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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to United Technologies First Quarter 2019 Earnings 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's a presentation available to download from UTC's website at www.utc.com.
Please note, except for otherwise noted, the company will be speaking 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 listeners that the earnings and cash flows expectations and any other forward-looking statements provided in the call are subject to risk and uncertainties. UTC's SEC filings, including 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.
All right. Thanks, Kevin, and good morning, everyone. As you guys all saw the press release, had a really good start to the year. Reported EPS, adjusted of $1.91, and that's up 8% versus the prior year and even above our expectations for the quarter, and that was driven primarily by better-than-expected segment operating profit results. As you saw the press release, sales were up 20% with organic growth of 8%, and that was driven by double-digit growth at the aerospace businesses. Free cash flow, a really good start to the year at $1.1 billion. In the quarter, a couple of notable highlights. At Pratt & Whitney, the GTF engine reached 2 million revenue flight hours with 36 operators, now benefiting from lower fuel burn emissions and noise. At Otis, the Otis team completed the largest modernization project to date in China, for one of the country's most iconic landmarks. You guys all recognize, of course, the Shanghai Pearl Tower. Additionally, United Technologies launched a hybrid-electric propulsion technology demonstrator program. This demonstrator program is expected to yield an average fuel savings for regional-sized aircraft of 30%, and we're targeting first flight within 3 years. Importantly, this project combines the engineering expertise and experience of the Collins Aerospace teams, Pratt & Whitney and our own research center. Of course, we also remain laser-focused on the integration of Rockwell Collins. In the first quarter, we saw $0.20 of accretion from the Rockwell Collins acquisition, really solid performance across each of their legacy businesses. This, of course, exceeded even our expectations. Having worked as a combined team for a full quarter, I'm even more confident in the long-term value the acquisition is going to bring our shareowners and our employees. From Avionics to Interiors to the Mission Systems business, we have a great future ahead of us at Collins Aerospace. Maybe just to step aside for a second and talk about the Mission Systems business. We talked about commercial aerospace as the growth vehicle, but I think it's also important, the aerospace business, 25% of our revenues actually come from defense. And our Mission Systems business, which is focused on our global military markets, we're bringing together our intelligence, surveillance and reconnaissance business and space capabilities with the communication and navigation expertise of Rockwell. We see the opportunity to enable faster tactical decision-making and greater mission assurance, while at the same time, reducing risk to personnel and high-value platforms. This is a capability that is unique to United Technologies and to Collins, and I think it's something, again, as we go forward, that we'll be talking more about. On the synergies front, Collins Aerospace team is on track to deliver approximately $150 million of cost synergies this year, and we still see at least $500 million of total cost synergy potential. We're also excited about the revenue synergies that the combination is going to enable. In short, we're happy with the execution at Collins thus far, and continued -- expect continued strong performance as we progress through the year. So based on the -- a very solid first quarter, we're going to raise the midpoint of our full year adjusted EPS outlook by $0.05, we're going to raise the lower end of the guidance from $7.70 to $7.80 to $8. We also remain confident in our ability to deliver on 3% to 5% organic sales growth, and free cash flow, $4.5 billion to $5 billion. And that $4.5 billion to $5 billion includes about $1.5 billion estimate for the onetime portfolio separation costs this year. With that, I'm going to turn it over to Akhil and Carroll, who'll take you through the results, and we'll come back at the end to wrap up and take your questions. Akhil?
Thank you, Greg. So I'm on Slide 2. Reported sales for the quarter of $18.4 billion were up 20%, with 8% organic growth and 15 points from the Rockwell Collins acquisition. Foreign exchange was a 3-point headwind in the quarter. Adjusted EPS was $1.91, up $0.14 or 8% versus prior year, this was clearly better than our expectations for the quarter, primarily from performance at Collins Aerospace and Otis. At Collins Aerospace, we saw higher commercial aftermarket and synergies. Given this solid start, as you would be, we are very confident that this segment will be able to deliver on its full year operating profit commitment, and that is even with the potential for up to $0.10 of headwind related to the Boeing 737 MAX program. At Otis, we saw slightly better global service performance, particularly, higher repair sales and better productivity. The Europe maintenance business that we have all been very focused on and keep talking about saw its first quarter of margin dollar growth since 2012. Below the segment line, the quarter benefited by $0.04 versus our expectations, primarily from a lower-than-anticipated effective tax rate, and that was largely due to the completion of a tax audit at Legacy B/E Aerospace. For the full year, we continue to expect an adjusted effective tax rate in the range of 23% to 24%. On a GAAP basis, EPS was $1.56, down 4% versus prior year and included $0.25 of nonrecurring charges. These charges included $0.16 for the final quarter of amortization of Rockwell Collins inventory step-up as well as $0.06 for costs related to the UTC portfolio separation activities. Restructuring was an additional $0.10 charge in the quarter. Free cash flow was $1 -- was $1.1 billion in Q1, significantly higher than last year and a solid start as Greg noted. This improvement was largely from better working capital performance, especially receivables management. Turning to Slide 3. You see the drivers of our strong organic growth in Q1. Overall, we continue to see good performance across our 2 end markets. At our commercial businesses, in the Americas, sales were up 9% with solid growth at both Otis and Carrier. New residential construction indicators