia Pacific and the Middle East.
Service sales grew 5% driven by growth across all regions.
Within service maintenance and repair it was up 5% and modernization was up 8%.
At constant currency, new equipment orders grew 3% driven by mid single digit growth in the Americas in Europe , as well as low single digit growth in China as the region continued to benefit from favorable pricing and mix.
Asia Pacific was down low single digit.
Operating profit was up 3% at constant currency, driven primarily by volume growth and favorable price and mix and service, partially offset by higher research and development and strategic investments in the business.
Service contribution also grew for the six straight quarter with all regions contributing.
Foreign exchange translation with a two point headwind to sales and a one point headwind to earnings.
For the year Otis the sales grew 5% organically with mid single digit growth in both new equipment and service.
Operating profit was up 28 million at actual currency.
The benefits from service transformation initiatives globally and improvements in China led to margin stabilization during the year and establishes a solid base for Otis to build upon as they become an independent company.
Moving to carrier on slide five.
Carrier sales were down 2% organically in the quarter, driven by refrigeration, which was down 8%.
That's mainly due to hard compares in the North American truck trailer business, which was up almost 50% in Q4 of 2018.
Global HVAC sales are flat and global fire and security was up 1% in the quarter.
Moving to orders carrier equipment orders contracted 4% organically in the quarter.
Primarily driven by transport refrigeration, which was down 32%.
Within transport refrigeration, North American truck trailer was down 63% after being up over 50% in the fourth quarter of last year.
Fire and security product orders were down 3%, while global truck orders were up 2% with North American residential up mid single digit and global commercial HVAC flat.
Within commercial HVAC EMEA was up 10% offset by high single digit declines in the Americas.
On a constant currency basis operating profit was down 4% in the quarter.
Lower volume and adverse mix as well as headwinds from lower discount rates used for value in long term liabilities were partially offset by pricing benefits material productivity net of tariff impacts.
Operating profit included the gain on a sale of an equity investment and a land sale offsetting absence of prior year similar items.
For the year carrier sales were up 1% organically and operating profit was down 80 million at actual currency.
The exceeding the most recent outlook for the business.
Turning to Pratt on slide six.
Sales of $5.6 billion were up 2% on both inorganic and reported basis in a quarter and that was on top of 22% organic growth last year.
Commercial OEM sales were down 7% driven by expected declines and B 2500 shipments, partially offset by higher GTF engines shipments and favorable engine mix at Pratt and Whitney Canada.
Commercial aftermarket sales were flat in the quarter.
Early GTF shop visits as well as higher Pratt Whitney, Canada and between 500 volumes offset expected declines in legacy programs and the absence of prior year contract adjustments.
Military sales were up 12% driven by continued to ramp of the F 135 program and higher aftermarket sales across all key platforms.
Operating profit of $456 million was up 34%.
Drop through on higher military sales favorable commercial aftermarket mix and growth at Pratt when it Canada more than offset commercial OE mix headwind and the net impact of contract adjustments.
Results also benefited from lower engineering and development expense in the quarter.
For the full year organic sales were up 8% driven by higher GTF and Pratt when it Canada engine shipments and higher military volume.
Operating profit was up $239 million.
Hi, turning to cons aerospace on slide seven.
Sales in the quarter were $6.4 billion.
Up 1.5 billion on a reported basis and 1% organically.
Operating profit of $1 billion was up 236 million versus the prior year.
Recall that the fourth quarter of last year contained about five weeks of results from the Rockwell Collins acquisition.
On a pro forma basis, including results for Rockwell Collins, the entire fourth quarter of 2018 Con aerospace delivered operating profit growth of 8% on 4% higher sales.
The pro forma sales growth reflects continued strength in commercial aftermarket military channel.
Partially offset by commercial OEM volume.
Commercial aftermarket sales were up 11% driven by continued strength in initial provisioning and demand for modifications and upgrades.
Military was up 10% driven by.
35 volume and overall aftermarket growth.
Commercial OEM sales were down 6% driven by expected declines in legacy programs, which more than offset growth in new platform sales.
