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UTC Expects Real Aerospace Growth After Bullish 2018 Results

The engine manufacturer's newly formed Collin Aerospace unit should see profits up in 2019.

With a deadline to neck down into aerospace-and-defense-only company by May 2020, leaders of United Technologies said Jan. 23 they expect high-single digit organic sales growth at engine-maker Pratt & Whitney this year, and mid-single digits at the new Collins Aerospace.

The two divisions will make up around 60% of total UTC sales of $75-77 billion for 2019. Pratt profits are expected to improve $200-250 million while Collins – the new combination of UTC Aerospace Systems and Rockwell Collins – should see profits up $1.55-1.66 billion in the first full year after the deal closed last November.

“Really solid trends in aerospace across the board: continued RPM growth and [commercial] production increases are coming in both Boeing and Airbus,” Chairman and CEO Greg Hayes told an investor teleconference. “So on the aerospace side, we feel really good.”

CFO Akhil Johri further said commercial aftermarket should grow mid-single digits, primarily driven by continuing V2500 engine growth and Geared Turbofan (GTF) activity, partially offset by declines related to legacy engines. Military business will see improvement from higher Lockheed Martin Joint Strike Fighter engine shipments and “strong” aftermarket.

Pratt Canada also is looking to grow again this year after “some” in 2018, according to Johri. “The markets that were weak within the Pratt Canada portfolio were the general -- the regional markets, 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, which is a platform where we never had an engine large business jets and now particularly the Gulfstream. Now we have that,” he stressed.

Indeed, UTC, which for now also includes Otis elevator and Carrier climate control divisions, expects continued sales, earnings and free cash flow growth across its portfolio in 2019, the executives said. Last year was “the best year of organic sales growth in over a decade.”

Total sales for 2018 were $66.5 billion, up 11% over 2017, including 8% organic sales growth and the rest from the net effect of acquisitions, a foreign exchange tailwind and accounting changes. Earnings per share (EPS) of $6.50 was 14% better despite restructuring charges and other significant items such as a $692 million tax charge primarily related to undistributed foreign earnings. Net income for 2018 was $5.3 billion, up 16%. Cash flow from operations was $6.3 billion and capital expenditures were $1.9 billion, resulting in free cash flow of $4.4 billion.

UTC’s adjusted EP bested Wall Street estimates by about $0.40, including a $0.25 boost from a new tax rate after the late-2017 tax change law in the U.S. Financial analysts applauded the results and stock traders pushed up UTC’s price around 5% during regular trading after the teleconference. “As the first A&D company to report 4Q18 results, UTX has set a benchmark for the rest of the sector,” Vertical Research Partners analysts said.

When UTC closed on Rockwell it also announced a decision to break into three companies, with the legacy UTC brand comprising Pratt and Collins. Managers aim to have their aerospace, Otis and Carrier divisions operationally separate by the end of the year at a cost of $1.5 billion.

Diving deeper into their newly enlarged aerospace business, the executives said the avionics information systems business they bought with Rockwell should continue to grow around the mid- to high single-digits. “Somewhere between what UTAS and Pratt experienced,” Hayes said. “The interiors business will be probably low to mid-single-digit type of growth there. Again, we expect some recovery in that business as well,” he continued. “Overall, business should be somewhere in the mid to high single digit type of growth for Rockwell Collins on an organic basis.”

Regarding GTF problems that continued to plague Pratt in 2018, Hayes said they continue to work through the issues. “There's still some aircraft out there that need to be retrofit, and there's always things that come up that affect a couple of engines, and we are always working through that,” He said. “But that's the same under V2500. It's been out there for 30 years. So we feel good,” the CEO added. Pratt essentially was at rate 65, he further said.

“[Pratt] took about 15% of the cost out last year [and expects] to take another 15% out this year,” according to Hayes. “We're coming down the curve as we had expected. The good news is there's no big jump in negative engine margin, even though the production rate continues to increase.”

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