continue to be positive and construction spending remained strong. Residential housing starts, however, are now forecast to be down slightly in 2019 versus Carrier's assumption of low single-digit growth at the beginning of the year. While we still believe mid-single-digit growth in residential HVAC sales is likely for the full year, we will continue to monitor the market and adjust our cost base as needed as we move through the year. Within EMEA, sales were flat in the quarter. Europe was up low single digit at Otis and flat at Carrier. Economic outlook across Europe remains mixed and is slightly weaker than the expectations from a few months ago. Orders at Carrier were up low single digits and flat at Otis. The Middle East remains a pressure point at both businesses. In Asia, sales were up 4% with 11% growth at Otis, partially offset by mid-single-digit declines at Carrier. Outlook for China feels incrementally better. Particularly for Otis, where we continue to see price stabilization in the equipment orders. On the aerospace side, Pratt commercial OEM sales were up 35%, driven by GTF shipments, which more than doubled versus the first quarter of 2018, granted somewhat of an easy compare. At Collins Aerospace, commercial OEM sales were up 13% organically, also driven by ramping new programs. Looking at commercial aftermarket, we continue to see high traffic demand and strong utilization of in-service products at both businesses. Sales were up 4% organically, driven by 9% growth at Collins Aerospace. Pratt & Whitney, commercial aftermarket sales were up 1%. This lower than expected aftermarket sales at Pratt was partially driven by engine reinspection requirements at 2 V2500 MRO providers. Beginning in the second quarter, we expect available capacity in the overall MRO network to mitigate the impact from these temporary delays. For the full year, Pratt continues to expect commercial aftermarket sales to be up mid-single digits. Organically, military sales were up 16% at Pratt & Whitney, driven by higher F135 production. At Collins Aerospace, military sales were up 8%, driven by ramping programs and strong aftermarket demand. With that, let me turn it over to Carroll to take us through the business unit details. Carroll?
Okay. Thanks, Akhil, I'm on Slide 4. Now I'll be speaking of the segments at constant currency as we usually do, and as a reminder, there's an appendix on Slide 12 with additional segment data you can use as a reference. Okay, starting with Otis. Otis sales were $3.1 billion in the quarter, up 7% organically. On a constant currency basis, new equipment sales grew 10%, driven by high-teens growth in China and double-digit growth in the Americas. Otis also saw mid-single-digit growth in Europe and the rest of Asia combined. Service sales were up 4% with solid growth in maintenance, including repair and modernization. New equipment orders were down slightly in the quarter. Orders in North America were down mid-teens. On a 12-month rolling basis, North America orders are up 8%. The activity level in North America remains healthy, though we have seen some increasing margin pressure in recent order activity. Orders grew low double digits in Asia, excluding China, and were flat in Europe.
In China, orders are up 8% in value, benefiting from pricing and mix with unit orders up slightly, and this continues the trend of stabilization in pricing on new equipment orders in China. Operating profit in the quarter was flat at constant currency, excluding headwind from transactional mark-to-market currency adjustments, which benefited Q1 of 2018. Operating profit grew 6%, driven primarily by strong volume growth. Foreign exchange translation was a 5-point headwind to sales and earnings. Looking ahead, we continue to expect Otis operating profit growth of $25 million to $75 million at constant currency.
Turning to Slide 5. Carrier sales were up 3% organically, led by refrigeration and global HVAC. Refrigeration was up 9% with North America truck trailer up more than 30%. Global HVAC was up 3% with North America residential HVAC up 5%, including the benefit of accelerated gas furnace sales driven by upcoming changes in fan efficiency ratings. The commercial HVAC business was up low single digits with growth in North America and Asia, offsetting declines in Europe and the Middle East. Fire & Security was flat. Carrier equipment orders contracted 2% organically in the quarter. Transport refrigeration orders were down 26% after growing 37% in Q1 of 2018. The combined backlog for the container and North America truck trailer businesses has grown more than 90% in the past year. And partially offsetting transport refrigeration declines, global HVAC equipment orders were up 3% with North America residential orders up high single digits, including demand stimulated by the upcoming efficiency rating changes. Fire & Security product orders were up 5%, driven by EMEA and Asia demand. At constant currency, operating profit contracted 5% including a 2-point impact from the divestiture of Taylor. Organic volume growth and pricing contributions were more than offset by input costs, including commodities, tariffs and logistics expenses. Looking ahead, we expect a decline in first half Carrier earnings to be more than offset by growth in the second half of the year. That will be driven by continued organic growth, aggressive cost reduction and easier year-over-year compares on commodity, tariff, logistics expenses and foreign exchange. So as a result, we continue to expect Carrier full year organic sales to be up low to mid-single digits, with earnings growth at $100 million to $150 million at actual FX. Shifting to Pratt & Whitney on Slide 6. Sales of $4.8 billion were up 12% organically. Commercial OEM sales were up 35%, driven by GTF and Pratt & Whitney Canada shipments, which more than offset anticipated declines in V2500 production. Total Geared Turbofan shipments, including those in the spare engine pool, more than doubled over the prior year first quarter. Commercial aftermarket was up 1% in the quarter. Growth in the GTF aftermarket was more than offset by the V2500 MRO impact that Akhil mentioned earlier. Pratt & Whitney Canada aftermarket saw growth resulting from higher volume and favorable mix. The ramping Joint Strike Fighter program continues to drive growth at Pratt's military business. Military sales were up 16% on higher F135 production. During the quarter, the U.S. Navy and United Kingdom achieved initial operational capability with the F-35C and the F-35B respectively, marking the latest milestones in this rapidly growing program. Adjusted operating