Raytheon Technologies Corp

NYSE:RTX

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to the United Technologies Fourth Quarter 2018 Earnings and 2019 Outlook Conference Call. On the call today are Greg Hayes, Chairman and Chief Executive Officer; Akhil Johri, Executive Vice President and Chief Financial Officer; and Carroll Lane, Vice President, Investor Relations. This call is being carried live on the Internet, and there is a presentation available for download from UTC's website at www.utc.com.

Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring costs and other significant items of a nonrecurring and/or nonoperational nature, often referred to by management as other significant items.

The company also reminds the listeners that their earnings and cash flow expectations and other -- any other forward-looking statements provided in this call are subject to risks and uncertainties. UTC's SEC filings, including its Forms 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. [Operator Instructions]

Please go ahead, Mr. Hayes.

[Gregory Hayes, executive]

Okay. Thank you, Amanda, and good morning, everyone. As you probably saw in the press release this morning, I think the numbers pretty well speak for themselves, a really, really good quarter and a really solid 2018. So we're all happy, I think, the way the year ended.

This morning, I'd like to cover 4 different things. Of course, we'll go through 2018, and I'll start and have Carroll take you through some of the business unit detail. After that, we're going to talk a little bit about 2019, our guidance for the year. Akhil will go through the detail on that. Let me come back at the end and talk about the portfolio separation activities, give you a, really, an update on where we are from both a schedule and a cost standpoint. And then lastly, a few words on the integration of Rockwell Collins.

So let's start on 2018. Obviously, sales and earnings, significantly above our expectations that we had going into the year and even above what our expectations were in November when we last updated guidance. The beat, of course, was driven in large part by a lower effective tax rate. And those were really the result of the finalization of some rulings -- rules from Treasury that happened late in the year. And I think, importantly, the beat was also driven by much better Rockwell Collins performance after the acquisition.

So we reported adjusted EPS of $7.61. That's up 14% versus last year. I think, most importantly, the organic sales was 8 -- up 8% for 2018. That's our best year over a decade for organic growth. Importantly, of course, each of the businesses reported accelerated organic growth versus 2017, with Pratt & Whitney leading the way, up 14%.

Free cash flow, just essentially in line with our forecast at $4.4 billion, and it sets us up for a very strong cash performance in 2019, which Akhil will take you through in just a minute. So again, across the board, good results.

Following along on the webcast on Slide 2. A lot happened in 2018, I don't need to tell everyone listening here. It was really a transformational year for us at UTC. First of all, with the completion of the Rockwell Collins acquisition. And this will position our Collins Aerospace Systems business to be the premier systems supplier in the aerospace industry for years to come.

In our commercial businesses, we continued to invest in innovation. And for a fourth year in a row, Carrier introduced more than 100 new products, and that contributed to their 6% organic revenue growth. Otis, of course, continued to invest in service transformation, which will enable efficiency gains as you think about the management of those 2 million units that we have in our service portfolio. And at Pratt, GTF production continued to ramp up successfully. It nearly doubled GTF production from our 2017 levels.

And I think, most significantly, we announced our intention to separate the UTC portfolio into 3 industry-leading companies. I'll talk more about that at the end after Akhil takes you through the numbers.

Moving on to Slide 3. We're clearly pleased with the results in 2018, but quite frankly, the focus right now is about 2019. The priorities, of course, in addition to the integration of Rockwell Collins into our Aerospace Systems business and the separation activities, has really not changed from prior years. We're going to continue to focus on growth through innovation. We're going to take a hard look at costs. And I guess, most importantly, we're going to be executing on our commitments to customers, and we'll remain disciplined in our allocation of capital. At the same time, of course, we continue to monitor the macro environment.

As you'll see and think about the aerospace business, this year will represent almost 60% of UTC's revenues. Really solid trends in aerospace across the board, continued RPM growth, production increases coming at both Boeing and Airbus. So on the aerospace side, we feel really good.

On the commercial side, it's more of a macro story. With North America, the U.S. again, really, really pretty good outlook for this year off the back of some strong orders that we saw in 2018.

Europe, it's a watch item. Think I've been saying that for about 15 years. We still expect it to grow modestly. But again, I think there's always a question in Europe in terms of overall growth, certainly not as strong as the U.S.

In China and Asia, again, continued growth. In China, probably on the back of additional infrastructure spending. But again, growth in China and Asia.

So in total, for 2019, we expect sales growth -- organic sales growth of 3% to 5%, on top of the 8% that we saw in 2018. We also expect continued earnings growth, with adjusted earnings per share of $7.70 to $8. Importantly, we expect each of our 4 businesses to grow operating profit, continuing the momentum from 2018.

As you saw, Otis did grow profits in the fourth quarter, which is a solid starting point for continued growth in 2019. At Carrier, Pratt and Collins Aerospace, they're all well positioned to see continued operating profit growth, adding to their gains in '18.

Akhil will take you through more detail on 2019 in just a few slides, but let me hand it over to Carroll to talk about the fourth quarter results. Carroll?

[Carroll Lane, executive]

Okay. Thanks, Greg. I'm on Slide 4. Q4 was another solid quarter for UTC. Reported sales of $18 billion were up 15%, including 11% organic growth and 4 points of acquisition benefit. Foreign exchange was a 1 point headwind in the quarter. That follows tailwinds earlier in the year.

