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United Technologies Corp  (NYSE:UTX)
Q4 2018 Earnings Conference Call
Jan. 23, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 non-recurring and/or non-operational nature, often referred to by management as other significant items.

The Company also reminds the listeners that the earnings and cash flow expectations and 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.

Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue as time permits.

Please go ahead, Mr. Hayes.

Gregory J. Hayes -- Chairman & Chief Executive Officer

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 a good quarter and a really solid 2018. So we're all happy, I think, the way year ended. This morning, I'd like to cover four 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. And I'm going to come back at the end and talk about the portfolio separation activities, give you everybody 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. Those were really the result of the finalization of some rulings -- or rules from Treasury that happened in -- late in the year. I think, importantly, the beat was also driven by a 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 up 8% for 2018. That's our best year over a decade for organic growth.

Importantly, of course, each of the businesses reported accelerating organic growth versus 2017, with Pratt & Whitney leading the way, up 14%. Free cash flow, just essentially in line with our forecasted $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 -- good results.

Following along on the webcast on slide two. A lot happened in 2018, I want 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 system supplier in the aerospace industry for years to come. In our commercial businesses, we continue 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, nearly doubled GTF production from our 2017 levels.

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

Moving on to slide three. 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 the 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 will remain disciplined in our allocation of capital. At the same time, of course, we'll continue to monitor the macro environment.

As you'll see, thinking about the aerospace business, this year it 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 the aerospace side, we feel really good.

On the commercial side, it's more of a macro story, with North America, the US 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. I think I've been saying that for about 15 years. Still expected to grow modestly, but again, I think there's -- there's always a question in Europe in terms of overall growth. Certainly not as strong as the US. And 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 four 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 (inaudible) their gains in '18.

Akhil will take you through more details 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 -- Vice President-Investor Relations

Okay. Thanks, Greg.

I'm on slide four. 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 in 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 US tax reform related updates issued throughout the year, including clarifications from the US 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 five. 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 mid single digit decline in Europe and a high single digit decline in Asia excluding China. In China, orders were up 2% (ph), 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 was 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 six. 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 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 seven. 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, unfavorable 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 eight, our new segment, Collins Aerospace. These results include legacy Aerospace Systems and five 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 Vice President and Chief Financial Officer

Thanks, Carroll.

So I'm on slide nine. As Greg said, I think the economic environment looks good from our perspective, certainly on the aerospace side of the business. On the -- on the macroeconomic side for the commercial businesses, we expect the economies to continue to grow though at a slightly moderating rate versus 2018. US 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 on 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 narrow-body 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 US dollar will be a headwind in 2019. Our assumptions for two 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 four 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 profits, 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 direct 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 one 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 four 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 US tax reform for our international entities, specifically the impact of the GILTI 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 one-time gains in 2018 and continued investments in our digital capabilities.

High 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 (ph) 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 improvement from the $0.15 to $0.20 we discussed in November is driven by two 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 one-time 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 one-time 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 had 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 studied 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 one-time 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 J. Hayes -- Chairman & Chief Executive Officer

Okay. Thanks, Akhil.

I hope you guys got all that. Obviously, a lot to digest. I think, again, the two 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. So -- 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 in 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 two 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 of 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. And so we're going to work through those things. But we really need to get those tax rulings to minimize the one-time costs, and that's why what we really drive is the 18 month kind of timeline.

So if you think about this, we announced late last year, November. This would push the timeline 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's been a lot of concern about that, $2.5 billion to $3 billion. Let me give you a little color on where that's going to come from. First of all, three big categories of costs. The largest, of course, is the tax cost of those 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 tertiary systems in place, et cetera. So that's about $500 million.

And the last big chunk of costs 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 (ph).

Obviously, the focus is to minimize all of these costs. We're also trying to minimize the recurring costs that Otis and Carrier will incur as stand-alone entities. You'll remember we talked about that being a $350 million to $400 million negative synergy associated with the separation. I would tell you that, well, Judy at -- 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 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 costs with 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 one-time costs as we get some more clarity there.

Finally, of course, I think this was a concern at -- 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 this separation done.

On Rockwell Collins and the integration, let me just say two things. First of all, we are on track and there are no surprises. 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 -- 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 culmination of the first four 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 with $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, 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 -- 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 -- out of Rockwell Collins this year. So another was 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 -- great group of people that have joined us with Rockwell Collins.

I think, 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?

Questions and Answers:

Operator

(Operator Instructions) And we do ask that you please limit yourself to one question per round to give everybody the opportunity to participate. Our first question is from the line of Jeffrey Sprague of Vertical Research Partners. Your line is open.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you. Good morning, all.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Mr. Sprague, good morning.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Good morning. Congrats on getting that done. Hey, just a two quick things for me. First on separation, I totally get everything you just said. It sounds so, 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 two or you don't see that as kind of relevant to the -- kind of the potential chess moves that could happen?