profit of $447 million was up 8%. Drop through from higher military sales and continued GTF cost reduction more than offset the negative margin impact of higher GTF shipments and higher E&D. Commercial aftermarket operating profit was up largely due to better mix and higher content. Results also reflect a gain from the divestiture and a licensing agreement, and those items benefited results by approximately $30 million. Looking ahead, we continue to expect Pratt & Whitney to grow full year operating profit by $200 million to $250 million. Okay. Turning to Slide 7. Collins Aerospace results include legacy Aerospace Systems and a full quarter of legacy Rockwell Collins. The sales in the quarter were $6.5 billion, that's up $2.7 billion. Operating profit of $1.1 billion, was up $486 million from the prior year. On a pro forma basis, including results for Rockwell Collins in the first quarter of 2018, Collins Aerospace delivered operating profit growth of 13% on 10% higher sales. Organic sales for the legacy Aerospace Systems business were up 10%, with growth in all 3 channels. Commercial OEM sales were up 13%, commercial aftermarket sales grew 9% and military sales were up 8%. When viewed on a pro forma basis, you see the strength across the combined businesses. Commercial OEM sales were up low double digits, driven by new production programs. Commercial aftermarket sales were also up low double digits, fueled by strong demand from modifications and upgrades as well as continued passenger traffic growth. Military sales were up high single digits, driven by higher F-35 volume and an overall strong order book. And we saw solid performance in the legacy Rockwell Collins Mission Systems business, which was up low-teens in sales. Operating profit growth was driven by solid contribution from the Rockwell Collins business, drop through on higher organic sales and synergy benefits. The Rockwell Collins acquisition contributed better-than-expected profit in the quarter as a result of strong sales volume and the cost synergy capture that Akhil referenced earlier, accretion to UTC earnings in the quarter was $0.20. So given the strong start in Q1 and with potential 737 MAX impact in mind, we continue to expect Collins' operating profit to be up $1.55 billion to $1.6 billion for the full year. And with that, I will hand it back over to Greg.
Okay. Thanks, Carroll. So I guess we don't need to say it again but I will, good quarter and a really solid start to the year. I would also say that we're really confident in this revised EPS guidance, and the reason we're confident is because each of the businesses is -- we still expect to grow both the top and bottom line in 2019. And more importantly, I think each business is supported by solid long-term fundamentals. Also important to note, as we remain focused on the 4 main priorities of UTC, and that's around execution, innovation, structural cost reduction and disciplined capital allocation. So there were -- many of you are interested in where we stand with the portfolio separation activities. No real change to report except that today we have more than 500 people across a full range of functions focused on preparing Otis and Carrier to operate as stand-alone companies. We continue to expect both businesses to be operationally ready for separation by the end of 2019. And there's no change to our expectations that the spin should be completed in the first half of next year. And we're excited about the future of each of those businesses. We'll stop there and we'll open it up for questions. Kevin?
[Operator Instructions] Our first question comes from Carter Copeland with Melius Research.
Just a couple of quick ones. One, the $0.10 that you've called out, Akhil. Just seems like a big number for just an OEM impact, so I'm assuming you've got some aftermarket assumption buried in there. Can you give us a little more color on what you assumed in that $0.10 sensitivity around 737 MAX?
Sure, Carter. So that's kind of an outer limit at this point that we are putting, up to $0.10 is what I said. And that's a combination of 3 things, one is obviously the profit that we make on the OEM side. We also feel that we will lose some provisioning, which is higher profit on the 737 MAX, as some of the operators get pushed out a little bit. And then on the other side, we have also taken into -- offsetting that to some extent the benefit we might see on higher aftermarket and some of the legacy programs. So it's a combination of those 3 things. You'll imagine for competitive reasons I don't think we want to go into the specifics of each of those line items, but it's those 3 things. And that's sort of an assumption that the rate stays at 42 through the end of the year, that would be the -- up to $0.10. Hopefully, it'll be less than that, but that's what the $0.10 is made up of.
Our next question comes from Julian Mitchell of Barclays.
Maybe just following up on the free cash flow. Working capital headwinds, halved year-on-year. Just wondered if there was anything sort of, particularly, timing related or whether you thought that type of improvement is something that we could see over the balance of the year. And also, maybe tied to that, any updated expectations around the free cash flow guide for Collins, in particular, for the year? And what was the EBIT from Collins in Q1?
Very solid Collins performance, both across EBIT and across the cash flow side, Julian. I would say a lot of the improvement you saw in the first quarter, working capital outflow was a lot less than what we saw last year in the first quarter, was driven by improvement on the aerospace side of the businesses, both Collins and Pratt and that's largely to do with the receivables management. So I think, I wouldn't say there is anything hugely abnormal, some of that does get impacted by timing of aircraft deliveries, factoring, associated with some of the receivables et cetera. But I think we still remain very confident that the full year feels very doable.
I mean some of you guys do to -- like to do conversion math, which we're trying to stay away from because the numbers keep changing depending on who you talk to. But based on some calculations, it'd be about 84% conversion, which is one of the strongest first quarters we've had. And if you traditionally -- if you think about the incentive payment that gets made in first quarter, actually the conversion in first quarter would be over 100%, right? Adjusting for the large outflow in cash from all the incentive payments that happen. So feel very good about where things are, and Rockwell Collins, certainly a huge contributor.