Adjusted EPS of $1.95, up $0.35, or 22% versus the prior year. On a GAAP basis, EPS was $0.83, up 66% versus prior year. Restructuring was an $0.11 charge, and we had $1.01 of nonrecurring charges in the quarter, including a $692 million tax charge, primarily related to undistributed foreign earnings.

As you saw on our press release table, the Q4 adjusted effective tax rate was 15.9%. Note, this reflects a true-up to the full year adjusted effective tax rate, which ended at 22.1%. That's significantly favorable to our lowered expectation of 24.5% for 2018, and the favorability was largely driven by U.S. tax reform-related updates issued throughout the year, including clarifications from the U.S. Treasury in the last quarter of 2018.

Fourth quarter free cash flow was $1.2 billion, taking our full year cash generation to $4.4 billion.

Now with that, I'll move on to the segment results. I'll be speaking to those results at constant currency as we usually do. And as a reminder, there's an appendix on Slide 19 with additional segment data as a reference.

Starting with Otis on Slide 5. Sales were $3.3 billion in the quarter, up 5% organically. On a constant-currency basis, new equipment sales grew 4%. Mid-teen growth in Asia, excluding China, and mid-single-digit growth in Europe were partially offset by low single-digit declines in both North America and China. Service sales were up mid-single digits, with growth in repair, modernization and maintenance.

Organic new equipment orders were flat in the quarter. Orders in North America grew 10%, offset by a mid-single-digit decline in Europe and a high single-digit decline in Asia, excluding China. In China, orders were up 2%, with the market stabilizing from a price and mix standpoint. And that continues the trend we've seen throughout 2018.

Operating profit at Otis was up 7% at constant currency, marking the first quarter of earnings growth since Q3 2015. The benefit from higher new equipment and service sales volume more than offset higher input costs as well as unfavorable pricing and mix, largely from China. Foreign exchange translation was a 3-point headwind to sales and earnings. For the full year, Otis operating profit declined $64 million at actual FX on 3% higher organic sales.

Turning to Slide 6. Carrier sales were up 6% organically. The growth was across the board. Strong demand in HVAC and transport refrigeration end markets continued in the fourth quarter. North America residential HVAC was up 12%, and global refrigeration was up 7%. Carrier equipment orders grew 3% organically in the quarter. North America HVAC continued to be strong, with residential orders up mid-teens and commercial orders up 6%. Transport refrigeration orders grew 12%, with over 50% growth in the North America truck trailer business, partially offset by contraction in container after being up 48% in the fourth quarter of last year. Fire and security product orders were up 4%.

Europe commercial HVAC was down 23% in the quarter. That's after being up 20% last year. For the first time this year, pricing more than offset input cost headwinds. Margin contribution from organic volume and the restructuring benefits was partially offset by the divestiture of Taylor and unfavorable mix. Carrier grew profit 3% in the quarter, excluding the impact of the Taylor divestiture.

Looking at the full year, Carrier saw 6% organic sales growth. That's the best year of organic growth since 2011. Carrier's operating profit grew $65 million at actual FX.

Shifting to Pratt & Whitney on Slide 7. Sales of $5.5 billion were up 24% and up 22% organically, driven primarily by higher GTF and F135 shipments and commercial aftermarket growth. Commercial OEM sales were up 74%, driven by 165% growth in large commercial engines. Total Geared Turbofan shipments, including those to the spare engine pool, continued to increase sequentially and nearly doubled over the prior year fourth quarter.

Pratt & Whitney Canada OEM sales were up 14%, with shipments growing year-over-year and sequentially. Military sales were up 17%, driven by F135 production and higher aftermarket. Commercial aftermarket sales were up 11%, as the large engine aftermarket continues to benefit from strength in the V2500.

Adjusted operating profit of $340 million was down 13%. Strong commercial and military aftermarket were more than offset by higher GTF negative engine margin on favorable OEM mix and FX at Pratt Canada, higher E&D and SG&A.

For the full year, organic sales were up 14%, with $61 million in operating profit growth. Higher commercial aftermarket as well as drop-through from growth in military OEM and aftermarket sales were partially offset by higher negative engine margin and ramp-related investments.

Turning to Slide 8, our new segment, Collins Aerospace. These results include legacy Aerospace Systems and 5 weeks of legacy Rockwell Collins. Sales in the quarter were $4.9 billion, including 9% organic growth, with operating profit of $721 million.

Within legacy Aerospace Systems, organic commercial aftermarket sales were up 8%. Parts and repair were up 10% and 14%, respectively. And provisioning declined by 2%, as expected, due to lower intercompany sales to Pratt & Whitney.

Commercial OEM sales grew 9% organically, driven by new production programs, primarily the A320neo, partially offset by declines in legacy programs. Military sales were up 12% organically, driven by strong aftermarket and higher F-35 volume.

Legacy Aerospace Systems operating profit grew 6%. Drop-through on higher organic sales and benefits from product cost reduction more than offset mix headwind and SG&A spend.

Legacy Rockwell Collins contributed $778 million of sales in the quarter, with better-than-expected profit and cash flow. As a result of the better business performance as well as lower amortization and other expenses, dilution to UTC earnings in the quarter was approximately $0.03 of EPS versus our prior expectation of $0.10.

On a full year basis, legacy Aerospace Systems delivered 8% organic sales growth and 10% operating profit growth, driven by strong execution on product cost reduction and a growing aftermarket business.

With that, I'll hand it over to Akhil, who will provide more detail on the 2019 outlook. Akhil?