Operating profit growth was driven by the contribution of two additional months of results from the Rockwell Collins acquisition drop through on higher commercial aftermarket military sales and synergy benefits.
The growth was partially offset by lower commercial OE volume and unfavorable mix as well as higher SGN, a and engineering and development.
On a full year basis columns aerospace delivered 6% organic sales growth and over $1.8 billion of operating profit growth driven by contributions from the Rockwell Collins acquisition solid execution and synergy capture and strong end markets.
So from an operating profit growth was 16% on 7% sales growth.
With that I'll hand, it over to nail wholl provide more detail on the 2020 outlook Neil.
Thank you Nathan I'm on slide eight as Greg said I'm going to talk about the 2020 outlook for Pratt and Whitney and Collins aerospace today.
You think about both businesses, let me begin by highlighting a few the dynamics, we see impacting our outlook before I go through the specific numbers.
Starting with the positives revenue passenger miles are projected to remain solid and grow over 4% in 2020, which will continue to support growth in the underlying aftermarket demand at both Pratt Whitney and Collins aerospace.
I'd say, we also have clear line of sight to continued growth in our military businesses driven by higher if 135 engines and F 35 system content as well as strong aftermarket demand a car across key programs, including the F 117, F 119, and F 35 programs.
And lastly, we will see continued synergy benefits columns aerospace as they enter your two as a combined entity.
We expect to capture approximately $150 million of incremental cost synergies from the Rockwell acquisition and that's on top of the $300 million that we realized in 2019.
On the challenges side of the equation no surprises here, we anticipate headwinds at Collin aerospace driven by the suspension of the 737 Max production as well as an expected decline in volume associated with SB mandate as the deadline for compliance in the US was the end of 2019, we do see some.
SBB demand in 2020, driven by the mid year European deadline, but substantially less than levels, we saw last year.
So turning to slide nine you will see the 2020 segment outlooks for both Pratt and Whitney and Collins Aerospace as usual the appendix has a detailed sales and operating profit walk for both businesses.
At a high level, we generally see these outlooks in line with our S. Four projections, excluding the impact of the suspension of the 737 Max production the expected impact of divestitures associated with the merger with Raytheon as well as cost to achieve synergies accounts aerospace, okay, starting with Pratt and Whitney and the outlook there we expect.
Mid single digit sales growth in 2020 organically commercial we will be up high single digit as GTF volumes will continue to ramp and we expect to see higher Pratt and Whitney Canada, OEM sales driven by business jet helicopter engine shipments commercial aftermarket is expected to grow low to mid single digits, primarily due.
Given by continued V 2500 growth and GTF activity, partially offset by declines in the legacy engines.
The military business will continue to see benefits from higher F. 135 engine shipments and continued aftermarket demand as is expected to grow mid single digit.
On the profit side, we expect expect Pratt's operating profit to increased $225 million to $275 million driven by drop through on the higher commercial aftermarket and military sales commercial OE profit is expected to be flat year over year.
So now turning to Collins aerospace.
Boarded sales are expected to be down low single digit, including approximately five points of headwind due to the suspension of the seven to seven Max production lower ABTSP Mandeep volume and the divestitures that I just mentioned.
Organically commercial OEM sales will be down mid single digit as declines in the seven to seven Max and legacy programs more than offset the ramp of other new programs.
Commercial aftermarket is expected to be up slightly and within the commercial aftermarket provisioning is expect to be down mid single digits after being up over 20% organically in 2019.
Military sales will be up mid single digit on continued strength in the military end markets.
Operating profit for college aerospace will be down 275 to 325 million versus 2019, including approximately $550 million to $600 million of combined headwinds due to the 737, Max SB Mandy and the required divestitures. These headwinds are partially offset by.
Drop through on higher military sales and $150 million of incremental cost synergies I referenced earlier.
Lastly, before I hand, it back over to Greg just a few comments as you think about UGC in the first quarter prior to the spends and merger.
Starting with sales, we expect Q1 2020 reported sales to be up slightly versus the prior year, we expect low to mid single digit growth at the aerospace businesses. Despite the 737, Max headwind and this growth will be partially offset by carrier, which is expected to be down driven by tough first half compares for the refrigeration business and some FX headwind.