Yes. Julian, the only thing I would add to that is I think if you look at inventory turnover, yes, for the last few years we've seen Pratt adding a lot of inventory as it prepared for the ramp-up. The fact is we actually saw the inventory turns at Pratt improve almost a 100 basis points, they're over 4 points today, and Collins has also seen some improvement. So the big ramp in aerospace, while it's not over, I think the inventory build is over. So that gives us a lot of confidence. Not just in this year's cash flow growth but in the next couple of years, we've got our arms around this and in turn should continue to improve.
And just tied to that maybe, apologies if I missed it, but did you point out the Collins profit contribution year-on-year?
Yes. It's -- effectively you think about it as -- because the businesses are getting integrated, the numbers that Carroll quoted are probably the better way to think about it, right? You have profit growth at both Collins and UTAS, but Collins growth was stronger than the growth in the UTAS number. I don't think -- it -- we are trying to integrate the businesses. So Mission Systems, that Greg referred to earlier, includes the traditional ISR business from the Goodrich business, the UTAS business.
Same -- similarly, the Avionics business that Rockwell Collins has also included some businesses that were traditionally the sensors business from UTAS. So I think it's becoming difficult to pry open the numbers. We make up numbers for the sake of making up numbers, right? In terms of the difference between Collins versus heritage UTAS. The bottom line is that the heritage Rockwell Collins businesses did extremely well and lot better actually than the heritage UTAS business in the quarter.
Our next question comes from Rob Epstein (sic) [ Ron Epstein ] with Bank of America.
Maybe 2 questions. One, on the commercial side of the business, we saw Otis margins kind of at a level we really haven't seen in a long time if ever. Is that the bottom of Otis margins? I mean how should we think about that?
Ron, just think about it this way, the margins are down 110 basis points. 90 of that was the FX that Carroll called out, that onetime benefit that we had last year didn't repeat this year. So yes I would say that should be the bottom of the margins. And as you think about Otis, growing earnings throughout the course of the year, margins should be improving as well.
Yes. One other thing, Ron, I think this is the second quarter now in a row we're adjusting for some of this FX noise, et cetera, actually. Otis grew profits operationally, when you adjust out for the one-timers, FX and other things. So I think it's a good sign, we feel really good. Otis, as we said, pleasantly surprised us in the quarter. It was better than what we were expecting coming into the quarter. So -- and the productivity improvements on the service side and the high repair sales growth were truly things which are encouraging as we look forward, on top of the improvement in the price mix that Carroll talked about in the China new equipment orders. So things are feeling better about Otis.
Got you. And then 1 aerospace question, if I may. If the A320neo, specifically the A321, were to get a little more share, what would be the bottlenecks for you guys to increase production even more on the GTF, right? I mean the competitor engine, as we know there's some controversy going on right now with their blades. 737 itself, as you know, grounded. So if the A320 were to pick up a little share, it may or may not happen, how much the challenge would that be for you guys to get production even higher?
There's 2 big bottlenecks, I would say, in terms of ramping up production. And this is the problem that is not new. One is on the casting side. And just trying to get additional capacity in the supply chain on the casting front is very, very difficult. The second place is our own forging capacity down in Georgia. And we just added a fifth line down there, it's coming online, this quarter it's starting to meet production ramp. But -- and frankly as we look forward, that line -- that fifth press is almost fully utilized in terms of the volume we see today. So there are a couple of constraints out there that require, I would say, a lot of CapEx and probably a couple of years. In the meantime, I think, I mean like, we're confident we're going to meet the customer requirements this year and next year with the capacity that we've added, additional capacity. It's just -- it's tough.
Our next question comes from Steve Tusa with JPMorgan.
The changing guidance from a profit perspective, I didn't hear much of a change for any of the segments. Is it just kind of bumping some of them to the high end of the range? Just wanted to kind of understand better, why you're clipping off the low end. It seems all the segments are basically [ like we asked ].
Yes. So I mean, if you think about it, we would probably have been looking at, and we seriously debated it, taking up the Collins guidance, given the solid stock that they've had, Collins Aerospace, in total. But the uncertainty associated with MAX 737 keeps us a little tempered at this point. We'll have to see how things progress. The next quarter may be another opportunity to look at that again. So I would say, if I was to be a gambling person, which I'm not, I would -- probably Collins would be towards the higher end of the range, even with some constraints that they have.
On the other hand, you have a little bit of challenge on the Carrier side. I think they've had -- again, not a surprise to us, internally very consistent with what we were expecting in the quarter. And we know there are several benefits that Carrier will see in the second half compared to the first half. Taylor, FX, being 2 of those. Taylor and FX were like $50 million headwind in the first half year-over-year, which goes away in the second half. Compares get better and commodities and things like that, also in the second half.
So we think Carrier has a great shot, but obviously, when a business starts off the year with down $44 million in the quarter, and you have a guidance of $100 million to $150 million for the full year, there's a little stretch in there. So based on that, I think we feel overall okay about our segments. I think the benefit that you saw at the bottom end was clearly the strong growth we saw in the first quarter as well as the tax benefit that I referred to earlier is what gave us confidence that we should be able to do better than the bottom end we had before.
