雷神技術公司 (RTX) 2005 Q1 法說會逐字稿

Good morning and welcome to the United Technologies' first quarter conference call.

On the call today are Jim Geisler, Vice President, Finance;

David Porter, Director, Investor Relations; and Greg Hayes, Vice President, Accounting and Control.

This call is being carried live on the Internet and there is a presentation available for download from UTC's home page at www.UTC.com.

The Company reminds 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 include its 10-Q and 10-K reports, provide details on important factors that could cause actual results to differ materially from those anticipated in these forward-looking statements.

Please go ahead, Mr. Geisler.

Thank you and good morning.

You may recall the last time we were together in March, we had a lot of good news to report.

The economic environment was good in the businesses we were executing and we felt good about 2005 and the first quarter.

And today with first quarter earnings up 19%, and free cash flow in excess of net income we continue to have lots of good news to talk about.

In the March meeting, I also talked about UTC's growth model.

It all starts with our market leading businesses generating sustained revenue growth, margin expansion, and free cash flow for redeployment.

We have lots of evidence of progress this quarter.

In the last 90 days, we have taken a strong portfolio and strengthened it.

We completed the acquisition of Kidde earlier this month making our new segment, UTC Fire & Security, number two in the global fire safety segment.

As you also note, Kidde had a high margin aerospace fire business that won the fire detection and suppression contract on Boeing 787 aircraft, so it's a great bid for Hamilton as well.

As a result of this deal we have increased the fire and security at Hamilton numbers to reflect the acquisition of Kidde.

This will drive higher revenues and profits for UTC.

With offsetting interest costs there is known net impact on our EPS guidance for this transaction consistent with our previous statements.

We remain on track to deliver all of the other aggressive business unit guidance we gave you last month.

We also announced the acquisitions of Rocketdyne which makes us a leader in liquid rocket propulsion, and Lenel, a leading software supplier for high-end, higher growth electronic security segments.

We also pruned the portfolio with the recent divestment announcement of Falk.

Falk is Hamilton's $200 million revenue Industrial Business.

It manufacturers power transmission solutions including gear drives and couplings. (indiscernible) generated high single digit returns, it's capital intensive and very cyclical, a non-strategically core asset for UTC or Hamilton Sundstrand.

So we think these portfolio moves are good, add into the core of the business with operations like Lenel and Kidde and selling for value a cyclical non-core and high capital intensive business like Falk.

Our strong businesses also continue to generate consistent revenue growth in the quarter.

Revenues were up 9% including 6 points of organic revenue growth continuing the trend of solid performance following last year's 8% growth, including the industrial universe.

In the first quarter, Otis, Carrier and Hamilton Sundstrand each had 10% or better revenue improvements, evident that demand is solid and that new products such as Gen II elevators and S-92 helicopters are succeeding in the marketplace.

With 60 basis points of margin improvement in the first quarter productivity and cost reduction issues are clearly working overcoming around $100 million of commodity cost headwind in the quarter largely in the commercial businesses.

We also invested for future margin expansion with restructuring of $50 million in the quarter slightly in excess of gains.

In this restructuring we also had some new actions, such as the closure of carriers UK facility.

Free cash flow in the quarter was strong at 107% of net income including $65 million of pension contribution and higher CapEx for projects that will drive future organic revenue growth like SEER 13 and Carrier.

We also increased cash to shareowners with a 26% dividend increase in the first quarter.

We continue to expect free cash flow to approximate net income before the impact of $500 million of voluntary pension contributions, although we achieved the higher standard of covering the cash pension contributions in the quarter.

Now all of this is evidence that the growth strategy is sound and that UTC is geared to outperform.

You see it in our first-quarter results, our recent dividend increase and the two-for-one stock split.

Based on the solid first quarter performance we are tweaking upwards our EPS guidance range for 2005, now expecting 12 to 16% growth or $5.90 to $6.15 per share on a presplit basis.

We are confident in this outlook for the year but it is still early.

We just completed the first, not the fourth quarter.

So we still have in front of us seasonally big 2Q and 3Q at Carrier, our shortest cycle business.

In total though, we feel good about our outlook.

Dave.

Okay Jim.

Thanks.

I will review first quarter performance with you starting on page 3, for those that are following along with the web cast.

Where you see revenues up a solid 9% in the quarter, and that is against a comparative that includes $250 million of MTU related gains in last year's first-quarter revenue.

So even stronger revenue growth in the 9% operationally that reflects 6% organic growth and acquisitions contributing much of the remainder.