On the earnings front for Q1 at the segment level, we expect operating profit to be flat, including the 737, Maxim NTSB headwind as well as some incremental costs at Otis and carrier as each business staff to be a stand alone entity.
Below the line, we see a few moving pieces first we have some FX pressure due to the portfolio separation interest expense and other corporate costs, which accounts for around 10 cents of headwind.
Second non surface pension income will be lower by three cents driven by the discount rate impact we discussed last quarter.
In addition, the absence of prior year tax gain which you will recall was related to the legacy B E business as well as higher minority interest adds another six cents of pressure and finally share count will be higher than last year on the cash front, we expect Q1 free cash flow to be an outflow and that's driven primarily by the approximately 1.6 billion.
$1, a portfolio separation payments expected to occur in the first quarter.
So with that I'll hand, it back to Greg.
Hey, Thanks, Neil so some moving pieces as always.
But really strong performance in 29 team.
Excuse me as it looked at 2020, I would just remind everybody that the priorities of our businesses remain clear and consistent we're focused on executing on our commitments to customers driving growth through innovation cost reduction and of course remaining disciplined capital allocation.
At the same time, we continue to monitor the macroeconomic environment.
The US remains strong Asia of course continues to grow a little bit slower rate and the Europe remains a watch item.
Overall, the aerospace and defense end market remain robust and we feel very good about our ability to deliver in 2020.
That said, we're also keeping our.
Yeah on the developing perrone by risk situation any impacts that could have to all of our businesses.
And while 40 20 marks the last chapter for United Technologies. It stands today. It also begins a bright future for Otis carrier and Raytheon technologies as Standalone public companies I'm excited about the future each of these businesses and I'm confident in the teams that we put in place to drive sustainable long term value creation thats going to benefit.
Customers employees shareholders and our communities for decades to come.
With that let's go ahead and open up the call for questions.
Thank you to ask a question you need to press star one on your telephone.
Your question press the pound.
And our first question comes from Jeff Sprague with vertical research your line is open.
Thank you good morning, everyone Mortimer Sprague.
On a little mythology here. This is the last call but.
Right. Thank you yes.
Amazing.
This is really is.
Greg I was hoping you could unpack a little bit to some degree kind of the.
The Collins errors had one between.
But as Max was 80 SP and what is tied to divestitures and does that assume kind of full year halt on on production.
Okay, let's let's start with the 737 Max is probably the easiest part for everybody to understand so we've assumed roughly a 90 day production delay, which is consistent with direction. The that we've received from Boeing. So if you think about that each month, if you add up both the OEM.
Aftermarket provisioning that you're not going to get.
Cost you about $100 million in revenue in about half of that an operating profit in a big chunk of that operating profit is coming from lack of absorption in our factories.
So so think about at 100 over three months Thats 300 million to Salesforce about 150 million of up profit.
And then in the back half of the year, we've essentially cut production in half from the rate that we had so from 42 to 21. So you can double that in the back half of the irrigate roughly 600 million and 300 million.
We've also in the guidance ended in some monies for some supplier disruption.
So we think overall the impact could be somewhere between 350 in 375 million.
To the year I hope that's conservative.
We hope, but again the reduction resumes more quickly, but as we as we sit here today.
That's the best outlook that we can give you.
The SB mandate I think we've taken you through that number before.
And again, it's it's a north of $100 million of earnings the the will go away and the other big piece.
Of course is the divestitures so to divestitures, one who is the military GPS business at.
Rockwell legacy Rockwell Collins, Cedar Rapids, as a great business.
As you guys saw a b.
Brought that are side the contracted by that that will close sometime we think in the back half of the year.
And then on top of that our business and Danbury, Connecticut, our is our business military optics.
Space objects that will also.
We will probably sign here. The next couple of months of that will also close in the back half of the year. So that's the additional headwind that we see both topline and bottomline. So because you'll you'll see about six months impact for the divestitures. This year, you'll see a full year, obviously next year.