[Akhil Johri, executive]

Thanks, Carroll. So I'm on Slide 9. As Greg said, I think the economic environment looks good from our perspective, certainly on the aerospace side of the business. On the macroeconomic side, for the commercial businesses, we expect the economies to continue to grow though at a slightly moderating rate versus 2018.

U.S. growth remains strong. Housing starts and commercial construction are projected to be up again in 2019. Inflation remains under check, and consumer spending is still robust.

In China, GDP growth is projected to again exceed 6%, including continued infrastructure spending, which is good news for both Otis and Carrier.

Europe, on the other hand, we have seen lower order rates recently for our commercial businesses, and we continue to watch that region carefully.

End markets in aerospace remain solid. Revenue passenger miles are projected to grow about 6% in 2019, on top of 6.5% in '18. Once again, these are all above the long-term growth trajectory of 5%. We expect the 2019 narrowbody aircraft deliveries to increase versus the 2018 levels, and global airline profitability outlook remains healthy. These trends, coupled with strong defense spending, should drive good organic top line growth once again at both Pratt and Collins Aerospace.

On the other hand, the stronger U.S. dollar will be a headwind in 2019. Our assumptions for 2 of the key FX rates are in the box on the lower left-hand side of the chart. In total, we have around $550 million of sales and $75 million of operating profit headwind from FX translation included in our 2019 outlook.

On Slide 10, you see the 2019 segment outlooks. As Greg highlighted, all 4 businesses are expected to grow operating profit in 2019 on a constant-currency basis. As usual, the appendix has detailed sales and EBIT walks for the segment outlooks, which you might find useful.

Let's start with Otis. We expect low to mid-single-digit organic growth in 2019 for both new equipment and service. China new equipment is projected to be up high single digit as the higher 2018 year-end backlog converts to sales. We also expect a stable new equipment market in China in 2019 and a faster conversion of new orders into sales.

North America new equipment sales will also benefit from strong 2018 orders. And the Europe service business is expected to grow low single digits, slightly better than the 1% growth we saw in 2018.

On profit, we anticipate Otis to be up $25 million to $75 million at constant currency, driven by significantly lower price/mix headwind and the benefits from volume and productivity. Translational FX will be a headwind of $300 million to sales and $50 million to operating profit. Keep in mind, this will be a disproportionate impact in the first half. Also, favorable mark-to-market adjustments in Q1 last year will be a headwind for Otis this quarter.

At Carrier, organic sales are expected to grow low to mid-single digit. We expect continued growth in North America residential and global commercial HVAC and strong backlog conversion in transport refrigeration. Our outlook is for operating profit to be up $125 million to $175 million at constant currency. Volume-related drop-through, pricing and productivity should more than offset input cost headwinds, which include an incremental $65 million of net tariff impact.

At Pratt & Whitney, sales are expected to be up high single digits. GTF volumes will continue to ramp in 2019, and we expect to see higher Pratt Canada shipments as well. Commercial aftermarket should grow mid-single digits, primarily driven by continuing V2500 growth and GTF activity, partially offset by declines related to the legacy engines. The military business will see benefits from higher Joint Strike Fighter engine shipments and strong aftermarket.

On the profit side, we expect Pratt operating profit to increase $200 million to $250 million, driven by growth in commercial aftermarket and military. Negative engine margin is expected to be flattish compared to 2018 as we have previously discussed.

Collins Aerospace is expected to grow reported sales by more than 50%, with the acquisition of Rockwell contributing over $8 million -- $8 billion to the year. On an organic basis, sales are expected to be up mid-single digit in commercial OE and military and low to mid-single digit in commercial aftermarket, in spite of tough compares on provisioning, which was up mid-teens in 2018.

Operating profit is expected to be in the range of $4.2 billion, up $1.55 billion to $1.6 billion versus the prior year. Legacy Rockwell Collins is expected to contribute nearly $1.35 billion of the year-over-year operating profit growth. Remember, this is incremental to the over $100 million profit contribution for 1 month in 2018.

And as you will see from the operating profit walk in the appendix, synergy savings in the year are expected to contribute around $150 million to the bottom line, a solid start to our goal of achieving $500 million over 4 years.

So overall, a solid segment outlook for 2019 with all segments contributing.

On Slide 11, you'll see our EPS walk for 2019. The segments are expected to add $1.85 of EPS at the midpoint of their outlook range. Pension will be an $0.08 tailwind. That's driven by $0.14 from Rockwell Collins. Tax and minority interest will be a $0.17 headwind. Our adjusted effective tax rate in 2019 is expected to be between 23% and 24% versus the 22.1% we got in 2018. This is primarily driven by the full phase-in of the U.S. tax reform for our international entities, specifically the impact of the duty provisions. Interest expense will be a $0.68 headwind, largely driven by nearly 11 months of incremental expense on the $11 billion of debt incurred for the Rockwell Collins acquisition and the $8 billion of debt acquired as part of the transaction.

In terms of other big items below the segment profit level, corporate expense, elims and other will be a $0.15 headwind, largely due to a few onetime gains in 2018 and continued investments in our digital capabilities. Higher share count, driven by Rockwell Collins' acquisition, will be a $0.58 headwind in 2019. We now expect our weighted average diluted share count to be around 870 million shares based on our final 2018 ending share count.