Earnings per share of $1.28 were up 19% in the quarter.

And this was fueled by double-digit operating profit improvements at Pratt and at Sikorsky on the aero side, as well as at Otis and UTC Fire & Security, more than offsetting the continuing profit and margin pressures at Carrier which continue to be impacted by commodity cost headwinds, slightly more than half of the $100 million that Jim just mentioned.

So even with a $0.03 FX benefit in the quarter, the 60 basis points of margin improvement and the 19% earnings growth, are very solid.

There was also a $0.02 per share drag from restructuring in the quarter which exceeded one time favorable items.

Finally, as we mentioned in the release this morning, you will recall that last year's first quarter included a $0.06 per share charge for a collaboration accounting matter at Pratt, and this obviously did not recur this year.

Free cash flow, $694 million was 107% of net income.

It included $65 million of voluntary pension contributions and CapEx at about 150 million.

This is less than depreciation in the period and about $30 million higher than the first quarter of 2004, largely reflecting Carrier's continuing investment in its SEER 13 productline.

Working capital was a headwind in the quarter at $100 million driven by higher receivables from this quarter's solid volume improvements and inventory growth, predominately at Carrier, again in anticipation of the prime selling season upcoming.

Turning to Otis, profit was up 15% on 10% higher revenue, resulting again in margin expansion at Otis 80 basis points this quarter.

And as is typical and as we have done in the past, I will talk to the segment results here with restructuring added back.

Revenues were up in all regions with good organic growth representing slightly more than half of this quarter's revenue increase at Otis and this was led by strong new equipment sales across the business.

FX contributed about 40% of the quarter's revenue growth at Otis.

Operating profit up 15% reported and up double-digit at constant currency as well, reflecting continued improvements in field efficiency, continued cost improvements, overhead cost improvements, and that is offset in part by the commodity headwinds that Ari (ph) reviewed with all of us back in March.

New equipment orders increased mid single digits in the quarter, reflecting continued strong growth in China, partially offset by market softness in career which we first reported to you back in last year's fourth quarter.

After a very strong 2004 in North America where new equipment orders improved double-digits, orders receded somewhat in the quarter in North America, although the backlog remains strong, remains robust, up midteens year-over-year.

At Carrier, following last year's strong 28% first quarter profit increase, operating profit was essentially flat in this year's first quarter, up $2 million year-over-year on 21% higher revenue.

Linde contributed just over $200 million of the revenue increase in the quarter, but reported a loss of almost $10 million due to the seasonal weakness that Geraud mentioned in March.

So before the earnings drag from Linda, Carrier's earnings were up 6%.

Revenue increased in all businesses and was up 7% organically in the quarter.

This reflected double-digit improvements at Transicold, as well as strong performance in North American HVAC as well.

Profit improvements from higher volume, continued productivity and improved pricing were offset by three key drags, the commodity cost inflation that Jim mentioned earlier, continuing investments in the SEER 13 productline, and the seasonal loss that I just reviewed at Linde.

Now price increases instituted late in the year in 2004 and earlier this year, are stickings covering about half of the $60 million year-over-year commodity cost headwind in Carrier's first quarter numbers.

Finally, FX contributed about two points of the quarter's revenue and profit growth at Carrier.

Just a quick note about the second quarter at Carrier.

Performance likely to remain challenging with the continued tough compares from the first half of last year, some Linde seasonality and continuing commodity cost inflation.

And we also see relatively higher inventory in the channel awaiting the prime selling season upcoming, as I mentioned.

On the plus side, however, price realization should continue to improve as we move through the year, and the demand environment remains very strong.

Carrier's end markets continue to grow.

At Chubb, which we renamed UTC Fire & Security effective with the Kidde acquisition earlier this month, operating profit was up almost 30% on 9% higher revenues resulting in 80 basis points of margin expansion in the quarter.

Revenues increased in all regions, 3% of this organically and then FX added another four points of growth.

Earnings were lead by the profit impact of the higher volumes across the business, and importantly continuing cost improvements.

Both the cost improvements as well as the higher volumes were fairly broad-based across most of Chubb's businesses and geographies.

Foreign exchange added 7 points to this quarter's 29 point profit growth.

And similar to last year's fourth quarter, results include ongoing costs to continue the outsource effort for many of Chubb's back office functions, improvements that we are seeing today and will continue to provide traction in the second half 2005.

So clearly Chubb is off to a very good start this year with nearly 30% profit improvement.

Turning to the aero companies, revenue at Pratt was up 4% with operating profit up 36% in the quarter.