Obviously the good news is we'll we'll get another shot at this guidance in the probably may once we close the with Raytheon, we'll come back in early May probably a month after the merger and give you a full year guidance for our TX and give you an update on the Max and everything else that's going on.
And just one more and I'll pass it on what was the Max impact in the fourth quarter.
It was it really was it was not significant.
Again, we were Boeing was still taking at a rate of 40 to get our original guidance that assumed it was going to be 56 I think.
So there was a little bit of an impact you can do the math, but it wasn't just wasn't significant and most of that was made up.
By additional aftermarket.
The other.
For the other aircraft that are flying.
Great. Thank you good luck with everything.
As Jeff.
Thank you. Our next question comes from Sheila.
Hello with Jefferies. Your line is open.
Good morning, Thank you Greg.
Just to continue on the Max.
It has been a pretty favorable environment for the GTF in general and Airbus recently announced a new allocation between CFM and proud with a higher share procedure. So I guess, when we think about GTF, how does that change the trajectory in terms of production how do we think about annualized loss. As you mentioned was there now are there other opportunities.
To take some share.
So, let's just put GTF in perspective, I think I mentioned it as we started out we've got about 10000 GTF engines in backlog in.
As a program to date, we've got about 40% share of the Athree 20 family higher share on the Athree hundred 21 that the athree maintain and through 20.
If you think about in the last 12 months, we want to about 50% of the orders that are out there. We just announced wins there obviously I think that came out yesterday.
As you think about it going forward I think the opportunities even better for GTF as you think about the.
XL are the long range version of the Athree hundred 21.
That requires a higher thrust engine, which will be able to deliver.
For Airbus and for their customers.
Again, we think more production going to the higher end, even the just the basic Athree hundred 21 were Pratt is probably a stronger offering having said that.
We are I would say production constrained.
In terms of how many engines that we can build I think loss provisions last year were about the same as a year before about.
$1.1 billion are so we expect that number will probably continue at this rate cost came down roughly 8% to 10% last year will continue to take cost out but.
We're trying to be judicious in terms of which customers, we choose and which should which customers we elect not to make offerings to.
You'll you'll note in the the discussion before there were some contract adjustments at Pratt in the quarter that obviously related to some of the durability issues that we've seen the other GCF specifically some of those very difficult operating environment, but again very very good performance in a very good future I think for for GTF.
Thank you thanks, Brad Jeff, Greg I will add a comment yes to that on production.
The numbers that you will see in our our external documents here are a combined GTF NB 2500, obviously the legacy engines production is coming down substantially if I. If I look at the production sequentially Q3 to Q4 on the GTF. It was up over 30% on a full year basis about 20%.
And we'd expect that seem kind of rate going into 2020. So.
The numbers you see arc, our aggregated, but we're supporting Airbus in 2019, and we're aligned with them in 2020 to deliver the engines for their airplanes.
Great. Thanks.
Thank you and our next question comes from Steve Tusa with Jpmorgan.
Good morning, guys.
To Echo a echo Jeff Jeff's comments.
Hi, just kind of a silly question.
But have you guys going back and looked at what possibly kind of could happen here with air traffic I know, it's early on with this whole virus thing, but just looking back at past events like this sweat let.
What the risk.
Framed the risk around that.
Yes, Steve we actually we've added we're back it took a look at 2003 of the impact of the Sars virus.
As you'll recall air traffic slowed down significantly for about three months and really there was about a six month impact overall in the aftermarket.
I would say there are two major differences today. One is the airlines are a hell of a lot healthier than there were three you were coming off of 911 airline bankruptcies and nobody had any money.
The fact is air traffic remains pretty strong, but there will be a blip in Asia. This quarter as a result of this.
The second thing is the flu it happens every year I, just we went back and we're looking.
The last full flu season.
We had 960000 people view us were hospitalized with the fluid 80000 people passed away.
So as we think about this you've got to keep it in perspective, it's a big deal obviously until they get it contained but the Chinese government I think is doing much better job today in terms of being proactive and containing this.
And while we expect there will be some some impact of the commercial aftermarket. We don't expect it will be significantly get back in 2003, we saw about a 20% drop in the aftermarket for that.
For two quarters I don't expect it's going to be that bad this time.