Finally, as usual, our EPS range of $7.70 to $8 includes contingency to account for the unexpected. It is about $110 million at the midpoint. As you can see on the chart, we now expect Rockwell Collins accretion to be approximately $0.35 in 2019. The improvements on the $0.15 to $0.20 we discussed in November is driven by 2 items: one, synergies are higher in 2019; and two, intangible amortization is approximately $100 million less than we anticipated at the time of the close. You will also note, our 2019 EPS range includes approximately $0.50 of expense from Rockwell Collins-related intangible amortization.

So overall, we feel very good about the 2019 EPS outlook with significant segment operating profit growth and solid accretion from Rockwell Collins, partially offset by higher tax rate and interest expense, FX headwind and absence of some onetime gains.

With regard to calendarization, we expect segment operating profits in Q1 to be around 22% of full year, similar to what we saw last year. However, primarily due to the absence of a few onetime gains below the line, specifically the $0.05 of gain we had in Q1 last year in the elims, 2019 first quarter adjusted EPS will be slightly below 2018.

Moving to Slide 12. Just a few comments on our cash outlook before I turn it back over to Greg. As we have said previously, we fully expect to see acceleration in our cash generation going forward. For the legacy UTC business, we expect our 2019 free cash flow to grow by 24% at the midpoint of our outlook range, up from $4.3 billion in 2018, excluding Rockwell Collins.

Now I know several of you have questions regarding legacy Rockwell's cash performance in 2018. As you can see, the legacy Rockwell Collins business is expected to generate a solid and above-normal $1.4 billion of free cash flow in 2019. That is on top of the roughly $300 million cash inflow in December 2018, which historically, as you will see if you study Rockwell Collins, was a period of cash outflow for the legacy business. So bottom line, heritage Rockwell Collins businesses are performing very well on all of the key financial metrics.

So all this gets us to a free cash flow of $6 billion to $6.5 billion before the onetime cash payments associated with portfolio separation activities. We expect these to be around $1.5 billion in 2019.

With that, let me hand it back over to Greg. Greg?

[Gregory Hayes, executive]

Great. Thanks, Akhil. Hope you guys got all that. Obviously, a lot to digest. I think -- again, the 2 key takeaways though: '18, really solid performance, better than what we expected; but really, it's the culmination of the investments that we've been making, especially on the aerospace side. And what we expect in '19 is a continuation of the same. So again, really, really solid performance.

Let me just add a couple of comments about the portfolio separation and then Rockwell Collins. So as you think about it today, we currently have about 15 separate teams with about 330 people working the separation process. That number is going to ramp up to about 500 people in the next few months.

Based on the work we've done over the last 2 months, we now see a path to achieve the separation in no more than about 18 months. The focus of the team, though, is to be operationally ready for separation by the end of this year. That means all the systems are in place and all the processes in place to actually be able to run separate companies at both Otis and Carrier and the remaining UTC.

Unfortunately, the ultimate timing of the spin will be subject to tax rulings. We've talked about this before. There's a couple of jurisdictions that have some relatively significant tax costs, absent favorable tax rulings. So we're going to work through those things, but we really need to get those tax rulings to minimize the onetime costs. And that's why -- what really drives the 18-month kind of time line.

So if you think about this, we announced late last year, November, this would push the time line someplace out to around May or so of 2020 to be complete. Obviously, we're pushing to get it done a lot faster or at least by the end of the year. I think that's unlikely, but we're going to keep pushing.

With regard to separation costs, there has been a lot of concern about that, $2.5 billion to $3 billion. Let me give you a little color on where that is going to come from. First of all, 3 big categories of costs. The largest, of course, is the tax cost of the separation activity, paying transfer tax and other types of taxes in a number of jurisdictions around the world. We think that, that could amount to almost $2 billion. Obviously, we're going to work to minimize that. But for today, we've got a placeholder of $2 billion.

Transaction costs, about $500 million. Again, that's all of the people working on these teams. That's the outside folks that are giving us a hand as well as all the internal resources to restructure about 1,200 legal entities that we have within UTC, put the IT systems in place, to put the treasury systems in place, et cetera. So that's about $500 million.

And the last big chunk of cost will be debt refinancing. We think that's about $300 million. It will depend, of course, upon what the markets look like at the end of this year in terms of what the interest rate differential is. But for today, we've got a placeholder of $3 million. Obviously, the focus is to minimize all of these costs.

We're also trying to minimize the recurring cost that Otis and Carrier will incur as stand-alone entities. You remember we talked about that being a $350 million to $400 million negative synergy associated with the separation. I would tell you that both Judy at Otis and her team and Bob at Carrier and his team are focused on how we can minimize those costs, how we can actually not see that type of cost growth. They are looking at the structural cost-reduction activities to minimize these costs, but also to give themselves cost runway going forward.

Obviously, we're also going to look to reduce cost at what's the remaining UTC. As I said before, about 40% of UTC's current revenue goes away, meaning that we're going to have to be doing -- taking reductions along those lines here at the corporate office as well. As we move through the year, we'll provide additional detail on both the separation costs as well as the onetime costs as we get some more clarity there.

Finally, of course, I think this was a concern back in November. We do remain open to strategic alternatives on the commercial businesses should there be a real value-enhancing opportunity out there that's going to create long-term shareholder value above that which the separation was going to provide. So we're still out there. We're still listening. And at the same time, we're working very hard to get the separation done.

On Rockwell Collins, on the integration, let me just say 2 things. First of all, we are on track, and there are no surprises. And the operating unit management teams under Kelly Ortberg and Dave Gitlin, which we announced late last year, are working well together. I think, again, you saw that in the better-than-expected Collins performance in December, but the teams really are focused. We've been out having customer visits, conversations with all the major OEMs and airline customers. And we've had clear alignment on the actions and the opportunities.