It would be quick to point out the absence of a $0.06 per share charge in last year's first quarter numbers for the collaboration accounting matter I mentioned earlier.

This contributed about 200 basis points of Pratt's year-over-year margin improvement.

Now revenue and profit increases were lead by growth in commercial spares and at Pratt Canada.

Spares for the quarter were up high single digits even against a tough compare from last year's first quarter following the recovery that we began to see in traffic, following last year's -- excuse me -- following the recovery we began to see in the back half of 2003.

Pratt Canada volumes were up midteens and this reflects both higher engine shipments as well as good performance with spares.

Military revenues were essentially flat as higher engine revenues helped offset the expected declines in development revenues and in military spares at Pratt.

The quarter also benefited from year-over-year, lower that is, year-over-year development costs and this is programmed timing driven.

First quarter last year included 77 engine R&D and there is program timing relative to a reimbursement program in Canada.

Turning to Hamilton, revenues were up 11% with operating profit up 7%.

Revenue increases were lead by double-digit improvements in Aero OEM and single digit growth in commercial spares.

Together with 20% growth in the industrial businesses, and this was principally Solare (ph) and Milton Roy.

The growth was partially offset by the lower military spares that Dave Hess mentioned last month.

Operating profit was driven by solid growth in the commercial aero aftermarket and in the industrial businesses from the higher year-over-year volumes I just mentioned.

This growth was partially offset -- excuse me -- this growth did partially offset the decline in military spares and higher R&D spending for the 787 systems, as well as the impact of some commodity headwinds in both the industrial and aero businesses at Hamilton.

Now at Sikorsky, on slide 9, revenue was up 8% and operating profit was up 13% in the quarter, and Sikorsky was able to overcome $60 million of year-over-year decline in Comanche revenue with higher aircraft revenues and mid single digit revenue improvement in its aftermarket operations.

Incremental margins on higher aftermarket volumes and lower S-92 R&D spending contributed to profit growth in the quarter.

Now excluding the Schweizer light aircraft, deliveries were flat year-over-year at 20, as Sikorsky shipped four fewer military aircraft offset by four additional high-value S-92 aircraft in the quarter.

Greg.

Thanks Dave.

Turning now to page 10 just a few words on restructuring.

We are continuing to make real good progress on our cost reduction actions across the Company.

As I mentioned last month we have initiated over $630 million of restructuring actions last year.

Those projects are continuing on track including Carrier's McMinnville factory closure and the Hamilton Sundstrand facility rationalization program.

During the first quarter of '05, we initiated additional actions primarily related to Carrier factory consolidation efforts, as well as some small factory SG&A cost reduction actions at Otis and Pratt.

Total restructuring costs for the quarter were $50 million and that was split fairly evenly between charges related to new actions and cost for actions that we launched last year.

Partially offsetting these costs was a gain of $32 million on the sale of a portion of our stock holdings at Snecma, the French aero engine company, which is in the process of being acquired by Sagem.

We held this investment for quite some time and giving the pending acquisition by Sagem we'll take the opportunity to liquidate a portion of our holdings in advance of the merger.

The 1Q Snecma gains recorded in the corporate (indiscernible) other line.

So for the quarter, $50 million of restructuring costs, $32 million of nonoperating gains for a net debt of about $18 million or about $0.02 a share.

For the balance of year we see around $100 million of trailing restructuring period costs for the previously initiated actions.

These costs should be offset by favorable items including the remaining gain from this type of Sagem acquisition which is expected to close later in the second quarter, and perhaps some operating (indiscernible) in the business.

So for the remainder of 2005, we again expect restructuring to equal or exceed gains just as it did in the first quarter.

Although quarterly earnings calendarization may be impacted again this year as it was in last year's second quarter.

We remain comfortable with our updated full year guidance in the range of 5.90 to 6.15 per share here.

Be assured, we will tell you about gains and restructuring actions (indiscernible) impact quarterly calendarization just like we did last year.

Just a word on restructuring cash spend.

For the quarter, actual cash spend was $67 million, almost all it related to the 2004 actions.

For the full year, we expect actual cash spending on restructurings to be right around $280 million.

Total pressure on our free cash flow this year (indiscernible) talked about in the past, but all still manageable within our overall cash flow guidance.

Turning to page 11.

Booking and acquisitions.

As Jim mentioned earlier, we completed the acquisition of Kidde effective April 1st.

With Kidde now closed and Lenel and Rocketdyne expected to close before the end of the second quarter, we are now committed to about $3.5 billion in acquisition spending for the year against the full year $4 billion target I mentioned to you in March.