Right and then just last one last one on an x. here.
When you look at.
The kind of the 8 billion plus cash target.
Obviously this is somewhat temporary you guys seem to make obviously a lot of money.
On out and what you're supplying to them. So it's a little bit different that engines, where you might be loss, making so lack of deliveries.
Kind of a positive from that perspective, but at any.
Any change to kind of that.
8 billion target and kind of that 21 time period from from though so look there is clearly a cash impact. This year was probably in the what's called 400 million dollar range.
Collins Aerospace and I would tell you that's within the.
As contemplated in our overall guidance for the years second to change the $8 billion target.
And again it is temporary next year I think that as Max production ramps back up that.
That's a big so I think again, it's a onetime issue and the part of it of course as you know see we're trying to keep the supply chain.
Going a little bit here anytime you have these production disruptions.
Always worry about the supply chain and some of the smaller suppliers out there. So columns is doing the right thing you're trying to manage their proactively so that we don't.
Have a problem as we started the wind back up with suppliers who.
Can't can't meet the demand.
Okay, great that great color. Thanks, I appreciate it thanks, Steve.
Thank you and our next question comes from Carter Copeland with.
Research.
Your line is open.
Good morning, gentlemen.
We incurred morning.
Greg I wondered if you might expand just quickly to clarify on that cash impact that is how much of that is payments to suppliers versus inventory you may build that's that's higher than the rate just to keep the keep the production healthy.
Well you can do the math on terms of the lost sales rate, we're talking about $600 million roughly for the year.
So most of that is going to be cash, we're not seeing from suppliers from who our customer but there was a small piece of that the we columns folks who have identified is going to.
The the supply chain, it's not we're not talking hundreds of millions of dollars here talking probably less than 100.
Yes, so it sounds like you're not you're not planning on building.
Inventory in any any substantial amount above whatever the they agreed upon rate is yes. So it will be I would say more surgical than just we're bringing all the inventory were due we're going to bring inventory and where we need to go to the other opportunity here is to the extent that we were behind as certain programs calls does have a pretty significant.
Backlog of things that they can work on.
There is still disruption costs in the factory as you could imagine that absorption issues, but we think we capture all of that in the in the guidance numbers here.
And do you have any just as a final point do you have any.
Cost actions built into that or whatnot are you basically just going to eat the stranded cost.
Yes.
We're not there we do not anticipate any lay off I think that would be the easiest thing to do but quite frankly.
Given the scarcity of talented aerospace.
Workers out there, we're not going to be lane anybody off for a 90 day delay here I think we're going to work on the backlog.
We'll we'll try and keep everybody busy but it just doesn't make sense to lay people off for 90 days and try and bring them back.
There is probably some offset here and again on the aftermarket haven't really been able to quantify what that is given the the late breaking nature of this changed over the there's probably some upside in the aftermarket from what.
But we've got baked into the guidance today, but.
We'll see what how that whole thing shakes out as the year progresses.
Great. Thanks, Greg next quarter.
Thank you. Our next question comes from Ronald Epstein with Bank of America. Your line is open.
Hey, good morning.
Good morning, Ron.
Could you walk through some of the kind of where we stand on the durability issues on the GTF you alluded to it being challenged in some of the more.
Hi, this challenging operating environments, but where do we stand what's going on and how should we think about it.
So I think let me just categorize there's no new durability issues on the GTF.
We've had three.
Issues that we've identified over the last couple of years it required retrofits.
The biggest issue today is on the third turbine blade third stage turbine blade.
This was a prober an issue that we identified early on in the program. Originally that lead was made of the titanium aluminum material, which proved to be way to fragile for the operating environment and so we've moved to a nickel based alloy.
That change was made a couple of years ago, all the new engines have the the upgraded bleed. Unfortunately, some of the issue or some of the early engines, especially those in India.
Indigo and go where.
Some of the other Asian operators as still have the older bleeds in there.
As you get filed through the engines. This bleed tends to fracture and causes inflate shut down so.
In a I would say to be very cautious focus on safety first.
We are doing some accelerated inspections and accelerated retrofit to get this older design bleed out of the market grew out of the.
