What I learned about UTC
The great thing about public companies, if you're a journalist, is that they tell you everything about their company's finances - because they have to. Still, you have to know where to look and when to listen. Yesterday, Ari Bousbib, who heads all of UTC's commercial businesses, just happened to be presenting to the Citi Industrial Manufacturing & Transportation Conference as the news of the acquisition of GE Security broke. Thus, when I called UTC for comment, I was simply referred to the webcast of Ari's presentation and I got basically all the information I needed, and then some. Since only so much was appropriate for the story, I thought I'd share some deeper information about where UTC stands now, their opinions on the recession and how we'll pull out of it, and give you a few of the slides that Bousbib shared yesterday (sorry about the slide resolution - that's what happens with screen shots of stuff from the web). First, it was interesting to hear Bousbib's opinions on how we'll recover from the recession: "Some of the short-term businesses are showing a pattern of improvement and one could see here a u-shaped type of recovery, and based on indications, this pattern is likely to continue. Now, on the minus side, our longer cycle businesses, commercial HVAC, elevator, fire and security in mature markets, we are not seeing any sign of recovery there, and frankly, based on indications I donâ€™t see a recovery for these markets until at the very least the back end of 2010, and most likely 2011. In some markets, Spain, maybe, not until 2012. I feel cautiously optimistic that we are indeed turning the corner, and we will see modest improvements in the market, and, overall, the balance will net out positively." You'll see in this chart that the long-term-sale businesses haven't exactly seen the recovery happen yet: Also, this is a nice graphic representation of how much of UTC those businesses actually represent. As you can see, a prolonged recession for those businesses will hurt UTC significantly. This next graph is pretty fascinating for me. If you want to show somebody just how fragmented the security industry is, this is the way to do it: Now, on to the part about GE Security. I talked in the Motley Fool post about being surprised by the $1.2 billion in 2009 revenue. Well, for good reason: It's down $300 million (20 percent) from 2008. Here's how UTC assesses GE Security: In my story on the deal you can hear from Bousbib why he considers GE Security such a good fit, but let's just say it was the fire business they were most excited about. It's about 40 percent of GE Security as a whole. So, going forward, what are they going to do? First thing is to cut costs. Check this chart - the overhead is killing them: And you can see that the majority of that overhead is the branch network. Expect to see some serious consolidation of branches for UTC, basically combining the fire and security offices into singular offices that handle all of UTC's Fire & Security capabilities: Bousbib: "The second reason why our return on investment wasnâ€™t that special up to now is the heavy load of overhead that we still have at Fire and Security. Weâ€™ve moved manufacturing to low cost locations, but when you look at $1.4 billion in overhead, almost three quarters of that resides in branches. We have 550 around the world, so weâ€™re reducing that overhead in the branches by merging branches in the field. Weâ€™re going to take fire specific branches, and security specific branches and move from a product-centric model and to a customer-centric branch, with one face to the customer and a full array of maintenance, monitoring, and repair services ... We expect to reduce the number of branches by 40 percent. We've started this and overhead rates have improved by 300 basis points." Theoretically, this will lead the company from a pretty pedestrian nine-percent operating margin for Fire & Security to something close to 15 percent. At least according to the projections on this chart: Or, as Bousbib put it: "With all of these actions we believe that we have a very clear path to 15 percent-plus operating margins at Fire and Security. Weâ€™ve moved margins nicely since 2003, from 5 percent to 9 percent in 2008, so itâ€™s approximately 1 point a year. A year ago we said we need to accelerate that to go to 2 points of expansion a year, and weâ€™re now on track to do that. Our margin expansion in Q2 and Q3, was closer to 2 percent [on an annual rate], and now we expect weâ€™ll reach that goal of 15 percent earlier." So, with all of this in mind, is UTC going to continue to buy in the sector, or just focus on fine-tuning what they've got? Bousbib: "Itâ€™s very fragmented, so there are a lot of small players. Even though GE relatively is a big deal for us, itâ€™s still a bolt on, theyâ€™re all bolt ons. With products and technologies, there are a couple of niches we donâ€™t have ... But itâ€™s about building density, as we merge those branches, increase revenue per branch, increase revenue per field technician, we want more of that, so any companies that have a network in a given market where we can combine our branches and generate more density, thatâ€™s a winner. Itâ€™s specific geographic markets." I'd say to look for buys of small, smart, well-located integrators, maybe overseas, but also in North American markets that Red Hawk doesn't cover well currently. Since Red Hawk comes with a traditional financial services background, maybe something in the Gulf area that's great with the petro-chem market would make sense.