Even though we still have most of the year in front of us, we are going to keep a placeholder of up to another billion dollars in acquisition spending for the year.

So that our new full year guidance on acquisition spending, we'll say is now about in the range of $4.5 billion versus the $4 billion we talked about in March.

Nothing further to report on other acquisitions today, but as always acquisitions are opportunity driven so we will see how this progresses as we go move through the year.

We will keep you informed.

A couple of notes on Kidde.

As Jim mentioned, the aerospace portion of Kidde becomes part of the Hamilton Sundstrand segment and the commercial Industrial Businesses combined with Chubb will create the new UTC Fire & Security business.

Our new Fire & Security business will become number two globally in fire safety and we will continue to utilize both the Chubb and Kidde brand names in the marketplace.

Integration efforts are well underway with teams from both Chubb and Hamilton working to integrate Kidde businesses into their own operations.

We currently have more than 40 people assigned full-time to this integration effort, with many others supporting these efforts on the various (indiscernible) organizations.

We expect to realize some cost synergies almost immediately as we consolidate the corporate office functions and eliminate some organizational redundancies.

Longer-term, we see significant synergy opportunities for manufacturing capacity reduction and supply chain rationalization.

These projects are already underway and we feel good about the plan, and just as importantly the people that we have assigned to the integration efforts.

Again we will keep you apprised of our progress on this as we move throughout the year.

In terms of EBIT contribution from Kidde, we see approximately $120 million of additional segment EBIT from Kidde in 2005, and that is after about 350 basis points of amortization expense and some cost related to the integration effort.

That EBIT contribution of 120 is split roughly 60/40 between the Fire & Security segment and the Hamilton Sundstrand segment.

As we look now on page 13 we have updated our segment guidance.

Aside from the Kidde event, there are no other changes to report to segment guidance we provided you in March.

With Kidde however, we now see Fire & Security revenues up more than 40% and profit up more than 80% reflecting the more than 30% operating profit improvement that we had expected from Chubb, plus about 60% of Kidde's operating profit for the last nine months of the year.

At Hamilton, we expect revenues will now be up about 10% including over $200 million of revenue contribution from Kidde.

We now see operating profit for Hamilton up low teens after adding Kidde's high margin aero fire business.

The segment EBIT contributions will help offset the higher interest in carrying costs associated with the acquisition.

So on a net basis we don't expect a lift from Kidde in 2005.

Overall though we like this business a lot.

We think it's a very well-run business, but also a business that will benefit from UTC's focus on the core operating disciplines and will add significantly to our bottom line in coming years.

To summarize, we had a great first quarter, continuing the double-digit earnings growth and solid cash generation trends we saw last year.

The businesses are all performing well as solid momentum.

We have made some positive moves in the portfolio, effectively redeploying cash and strengthening our market leading businesses while continuing to reinvest in the business for future margin expansion.

We feel good about the first quarter results and we feel equally good about the remainder of 2005.

So with that, let's open the call for questions.

(OPERATOR INSTRUCTIONS).

Joe Campbell from Lehman Brothers.

Good morning.

Two things.

One you've outlined the spread for us in Pratt & Whitney with sort of flat military and strength in Canada and not quite sure what is going on in the rest.

I wonder if there is any seasonality to the way we see the Pratt business for the rest of the year?

Then on Lenel, could you comment on when that acquisition comes in, what it might do for sales and profits for the year?

Thanks.

Joe, why don't I start with Pratt, and you're right we did talk about flat military and talked about some of the componentry there.

Good engine shipments in the quarter offsetting -- we expected declines in development on the JSF peak that we have already passed.

And then spares, roughly flat.

Canada good volumes, both new engine shipments as well as aftermarket.

And the other significant piece is commercial spares in the quarter.

Up high single digit tracking with traffic up sequentially, and again tracking with the traffic improvement we have seen.

Joe, on Lenel we are excited about that property because of what the software brings to the electronic security business at UTC Fire & Security.

We'll probably close in the second quarter here at maybe a couple points of revenue and a little bit more on the operating profit side because it's high margin.

But again that will all be of higher interest associated with below the line.

So like most UTC deals they are not (indiscernible) current period for accretion, but for benefit and growth in future periods.

And we will update if there is any need be on the (indiscernible) segment guidance when it closes in Q2.

Thank you very much.

Heidi Wood with Morgan Stanley.

Just a follow-up on Joe's question on Pratt.

Can you actually give us the engine delivery numbers?

We certainly can do that, Heidi.