Gregory J. Hayes -- Chairman & Chief Executive Officer

Well, you didn't follow the rules, Jeff. That's two questions. But we're going to answer both of them. First of all, the $1.5 billion of one-time cash costs this year, I would tell you that's a placeholder. I can't -- 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 costs 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 part of whenever we actually go to market. And then the other piece of 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 -- 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 Vice President and Chief Financial Officer

No. I think you're exactly right. If anything, Jeff, the tax costs and some of the other costs would 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 J. Hayes -- Chairman & Chief Executive Officer

Let me just make a comment on the -- 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, it's a business of roughly $2.5 billion in sales about it, 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 that 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. 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 -- we like the fundamentals of the business. We've probably under-invested in it over time, so there will be a little bit more incremental investment. But got a good team and it's got a good footprint and we're going to -- we're going to run it.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Thank you.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Thanks, Jeff.

Operator

Thank you. Our next question is from the line of Ronald Epstein of Bank of America Merrill Lynch. Your line is open.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Hey, yeah. Good morning, guys.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Good morning, Ron.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Greg, if you could speak to -- you mentioned -- just kind of going back to 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'd you get them to do that? Like -- an investor question I just, another way to say, 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, yeah, this is a good idea?

Gregory J. Hayes -- Chairman & Chief Executive Officer

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. Anyhow, Rockwell Collins, prior to the completion of the acquisition, they did enter into an arrangement with Boeing but really 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 system suppliers to those two big companies can -- can really provide benefit to them long term in terms of the innovation, the technology that we bring to bear. But they -- 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 at 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 all their commitments. And if we do that, I don't think there's going to be a lot of noise in the system.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thank you.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Thanks, Ron.

Operator

Thank you. Our next question is from the line of Steve Tusa of JP Morgan. Your line is open.

Stephen Tusa -- JP Morgan -- Analyst

Hey, guys. Good morning.

Akhil Johri -- Executive Vice President and Chief Financial Officer

Good morning, Steve.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Good morning, Mr. Tusa.

Stephen Tusa -- JP Morgan -- Analyst

Can you maybe just provide a little bit more around the components of the 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, collaboration and tangible, that kind of stuff?

Akhil Johri -- Executive Vice President and Chief Financial Officer

Sure. So as -- I think you can 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 costs, 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-map. 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, 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 customer financing and intangibles, the -- not intangibles, but the other items below the line, below free cash flow, is generally in the range of $1 billion to $1.5 billion. I think it will 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 two, together, is what you should take into account in your cash models.

Stephen Tusa -- JP Morgan -- Analyst

Okay. One last question for you. What do you see in Carrier in China (multiple speakers) Otis?

Akhil Johri -- Executive Vice President and Chief Financial Officer

Yeah. 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 costs 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's -- Carrier is seeing some strength in the -- in the other segments as well.

Stephen Tusa -- JP Morgan -- Analyst

Got it. Okay. Thanks a lot, guys.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Thanks, Steve.

Operator

Thank you. Our next question is from the line of Noah Poponak of Goldman Sachs. Your line is open.

Noah Poponak -- Goldman Sachs -- Analyst

Hey, good morning, everyone.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Good Morning, Noah.

Noah Poponak -- Goldman Sachs -- 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 -- I think you stayed a lower price/mix headwind, which sounds like still a price/mix headwind. I would have thought that your comments on China OE pricing, Europe service the last few quarters would suggest a better book translating to the P&L at this point. So maybe you could just elaborate a little bit more on what you're expecting there and how that progress is going forward.

Akhil Johri -- Executive Vice President and Chief Financial Officer

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 flatten, 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 relative 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 there is still a long way to go. Otis, in our minds, 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

Thank you. Our next question is from the line of Julian Mitchell of Barclays. Your line is open.

Julian Mitchell -- Barclays -- Analyst

Thanks. Good morning. So maybe sticking to the one topic rule, really focused on Collins. You clarify 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 and 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 Vice President and Chief Financial Officer

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 one 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 levels, 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 that -- 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.

Julian Mitchell -- Barclays -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is from the line of Carter Copeland of Melius Research. Your line is open.

Carter Copeland -- Melius Research -- Analyst

Yeah, thanks. Good morning, guys.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Good morning, Carter.

Carter Copeland -- Melius Research -- Analyst

Just following up on Julian. So 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? Thanks.

Akhil Johri -- Executive Vice President and Chief Financial Officer

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 $150 million 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 have the benefit in the -- in the 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. That sort of makes up for some of the weakness that you saw in 2018 10-K. So we feel pretty good, I think, is there 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.

Carter Copeland -- Melius Research -- Analyst

Great. And on BIZF (ph)?

Akhil Johri -- Executive Vice President and Chief Financial Officer

Yeah. BIZF. 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 aviation -- 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 -- particularly with Gulfstream -- and now we have that. So I think the benefit of market share again along with improving sentiment should be a positive number for business jets.

Carter Copeland -- Melius Research -- Analyst

Does that get you high singles kind of growth?

Akhil Johri -- Executive Vice President and Chief Financial Officer

Yes, it does.

Carter Copeland -- Melius Research -- Analyst

Okay. Thanks for the color.

Akhil Johri -- Executive Vice President and Chief Financial Officer

For us. For us. yes.