Out of the fleet, so that will that will happen, mostly in India in the first half of the year, given very difficult operating environments, and we're monitoring that around the rest of world with probably all of that they're retrofits going to take through the end of this year to give complete.
The two other issues with the we've always talked about one was the jewelry gearbox, where we had a.
A year that needed to be replaced we were getting some residents and some early fatigue that.
That retrofit is underway.
And lastly of course, the combustor liner, which we get has been a problem.
Since the Getgo, especially in these difficult operating environment given the temperatures as operates at.
So that will again, we've got a retrofit program in place for that the latest version of the can bolster the de will be out sometime in the June timeframe. This year. So we'll be retrofitting that so no new issues, but I'll tell you, it's causing our the operators pain, especially in India, China and give some of these were.
Difficult operating environment. So as a result of that again, we're trying to be very cautious here, we want to belabor. It risk. So lot of inspections lot of time on wing or a lot of time out there trying to get all this fleet upgraded its just going to take us probably through the first half of this year to get most of that work done.
Okay, Great you expected it mostly done through the first half there.
Great. Thanks, Thanks, Ron.
Our next question comes from Julian Mitchell with Barclays. Your line open.
Hi, good morning.
Good morning Boenning.
Just a question around.
So you do have those legacy programs weighing on the aftermarket growth.
Maybe just help us understand what headwind dialing in so legacy aftermarket sales declines in 2020 .
And what the scale of that legacy piece now is within Pratt.
And then perhaps or switching tax slightly within Colins aerospace maybe give any color around the cadence of organic sales as we go through the please within that down slightly guide, how we think about first half second half.
Julien Thanks, its Neil.
Just a couple of comments on the Pratt aftermarket clearly.
The legacy programs are starting to trail off, but there's still a pretty substantial part of the profit.
Going forward and Pratt.
We've had some headwinds we talk talked about that earlier this year and some contract adjustments, but think about the be though when we came out of the fourth quarter here very strong inductions. So we saw about a 6% increase quarter over quarter in induction activity on the V. we.
We are well capacitized to deal with that level of inductions through 2020, and we'd expect the underlying demand to be there.
Keep in mind, though in order to overhaul in engine it needs to come off of the wing and with the.
737, Max situation I would the legacy planes are flying quite a bit more and so.
And we've seen good durability on the V 2500 that said still expecting to see growth. There. The network is recovered from the early blips that we had in 2019, so I think well positioned for 2020 on the aftermarket site at Pratt as for the Collins organic growth I think we'll expect to see that fell.
Early ratable through through the year.
What I would say is that the first quarter well her a bit more from the 737 Max.
Headwind that we just talked about and you will recall that the first quarter of 2019 for Collins was exceptionally strong, especially given the Rockwell post merger activity.
Great. Thank you.
You're welcome.
Our next question comes from Peter Arment with Baird. Your line is open.
Yes, thanks, good morning, Greg.
Correct.
Hey, just you had some required divestitures with the Collin Cps and I guess.
This business I think you mentioned regarding the to that's going to still be.
We closed here soon enough what about other divest or act divestiture activity just given the.
The merger with Raytheon a are you thinking about other things there should we expect other other actions going forward.
I'm not going to announce anything today, Peter but let me tell you.
I don't want to get ahead of myself here, but I think of it is clear when we get when we complete the merger.
As Raytheon, we're going to have a fairly substantial portfolio.
And I think.
As we typically would do you to see we're going to take a look at that portfolio with the quite frankly some of it is investable. So it probably is not but I think we'll take the first year.
Mike to make who has of our strategy group here do you and I will will go through the portfolio on both sides of the business and I think yes, there will be places, where we might elect not to invest.
The cash out in other places, where we meet ought to double down but.
Right now I can't tell you what that is going to be able to the fact that we're going to as we typically do here, we'll take a dispassionate look at the whole portfolio and figure out.
Where we think we can really add value over the long term and where we can't.