Let me find that here.

The engine deliveries, and I will talk about a couple of things.

The large commercial engine business at Pratt, up 8 year-over-year.

That is 83 shipments versus 75 in the year ago period.

That reflects strong year-over-year growth, most of that coming from the V2500 engines.

In military, up 6 at 35 engines.

And Pratt Canada, up over 25% new engine shipments; 426 engines versus 336 a year-ago.

That is really across the productline there and a continuation of what we have seen in terms of volume growth at Pratt Canada over each of the last several quarters.

The military spares book-to-bill at Pratt, what was that?

How do you feel the military spares are going to look over the next three quarters?

We saw this quarter, a decline in mil spares for the Company that is largely at Hamilton.

Pratt mil spares down slightly but not a significant year-over-year decline.

I think as we have said, Heidi, we do not expect in the fixed wing part of the business, the military fixed wing business, for there to be growth in military spares.

So we see that leveling to slightly declining as we move through the year.

The book-to-bill was fine.

All right.

Any stock buyback in the quarter?

There was 115 million of cash flow put into the stock buyback program in the quarter.

All right, great.

I will let someone else ask a question.

Steve Binder with Bear Stearns.

Good quarter.

A couple things.

One, Carrier, I think you spelled out about 1.5% of pricing improvement from a year ago.

I think you said about 30 million, just kind of sizing up the commodity headwind.

Can you maybe quantify how much of a price increase you saw in North America year-over-year, both commercial and residential together?

Steve, we did say that about half of the commodity headwind at Carrier in the quarter which was 60 million or so was realized, if you will, through price increases.

And a fair amount of that in North America in both the residential and commercial businesses as well.

If you look at before the loss at Linde, it looks like your profit is up $42 million at Carrier before restructuring, as well.

Do you know roughly, would you say it is two-thirds of volume, one-third restructuring savings?

(indiscernible) all the math on that.

We talked the Linde loss is around $10 million.

Right.

So we get profits up then --.

I'm sorry, before the commodity cost headwind, excuse me.

You look at the $30 million delta, right, for the headwind you found plus a $10 million loss, right?

You're up a little bit more than 40 million in profit, right?

If you look at -- that is mainly savings from the restructuring program plus organic growth, right?

Just looking at the split, would you say it's two-thirds, one-third?

Yes, that feels about right, Steve.

You have good volume in the quarter as well as the continuing productivity, a lot of that generated out of the cost reduction programs that have been put in place at Carrier over the last several years.

Then Pratt, book to bill in the large commercial engine catalog parts business, where did you kind of come out in the quarter?

Just about one, Steve.

All right.

If you look at Pratt's performance, it was quite good from year ago and sequentially as well.

You've been talking in midteens.

It seems like you are off to a very good start there.

Is there any reason why the margins started trickling down through the balance of the year?

No.

So it looks like to fairly conservative forecast then, at this point?

From the first quarter, I think we're off to a good start at UTC as well as Pratt.

Okay, thanks very much.

Howard Rubel with Jeffries & Co.

Thank you.

Good morning.

A couple of quick questions.

You have now got Linde under your belt for six months.

How is that stacking up versus your plan?

We like to be asked that a lot Howard.

Again, it gives us a good brand name into Europe and very good share, as well, to this number one segment share in Europe.

So we like to get asked that a lot.

We didn't buy it for very much and we always knew it would be a tough restructuring and productivity play, (indiscernible) we are good at UTC, evidence of the margin expansion over the late '90s and to this decade.

So we continue to work on that asset, but improving the profitability there will be, as we said, a multi-year activity like we are in today.

I understand that, but I'm sort of saying unlike Chubb, you're not finding anything that is a surprise in the asset, and in fact, it's as good as you expected?

I know you didn't pay a lot for it, Jim.

We like the asset.

It is on plan.

Two other things.

One is, are there any other divestitures that you're sort of contemplating?

It is nice to see, finally after all of these years, that Falk or that some of those assets are sort of not part of your portfolio being sold at good prices?

Well as you know, Howard, none of the portfolio is for sale but all of it is for a price.

So we think we have very good value on Falk and there are other good values to be gotten for assets in the portfolio.

We take advantage of that as well.

Finally, if we were to look at Pratt's commercial outlook, what kind of sense do you have in terms of percentage of the business that sold, or deliveries that are -- or the positions that are sold for '05 and '06?

It's Greg.

In fact, '05 deliveries are pretty well sorted out on the large commercial engine business, as well as at Pratt Canada.