Okay. And then you would -- just to get back to the aerospace free cash flow discussion. It sounds to me like you guys have a pretty, I'll call it, kind of heavily burdened, currently, kind of free cash flow generating profile. It sounds like you're kind of coming off the bottom of that. There's not much positive that's kind of currently influencing aviation free cash flow. There has been a pretty good cycle in aftermarket though. Are there any kind of unusual positives flowing through on the aftermarket from a cash perspective? Is there any way that you can kind of pull forward cash by giving things like discounts for spares purchases when demand is high? Is that kind of common practice, and is any of that embedded currently in your free cash flow?
No, Steve. I think with the market as strong as it is today, we're not in the mode of the need to discount to bring in these orders. I think if anything, cash was a little constraint as you saw. Pratt's aftermarket only grew 1% in the first quarter. That gives us -- that happened obviously, in the back half of the year as we recover those V2500 MRO visits. But there is nothing out there that I would say is unusual other than just execution, collecting receivables. But more importantly, driving inventory down and driving turns up. And again, I think that's just as natural as we drive the costs down on the GTF. You're increasing the velocity through the shops, you're increasing the velocity of the inventory turns, all of that is very positive. But there's nothing in the background in terms of discounting or anything else that's going on that would have given us a better-than-expected first quarter or even full year.
Right. So no prepayments from spares to help [ get your ] cash flow? Doesn't look that way to me.
No.
No, no. And the reality, Steve, is we've talked about this several times. I think we had been in an investment phase. We're coming to a point where GTF is now delivering in terms of what the expected requirements are from the customer base. So the inventory that Greg talked about earlier starts to -- gets -- becomes more and more manageable. We see improvements on the receivables side as well. So overall, while CapEx still remains high and will remain high for this year. I think as we look forward, not just this year but for the next several years, the story on cash particularly on the Aviation side should be really good. And that's what our internal focus is to grow profits higher than sales and cash greater than profits.
Right. So your cash flow is troughed, is that what you're saying?
I believe it is, absolutely.
Yes.
I mean of course, you have to exclude the onetime costs associated with the project -- with the separation of the portfolio. But other than that its base business is really strong and should continue to grow.
Our next question comes from Sheila Kahyaoglu with Jefferies.
Just on the Collins better accretion. Can you maybe talk about how much of that was cost synergies and -- or better sales outlook? And if you could give some color on the different businesses, commercial OE for Collins, defense and interiors? Just the moving pieces there.
Sure. So roughly, I would say, $0.12 better than what we were expecting in accretion in the quarter and that's broken up. $0.04 of that was that tax benefit that I've been talking about a couple of times now, that's the B/E Aerospace-related stuff. So that sort of was a onetime thing if you could think about. The rest of it was strong performance operationally, commercial aftermarket in the heritage Rockwell Collins business was very strong, some of it was driven probably by timing on margin upgrades, which are a little lumpy at times. Saving -- the synergy benefits were about $50 million in the quarter. So clearly ahead of the run rate that we have been expecting. And then the operational performance across all businesses, whether it's the Interiors business, whether it's the Mission Systems business or the Avionics business, all of the 3 businesses did a little bit better than we were expecting at the beginning.
Our next question comes from Jeffrey Sprague with Vertical Research Partners.
Just to the separation process, I know there's a tremendous amount of hard work going on in the background. But it feels like you're kind of on autopilot now to your time line. And just wondering if there was a particular hurdle that you're looking at? And as part and parcel to that question, we kind of passed the expiration date, so to speak, to consider some other strategic action around your plans, given your desire not to disrupt your time line?
Well, first of all, Jeff, if there is an autopilot switch on this thing I have yet to find it. I would tell you that the team is working pretty hard. I would tell you, 2 big milestones that we've talked about there -- out there that drive the whole time line are the tax filings in Canada and the tax filing here in the U.S., and both of those have been completed now. And we're just waiting for the Canadian Revenue Authorities and the IRS to come back and give us rulings. That's a 6 to 9 months process. The good news is that should all happen now, given the fact we've got them filed, should all happen this year, which should allow us to then finish the final restructuring to complete the separation activities. There is a tremendous amount of work going on to get these 2 businesses, though, set up.
I would tell you the digital or the IT organization here trying to create 2 new stand-alone IT system architectures, that's a ton of work. Treasury and the tax folks and the controllers folks trying to get the Form 10s, right? There is just a lot of work going on. But I think, again, it's all on track. We meet every couple of weeks, if not more often we go through the progress, no showstoppers. So again, I think operationally, end of the year, we will be in a position to do the spins. The tax again -- tax will drive the ultimate timing whether that happens in the first quarter or shortly thereafter I don't know. But it's -- again, it's all on track to what we expect.
As far as potential transactions, to your point, we laid it out. There were 3 issues, right? We needed to get full value, it needed to be tax-free, and it needed not to impact the timing of the spin transactions. There remain opportunities, I would say, out there that we think are attractive for the businesses in the long term from an M&A standpoint. I just think it's unlikely to your point probably because of the timing that it will happen now. But those opportunities that exist today will also exist today that the businesses get spun off. And I would expect that they will pursue those activities just as we have before the spin.
Right. And on -- just on separation [indiscernible] and the like. I guess there was little or nothing in the first quarter from a cash standpoint?
Very small, Jeff. So the $0.06 that I talked about, as the accounting costs were a little less than that was on a cash front, right? So very small in the first quarter.
And just -- could you put a finer point on Carrier of your view in the back half? I know what you're expecting for price cost and maybe other key variance items that kind of lift into that op guide for the year?