And now that the teams from both businesses have been able to work on the cost synergy, we're even more confident in our ability to deliver $500 million in cost synergies as a result of the combination in the first 4 years. As with everything else at UTC, we're going to push harder on that number. We'll come back as we did with Goodrich. We started at $350 million and ended at $600 million. We're going to continue to look for additional opportunities beyond that $500 million.

We're also looking at revenue synergies. The team has identified some revenue synergies already. They're really focused on those key trends around autonomy, a more electric aircraft and a more connected aircraft.

I think, just as importantly though, we expect very strong cash flows out of the legacy Rockwell Collins business -- or the Rockwell -- or the Collins Aerospace business going forward. As Akhil mentioned, about $1.3 billion better than this year, which means about $1.4 billion of cash coming out of Rockwell Collins this year. So I know there were some concerns a couple of months ago, let me just tell you, we are on track. There is no surprise here. We have a great property and a great group of people that have joined us with Rockwell Collins.

Of course, as we work through the separation process, our focus is still on delivering to our customers first and foremost and executing on all the other priorities that we have talked about.

So with that, I think the filibuster has ended. Why don't we open up the call to questions? Amanda?

[Operator]

[Operator Instructions] Our first question is from the line of Jeffrey Sprague of Vertical Research Partners.

[Jeffrey Sprague, analyst]

Just 2 quick things from me. First, on separation. I totally get everything you just said. It sounds though, guiding $1.5 billion here in 2019, that you actually are going to get some of the bigger, stickier tax things done this year. Is that a correct way to interpret that? And then separately, just kind of on the whole strategic discussion on the commercial businesses. Does the retention of Chubb, in your view, in any way complicate doing something strategic with Carrier, maybe preclude a permutation or 2? Or you don't see that as kind of relevant to kind of the potential chess moves that could happen?

[Gregory Hayes, executive]

Well, you didn't follow the rules, Jeff. That's 2 questions, but we're going to answer both of them. First of all, on the $1.5 billion of onetime cash cost this year, I would tell you that's a placeholder. I can't -- and Akhil and I have been back and forth with the tax folks as we look at this and some of the others. Obviously, the separation cost for the teams, that's pretty well known. We'll incur a big chunk of that this year. That might be $300 million out of that $500 million. But as far as the debt refinancing, that will be a part of whenever we actually go to market. And then the other piece on the tax will depend really on getting these tax rulings. I would tell you we'll give you visibility every quarter to what we're doing here. But again, it's a placeholder. Whether it happens all this year or some of that spills into next year, I don't know. Akhil, any other...

[Akhil Johri, executive]

No. I think you're exactly right. If anything, Jeff, the tax costs and some of the other costs will probably be later in the year. The transaction costs are happening every day. And we've got -- perhaps sometimes I feel there are more consultants around in this building than there are actual employees. But still, it's -- we are moving at a very fast pace and hope to get as much done as possible, at least operationally. And then some of the tax stuff will happen when it happens, unfortunately, a little outside of our control.

[Gregory Hayes, executive]

Yes. Let me just make a comment on the Chubb potential divestiture. We saw an opportunity last year with the markets relatively frothy to take a look at a potential divestiture of the Chubb field business. And keep in mind, this is a business of roughly $2.5 billion in sales about a -- with a roughly 10% operating margin. This business was not broken. This business, we thought, perhaps would benefit from a different ownership in terms of the ability to consolidate more in the space. We went through the process. I think everybody knows the markets got really choppy in November and December. And quite frankly, we weren't going to give the business away. We've got new management in place with the Chubb business today. I talked to Bob yesterday about it. We're going to keep the business. And I don't think it really impacts anything from a strategic standpoint. Again, it is a solid business. It's not going to present any challenges if there is a consolidation opportunity out there later on. So we like the fundamentals of the business. We've probably under-invested in it though over time, so there will be a little bit more incremental investment. But we've got a good team, and it's got a good footprint, and we're going to run it.

[Operator]

Our next question is from the line of Ronald Epstein of Bank of America Merrill Lynch.

[Ronald Epstein, analyst]

Greg, if you could speak to -- you mentioned, just kind of going back to one of your comments, that you met with customers and the OEs. Specifically with the OEs, to get them to kind of fall in line with you guys owning Collins, how did you get them to do that? Like, an investor question -- I guess, another way to say it, a question we've been getting is what did UTC have to give up to get Boeing to sign this deal? I know you can't specifically answer that, but can you broadly speak to what you had to do to kind of get everybody in line and say "Yes, this is a good idea"?

[Gregory Hayes, executive]

So let me be clear, UTC didn't have to do anything at the end of the day in terms of getting Boeing or Airbus to do the deal. Rockwell Collins, prior to the completion of the acquisition, they did enter into an arrangement with Boeing. But really, it was more tied up in PFS and some longer-term incentives to Boeing to select more Rockwell Collins product. At the end of the day, I think both Boeing and Airbus understand that we, as systems suppliers to those 2 big companies, can really provide benefit to them long term in terms of the innovation, the technology that we bring to bear. But they weren't easy discussions. I think, obviously, when your supplier gets to be really big, people always get concerned. But the fact is, we still compete every single day on every single system that we provide to both Boeing and Airbus. And our goal, as we told both Tom Enders and Dennis Muilenburg, is to be the best Aerospace Systems supplier we can possibly be. So those conversations aren't always easy, and it's a little bit of show-me out there. But I would tell you, Kelly Ortberg understands, Dave Gitlin understands, that whole organization understands that they need to deliver on their commitments. And if we do that, I don't think there's going to be a lot of noise in the system.