Volumes have been very strong, as you know, the A320 family with IAE and we see those volumes continuing into '06.

Actually I should have also asked you, you talked about lumpy quarterly.

What did you mean by that in the second quarter, and then I am done.

As I mentioned, Howard, we do have a small gain coming in the second quarter from the proceeds of the Snecma merger.

However, we also have some trailing restructuring costs.

Right now we have a little bit of gain in excess of restructuring costs, but more restructuring will be teed up here in the quarter.

So we think it will be fairly equal to gain equal restructuring for the year.

Clearly we will have gain equal to restructuring.

The real comment was just as it related to last year, if you remember we had about $100 million or $0.14 of gain in excess of restructuring in last year's second quarter.

So we won't see that kind of lumpiness, but if we do see something big coming up we will certainly let you know.

Gentlemen, thank you very much.

Nicole Parent with CSFB.

Good morning guys.

You walked us through the financials on Lenel.

I am just wondering if you could talk a little bit about the strategic significance of the deal?

I'm sorry, your question was on Lenel there?

Yes.

You walked through the financials already in response to Joe's question.

I'm just wondering if you could talk bigger picture, kind of what it gives you that you didn't have?

Lenel is a software suite that allows you to put together electronic security hardware and software, linking it together in a single package.

So obviously it for a building that would have a variety of electronic security needs, this is a nice way to bundle those together and sell that as an integrated package.

These are obviously high-end systems, again for users that would have fairly demanding criteria.

But that is where there is more growth in the market.

That is why we like that acquisition.

I think we talked -- it's really more of a software play and hence the valuation, than a hardware or a more standard manufacturing acquisition.

And we will have more to talk about that.

We expect this to close in the second quarter and we will have more to tell you about that actually when it closes.

Great.

I guess just on general commercial construction trends in North America, could you talk a little bit about what you are seeing?

Do you see any acceleration in the order trends there?

We saw growth, Nicole, in the commercial business at Carrier in the quarter, organic growth there in the high single digit range, broad kind of movements year-over-year in nonrevs.

Construction starts, no, did not see lots of movement in the quarter.

Okay.

Lastly, just a little bit of color on China by business.

I'm just wondering if you saw any residential slowdown in China in the quarter?

Most of our business is not -- well Carrier we don't have residential.

It is commercial business for us.

That business continues good in Carrier in China, good organic revenue growth.

Obviously this is a part of the world that is being hit hard by commodity prices and some pricing.

Otis, as well, we saw continued growth in the region.

Although we can give an update quarter-by-quarter as we do, I think what we like so much about the region is the low penetration rates for HVAC and elevators in China.

So it may go up or down a little bit in quarters.

And we saw a little bit of slowness (indiscernible) third quarter last year.

But overall we like our position in the region and we like China's long-term growth prospects.

Great.

Thank you.

Jeff Hammond with KeyBanc Capital Markets.

Good morning.

I guess, broadly, there has been some discussion about some slowing in Europe or just really a muted recovery.

Can you maybe speak to that relative to each of your businesses?

I would say Europe is more spotty and it is good for Otis.

We are seeing good profit and momentum there and less so for Carrier.

I think that just goes to the nature of European economies which have tended to grow slower than that of the states, and certainly much slower than Asia.

Okay, thank you.

Joe Nadol with J.P. Morgan.

Thanks.

Good morning.

First question is on share repurchase.

I am wondering if -- you upped your acquisition target for the year.

Is the share purchase outlook changing or are you anticipating a little bit more net debt?

Joe, it's Greg.

I think right now we're anticipating just a little bit more net debt.

We like the share repurchase program.

We've got a $600 million placeholder in there, obviously with the share price where it is, at least as it closed yesterday, and we think it's a real good value.

So we continue to look at share repurchase as well as acquisitions.

And I think we're not constrained in terms of our net debt position for increasing the share repurchase program later in the year.

Right now we like it at the $600 million level though.

Secondly, last quarter, I think you noted that you were seeing a slowdown in Korea.

I'm wondering if you could update that?

And then are there any other areas globally where you are seeing things slow down a little bit economically?

Joe, it's Dave.

I did mention in my comments about Otis, that the order growth in Korea had softened.

That we have market softness there, is the way I characterized it.

That had been a good performer in terms of order growth as we moved through a good piece of 2004.

And we mentioned in the last quarter's call, as you know, the slowdown or the softness that was ensuing there.

Beyond that, good organic growth trends and good order bookings in many -- I should actually say -- most of our markets around the world.

Okay.

Just one final one and it's kind of asking Howard's question earlier a little bit differently.