Yes. Look, I -- there's a couple of things that give us confidence is, as Akhil mentioned, some of the compares obviously get easier whether it's FX. And some of the input costs that we saw like logistics costs that were up, they were big in the first quarter. Those compares get easier in the back half of the year. But I think more importantly, organic growth will continue at pace. We saw 3%. We continue to expect pretty good growth on the top line. I would also say Bob McDonough and team have done a pretty good job of identifying costs to take out. And so there's a program today in place to have a major cost reduction that would probably yield I don't know $75 million...
$75 million in the next 3 quarters of restructuring savings, Jeff, compared to, say, $13 million in the first quarter, right? So the restructuring benefits go up significantly in the back half.
If you think about their guidance with that $75 million. That's why we're confident because of the cost action -- the cost takeout actions. As far as cost price?
Yes. Price has been actually pretty good in the first quarter as well. We do expect that to improve a little bit as the year goes by, but in the first quarter, Jeff, we saw over $50 million, similar to the volume adjusted, similar to what we saw in the fourth quarter. So I don't think price is that much of an issue. The point was exactly what Greg said, which is first quarter this year we had the toughest year-over-year compare on the logistics costs. So price was not enough to offset that year-over-year increase. Those compares start to get a little easier Q2 onwards and specifically, in the second half. So I think as Carroll said, we probably don't expect Carrier to grow earnings in the first half for variety of reasons, but the growth in the second half, based on the things that we just talked about, feels doable.
[Operator Instructions] Our next question comes from Doug Harned with Bernstein.
I wanted to continue on in how the transition takes place. So as you look at the next 12 months, and with Otis and Carrier moving out, how do you envision the process to establish the management teams and the boards for those companies? And in that transition period, ensure that no one takes their eye off the ball to get the performance you want?
Well, look, I think hitting the operational targets a year for this year is absolutely critical to the stories of both Otis and Carrier going forward. And I think I've mentioned this before, we've changed our compensation system here so that all the Otis folks are going to get their compensation based upon Otis performance and Carrier folks based upon Carrier performance. So we think we've incentivized the folks to be focused on this. In terms of process timing, we expect -- we'll name the management teams here sometime in the second quarter, before the end of the second quarter, I would say, the Board of Directors, that process is ongoing. We'll probably have those done by the end of the third quarter, such that by the beginning of the fourth quarter we'll have fully constituted Board of Directors and management teams for both companies that will allow us to do -- prepare for this -- for the actual separation. Obviously, there's Form 10s to fill out and all that. They'll be roadshows that have to be done. But I think that's all. There's a time line established for all of those activities, and we feel confident we'll hit all of these targets.
Our next question comes from Deane Dray with RBC Capital Markets.
It was also nice to hear Akhil say he's not a gambling person. So that was very reassuring.
Thank you, Deane. My wife appreciates that as well.
All right, good. Can we get some more color on the resi assumption at Carrier lowering from modest growth to modest decline? And then part of your answer, can you give us a sense of where the inventory is in the channel as you build for the cooling season?
So first to clarify, that the modest decline part was only with 1 of the assumptions being which was the housing starts assumption. That's not what we believe our business will do. I -- we still believe our business will be up mid-single digit. As you know for the residential business, while housing starts and new construction is a significant part, it's about 30% of the total volume. 70% of the volume still comes from replacement cycle and we think that cycle is still pretty robust and solid. Consumers still remains strong.
We did see some weakness, as Greg mentioned earlier, in the quarter at a conference, we see -- saw a slow start in January, and that had to do with inventory in the channels from some high shipments that we saw last year in the fourth quarter, right? Residential was up 14% fourth quarter. And so there was more inventory in the channel there which took a little time to correct itself. The orders through the quarters have -- through the quarter have been improving. The first couple of weeks this quarter have also been decent. So we do believe, just to make clear, that our full year outlook is still mid-single-digit growth in the residential HVAC business. No change to that. It's the housing starts dynamic, which we believe is now a little weaker than it was coming in.
Got it. But just any specifics regarding how much inventory is in the channel versus a year ago on the setup for the cooling season?
Sure. So I think we should break it up into 2. The reference that Carroll made about the prebuy associated with the fan efficiency regulations. That impacts the furnace part of the equation. And there we do see inventory in the channel significantly higher than what it was last year and partly to do with this prebuy. But on the split, which is what is the more relevant segment as the cooling season comes through, the inventory in the channel is not out of line with what we saw last year. So we feel good about the split side of the business. On the furnaces, driven by this prebuy, there is some extra inventory right now, yes.
Our next question comes from Jon Raviv with Citi.
Greg, what are you seeing -- I'm curious about your military comments. What are you seeing in the military market driving you to talk more about Mission Systems going forward? There are some of you out there that military growth has to slow at some point. But that's not really apparent in the results or in the way that the folks like yourselves are talking about these markets. So if you just add a little color there that will be much appreciated.
Yes. As we look at all of the military platforms that we're on, JSF obviously, we see production ramping there. But we also continue to see very strong growth in the ISR business, the space business and some of the other businesses that we don't often talk about. And again, this is what Rockwell Collins brought to UTC that gave us real heft in the ministry communications side. Some of the optics and satellites have worked very well with our ISR business. So if you look at those businesses, both Pratt, because of the JSF and the aftermarket, and at Collins, really, really strong quarters. And this is 25% of our business going forward on the aerospace side.