[Operator]

Our next question is from the line of Steve Tusa of JPMorgan.

[C. Stephen Tusa, analyst]

Can you maybe just provide a little bit more around the components of the Collins accretion? And then one last one, on free cash flow. Just a little bit of guidance on some of the below the operating line stuff, like customer financing activities, collaborations, intangibles, that kind of stuff.

[Akhil Johri, executive]

Sure. So I think if you look at the appendix, Steve, you'll see the Collins operational profit incrementally is about $1.35 billion or so, roughly. Then you adjust against that the intangibles amortization, the interest costs associated with the debt, the integration cost, et cetera, and that's how we get to the $0.35. So it's essentially looking at what we would have -- what we have got from Rockwell Collins incrementally after allowing for the interest, after allowing for the intangibles amortization, about $0.50, as I said, and after allowing for all the synergies and integration costs. So that's the net math. The difference between the $0.15 to $0.20 we were expecting and the $0.35, as I said earlier, largely came from a little better operating performance, a little better synergies and largely from the lower intangibles, which have been finalized over purchase accounting as we went through. Now that number could change a little bit, but I think we are pretty much done with purchase accounting. With regard to your question on customers financing and intangibles -- not intangibles, but other items below the line, below free cash flow, it's generally in the range of $1 billion to $1.5 billion. I think it'll probably be somewhere in that range again this year. You'll see that in our K, which will come out. I think, this year that number was more like $800 million, so somewhere in that range, the 2 together is what you should take into account in your cash models.

[C. Stephen Tusa, analyst]

Okay. One last question for you. What are you seeing in Carrier in China in comparison with Otis?

[Akhil Johri, executive]

Yes. Carrier was also good growth. Actually, it was double-digit growth in the fourth quarter for the commercial HVAC business. The fire and security products business in Carrier had struggled a little bit earlier in the year, but I think the comps got a little easier by fourth quarter. So our outlook is to grow probably sort of low to mid-single digit again next year. There has been good growth on the commercial HVAC side, a lot of it is infrastructure-related. But also, there, Carrier is seeing some strength in the other segments as well.

[Operator]

Our next question is from the line of Noah Poponak of Goldman Sachs.

[Noah Poponak, analyst]

Akhil, I wonder if you would dive a little bit more into the Otis margin and where you think it goes next. It looks like if I use the sort of FX normalized or FX adjusted, I guess, revenue and segment EBIT guidance, it looks like you're expecting the core margin to be flat to maybe even down a little bit. And I think you stated a lower price/mix headwind, which sounds like still a price/mix headwind. I would have thought that your comments on China OE price and Europe service the last few quarters would suggest a better book translating to the P&L at this point. So maybe if you could just elaborate a little bit more on what you're expecting there and how that progresses going forward.

[Akhil Johri, executive]

Sure. So let's first talk about the price/mix thing. I think again, in the appendix, Noah, you'll see we've got a price/mix headwind of about $25 million in 2019. That compares to about $150 million that we saw in 2018. And in that number -- obviously, that's a composite number of a lot of the geographies. China, we believe, is flattish for 2019 from a price/mix perspective. And we have seen that trend sort of in our orders this year, so that's consistent. We still have a little bit of negative pricing baked in for Europe service business because while that trend has been improving, it is not back to neutral yet. We still have slight -- we still saw a slight decline in Europe service pricing for Otis in 2018 on a year-over-year basis, and we expect that trend to improve but maybe a little bit less. So that's kind of the makeup of that. Overall, margins for Otis, I think we believe it sort of flattens -- it troughs around 2018 level. We think '19 should be flattish. Our focus at Otis, as we have said many times, is on operating margin dollar growth, not the margin percent so much. Because the first step is to start growing earnings on a consistent basis. And then the next step will be to start growing earnings faster than sales. We do believe, longer term, Otis should look at mid- to high teen margins possibly again because that's the business which has the scale advantage related to its competitors. And if you have 2 million-plus units under maintenance, you have the benefit of density. You have the benefit of productivity that you can get. That all should drive higher margin differential versus competitors on Otis. So we still feel good. I know that it's still a long way to go. Otis, in our mind, is still work in progress. We still are in early stages of productivity from the investments we are making in the tools, but we do believe we are on the right track. And over time, we will see those benefits come through.

[Operator]

Our next question is from the line of Julian Mitchell of Barclays.

[Julian Mitchell, analyst]

So maybe sticking to the one-topic rule, really focused on Collins. You clarified the EBIT and EBITDA moving parts but wondered what your updated thoughts were on its organic sales growth for calendar '19. I think you talked about some issues in interiors, last call. And also on the free cash flow bridge for Collins. If I look at Slide 12, it looks like it's about $1 billion of free cash after acquisition integration. Is that like-for-like versus the $500 million to $750 million that you talked about in November? And if so, what's the big step up outside of the extra synergies?