Operator

Thank you. Our next question is from the line of Sheila Kahyaoglu of Jefferies. Your line is open.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi. Good morning and thank you.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Good morning, Sheila.

Sheila Kahyaoglu -- Jefferies -- Analyst

Just on the free cash flow bridge, I was hoping we could dig into it a little bit better. The underlying business, 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 missing pieces?

Akhil Johri -- Executive Vice President and Chief Financial Officer

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, you know, 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 are continuing 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 onward. So we are on a good trajectory here, and hopefully, you all can see that.

Sheila Kahyaoglu -- Jefferies -- Analyst

Thank you.

Operator

Thank you. And next question is from the line of Myles Walton of UBS. Your line is open.

Myles Walton -- UBS -- Analyst

Thanks. Good morning.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Morning, Myles.

Myles Walton -- UBS -- Analyst

One clarification on Collins if I could. Maybe I misheard. 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 -- 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 Vice President and Chief Financial Officer

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

Myles Walton -- UBS -- Analyst

Got it. Helpful. Thank you.

Akhil Johri -- Executive Vice President and Chief Financial Officer

Yeah.

Myles Walton -- UBS -- Analyst

And then the other one on -- I think you said you were assuming a faster conversion rate for orders in China. 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 and aftermarket in UTAS seems a bit conservative, and just curious if you're seeing slowing book to bill trends there.

Akhil Johri -- Executive Vice President and Chief Financial Officer

Sure. So on Otis first, Myles. The -- typically about 60% of our current year sales come out of backlog. So that part is clearly there. The -- so in terms of sensitivity, somewhere around 40% of the next year sales are based on orders that Otis will be receiving that year. And based on some of the liquidity concerns that -- 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 do 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 up 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 for 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.

Myles Walton -- UBS -- Analyst

That's helpful. Thanks a lot.

Akhil Johri -- Executive Vice President and Chief Financial Officer

Okay.

Operator

Thank you. And our next question is from the line of Nigel Coe of Wolfe Research. Your line is open.

Nigel Coe -- Wolfe Research -- Analyst

Thanks. Good morning, guys.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Nigel.

Nigel Coe -- Wolfe Research -- Analyst

Just a quick clarification, and then my question. On the -- on the breakup timeline, 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 spin (inaudible) just to clarify that. Then on the -- the negative $25 million of price/mix in Otis next year, can you just break that out between China and Europe?

Gregory J. Hayes -- Chairman & Chief Executive Officer

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

Akhil Johri -- Executive Vice President and Chief Financial Officer

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.

Nigel Coe -- Wolfe Research -- Analyst

Great. Thank you very much.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Thanks, Nigel.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Deane Dray of RBC Capital Markets. Your line is open.

Deane Dray -- RBC Capital Markets -- Analyst

Thanks for squeaking me in here. Good morning, everyone.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Hi, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey. 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 J. Hayes -- Chairman & Chief Executive Officer

That is a pretty quick answer. The fact is, we have not seen any impact. And keep in mind while we talk about our shutdown, it's partially government shutdown, and the fact is the DoD budget is fully funded. So that means we're still shipping parts to -- 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 review time, that's something else, but at least for the -- for the business, really no impact from the shutdown.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Peter Arment from Baird. Your line is open.

Peter Arment -- Baird -- Analyst

Thanks. Good morning, Greg, Akhil.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Hi, Peter.

Peter Arment -- Baird -- Analyst

Hey, Greg. Just why don't we finish on the -- 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 -- what we should expect in 2019. Obviously, a big step-up in production in Q4.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Yeah, Peter, thanks. It's interesting. We got all the way through the conference call with the -- or nearly finally asked the GTF question. I'll tell you, the GTF, the durability continues to improve. The on-tag perform -- the performance of the engine is still like 99.89% or 99.88%. So really good dispatch reliability. We continue to work through the teething problems that we talked about a year ago. There're still some -- some aircraft out there that need to be retrofit. And there's always little niggling things that come up that affect a couple of engines and we're going to always working through that, but that's the same on the V2500s that have 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, increase. What we saw in the fourth quarter will continue. We're essentially on rate 65, I think, for Airbus this year whether or not -- yeah -- 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, take 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.

Peter Arment -- Baird -- Analyst

That's great. Thanks, Greg.

Gregory J. Hayes -- Chairman & Chief Executive Officer

Thanks, Peter.

Operator

Thank you. 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 J. Hayes -- Chairman & Chief Executive Officer

Okay. Thank you, Amanda. Thank you, everyone, for listening in. As always, of course, Carroll and team are here to answer all your questions. And look forward to seeing you, folks. I guess we'll be 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.

Duration: 60 minutes

Call participants:

Gregory J. Hayes -- Chairman & Chief Executive Officer

Carroll Lane -- Vice President-Investor Relations

Akhil Johri -- Executive Vice President and Chief Financial Officer

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Stephen Tusa -- JP Morgan -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

Julian Mitchell -- Barclays -- Analyst

Carter Copeland -- Melius Research -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Myles Walton -- UBS -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Peter Arment -- Baird -- Analyst

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