Should we view the divestiture of Falk very much as opportunistic or is it more of a systematic -- the beginning of a systematic effort to sell off some of these fund strained industrial businesses?

Our entire acquisition or even divestiture strategy, is always based on value so it's opportunistic. (indiscernible) and we sell properties when we can get good value for them.

Okay, thank you.

Thank you Joe.

George Shapiro with Citigroup.

Good morning.

Good numbers.

I wanted to pursue Pratt a little bit more.

I mean the profit seemed particularly strong.

I mean even if you make the adjustments from the collaboration, and I assume most of the drop in R&D was at Pratt.

You still come up with year-over-year, close to 50% incremental margins.

If you look at it sequentially you have higher profits on lower revenues than what you had in the fourth quarter.

So if you could just go through what is driving such strong profitability there this quarter?

George, I think you have actually identified most of the key things that moved Pratt's numbers around in the quarter, the collaboration charge that I had mentioned and you just repeated.

The R&D, you are correct.

Much of the corporation's R&D, it was down 20 million in the quarter, came from Pratt on program timing, as I mentioned.

And very good growth in both the Canadian business, good marginal return, and we had good growth in spares in the quarter.

Again, good marginal return.

So were the absolute dollars of spares this quarter higher than what they were in the fourth quarter?

Yes.

All right.

That will help to explain some of it.

Okay.

Glad to help.

Just one other.

If you could go through China and compare what you saw at Carrier versus what American Standard reported, overall about 7% growth in their HVAC business.

Well, we saw also good growth in our HVAC business, high single digit kinds of organic growth.

I was not actually on the American Standard call yesterday, so I won't try to do a compare there.

But we have had good growth in the quarter in our North American and global HVAC businesses.

Okay, thanks a lot.

Thank you, George.

Tony Boase with A.G. Edwards.

Thanks.

Just wanted to clarify a comment on inventories that you mentioned about Carrier.

This is inventories in the channel are high, and also is it on the residential side or is it on the commercial side?

Tony, they are higher on the residential side.

Higher than what you typically experience given this time of the year?

They were higher than last year, but again we're gearing up for the summer selling season, and obviously that is weather dependent.

So I am delighted to report it's supposed to hit over 85 degrees today in Hartford.

I suppose one day does not a selling season make, but weather like that is always helpful.

Also, just another question on the commercial aspect of Carrier.

We have heard from, I don't know, another company in a little different area that is also dependent upon commercial construction, they felt that raw materials had hampered new construction starts.

And just wondering whether that was an impact for you in the quarter and whether your forecast for commercial business in the year has changed at all?

Tony, it's not.

I think when you think about commercial construction, UTC (indiscernible), although it is important to get some.

You know commercial business is only about 15% of Carrier.

Although more important at Otis, it's a little bit longer lead-time and cycle business.

So we obviously pay attention to this quite closely, but (indiscernible) changed outlook for this year.

Most of Otis' work is in backlog, again for Carrier it is important but not a huge piece of the business.

Okay, thanks very much.

Cai Von Rumohr with SG Cowen.

Thank you.

Kidde, if I take the 120 and I add back the 50 plus you're telling us, it looks like you are talking about 11% margins for the remainder of the year.

The last part of the year seems to be stronger than the first normally.

They did 12% last year.

How come the margins aren't better?

It's Greg.

As we look at the Kidde numbers for the rest of the year, I think last year they reported just in excess of about 12% return on sales.

With that as our baseline, obviously we are going to get segregation for the amortization of the intangibles; that's about 350 basis points.

We also have integration costs which are not insignificant, as we start looking at closing some of the factories and doing some of the other work of closing the operations over at the UK headquarters and moving those to Farmington.

Probably another drag of maybe up to $20 million or so related to those integration related costs.

Overall, I think it nets to about an 8% return, $1.5 billion in additional revenues this year, and about $120 million of EBIT.

That essentially (indiscernible).

Otis, could you tell us what was the year-over-year gain in dollars ex foreign exchange in terms of orders at Otis in the quarter, and what was the book-to-bill at Otis in the quarter?

Orders were -- new equivalent orders at Otis were up low single digits.

Now that is a little bit lighter than what we have seen in the past, but it comes off of a very strong last year.

So the backlog is still up strong, up high single digits, even with the orders in the quarter.

So we feel good about the outlook for '05.

Okay, so the book -- the orders were up in low single digits.

So the book-to-bill would have been over what (indiscernible)?

But the backlog was up from the fourth quarter?