[Akhil Johri, executive]

Sure. So second question first. I think that's exactly right. The $1 billion that you see now is actually compared to the $500 million to $750 million, and part of it is just the timing thing. Remember, you all were very concerned about the 2018 negative cash flow out of Rockwell Collins. Well, some of that was just goodness that came into as we finalized our plans for 2019, plus the goodness that you saw in the 1 month of $300 million positive cash flow in 2018 December, right? That traditionally, Julian, as you know very well, is a negative outflow quarter or a cash outflow quarter for Collins. So that's just a little bit of correction of some of the issues that you saw in 2018 10-K for Rockwell Collins. So fundamentally, all good there. No problems. We said that at that time, but nobody believed it. Hopefully, you do now. So that's all good there. The first question was about organic growth on Rockwell Collins. We believe the avionics business and the mission systems business should continue to grow, hopefully, around the mid- to high single-digit level, so somewhere between what UTAS and what Pratt are experiencing -- are going to experience. The interiors business would be probably low to mid-single-digit type of growth there. Again, we expect some recovery in that business as well. Overall, business should be somewhere in the mid- to high single digit type of growth for Rockwell Collins on an organic basis.

[Operator]

Our next question is from the line of Carter Copeland of Melius Research.

[Phillip Copeland, analyst]

Just following up on Julian, though. I think there was a piece there that was still missing on the 2019 Collins bridge. I mean, obviously, you had a big benefit that you highlighted, Akhil, on the '18 recapture. But for your '19, clearly, that cash flow number sounds a little bit better and at least the EBIT delta came from amort, so that shouldn't have an impact on cash. So just wondering if there's any particular working capital items there worth noting. And then with respect to the outlook, I just wondered, across the aerospace portfolio, what's embedded in your assumptions around business aviation next year.

[Akhil Johri, executive]

Sure, Carter. So again, look at the -- you would normally have expected about $1 billion from Rockwell Collins in '19, right? So that $1 billion is $1.4 billion, that shows the improvement. Plus the $300 million that you see in 2018, would have probably been negative 1 50 over the quarter. What you also don't see here is some goodness that we saw in the period, which is not included, which is the October-November time period. Cash in that period benefit from the early payment of the incentives in September that you saw in the 10-K, right? So you had the benefit in sort of the period which is not included in any results. You have the $300 million in the December period, positive as compared to the negative historically. And then you have $1.4 billion compared to what would otherwise have been a normal $1 billion or so. The sort of makes up for some of the weakness that you saw in 2018 10-K. So we feel pretty good. I think if there's some upside opportunity, I think Collins is going to continue to look for additional opportunities to see if they can do better in 2019. But clearly, we're on the right track. We don't see any issues, Carter, with cash generation at Rockwell Collins.

[Phillip Copeland, analyst]

Great. And on bizav?

[Akhil Johri, executive]

Yes. Bizav, we expect growth there. So Pratt Canada shipments are looking to grow again. We saw some level of growth this year. The markets that were weak within the Pratt Canada portfolio were the general -- the regional market, to some extent. But the business jet market grew this year. Plus, keep in mind that we will benefit next year from big market share gain at Pratt Canada from the PW800 on the Gulfstream side, right, which is a platform where we never had an engine, the large business jets, and now -- and particularly with Gulfstream, and now we have that. So I think the benefit of market share gain, along with improving sentiment, should be a positive number for business jets.

[Phillip Copeland, analyst]

Does that get you high singles kind of growth?

[Akhil Johri, executive]

Yes, it does. For us. For us, yes.

[Operator]

Our next question is from the line of Sheila Kahyaoglu of Jefferies.

[Sheila Kahyaoglu, analyst]

Just on the -- Akhil, on the free cash flow first, I was hoping we could dig into it a little bit better. The underlying businesses, I think you said legacy UTX should be up double digits. What's really improving in 2019? And how do we think about working capital and any other moving pieces?

[Akhil Johri, executive]

Sure. So some of the improvements, Sheila, are coming. As you see, capital expenditure is not really coming down, right? So a lot of this is coming from improvement in our working capital. I've been saying for many years now that as we get through some of this ramp up-related challenges, the inventory turns for the businesses should improve. We saw some improvement in the inventory turns for both Otis -- for all of UTC, but specifically for the aerospace companies in 2018. We expect that trend to continue in 2019. So even though there is good organic growth in '19, the call on inventory or the call on cash from inventory is not as high as it has been in the last few years. We should see improvements there. Carrier is focused on ensuring that their receivables days are improving. They have had an issue with overdues for a period of time that they are working on and are focused on. So they'll continue to work on that. And then Otis, as always -- I mean, Otis is a business where we don't talk much about working capital, but their turns are like 60 turns. And they continue to benefit from that strong cash profile that they have. So overall, I think it's more a function of the working capital improvement that we have been talking about for a while. And I think capital expenditures, hopefully, should start to decrease a little from 2020 onwards. So we're on a good trajectory here. And hopefully, you all can see that.

[Operator]

Our next question is from the line of Myles Walton of UBS.

[Myles Walton, analyst]

One clarification on Collins, if I could, Akhil. Maybe I misheard it. I thought you said $8 billion sales contribution in '19. And then in response to Julian's question, it was mid-single-digit kind of organic growth. And so just kind of curious, was there a rev rec that comes into play that kind of works against you in '19? Because I think they did $8.7 billion in fiscal '18.

[Akhil Johri, executive]

Yes. So the $8 billion was incremental, right? So I think it's like $8 billion, $9 billion, roughly in that range. 8 was the -- I was rounding 8, and 8 is incremental, not absolute numbers.