I appreciate that and just if I could just ask one follow up quickly on the GTF. Greg are you changing the cash profile of that that outlook just given some of these durability issues or is that still kind of tracking that what you. Originally said back now it's it looked as though there we've talked about charge, we took in the fourth quarter impacted the aftermarket because of some of these days.
Durability issues, but again it doesn't change the overall either the overall return to other Furthermore, the cash outlook.
I appreciate the color thanks, Greg Thanks.
Our next question is from Nigel Coe.
Research Your line is open.
Thanks, Good morning.
Good morning, Greg Congratulations on getting this beast essentially.
Neil almost there.
I just wanted to ask my first question on.
The conference.
At this quarter.
The fully in line with your guidance, but a big step down from the 1.1 to 1.2, but in the run rate through to 2019. So I'm just curious does that normal seasonality full cones as it now.
With that mix differential and anything any color there.
Yes, there were there was a lot of moving pieces. There I think obviously you have the aftermarket was was still strong would you also had some.
Some OEM headwind in the quarter and some additional envy spend.
Which impacted the quarter a little more than normal keep in mind also is we picked up the last five weeks of Collins last year. There was a very very strong five weeks of activity.
As you can imagine in any of these acquisition so I wouldn't draw any conclusions from the from the fourth quarter compared Cowens I mean, the business is doing great 300 billion a cost synergies overall the aftermarket for the year was up 14% with 20% growth in the.
Provisioning, so it's just a solid quarter.
And again, though no drama there I fully agree with that it was I would say characterization of OE deliveries from Q4, we see some of that coming back in Q1, so nothing abnormal.
In the results, they're very strong.
Thanks very helpful. Then follow on to you you provided some I know that.
No Otis and Kevin guidance will be.
Next time, but you provided some elements of guidance.
Look between 20 fall that the commercial businesses just to remind us on that I didn't catch all the elements that I think you said slats op profit, but maybe I'm confused.
Oh It was talking about there was with respect to the first quarter. So we do expect carrier to be down a little bit on the sales. That's ahead, when we expected because of the transport refrigeration headwind and some foreign currency headwind on the sale side. We also have a couple of some cost coming through in the first quarter.
Now that these two businesses are operating separately there are costs embedded in their standalone business right now that are not incremental onto the combined UGC and so they won't be measured doubts we have a little bit ahead, when there, but thats as expected because we're ready to turn them on to be Standalone companies. Just remember as we always talk just.
Probably about 300 million of annual cost that businesses have added between the two of them for.
Standalone public company costs and that of course, the year over year basis will be headwind here in the first quarter is.
Good both Judy in Dave have done most of the staffing I think over 90% effective what we had.
Expected needed to be to be added to these businesses. So it's it's a it's just a funky quarter with the with all of these transition costs. Some of it will identify them when we're done with the quarter.
But it's just it's going to be a little choppy.
Great. Thanks, guys and good luck.
Thank you.
Next question is from Myles Walton.
Okay.
Thanks, Good morning.
Thanks.
Six or seven quarters ever done much restructuring at Pratt and obviously, a big pickup here in the fourth quarter.
So maybe was there something you saw there that you're taking action that you had an opportunity do previously and then as you look out over the next year not considering the kind of the integration, which sounds like you're going to keep the two business is relatively separately with raytheon, but what's the outlook for opportunity at those type of college.
Space as well as as well as perhaps.
Yes, so at Pratt in the fourth quarter, we had a.
Early retirement program, which was I would say well received and frankly for the last five years as we've ramped up GT production at Pratt we have entity tremendous amount to the workforce in the in the back office to support procurement quality manufacturing et cetera.
And is yes, Chris Kelly, who is taking over there.
We decided that it was time probably to turn does that speak it off and to take some and give some efficiencies in the in the overhead pools, we've taken out over a thousand people through and through the early retirement program and obviously the payback is phenomenal on that and that's back what's driving a big chunk of Pratt growth next year is that.
Gary.
There remains other opportunities that I think.
We'll get an opportunity later this year to have Mr. Cleo industry were take you guys through.
Some of the opportunities they have Chris is looking at the at a restructuring or some of the other manufacturing operations, there and there'll be other things that we can do I think two to drive efficiency at Pratt Collins is I think Neil mentioned, we expect to another 150 million of cost synergies this year.