Right, but the backlog is going to reflect orders booked in the third and fourth quarter as well.

Right.

So it was up in the quarter, the backlog was up on the currency adjusted basis?

Right.

Could you give us a little more color on the combination of restructuring and nonrecurring gains for the year?

It is always a big item.

I know you'll get it off-line.

But how should we model, how big should we model restructuring and nonrecurring for the year?

You said it is not going to be as big as the $0.14 last year.

Can you give us some sense as to how big we should model it for the second quarter?

For the second quarter, I think right now we would look to have a gain slightly in excess of restructuring.

But we're going to launch some additional restructuring actions in the quarter and make some other investments.

So we are not thinking that is going to be a very big number at all at the end of the day.

If something were to break and we do a big action or we have something else pop in the quarter, we will certainly get back to you.

But again not a big impact like it was last year in the second quarter.

I would add, just to be blunt for the model now, nothing to do I think.

Excuse me?

I think for the model, right now nothing to do.

So assume it is basically a wash?

Right.

It's not a wash historically, we've told you and given you a heads up in advance, if that comes to be the case, as Greg's foreshadow.

We will get back to you.

But to follow-up on that, if in fact you would launch more restructuring and we have 100 million of trailing costs left to go and you only did 25 of trailing impact in the first quarter, presumably that would mean that restructuring would exceed nonrecurring gains in the second half because, don't you expect to get this tax benefit here in the second quarter?

Are we looking for the rest of the year, the restructuring really could be higher than the nonrecurring?

That's exactly right.

I think if we do see some goodness coming out of the tax law here in the second quarter, and we don't get the restructuring all washed as you know takes some time, we will see restructuring in excess of gains in the second half.

Again we're not prepared today to tell you what the (indiscernible) is going to look like, but we will certainly get back to you.

Okay.

The last one, again on Pratt, you mentioned the timing and that the R&D was low.

By my numbers R&D would be building at Pratt and so wouldn't that partially explain why you don't expect the margins to be as good as they were in the first quarter?

We expect R&D spend at Pratt to be up in '05.

I think what you saw in the first quarter was the impact of timing.

We identified two key timing elements, the 70 split 7 engine spending in the year ago period, and reimbursement from our Canadian government partner in Canada in the small engine business.

Spending continues to be strong from an R&D standpoint at Pratt & Whitney.

How big was the reimbursement at Pratt Canada?

When you take the 70/7 together with the reimbursement, that accounts for the roughly 20 million of year-over-year decline you see in the UTC numbers.

Great, thank you.

I think folks we have time for one more question if there is one, Stacey.

Byron Callan with Merrill Lynch.

Good morning.

Thanks for taking my question.

You mentioned acquisitions.

Are we looking kind of any geographic bias, any business bias at this point for the balance of the year since we kind of upped this placeholder a bit?

We always look in the core businesses, elevators, HVAC, aerospace aftermarket and that opportunity extends around the globe.

Okay.

Are you're going to be competing for the personal recovery vehicle in Sikorsky?

That has been debated in the press.

I just wonder if you have an official stance on this yet?

As you know we really like the S-92 product.

We think it's a very good one.

It won the five previous campaigns against the EH101 before the presidential selection.

Again, EH101 has lower maintenance costs, flies further, faster with more payload.

So we think it's a great product.

There is a lot of funding right now obviously flowing into the EH101 from not only Europe where the helicopter is from, but also in the states now.

I can't say the same for the S-92, so we are always worried about a level playing field because we think we've got a really good product that could do well as the PRB.

So we want to compete.

We want to compete on a level playing field.

Okay.

The last thing on Otis, has the share remained fairly constant in China?

There have been some diplomatic issues with other regional countries lately and I'm just curious if you have seen any of that spill into marketshare in Otis in China?

Our share in China has increased in part because we have a multitier brand strategy there.

This is the high-end and some other brands at the lower end (indiscernible) approach the entire market share and China is a good news story for us.

Okay, thanks a lot.

Thank you Byron.

Well I think that wraps up our call today and I think all of you for participating.

Maybe just one more comment.

A number of you over a long period of time have worked with Rick Berrell (ph) who actually here with us today in our conference room.

Rick will be moving on to a financial executive role at our Chubb business -- excuse me -- inside of UTC Fire & Security.

Rick, we thank you very much for all of the efforts and help over the years, and I think I can say the same for a number of the people participating on the call today.

So I thank you very much, and we will be here this afternoon to try to answer any questions that were not answered on the call.

Thank you.

Thank you for participating in today's conference.

You may now disconnect.