[Myles Walton, analyst]

Yes. Helpful. And then the other one, on -- I think you said that you're assuming a faster conversion rate for orders in China. I'm just curious how sensitive your assumptions are to that assumption, why you're assuming it. And then conversely, the assumption on low single-digit organic growth in aftermarket UTAS seems a bit conservative and just curious if you're seeing slowing book-to-bill trends there.

[Akhil Johri, executive]

Sure. So on Otis first, Myles. Typically, about 60% of our current year sales come out of backlog. So that part is clearly there. So in terms of sensitivity, somewhere around 40% of the next year's sales are based on orders that Otis will be receiving that year. And based on some of the liquidity concerns that the market had overall seen in 2018, our expectation is that those conditions will improve a little bit, which will allow for a slightly better conversion. And this conversion rate is time between the booking of the order and the sale. So that's the belief there. Now could that be subject to some risk? Possibly. We do believe that the government's focus on infrastructure spending is going to help the market overall. It's in their interest to try and keep the GDP growth above 6%. So we don't feel that, that should be something that will come to fruition, but the range of risk would be on that 40%, to some extent, as I talked about. On the UTAS side, look, you were with us in 2015. And what we do not want to do is build a plan which again relies on a very strong provisioning in 2019 on top of very strong year in 2018. We had 14% growth, low-teens growth in 2018. So in our plan right now, what we've assumed is that provisioning will be flattish for 2019. If that number turns out to be better than that, that will be good news. But at this point, we do feel that given the 787 maturity that's happening, even though the rates are increasing, but the provisioning per operator does tend to go down as more provisioning stock is accumulated as well as on the legacy platforms, we see some pressure. No other change. The parts business and the repairs business should grow consistent with traffic, somewhere in the mid-single-digit range. So it's all about provisioning, Myles.

[Operator]

And your next question is from the line of Nigel Coe of Wolfe Research.

[Nigel Coe, analyst]

Just a quick clarification and then my question. On the breakup time line, does that apply to both spins? Or could one happen before the other? And therefore, that May deadline for 2020, is that the deadline for both spins or one could happen sooner? Just to clarify that. And then on the negative $25 million of price/mix in Otis next year, can you just break that out between China and Europe?

[Gregory Hayes, executive]

I will start out with the separation. Right now, the plan is to separate both Carrier and Otis at the same time. So the time line assumes that they both occur sometime between end of the first and end of the second quarter. Unlikely you would see a divergence from there. I think it's just much cleaner as we think about this to do everything at once in terms of the Forms 10s that have to filed, the roadshows, all of the activity around on the planning side. Everything really needs to be done once and -- as opposed to trying to stagger these things. So our goal, get them both done at the same time.

[Akhil Johri, executive]

And as early as possible because it's in everybody's interest to do it sooner rather than later. On the question about the price/mix for Otis, the $25 million negative. China is flattish. So essentially, all of the $25 million is Europe service. There is some small noise in other countries, but I would say, broadly speaking, that's probably what it is.

[Operator]

[Operator Instructions] Our next question comes from the line of Deane Dray of RBC Capital Markets.

[Deane Dray, analyst]

I don't know if this is going to be a quick question -- or a quick answer, but any comments on how the shutdown has been affecting the company broadly?

[Gregory Hayes, executive]

That is a pretty quick answer. The fact is we have not seen any impact. And keep in mind, while we talk about a shutdown, it's a partial government shutdown. And the fact is the DoD budget is fully funded. So that means we're still shipping on parts to the DoD. We still have DCMA and all the other folks from the government in, inspecting products and all that stuff on a regular basis. So we have not seen an impact per se. Whether or not we get our 10-K reviewed timely, that's something else. But at least for the business, really no impact from the shutdown.

[Operator]

Your next question is from the line of Peter Arment from Baird.

[Peter Arment, analyst]

Greg, just why don't we finish on a real high note? It seems like you're making a lot of progress on the GTF and seeing -- maybe you could just give us an update on what we should expect in 2019. Obviously, a big step up in production in Q4.

[Gregory Hayes, executive]

Yes, Peter. Thanks. It's interesting. We got all the way through the conference call with the -- or near the final, asked the GTF question. I would tell you, the GTF, the durability continues to improve. The on-time perform -- or the performance of the engine, it's still like 99.89% or 99.88%. So a really good dispatch reliability. We continue to work through the teething problems that we had talked about a year ago. There's still some aircraft out there that need to be retrofit. And there's always little naggling things that come up that affect a couple of engines, and we are always working through that. But that's the same on the V2500 that's been out there for 30 years. So we feel good. I think what's really important and you pointed it out is the production ramp increased. What we saw in the fourth quarter will continue. We're essentially on rate 65, I think, for Airbus this year. Whether or not we deliver all those engines, that will be determined by Airbus. But we feel good there. We've got engines going down to Embraer. We've got Mitsubishi out there still doing flight testing. But engine continues to progress, and we feel good about it. We took about 15% of the cost out last year, taking another 15% out this year. We're coming down the curve as we had expected. So good news is you shouldn't see a big bump in negative engine margin even though the production rate continues to increase.

[Operator]

And this does conclude the question-and-answer session. I would like to turn the conference back over to Mr. Greg Hayes for the closing remarks.

[Gregory Hayes, executive]

Okay. Thank you, Amanda. Thank you, everyone, for listening. As always, of course, Carroll and team are here to answer all your questions. And look forward to seeing you folks, I guess, it will be in -- at Barclays in Miami in about another month. So have a great day. Thanks.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.