That's going to slow down a little bit, but there are still I would say lots of opportunities of the facilities side.
That Kelly in team continue to look at so.
Even though we haven't done a lot in the west I would say six quarters.
We haven't forgotten how to do this I would tell you also carrier over the course of the last year did a lot of restructuring I think thats a good about 1300 indirect heads during the year. So we have we haven't forgotten their routes on cost reduction.
We're just trying to be judicious with the aerospace sales up like they have better for the last couple of years.
Just hasn't been as much opportunity but.
We certainly see more on the horizon.
Okay, and just one clarification the GTF manufactured delivery profiles of last year has that changed significantly.
In terms of your outlook or is that roughly the same.
No I'd say, it's roughly the same.
Okay. Thank you.
Welcome.
Thank you and our next question comes from Robert Thanks.
With credit Suisse. Your line is open.
Hi, good morning, good morning.
I wanted to follow up on the question on the Collins cadence on a couple of minutes ago and focusing on the interiors business. We don't talk about it a lot, but given that it's a discretionary driven business it behaves differently than the others I wanted to see how that was trending at the back end of 19, and what you're expecting there in 2020.
Yes, I would tell you that.
The interiors business.
First half of last year, and even back from 28 team was not doing as well as what we had hoped but they have really picked up the cadence here in the back half and very strong backlog they've got some new products out there both of the economy, an economy plus as well as in the business class seats, they've got a very strong backlog.
So.
If anything I would expect to some pretty decent growth coming out of the interiors business. This year.
Yes.
No I was just want to comment.
Yes, I'm sorry.
Just going to say the interiors business was a major part of our parts and repair performance in the fourth quarter. So they are performing quite well.
Does the pressure from Max on the airlines interfere with that discretionary spend or is the idea that thats really narrow body care carriers really doesn't influence what is otherwise a wide body business.
Well just to be clear are we still supply a lot of I would say economy economy, plus seating in the narrow bodies sector no we haven't seen a big impact.
This past year of course, because Boeing was still building the aircraft and still doing fitting out the interiors and keep in mind is more than just see that's also all the galleries.
Where we've got pretty good share as well so when we think about that we've talked about $100 million. So sales above chunk of that will come out of the interiors business.
Here in the first first few months as Boeing has this production pause, but beyond that the backlog still remains very robust.
We continue to add to folks both of the Philippines that are factory there as well is done in Winston Salem. So.
I would say that business.
As turned around nicely.
Okay. Thank you very much.
Thank you.
Next question comes from.
Cowen Your line.
Yes, thank you very much.
Hey, guys, followed you Tc longer than most so Greg.
You mentioned on the Max that the 90 day suspension and then you're going to 21 in the second half is that based on your estimate or with some.
Ross guidance from Boeing.
I would say that we have been in constant contact with with Boeing and so this is our our best guess.
Okay, the guest and working with Boeing about what that production pause will look like.
Obviously, we're working with them on the software elements of this but we think this is a most reasonable view we could have in terms of what the impact will be to the year. If it's better you guys, we'll certainly see us but for right now we think thats.
That's what it's going to be.
But you mentioned that you don't plan on laying anyone off for 90 days, but it isn't really 90 days because your production rate in the second half by your assumption is going to be down 50%. So could this very high drop through of the decremental volume be lower I mean some.
Point are you going to think of land some people off given this goes for more than nine months.
Well keep keep in mind Guy. This if you think about Collins $26 billion in revenue last year.
Got a lot of other programs out there you've got growing demand on the military side, you've got backlog in wheels, and Briggs and many other parts of the business. So.
Well, we work some less overtime, probably but we're going to lay people off because of this no I think again, it's just it hurts on the absorption front, but it's not it's not significant in terms of the overall Collins business.
Okay terrific. Thank you.
Thanks.
So I want to thank everybody for listening today I know its is a busy earnings Davis will be the last earnings call for you, TX all things being equal and we look forward to seeing everybody talking to everybody.
With the completion of the merger and the we wish our friends at secure and Otis very well and the thank everybody for listening today take care.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.