So we just thought it was important, as you think about we're not just a commercial aerospace company we're an A&D company. And I think we shouldn't forget that we have a very, very solid position on the defense systems side. Again, defense spending goes up and down. We know that. Has it peaked? I am not sure. But we can certainly see the programs that we're on have a lot of runway, both on the ISR side or the communications side as well as the ramp on the JSF.
Yes, Jon. As you know, the defense is a broad-based moniker to you -- that people use often. The secret is being on the right platforms. So if you're in the high-growth areas of the defense spend, then you tend to do well. And fortunately, we have a portfolio which seems to be positioned well in those high growth areas of the defense budgets. Kevin, any other questions?
Yes. Our next question comes from Rajeev Lalwani with Morgan Stanley.
I have a question on the GTF side. As the program starts to mature, do you think there's an opportunity to maybe improve on the $1 billion-or-so OE loss that you've talked about? Your partner in MTU has highlighted sort of breakeven OE economics at some point next decade from lost discounts and automation benefits. Is that something you can do? And then a clarification for Akhil. Akhil, you've talked about the opportunities on Pratt around working capital and CapEx. Have you quantified that or can you quantify what that could be?
Let me start on the GTF and I'll let Akhil answer the harder question. As far as the GTF, the cost profile, we continue on this learning curve which is about 87%. Production this year is going to be up. We'll see probably overall cost per engine down around 15%, after being down roughly 15% in each of the last couple of years. So we continue to take cost out. To your point, it's all about the discount level that -- around the engines. And obviously, we're still working through the backlog of initial orders for these engines which have a higher discount.
Will we get to breakeven? I don't see that. Even the V2500, which we've built for 30 years was still a negative margin business going out the door at the end of its production run. So will get better. Costs continue to come down and we're on the right trajectory. But getting to breakeven is hard. What I would say, in terms of negative engine margin in total, that's peak last year, it won't go up any higher than that, again, just because we're continuing to drive cost down even as production goes up.
Yes. And Rajeev, on the working capital side of the cash flow opportunity on the Aviation businesses. I think even though we don't have a specific target that we have laid out, but here is why I feel good about things. Previous investment cycle or pre the GTF, Pratt and Collins or UTAS at that time, inventory turns were in the 5 to 6 turns range. We went down to as low as 3-point-some inventory turns for both businesses, that number is now above 4, as Greg said and we think there is opportunity to get another 1 to 2 points of improvement on the inventory turns. That's clearly the biggest opportunity we have over the long term.
The second aspect is CapEx, we are still continuing to invest significantly on the aero side. For the last few years, it was to do with putting up additional capacity on the OE production levels, and now it's transitioning more to make sure we have adequate MRO capacity. So the CapEx continues to be high but it will come down because over the long term no business operates at 170% of depreciation for too long. And that's what where we are, and I fully expect that to go down to 120%, 130% level over time, that would free up $200 million to $300 million of additional cash. So we think good opportunity on cash. And our simple message inside the business is to make sure profits grow higher than sales and cash grows higher than profit, right? As we -- if we keep doing that that's good for us and for the shareholders.
Our next question comes from Nigel Coe with Wolfe Research.
Wanted to just spend some time talking about North American commercial markets. Carroll, I think you mentioned some price pressure in Otis new equipment orders. And one of your competitors talked about some weakness or pause, to be more accurate, on the light commercial side during 1Q. So maybe just -- if you could just maybe unpack what you saw during 1Q in a bit more detail? And how you see that playing out over the remainder of the year?
Overall, we feel really good about North America, Nigel. And you look at the orders on a rolling 12-month basis they're obviously up. It is a very healthy environment. We're seeing a little bit more pressure on the margins. So just to think about the revenue per unit coming into the backlog, that's coming in today. But when we look ahead, we think we've got a very good year ahead of us in North America and feel confident about the industry overall.
And on the Carrier side, the light commercial market still continues to be pretty robust. We have not seen any reduction in demand there. The award activity at Otis as well, I think as Carroll mentioned earlier, still seems to be pretty good. I worry a little bit about, it's been a strong market for 5 years almost, and you tend to think about at what point does it start to slow down a little bit. But thus far, touch wood, it's been a great story. And even though, quarterly you see orders compare up and down. The activity level, the bidding activity in the market is still pretty strong. The issue that Carroll referred to, to some extent is driven by product mix as well there we're seeing demand for a slightly lower featured less -- lower-price products which creates a little pressure in the margin from Otis perspective.
Our next question comes from Myles Walton with UBS.
I know it's early in the GTF aftermarket life cycle here. But I'm curious on your power-by-the-hour contracts in your FMP programs. How volatile the EACs are? Are they settling into a range that's kind of in line with your business plan? And are you still on a pathway that 2022 as kind of total breakeven for the program?
So the early FMPs on this, Myles, as you would imagine, are not as profitable as some of the later FMPs on GTF are. It's part of the whole equation of how you win certain campaigns early on. So clearly you'd see some of that flow through our numbers early on. The good news is that we have a very profitable, very strong aftermarket content coming through from the V2500s and a little longer-than-expected utility out of our PW4000 and 2000 legacy engines as well. So overall aftermarket feels very good. GTF aftermarket, specifically, will continue to improve as time goes by, as years go by. No concerns about EACs on the GTF beyond what we were expecting already. Most of the good part about all the negativity that you guys have heard about with some of the teething issues is that we have been able to catch a lot of that early in the cycle. And as a result you've been able to fix things before too many of the engines have been out in the marketplace. And that's kind of helped us manage to some extent on the aftermarket profitability going forward. Anything to add?
Yes, Myles. I think what you're referencing is when does the aftermarket cash flows in GTF offset the negative engine losses. And I think that's the general time frame plus or minus a year or 2. And obviously, the engine gets a vote in terms of its interval. But that's about right. I'd say, as we look at the V2500 aftermarket today and the legacy engine aftermarket today, feeling very good about it. The content that we're seeing on the V2500 today, very strong. The content on the 4000 is very strong. And that's how, even with an aftermarket that only grew by 1% in this quarter, you still saw a profit growth coming out of that aftermarket. So we feel very good about the outlook for this year. It is well north in the 1,000 -- demand for more than 1,000 V2500 visits this year, even with the issues on the capacity constraints with those 2 shots that Akhil referenced. We're going to try to get to at least 1,000 of those, from moving engines around. So no signals on the demand side that -- anything to be concerned about.
And then Akhil, are you at 52 a month across your production system? Or you at 42? Or is it a real blend there?
Are you talking about on the 737, right? Because of the Airbus side it'd be at a rate higher than that on the 320. We are still operating at somewhere, I would say, in between 52 and 42, depending on what the individual components being supplied to Boeing need. So there are certain places where we want to make sure that we continue to produce at a rate which can help with the restart of the lines, which is going to inevitably happen. And I think -- so it's somewhere between that depending on the specific components you talk about.
Our next question comes from Noah Poponak with Goldman Sachs.
Just wanted to cycle back to the Otis margin just because it sounds like you feel more confident in the medium-term outlook there then you have in quite some time when it's been kind of uncertain and choppy. And Akhil, you mentioned that the Europe service margin dollars grew for the first time in several years. I was wondering if you could give us the numbers of what that did in the order book? And also what China new equipment pricing did in the order books, since those have been kind of the 2 hurdles there? And then last quarter you mentioned the potential for that business to be high-teens again. Is that something you are starting to be able to see in a specific time frame in your plan? Or does it remain more of a kind of theoretical, just where that business naturally should be over time?
So a couple of different things here. Let's talk about the Europe service business first. The good news there was, again, we saw dollar growth in service margins at Europe this quarter after several years, as you pointed out. And a lot of that was driven by productivity. So we have talked about this often. Revenue per unit was still flattish on a year-over-year basis in the European service business in the maintenance business, but we saw good news where hours per unit were actually better by 4% in the quarter in Europe, 3% overall for Otis globally but 4% better in Europe. And that was more than the increase in the cost per unit on the rate side. So as a result, they were able to grow the margin dollars in the European business, right? So that's an encouraging sign. Again, one quarter does not make a trend, we will need to watch this for a period of time to make sure that, that sustains itself. But very encouraging sign after several years.
In the China side, Carroll mentioned this, the value growth in orders was 8% and the units were up slightly. So as a result, you can see that the mix, the difference between the value and the units was largely driven this time by price and mix. Pricing was consistent with what we have seen now for 5 and 6 quarters, where it's up few points. And again, it's not a very precise calculation but it's directionally correct. The good we saw this quarter and again, one quarter doesn't make a trend, is that we had greater demand for mid-range and high-range products which come with more features and with slightly higher dollars per unit. So that combination helped us get to the gap of the 7 points that you saw in the dollars and the value of the orders as well as the unit orders. So overall, things in Otis seem to be trending in the right direction, whether we can get to the mid-teens. I'll let the boss answer or high teens.
Yes, look, I think you need to think about the last 3 years-or-so at Otis, we have been reinvesting in technology, in automation and in productivity. And I think Judy and team, have -- we've been very clear about that. And we knew that, that was going to drag down margins as we made all of these investments. We've taken R&D up, we've taken -- increase in spending on service portfolio, all of those things. We're starting to see some traction, as Akhil said, we're starting to get productivity in the service. I think there's more productivity to come. We still haven't rolled out the global service platform yet. That will happen in the next year or so which again should help on the productivity front. And the Otis strategy is pretty straightforward, right? We're trying to sell as many elevators as we can, while at the same time servicing them more efficiently every single year. And it's a drive to efficiency and the service that's going to continue to drive the margins north, and that's why we've got confidence.
There's a lot of cost we can still take out at Otis. I know Judy and the team are laser-focused on how to take those costs out. And I think, as you think about next year especially, Otis has got a lot of runway. We're starting to see profit growth this year, we're confident in that. And I think it's only going to continue higher over the next 2 or 3 years as we look at taking structural costs out from the back office from the factories and from the service side. So I think that high teens, is it next year absolutely not. Is it 3 years, 4 years, probably. And again, that's the -- that is the Otis story and that's why we're so excited about the prospects of Otis as a stand-alone business.
Ladies and gentlemen, that concludes today's Q&A portion. I'd like to turn the call back over to Greg Hayes.
Well, thank you all for listening in today. I won't repeat about the good quarter you guys get that. I will say Carroll and team are around all day today so please feel free to call. And we look forward to seeing you guys at EPG in May. Take care. Thank you.
Ladies and gentlemen, this conclude today's presentation. You may now disconnect, and have a wonderful day.